UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 333-22585
VIALOG Corporation
(Exact name of registrant as specified in its charter)
Massachusetts 04-3305282
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
35 New England Business Center, Suite 160
Andover, Massachusetts 01810
(Address of principal executive offices, including Zip Code)
(978) 975-3700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
Yes [X] No [ ]
At May 12, 1999 the registrant had outstanding an aggregate of 8,547,962 shares
of its Common Stock, $.01 par value.
1
VIALOG CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Basis of Presentation 3
Pro Forma Consolidated Statement of Operations (Unaudited) for the
Three Months Ended March 31, 1999 4
Notes to Pro Forma Consolidated Statement of Operations (Unaudited) 5
HISTORICAL FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1998 and
March 31, 1999 (Unaudited) 6
Consolidated Statements of Operations (Unaudited) for the
Three Months Ended March 31, 1998 and 1999 7
Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended March 31, 1998 and 1999 8
Notes to Consolidated Financial Statements (Unaudited) 9-12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
2
VIALOG CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
BASIS OF PRESENTATION
The following unaudited pro forma consolidated Statement of Operations
gives effect to (i) the acquisitions by VIALOG Corporation on February 10, 1999
of all of the stock of A Business Conference-Call, Inc. ("ABCC"), Conference
Pros International, Inc. ("CPI"), and A Better Conference, Inc. ("ABCI"), and
(ii) the consummation of an initial public offering of common stock as if they
had occurred on January 1, 1999. The acquisitions were accounted for using the
purchase method of accounting. The pro forma statement is based on the
historical financial statements of VIALOG Corporation, ABCC, CPI and ABCI and
includes pro forma adjustments based upon estimates, currently available
information and certain assumptions that management deems appropriate. The
unaudited pro forma statement presented herein is not necessarily indicative of
the results that would have been obtained had such events occurred on January 1,
1999, as assumed, or of future results. The unaudited pro forma consolidated
Statement of Operations should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Report.
3
VIALOG CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(In thousands, except share and per share data)
1/1/99 - 2/10/99 Pro Forma
VIALOG -------------------------- ------------------------------
Corp. ABCC CPI ABCI Adjustments(1) Consolidated(1)
----- ---- --- ---- -------------- ---------------
Net revenues $ 15,882 $1,058 $ 444 $ 408 $-- $ 17,792
Cost of revenues, excluding depreciation 7,633 295 214 137 8,279
Selling, general and administrative expense 4,834 224 136 145 (98)(a) 5,241
Depreciation expense 881 23 15 26 945
Amortization of goodwill and intangibles 830 -- -- -- 170(b) 1,000
----------- ------ ----- ----- ----- -----------
Operating income (loss) 1,704 516 79 100 (72) 2,327
Interest expense, net (3,371) -- (5) (9) -- (3,385)
----------- ------ ----- ----- ----- -----------
Income (loss) before income taxes (1,667) 516 74 91 (72) (1,058)
Income tax expense (50) -- -- -- -- (50)
----------- ------ ----- ----- ----- -----------
Net income (loss) $ (1,717) $ 516 $ 74 $ 91 $ (72) $ (1,108)
=========== ====== ===== ===== ===== ===========
Net loss per share - basic and diluted $ (0.28) $ (0.13)(c)
=========== ===========
Weighted average shares outstanding 6,032,774 8,332,774(c)
=========== ===========
- -------------------------------------------------
(1) See Note 3 to unaudited pro forma consolidated financial statement.
4
VIALOG CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(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 were 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 $300,000 to certain
stockholders of certain of the acquired companies.
The total purchase price of the acquired companies was $29.2 million and
consists of $28.4 million in cash paid to the stockholders of the acquired
companies, approximately $460,000 of acquisition costs and approximately
$300,000 related to tax reimbursements. Of the purchase price, $1.7 million has
been allocated to the identifiable assets acquired and liabilities assumed and
the balance of $27.5 million has been allocated to intangible assets on a
preliminary basis. In management's opinion, the preliminary estimates regarding
allocation of the purchase price are not expected to differ materially from the
final adjustments.
(3) Unaudited Pro Forma Consolidated Statement 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.
(b) Adjustment reflects the amortization of goodwill and intangible assets,
which are amortized over periods ranging from 5 to 25 years.
(c) 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.
5
VIALOG CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, March 31,
1998 1999
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 232 $ 3,526
Accounts receivable, net of allowance for
doubtful accounts of $164 and $312,respectively 7,391 11,301
Prepaid expenses 425 501
Deferred offering costs 596 --
Other current assets 165 221
--------- ---------
Total current assets 8,809 15,549
Property and equipment, net 11,987 15,353
Deferred debt issuance costs 5,429 5,202
Goodwill and intangible assets, net 41,679 68,345
Other assets 1,362 603
========= =========
Total assets $ 69,266 $ 105,052
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities :
Revolving line of credit $ 2,057 $ 2,332
Current portion of long-term debt 1,465 2,030
Accounts payable 3,064 3,046
Accrued interest expense 1,215 3,606
Accrued expenses and other liabilities 3,386 3,992
--------- ---------
Total current liabilities 11,187 15,006
Long-term debt, less current portion 74,189 74,127
Other long-term liabilities 482 664
Commitments and contingencies
Stockholders' equity (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;
3,693,672 and 8,399,066 shares in 1998 and 1999,
respectively, issued and outstanding 37 84
Additional paid-in capital 11,854 45,371
Accumulated deficit (28,483) (30,200)
--------- ---------
Total stockholders' equity (deficit) (16,592) 15,255
========= =========
Total liabilities and stockholders' equity (deficit) $ 69,266 $ 105,052
========= =========
See accompanying notes to consolidated financial statements.
6
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except share and per share data)
Three Months Ended March 31,
--------------------------------
1998 1999
----------- -----------
Net revenues $ 11,290 $ 15,882
Cost of revenues, excluding depreciation 6,121 7,633
Selling, general and administrative expense 3,506 4,834
Depreciation expense 584 881
Amortization of goodwill and intangibles 628 830
----------- -----------
Operating income 451 1,704
Interest expense, net (3,045) (3,371)
----------- -----------
Loss before income tax expense (2,594) (1,667)
Income tax expense -- (50)
----------- -----------
Net loss $ (2,594) $ (1,717)
=========== ===========
Net loss per share - basic and diluted $ (0.73) $ (0.28)
=========== ===========
Weighted average shares outstanding 3,542,668 6,032,774
=========== ===========
See accompanying notes to consolidated financial statements.
7
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended March 31,
----------------------------
1998 1999
-------- --------
Cash flows from operating activities:
Net loss $ (2,594) $ (1,717)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 584 881
Amortization of goodwill and intangibles 628 830
Amortization of debt issuance costs and debt discount 748 784
Provision for doubtful accounts 55 62
Compensation expense for issuance of common stock and options -- 52
Changes in operating assets and liabilities, net of effects from
acquisitions of businesses:
Accounts receivable (1,330) (2,327)
Prepaid expenses and other current assets (172) (57)
Other assets 20 567
Accounts payable 366 (557)
Accrued expenses 1,803 2,691
Other long-term liabilities 19 (196)
-------- --------
Cash flows provided by operating activities 127 1,013
-------- --------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired -- (29,095)
Additions to property and equipment (1,600) (2,590)
-------- --------
Cash flows used in investing activities (1,600) (31,685)
-------- --------
Cash flows from financing activities:
Advances on line of credit, net -- 275
Payments of long-term debt, net (104) (401)
Proceeds from issuance of common stock 25 33,512
Deferred offering costs -- 596
Deferred debt issuance costs -- (16)
-------- --------
Cash flows provided by (used in) financing activities (79) 33,966
-------- --------
Net increase (decrease) in cash and cash equivalents (1,552) 3,294
Cash and cash equivalents at beginning of period 9,567 232
-------- --------
Cash and cash equivalents at end of period $ 8,015 $ 3,526
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 36 $ 202
======== ========
Taxes $ -- $ --
======== ========
Acquisitions of businesses:
Assets acquired $ -- $ 31,041
Liabilities assumed -- (1,855)
-------- --------
Cash paid -- 29,186
Less cash acquired -- (91)
-------- --------
Net cash paid for acquisitions of businesses $ -- $ 29,095
======== ========
See accompanying notes to consolidated financial statements.
8
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission, and reflect all adjustments (all of which are of a normal
recurring nature) which, in the opinion of management, are necessary for a fair
statement of the results of the interim periods presented. The unaudited results
of operations for the quarter ended March 31, 1999 are not necessarily an
indication of the results of operations for the full year. These financial
statements do not include all disclosures associated with annual financial
statements and, accordingly, should be read in conjunction with the financial
statements and footnotes for the year ended December 31, 1998 included in the
Company's Form 10-K. The consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(2) Description of Business
VIALOG Corporation (the "Company") was incorporated in Massachusetts on January
1, 1996. The Company was formed to create a national independent provider of
audio, video and Internet conferencing services. On November 12, 1997, the
Company sold $75.0 million in senior notes due 2001 (the "Senior Notes"), in a
private placement (the "Private Placement"). Contemporaneously with the closing
of the Private Placement, the Company acquired, in separate transactions (the
"Original Acquisitions"), six private conference service bureaus in exchange for
cash and shares of its common stock.
Prior to November 12, 1997, the Company did not conduct any operations, and all
activities conducted by it related to the Original Acquisitions and the
completion of financing transactions to fund the Original Acquisitions.
(3) Initial Public Offering
On February 10, 1999, the Company completed an initial public offering for the
sale of 4,600,000 shares of common stock. The net proceeds from this offering,
after deducting underwriting discounts, commissions and offering expenses were
approximately $32.7 million. Of the net proceeds, approximately $29.2 million
was used to acquire three private conference service bureaus (as discussed in
Note 4). In addition, approximately $305,000 of indebtedness was paid to the
former stockholder of one of the acquisitions. The remaining net proceeds of
$3.2 million will be used for working capital and general corporate purposes.
(4) Acquisitions
On February 10, 1999 the Company acquired all of the issued and outstanding
stock of A Business Conference - Call, Inc. ("ABCC"), Conference Pros
International, Inc. ("CPI"), and A Better Conference, Inc. ("ABCI"). These
acquisitions occurred contemporaneously with the closing of the initial public
offering of the Company's common stock. Each of the acquisitions (together with
the Original Acquisitions, each an "Operating Center"; collectively, the
"Operating Centers") is a wholly-owned subsidiary of the Company. The
acquisitions were accounted for using the purchase method of accounting.
The total purchase price of the acquired companies was $29.2 million and
consisted of $28.4 million in cash paid to the stockholders of the acquired
companies, approximately $460,000 of acquisition costs and approximately
$300,000 related to tax reimbursements. The total purchase price was allocated,
on a preliminary basis, as follows (in thousands):
Working capital $ 967
Property and equipment, net 1,657
Goodwill and intangible assets 27,494
Other assets 78
Long-term liabilities (1,010)
---------
$ 29,186
=========
9
The purchase price exceeded the fair value of the net assets by an estimated
$27.5 million. The excess was allocated to goodwill and other intangibles on a
preliminary basis, and is being amortized over periods from 5 to 25 years. In
management's opinion, the preliminary estimates regarding allocation of the
purchase price are not expected to differ materially from the final adjustments.
In addition, the Company repaid $305,000 of long-term debt of the acquired
companies.
(5) Long-Term Debt
Long-term debt consists of the following:
December 31, March 31,
1998 1999
------- -------
(in thousands)
12 3/4% Senior Notes Payable, due 2001,
net of unamortized discount of $3,115 and
$2,843, respectively $71,885 $72,157
Term loans 3,030 2,755
Capitalized lease obligations 669 592
Other long-term debt 70 653
------- -------
Total long-term debt 75,654 76,157
Less current portion 1,465 2,030
======= =======
Total long-term debt, less
current portion $74,189 $74,127
======= =======
Senior Notes Payable
The Senior Notes issued in the Private Placement bear interest at 12 3/4% per
annum, payable semi-annually on May 15 and November 15 of each year. The Senior
Notes, which are guaranteed by each of the Operating Centers, mature on November
15, 2001 and are redeemable in whole or in part at the option of the Company on
or after November 15, 1999 at 110% of the principal amount thereof, and on or
after November 15, 2000 at 105% of the principal amount thereof, in each case
together with accrued interest to the date of redemption. In addition, there are
certain other early redemption options available to the Company at any time on
or prior to November 15, 1999 at certain premiums, as specified in the indenture
pursuant to which the Senior Notes were issued.
(6) Net Loss Per Share
As the Company was in a net loss position for the three months ended March 31,
1998 and 1999, common stock equivalents of 1,837,262 and 1,671,434 respectively,
were excluded from the diluted net loss per share calculation as they would be
antidilutive. As a result, diluted net loss per share for the three months ended
March 31, 1998 and 1999 is the same as basic net loss per share and, therefore,
has not been presented separately.
(7) Non-recurring Charge
During the third quarter of 1998, the Company incurred a $1.2 million
non-recurring charge related to the consolidation of the Atlanta and Montgomery
Operating Centers. In accordance with the consolidation plan, the Atlanta
Operating Center remained staffed through January, 1999, after which time the
Atlanta facility was vacated and its traffic managed by operators in the
Montgomery Center as well as other Operating Centers. During the three months
ended March 31, 1999, the Company paid out approximately $243,000 related to
personnel reductions and the facility closing.
10
(8) 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 three
months ended March 31, 1999. Separate financial statements and other disclosures
concerning the guarantor subsidiaries are not presented because management has
determined that they are not material to investors.
11
VIALOG Call
Corp. Access CSI Points ABCC TCC ABCI
----- ------ --- ------ ---- --- ----
(In thousands)
Balance Sheet Information
as of March 31, 1999
(unaudited)
Total current
assets $ (3,051) $ 7,285 $ -- $ 6,160 $ 1,922 $ 2,168 $ 581
Property and
equipment, net 683 6,493 -- 4,614 802 973 459
Investment in
subsidiaries 86,307 -- -- -- -- -- --
Goodwill and
intangible assets,
net -- 14,803 -- 17,460 15,216 3,687 5,960
Other assets 5,332 260 -- 64 -- 8 70
--------- --------- --------- --------- --------- --------- ---------
Total assets $ 89,271 $ 28,841 $ -- $ 28,298 $ 17,940 $ 6,836 $ 7,070
========= ========= ========= ========= ========= ========= =========
Current liabilities $ 8,310 $ 1,850 $ -- $ 2,143 $ 580 $ 446 $ 473
Long-term debt,
excluding current
portion 73,810 4 -- 138 -- 67 15
Other liabilities -- 265 -- 264 -- -- 113
Stockholders' equity
(deficit) 7,151 26,722 -- 25,753 17,360 6,323 6,469
--------- --------- --------- --------- --------- --------- ---------
Total liabilities
and stockholders'
equity (deficit) $ 89,271 $ 28,841 $ -- $ 28,298 $ 17,940 $ 6,836 $ 7,070
========= ========= ========= ========= ========= ========= =========
Statement of Operations
Information for
the Three Months
Ended March 31, 1999
(unaudited)
Net revenues $ -- $ 6,422 $ 374 $ 3,856 $ 1,329 $ 1,823 $ 517
Cost of revenues,
excluding
depreciation -- 2,886 236 2,265 396 869 161
Selling, general
and administrative
expenses 3,180 465 26 318 146 251 105
Depreciation expense 37 382 40 205 28 65 30
Amortization of
goodwill and
intangibles -- 218 72 205 118 51 46
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss) (3,217) 2,471 -- 863 641 587 175
Interest income
(expense), net (3,337) -- (4) (10) -- (6) (6)
--------- --------- --------- --------- --------- --------- ---------
Loss before
income tax
expense (6,554) 2,471 (4) 853 641 581 169
Income tax expense -- (50) -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) $ (6,554) $ 2,421 $ (4) $ 853 $ 641 $ 581 $ 169
========= ========= ========= ========= ========= ========= =========
Cash Flow Information
for the Three Months
Ended March 31, 1999
(unaudited)
Cash flows provided
by (used in)
operating activities $ (1,406) $ (90) $ 17,687 $ (16,423) $ 879 $ (38) $ 226
Cash flows provided
by (used in)
investing activities (29,254) (961) 1,602 (2,765) (68) (43) (31)
Cash flows provided
by (used in)
financing activities 33,580 506 (19,350) 19,292 -- (28) (96)
--------- --------- --------- --------- --------- --------- ---------
Net increase (decrease)
in cash and cash
equivalents 2,920 (545) (61) 104 811 (109) 99
Cash and cash
equivalents at
the beginning of
period 90 -- 61 61 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Cash and cash
equivalents at
the end of period $ 3,010 $ (545) $ -- $ 165 $ 811 $ (109) $ 99
========= ========= ========= ========= ========= ========= =========
CPI Americo CDC Eliminations Consolidated
--- ------- --- ------------ ------------
(In thousands)
Balance Sheet Information
as of March 31, 1999
(unaudited)
Total current
assets $ 463 $ (633) $ 654 $ -- $ 15,549
Property and
equipment, net 490 627 212 -- 15,353
Investment in
subsidiaries -- -- -- (86,307) --
Goodwill and
intangible assets,
net 6,108 2,773 2,338 -- 68,345
Other assets -- 65 6 -- 5,805
--------- --------- --------- --------- ---------
Total assets $ 7,061 $ 2,832 $ 3,210 $ (86,307) $ 105,052
========= ========= ========= ========= =========
Current liabilities $ 798 $ 313 $ 93 $ -- $ 15,006
Long-term debt,
excluding current
portion 29 64 -- -- 74,127
Other liabilities -- -- 22 -- 664
Stockholders' equity
(deficit) 6,234 2,455 3,095 (86,307) 15,255
--------- --------- --------- --------- ---------
Total liabilities
and stockholders'
equity (deficit) $ 7,061 $ 2,832 $ 3,210 $ (86,307) $ 105,052
========= ========= ========= ========= =========
Statement of Operations
Information for the Three
Months Ended March 31, 1999
(unaudited)
Net revenues $ 477 $ 719 $ 666 $ (301) $ 15,882
Cost of revenues,
excluding
depreciation 236 399 486 (301) 7,633
Selling, general
and administrative
expenses 106 119 118 -- 4,834
Depreciation expense 19 30 45 -- 881
Amortization of
goodwill and
intangibles 48 39 33 -- 830
--------- --------- --------- --------- ---------
Operating income
(loss) 68 132 (16) -- 1,704
Interest income
(expense), net (5) (3) -- -- (3,371)
--------- --------- --------- --------- ---------
Loss before
income tax
expense 63 129 (16) -- (1,667)
Income tax expense -- -- -- -- (50)
--------- --------- --------- --------- ---------
Net income (loss) $ 63 $ 129 $ (16) $ -- $ (1,717)
========= ========= ========= ========= =========
Cash Flow Information
for the Three Months
Ended March 31, 1999
(unaudited)
Cash flows provided
by (used in)
operating activities $ 74 $ 53 $ 51 $ -- $ 1,013
Cash flows provided
by (used in)
investing activities (72) (53) (40) -- (31,685)
Cash flows provided
by (used in)
financing activities 68 (6) -- -- 33,966
--------- --------- --------- --------- ---------
Net increase (decrease)
in cash and cash
equivalents 70 (6) 11 -- 3,294
Cash and cash
equivalents at
the beginning of
period -- -- 20 -- 232
--------- --------- --------- --------- ---------
Cash and cash
equivalents at
the end of period $ 70 $ (6) $ 31 $ -- $ 3,526
========= ========= ========= ========= =========
12
Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the financial statements and
footnotes for the three months ended March 31, 1999 and the Form 10-K for the
year ended December 31, 1998 filed with the Securities and Exchange Commission.
VIALOG Corporation
Results of Operations
The Company was incorporated on January 1, 1996. On February 10, 1999, the
Company completed an initial public offering of common stock and
contemporaneously acquired three private conference service bureaus.
Net revenues. Net revenues increased approximately $4.6 million, or 41%, from
$11.3 million to $15.9 million for the three months ended March 31, 1998 and
1999, respectively. The increase was primarily due to increased call volumes for
audio and video conferencing services as well as the acquisition of three
private conference service bureaus on February 10, 1999. The major components of
this increase were (i) an increase in the Reston Center's net revenues of $2.0
million, or 47.5%, from $4.4 million to $6.4 million for the three months ended
March 31, 1998 and 1999, respectively, which consisted of increased sales of
teleconferencing services of approximately $600,000 and $1.4 million to existing
and new customers, respectively, (ii) an increase in the Cambridge Center's net
revenues of $432,000, or 31.1%, which was primarily attributable to increased
audio teleconferencing services to existing customers and new customers, and
(iii) an increase of $2.3 million relating to the Chaska, Houston and Palm
Springs Operating Centers which were acquired on February 10, 1999 and included
in the Company's consolidated results beginning February 11, 1999.
The Company's largest outsourcing customer has acquired a competitor of the
Company. The customer, 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.
Although a significant reduction in or loss of net revenues from this customer
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.
Cost of revenues excluding depreciation. Cost of revenues, excluding
depreciation increased approximately $1.5 million, or 25%, from $6.1 million to
$7.6 million for the three months ended March 31, 1998 and 1999, respectively,
but decreased as a percentage of revenue from 54.2% to 48.1% for the three
months ended March 31, 1998 and 1999, respectively. The dollar increase was
primarily attributable to (i) an increase in the Reston Center's cost of
revenues, excluding depreciation of $792,000, or 38.1%, resulting from increased
telecommunications costs and personnel and related costs associated with
increased call volumes, (ii) an increase in the Cambridge Center's cost of
revenues, excluding depreciation of $148,000, or 20.5%, resulting from increased
telecommunications costs associated with increased call volumes, and (iii) an
increase of $793,000 relating to the Chaska, Houston and Palm Springs Operating
Centers which were acquired on February 10, 1999 and included in the Company's
consolidated results beginning February 11, 1999. The decrease as a percentage
of revenues was primarily due to an overall reduction in telecommunications cost
per minute resulting from negotiating telecommunications contracts with lower
prices and the favorable impact resulting from the addition of the Chaska,
Houston and Palm Springs Operating Centers.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.3 million, or 38%, from $3.5 million to
$4.8 million for the three months ended March 31, 1998 and 1999, respectively.
The increase was primarily attributable to (i) an increase in selling expense of
$797,000 primarily due to the deployment of a national sales force throughout
1998, and (ii) an increase of $357,000 relating to the Chaska, Houston and Palm
Springs Operating Centers which were acquired on February 10, 1999 and included
in the Company's consolidated results beginning February 11, 1999.
13
Depreciation and amortization expense. Depreciation and amortization expense
increased $499,000 from $1.2 million to $1.7 million for the three months ended
March 31, 1998 and 1999, respectively. The increase was primarily due to the
additions to property and equipment throughout 1998. In addition, amortization
of goodwill and intangibles increased $202,000 which represents amortization
expense related to the three Operating Centers acquired on February 10, 1999.
Interest expense, net. Interest expense, net increased $326,000 to from $3.0
million to $3.4 million for the three months ended March 31, 1998 and 1999,
respectively. The increase was primarily due to the following: (i) $145,000
interest expense related to the Company's revolving credit facility executed in
the fourth quarter of 1998, (ii) $40,000 of non-cash interest expense related to
the amortization of deferred debt issuance costs and (iii) decreased interest
income of approximately $123,000 due to reduced cash balances.
Liquidity and Capital Resources
The Company generated positive cash flows of $3.3 million for the three months
ended March 31, 1999 as compared to negative cash flows of $1.6 million for the
three months ended March 31, 1998. For the three months ended March 31, 1999,
the Company generated positive cash flows from operations of $1.0 million. Cash
used in investing activities of $31.7 million for the three months ended March
31, 1999 included $29.1 million related to the acquisitions of ABCC, CPI and
ABCI, as well as $2.6 million related to the acquisition of property and
equipment. Cash provided by financing activities of $34.0 million for the three
months ended March 31, 1999 includes $33.5 million in proceeds from the issuance
of common stock, the majority of which relates to the initial public offering of
common stock which was completed on February 10, 1999.
On November 12, 1997, the Company completed a Private Placement of $75.0 million
of Senior Notes. The Senior Notes bear interest at 12 3/4% per annum, payable
semi-annually on May 15 and November 15 of each year. The Senior Notes are
guaranteed by the Operating Centers and mature on November 15, 2001. The Senior
Notes are redeemable in whole or in part at the option of the Company on or
after November 15, 1999 at 110% of the principal amount thereof, and on or after
November 15, 2000 at 105% of the principal amount thereof until maturity, in
each case together with accrued interest to the date of redemption. In addition,
there are certain other early redemption options available to the Company at any
time on or prior to November 15, 1999 at certain premiums, as specified in the
Indenture. In the event of a change in control, as defined in the Indenture, the
Company may be required to repurchase all of the outstanding Senior Notes at
101% of the principal amount plus accrued interest and additional interest, if
any. The Indenture contains restrictive covenants with respect to the Company
that among other things, create limitations (subject to certain exceptions) on
(i) the incurrence of additional indebtedness, (ii) the ability of the Company
to purchase, redeem or otherwise acquire or retire any Common Stock or warrants,
rights or options to acquire Common Stock, to retire any subordinated
indebtedness prior to final maturity or to make investments in any person, (iii)
certain transactions with affiliates, (iv) the ability to materially change the
present method of conducting business, (v) the granting of liens on property or
assets, (vi) mergers, consolidations and the disposition of assets, (vii)
declaring and paying any dividends or making any distribution on shares of
Common Stock, and (viii) the issuance or sale of any capital stock of the
Company's subsidiaries. The Indenture does not require the Company to maintain
compliance with any financial ratios or tests, except with respect to certain
restrictive covenants noted above. At March 31, 1999, the Company was in
compliance with all covenants contained in the Indenture.
On October 6, 1998, the Company closed a two year, $15.0 million credit facility
(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 Operating Centers and the assets of VIALOG Corporation,
excluding the ownership interest in each of the Operating Centers. The Company
is required to maintain compliance with certain financial ratios and tests,
including a debt service coverage ratio and minimum net worth level. At March
31, 1999, the Company was in compliance with such ratios and tests. As of March
31, 1999, the Company had outstanding $1.5 million on the term loan; $1.2
million on the equipment term loan; and $2.3 million on the revolving loan.
The Company anticipates that its expected cash flows from operations,
supplemented by borrowings under the Credit Facility, will meet or exceed its
working capital needs, debt service requirements and planned capital
expenditures for property and equipment for the next twelve months. The Company
expects to meet its longer term liquidity requirements,
14
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 Original Acquisitions were
acquired, except for the Oradell Center, limit through 1999 the Company's
ability to change the location of an Original Acquisition's facilities (except
for the Montgomery Center), physically merge the Original Acquisitions
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
Original Acquisition. 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 at March 31, 1999. This indebtedness requires
the Company to dedicate a significant portion of its cash flow from operations
to service its indebtedness and makes the Company more vulnerable to unfavorable
changes in general economic conditions.
Year 2000 Compliance
Many currently installed computer systems and software programs were designed to
use only a two digit date field. These date fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. Until
the date fields are revised, the systems and programs could fail or give
erroneous results when referencing dates following December 31, 1999. Such
failure or errors could occur prior to the actual change in century.
The Company relies on computer applications to manage and monitor its
operations, accounting, sales and administrative functions. In addition, the
Company's suppliers and service providers (particularly telecommunications
companies) are reliant upon computer applications, some of which may contain
software that may fail as a result of the upcoming change in century. Failure of
the Company's systems or those of its suppliers or service providers could have
a material adverse impact on the Company's business, financial condition and
results of operations.
State of readiness. The Company's current Year 2000 readiness project consists
of 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
15
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 September,
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 communications services,
and could have a material adverse impact on the Company's business, financial
condition and results of operations. However, the Company believes that its
ability to redistribute certain of its telecommunications services among its
multiple third party service providers could lessen any potential adverse
impact.
Contingency plan. The Company has not yet developed a Year 2000-specific
contingency plan as the Company expects its systems and system components to be
Year 2000 compliant by September, 1999. The Company intends to prepare a
contingency plan as it becomes aware of Year 2000 problems or risks.
Results of Operations - Combined Operating Centers and VIALOG Corporation
The following unaudited combined data of the Operating Centers on an historical
basis are derived from the respective 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.
Three Months Ended March 31,
----------------------------------------------
1998 1999
--------------------- ---------------------
Net revenues $14,270 100.0% $17,792 100.0%
Cost of revenues, excluding depreciation 7,253 50.8% 8,279 46.5%
Net revenues. Net revenues increased $3.5 million, or 24.7%, from combined net
revenues of $14.3 million in 1998 to combined net revenues of $17.8 million in
1999. 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 $2.0 million, or
47.5%, from $4.4 million to $6.4 million for the three months ended March 31,
1998 and 1999, respectively, which consisted of increased sales of
teleconferencing services of approximately $600,000 and $1.4 million to existing
and new customers, respectively, (ii) an increase in the Cambridge Center's net
revenues of $432,000, or 31.1%, which was primarily attributable to increased
audio teleconferencing services to existing customers and new customers, (iii)
an increase in the Chaska Center's net revenues of $605,000, or 34.0%, which was
due to increased sales of teleconferencing services to existing and new
customers, (iv) an increase in the Palm Springs Center's net revenues of
$313,000, or 51.1% which was primarily due to increased sales of
teleconferencing services to existing and new customers, and (v) an increase in
the Houston Center's net revenues of $334,000, or 56.9%, which was primarily due
to increased revenues for audio teleconferencing services to existing and new
customers.
16
Cost of revenues, excluding depreciation. Cost of revenues, excluding
depreciation for the three months ended March 31, 1999 increased $1.0 million,
or 14.1%, from cost of revenues, excluding depreciation for the three months
ended March 31, 1998, but decreased as a percentage of revenue from 50.8% to
46.5% for the three months ended March 31, 1998 and 1999, respectively. The
dollar increase was primarily attributable to (i) an increase in the Reston
Center's cost of revenues, excluding depreciation of $792,000, or 38.1%,
resulting from increased telecommunications costs and personnel and related
costs associated with increased call volumes, and (ii) an increase in the
Cambridge Center's cost of revenues, excluding depreciation of $148,000, or
20.5%, resulting from increased telecommunications costs associated with
increased call volumes as well as increased operating costs and personnel and
related costs due to increased staffing to support current and projected revenue
growth. The decrease as a percentage of revenues was primarily attributable to
an overall reduction in telecommunications cost per minute as a result of
negotiating telecommunications contracts with lower prices.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 provides guidance on
accounting for the costs of computer software developed or obtained for internal
use, and became effective for the Company on January 1, 1999. The adoption of
SOP 98-1 did not have a material effect on the Company's financial statements.
Cautionary Statements for Forward Looking Information
Management's discussion and analysis set forth above contains certain forward
looking statements, including statements regarding its financial position,
results of operations and Year 2000 compliance. These forward looking statements
are based on current expectations. Certain factors have been identified by the
Company which could cause the Company's actual results to differ materially from
expected and historical results. These factors are discussed in the Safe Harbor
for Forward Looking Statements section of the Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Form 10-K for the year ended December 31, 1998, and should be read in
conjunction with this Form 10-Q.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than as described below, there are no material pending legal proceedings
to which the Company is a party or to which any of its properties are subject.
A former employee of Conference Source International, Inc. ("CSI") has claimed
in writing that he may be entitled to up to five percent of the stock of CSI,
based on an unsigned paper outlining possible employment terms. Based on the
$18.7 million consideration paid to CSI's stockholders upon the consummation of
the acquisition of CSI by the Company, the value of a five percent equity
interest in CSI would be approximately $934,000. CSI's position is that the only
agreements with such employee were set forth in two successive executed
employment agreements, each of which had a specific provision that such
agreement was inclusive as to the terms of employment. The Company and the
former stockholders of CSI believe that such claim is without merit.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 11(a) - Calculation of Shares Used in
Determining Net Loss Per Share
(b) Reports on Form 8-K.
A report on Form 8-K was filed on January 15, 1999 to report that the
Company entered into separate definitive merger agereements with Conference Pros
International, Inc. ("CPI") and A Better Conference, Inc. ("ABCI"), pursuant to
which the Company would acquire all of the outstanding capital stock of CPI for
approximately $6.0 million in cash and all of the outstanding capital stock of
ABCI for approximately $6.2 million in cash.
A report on Form 8-K was filed on February 25, 1999 to report that the
Company acquired by merger on February 10, 1999 all of the outstanding capital
stock of A Business Conference - Call, Inc. ("ABCC"), Conference Pros
International, Inc. ("CPI") and A Better Conference, Inc. ("ABCI").
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
VIALOG Corporation
(Registrant)
Date: May 17, 1999
/s/ Glenn D. Bolduc
--------------------------------------
Glenn D. Bolduc,
President and Chief Executive Officer
/s/ John J. Dion
--------------------------------------
John J. Dion,
Vice President - Finance and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
19
EXHIBIT INDEX
Page
----
11(a) - Calculation of Shares Used in Determining Net Loss Per Share 21
20