- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 JUNE 30, 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 August 9, 1999 the registrant had outstanding an aggregate of 8,668,088 shares of its Common Stock, $.01 par value. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- VIALOG CORPORATION INDEX PART I. FINANCIAL INFORMATION Page ----- Item 1. Financial Statements HISTORICAL FINANCIAL STATEMENTS Consolidated Balance Sheets at December 31, 1998 and June 30, 1999 (Unaudited)........................................................... 3 Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 1998 and 1999................................... 4 Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 1998 and 1999.......................................... 5 Notes to Consolidated Financial Statements (Unaudited)................. 6-9 UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS Basis of Presentation.................................................. 10 Pro Forma Consolidated Statements of Operations (Unaudited) for the Six Months Ended June 30, 1999 and 1998................................... 11 Notes to Pro Forma Consolidated Statements of Operations (Unaudited)... 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 CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) December 31, June 30, 1998 1999 ------------ ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents........................... $ 232 $ 1,426 Accounts receivable, net of allowance for doubtful accounts of $164 and $380, respectively............ 7,391 11,183 Prepaid expenses.................................... 425 388 Deferred offering costs............................. 596 -- Other current assets................................ 165 640 -------- -------- Total current assets.............................. 8,809 13,637 Property and equipment, net........................... 11,987 16,054 Deferred debt issuance costs.......................... 5,429 4,690 Goodwill and intangible assets, net................... 41,679 67,346 Other assets.......................................... 1,362 639 -------- -------- Total assets...................................... $ 69,266 $102,366 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Revolving line of credit............................ $ 2,057 $ 4,169 Current portion of long-term debt................... 1,465 1,841 Accounts payable.................................... 3,064 2,765 Accrued interest expense............................ 1,215 1,215 Accrued expenses and other liabilities.............. 3,386 5,521 -------- -------- Total current liabilities......................... 11,187 15,511 Long-term debt, less current portion.................. 74,189 74,118 Other long-term liabilities........................... 482 2,782 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; issued: 3,693,672 and 8,672,353 shares, respectively; outstanding: 3,693,672 and 8,661,722 shares, respectively............................... 37 87 Additional paid-in capital.......................... 11,854 45,323 Accumulated deficit................................. (28,483) (35,408) Treasury stock, at cost; 0 and 10,631 shares, respectively....................................... -- (47) -------- -------- Total stockholders' equity (deficit).............. (16,592) 9,955 -------- -------- Total liabilities and stockholders' equity (deficit)........................................ $ 69,266 $102,366 ======== ======== See accompanying notes to consolidated financial statements. 3 VIALOG CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except share and per share data) Three Months Ended June 30, Six Months Ended June 30, ---------------------------- -------------------------- 1998 1999 1998 1999 ------------- ------------- ------------ ------------ Net revenues............ $ 11,878 $ 18,031 $ 23,168 $ 33,913 Cost of revenues, excluding depreciation........... 6,012 8,251 12,134 15,884 Selling, general and administrative expense................ 4,437 6,649 7,942 11,483 Depreciation expense.... 651 1,019 1,235 1,900 Amortization of goodwill and intangibles........ 623 999 1,251 1,829 Non-recurring charge.... -- 2,982 -- 2,982 ------------- ------------- ------------ ------------ Operating income (loss)............... 155 (1,869) 606 (165) Interest expense, net... (3,109) (3,339) (6,154) (6,710) ------------- ------------- ------------ ------------ Loss before income tax expense.............. (2,954) (5,208) (5,548) (6,875) Income tax expense...... -- -- -- (50) ------------- ------------- ------------ ------------ Net loss.............. $ (2,954) $ (5,208) $ (5,548) $ (6,925) ============= ============= ============ ============ Net loss per share-- basic and diluted...... $ (0.81) $ (0.61) $ (1.55) $ (0.97) ============= ============= ============ ============ Weighted average shares outstanding............ 3,628,072 8,562,249 3,585,370 7,140,146 ============= ============= ============ ============ See accompanying notes to consolidated financial statements. 4 VIALOG CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended June 30, ----------------- 1998 1999 ------- -------- Cash flows from operating activities: Net loss.................................................. $(5,548) $ (6,925) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation............................................ 1,235 1,900 Amortization of goodwill and intangibles................ 1,251 1,829 Amortization of debt issuance costs and debt discount... 1,496 1,574 Provision for doubtful accounts......................... 131 169 Compensation expense for issuance of common stock and options................................................ -- 52 Non-cash portion of non-recurring charge................ -- 797 Changes in operating assets and liabilities, net of effects from acquisitions of businesses: Accounts receivable..................................... (1,058) (2,316) Prepaid expenses and other current assets............... (100) (363) Other assets............................................ (199) 525 Accounts payable........................................ 490 (838) Accrued expenses........................................ (151) 1,829 Other long-term liabilities............................. 31 1,125 ------- -------- Cash flows used in operating activities............... (2,422) (642) ------- -------- Cash flows from investing activities: Acquisitions of businesses, net of cash acquired.......... -- (29,095) Additions to property and equipment....................... (3,087) (4,310) Deferred acquisition costs................................ (119) -- ------- -------- Cash flows used in investing activities............... (3,206) (33,405) ------- -------- Cash flows from financing activities: Advances on line of credit, net........................... -- 2,112 Payments of long-term debt, net........................... (198) (871) Proceeds from issuance of common stock.................... 41 33,420 Deferred offering costs................................... (174) 596 Deferred debt issuance costs.............................. -- (16) ------- -------- Cash flows provided by (used in) financing activities........................................... (331) 35,241 ------- -------- Net increase (decrease) in cash and cash equivalents........ (5,959) 1,194 Cash and cash equivalents at beginning of period............ 9,567 232 ------- -------- Cash and cash equivalents at end of period.................. $ 3,608 $ 1,426 ======= ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest................................................ $ 4,934 $ 5,142 ======= ======== Acquisitions of businesses: Assets acquired......................................... $ -- $ 31,041 Liabilities assumed and issued.......................... -- (1,855) Common stock issued..................................... -- -- ------- -------- Cash paid............................................... -- 29,186 Less cash acquired...................................... -- (91) ------- -------- Net cash paid for acquisitions of businesses.......... $ -- $ 29,095 ======= ======== See accompanying notes to consolidated financial statements. 5 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission, and reflect all adjustments (all of which are of a normal recurring nature) which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. The unaudited results of operations for the three and six months ended June 30, 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 audioconferencing, videoconferencing 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 were 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): 6 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited) 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 ======= 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, June 30, 1998 1999 ------------ -------- (in thousands) 12 3/4% Senior Notes Payable, due 2001, net of unamortized discount of $3,115 and $2,571, respectively......................................... $71,885 $72,429 Term loans............................................ 3,030 2,479 Capitalized lease obligations......................... 669 424 Other long-term debt.................................. 70 627 ------- ------- Total long-term debt................................ 75,654 75,959 Less current portion................................ 1,465 1,841 ------- ------- Total long-term debt, less current portion.......... $74,189 $74,118 ======= ======= 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 and six months ended June 30, 1998 and 1999, common stock equivalents of 1,971,468, 1,475,073, 1,904,365 and 1,573,254 for the three months ended June 30, 1998 and 1999 and the six months ended June 30, 1998 and 1999, respectively, were excluded from the diluted net loss per share calculation as they would be antidilutive. As a result, diluted net loss per share for the three and six months ended June 30, 1998 and 1999 is the same as basic net loss per share and, therefore, has not been presented separately. 7 VIALOG CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited) (7) Non-recurring Charges 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 conference coordinators in the Montgomery Center as well as other Operating Centers. During the three and six months ended June 30, 1999, the Company paid out approximately $91,000 and $335,000, respectively, related to personnel reductions and the facility closing. At June 30, 1999, approximately $542,000 of the non-recurring charge was outstanding. The results for the three months ended June 30, 1999 include a non-recurring charge of approximately $3.0 million related to the consolidation of four of the Company's Operating Centers. The Operating Centers affected include Oradell, New Jersey and Danbury, Connecticut which the Company expects to close in the third quarter of 1999; and Houston, Texas, and Palm Springs, California which are expected to close by the end of 1999. In conjunction with these closings, the Company is expanding its other facilities to accommodate the transitioned business. In addition, the Company plans to combine its Corporate offices and its Cambridge Center in the first half of 2000. The non- recurring charge includes (i) approximately $1.2 million associated with facility lease costs from the exit dates through the lease termination dates (net of estimated sublease income), (ii) $860,000 associated with personnel reductions of approximately 130 conference coordinators, customer service, technical support, and general and administrative positions, (iii) $683,000 associated with the impairment of intangible assets, (iv) $150,000 associated with legal fees and other exit costs, and (v) $114,000 associated with the write-off of leasehold improvements. No amounts have been paid as of June 30, 1999. (8) Officer Resignation Selling, general and administrative expenses for the three months ended June 30, 1999 include approximately $1.2 million in increased operating expenses due to costs associated with the departure of the Company's former Chief Executive Officer and other management staff. Approximately $298,000 has been paid as of June 30, 1999. (9) 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 six months ended June 30, 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. 8 VIALOG Call Corp. Access CSI Points ABCC TCC ABCI CPI Americo CDC Eliminations -------- ------- -------- -------- ------- ------ ------ ------ ------- ------ ------------ (In thousands) Balance Sheet Information as of June 30, 1999 (unaudited) Total current assets.......... $(10,216) $ 9,246 $ -- $ 7,089 $ 2,978 $2,792 $ 935 $ 508 $ (484) $ 789 $ -- Property and equipment, net.. 713 6,821 -- 4,992 753 1,109 430 455 597 184 -- Investment in subsidiaries.... 86,307 -- -- -- -- -- -- -- -- -- (86,307) Goodwill and intangible assets, net..... -- 14,585 -- 17,184 15,003 3,635 5,876 6,024 2,733 2,306 -- Other assets..... 4,869 260 -- 64 -- 10 55 -- 65 6 -- -------- ------- -------- -------- ------- ------ ------ ------ ------ ------ -------- Total assets.... $ 81,673 $30,912 $ -- $ 29,329 $18,734 $7,546 $7,296 $6,987 $2,911 $3,285 $(86,307) ======== ======= ======== ======== ======= ====== ====== ====== ====== ====== ======== Current liabilities..... $ 8,304 $ 1,433 $ -- $ 2,236 $ 351 $ 584 $ 811 $ 840 $ 473 $ 479 $ -- Long-term debt, excluding current portion......... 73,806 -- -- 107 -- 52 (55) 151 57 -- -- Other liabilities..... 566 271 -- 264 -- -- 316 427 741 197 -- Stockholders' equity (deficit)....... (1,003) 29,208 -- 26,722 18,383 6,910 6,224 5,569 1,640 2,609 (86,307) -------- ------- -------- -------- ------- ------ ------ ------ ------ ------ -------- Total liabilities and stockholders' equity (deficit)...... $ 81,673 $30,912 $ -- $ 29,329 $18,734 $7,546 $7,296 $6,987 $2,911 $3,285 $(86,307) ======== ======= ======== ======== ======= ====== ====== ====== ====== ====== ======== Statement of Operations Information for the Six Months Ended June 30, 1999 (unaudited) Net revenues..... $ -- $12,978 $ 374 $ 7,942 $ 3,705 $3,669 $1,544 $1,347 $1,342 $1,435 $ (423) Cost of revenues, excluding depreciation.... -- 5,868 236 4,416 1,119 1,723 530 699 745 971 (423) Selling, general and administrative expenses........ 7,418 912 26 722 513 533 535 353 228 243 -- Depreciation expense......... 79 803 40 482 79 131 74 62 60 90 -- Amortization of goodwill and intangibles..... -- 437 72 481 331 102 130 132 78 66 -- Non-recurring charge.......... 454 -- -- -- -- -- 329 721 911 567 -------- ------- -------- -------- ------- ------ ------ ------ ------ ------ -------- Operating income (loss)......... (7,951) 4,958 -- 1,841 1,663 1,180 (54) (620) (680) (502) -- Interest income (expense), net.. (6,665) -- (4) (19) -- (12) (22) 18 (6) -- -- -------- ------- -------- -------- ------- ------ ------ ------ ------ ------ -------- Loss before income tax expense........ (14,616) 4,958 (4) 1,822 1,663 1,168 (76) (602) (686) (502) -- Income tax expense......... -- (50) -- -- -- -- -- -- -- -- -- -------- ------- -------- -------- ------- ------ ------ ------ ------ ------ -------- Net income (loss)......... $(14,616) $ 4,908 $ (4) $ 1,822 $ 1,663 $1,168 $ (76) $ (602) $ (686) $ (502) $ -- ======== ======= ======== ======== ======= ====== ====== ====== ====== ====== ======== Cash Flow Information for the Six Months Ended June 30, 1999 (unaudited) Cash flows provided by (used in) operating activities...... $ (4,297) $ 366 $ 17,687 $(15,541) $ 136 $ 165 $ 624 $ 104 $ 43 $ 71 $ -- Cash flows provided by (used in) investing activities...... (29,326) (1,710) 1,602 (3,420) (70) (246) (46) (80) (52) (57) -- Cash flows provided by (used in) financing activities...... 35,059 503 (19,350) 19,228 -- (59) (176) 49 (13) -- -- -------- ------- -------- -------- ------- ------ ------ ------ ------ ------ -------- Net increase (decrease) in cash and cash equivalents..... 1,436 (841) (61) 267 66 (140) 402 73 (22) 14 -- Cash and cash equivalents at the beginning of period.......... 90 -- 61 61 -- -- -- -- -- 20 -- -------- ------- -------- -------- ------- ------ ------ ------ ------ ------ -------- Cash and cash equivalents at the end of period.......... $ 1,526 $ (841) $ -- $ 328 $ 66 $ (140) $ 402 $ 73 $ (22) $ 34 $ -- ======== ======= ======== ======== ======= ====== ====== ====== ====== ====== ======== Consolidated ------------ Balance Sheet Information as of June 30, 1999 (unaudited) Total current assets.......... $ 13,637 Property and equipment, net.. 16,054 Investment in subsidiaries.... -- Goodwill and intangible assets, net..... 67,346 Other assets..... 5,329 ------------ Total assets.... $102,366 ============ Current liabilities..... $ 15,511 Long-term debt, excluding current portion......... 74,118 Other liabilities..... 2,782 Stockholders' equity (deficit)....... 9,955 ------------ Total liabilities and stockholders' equity (deficit)...... $102,366 ============ Statement of Operations Information for the Six Months Ended June 30, 1999 (unaudited) Net revenues..... $ 33,913 Cost of revenues, excluding depreciation.... 15,884 Selling, general and administrative expenses........ 11,483 Depreciation expense......... 1,900 Amortization of goodwill and intangibles..... 1,829 Non-recurring charge.......... 2,982 ------------ Operating income (loss)......... (165) Interest income (expense), net.. (6,710) ------------ Loss before income tax expense........ (6,875) Income tax expense......... (50) ------------ Net income (loss)......... $ (6,925) ============ Cash Flow Information for the Six Months Ended June 30, 1999 (unaudited) Cash flows provided by (used in) operating activities...... $ (642) Cash flows provided by (used in) investing activities...... (33,405) Cash flows provided by (used in) financing activities...... 35,241 ------------ Net increase (decrease) in cash and cash equivalents..... 1,194 Cash and cash equivalents at the beginning of period.......... 232 ------------ Cash and cash equivalents at the end of period.......... $ 1,426 ============ 9 VIALOG CORPORATION UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS BASIS OF PRESENTATION The following unaudited pro forma consolidated Statements of Operations give effect to (i) the acquisitions by VIALOG Corporation on February 10, 1999 of all of the stock of ABCC, CPI, and ABCI, and (ii) the consummation of an initial public offering of common stock as if they had occurred on January 1, 1998. The pro forma statements are based on the historical financial statements of VIALOG Corporation, ABCC, CPI and ABCI and include pro forma adjustments based upon estimates, currently available information and certain assumptions that management deems appropriate. The unaudited pro forma statements presented herein are not necessarily indicative of the results that would have been obtained had such events occurred on January 1, 1998 as assumed, or of future results. The unaudited pro forma consolidated Statements of Operations should be read in conjunction with the other financial statements and notes thereto included elsewhere in this Report. 10 VIALOG CORPORATION PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 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............ $ 33,913 $1,058 $444 $408 $ -- $ 35,823 Cost of revenues, excluding depreciation........... 15,884 295 214 137 -- 16,530 Selling, general and administrative expense................ 11,483 224 136 145 (98)(a) 11,890 Depreciation expense.... 1,900 23 15 26 1,964 Amortization of goodwill and intangibles........ 1,829 -- -- -- 170 (b) 1,999 Non-recurring charge.... 2,982 2,982 ---------- ------ ---- ---- ----- ---------- Operating income (loss)............... (165) 516 79 100 (72) 458 Interest expense, net... (6,710) -- (5) (9) -- (6,724) ---------- ------ ---- ---- ----- ---------- Income (loss) before income taxes......... (6,875) 516 74 91 (72) (6,266) Income tax expense...... (50) -- -- -- -- (50) ---------- ------ ---- ---- ----- ---------- Net income (loss)..... $ (6,925) $ 516 $ 74 $ 91 $ (72) $ (6,316) ========== ====== ==== ==== ===== ========== Net loss per share-- basic and diluted...... $ (0.97) $ (0.75)(c) ========== ========== Weighted average shares outstanding............ 7,140,146 8,454,432 (c) ========== ========== VIALOG CORPORATION PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 (In thousands, except share and per share data) Pro Forma VIALOG ------------------------------ Corp. ABCC CPI ABCI Adjustments(1) Consolidated(1) --------- ------ ------ ------ -------------- --------------- Net revenues............ $ 23,168 $3,590 $1,228 $1,383 $ -- $ 29,369 Cost of revenues, excluding depreciation........... 12,134 1,181 621 482 -- 14,418 Selling, general and administrative expense................ 7,942 754 437 505 (158)(a) 9,480 Depreciation expense.... 1,235 74 75 80 1,464 Amortization of goodwill and intangibles........ 1,251 -- -- -- 762 (b) 2,013 --------- ------ ------ ------ ----- ---------- Operating income (loss)............... 606 1,581 95 316 (604) 1,994 Interest expense, net... (6,154) 4 (4) (66) -- (6,220) --------- ------ ------ ------ ----- ---------- Income (loss) before income taxes......... (5,548) 1,585 91 250 (604) (4,226) Income tax expense...... -- -- -- -- -- -- --------- ------ ------ ------ ----- ---------- Net income (loss)..... $ (5,548) $1,585 $ 91 $ 250 $(604) $ (4,226) ========= ====== ====== ====== ===== ========== Net loss per share-- basic and diluted...... $ (1.55) $ (0.52)(c) ========= ========== Weighted average shares outstanding............ 3,585,370 8,186,645 (c) ========= ========== - -------- (1) See Note 3 to unaudited pro forma consolidated financial statement. 11 VIALOG CORPORATION NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS 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 videoconferencing 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 ABCC, CPI, and 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 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. 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 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. (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. 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 and six months ended June 30, 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 $6.1 million, or 52%, from $11.9 million to $18.0 million for the three months ended June 30, 1998 and 1999, respectively, and increased $10.7 million, or 46%, from $23.2 million to $33.9 million for the six months ended June 30, 1998 and 1999, respectively. The increase was primarily due to increased call volumes for audioconferencing and videoconferencing services during the three and six months ended June 30, 1999, 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 $2.1 million and $4.2 million for the three and six months ended June 30, 1999, respectively, which consisted of increased sales of teleconferencing services of approximately $1.2 million to existing customers and $871,000 to new customers for the three months ended June 30, 1999, and $2.0 million to existing customers and $2.2 million to new customers for the six months ended June 30, 1999, (ii) a net decrease in the combined Atlanta-Montgomery Center's revenues of $495,000 and $635,000 for the three and six months ended June 30, 1999, respectively, which consisted of a decrease in the Atlanta Center's revenues of approximately $2.1 million and $3.8 million due to the closing of the Atlanta facility in January, 1999, and an increase in the Montgomery Center's revenues of $1.6 million and $3.2 million related to the consolidation of the Atlanta Center's traffic with Montgomery, (iii) an increase in the Cambridge Center's revenues of $425,000 and $857,000 for the three and six months ended June 30, 1999, respectively, which consisted of increased audio teleconferencing services to existing and new customers, and (iv) an increase of $4.2 million and $6.6 million for the three and six months ended June 30, 1999, respectively, 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 $2.2 million, or 37%, from $6.0 million to $8.2 million for the three months ended June 30, 1998 and 1999, respectively, and increased $3.8 million, or 31%, from $12.1 million to $15.9 million for the six months ended June 30, 1998 and 1999, respectively, but decreased as a percentage of revenue from 50.6% to 45.8% for the three months ended June 30, 1998 and 1999, respectively, and from 52.4% to 46.8% for the six months ended June 30, 1998 and 1999, respectively. The dollar increase was primarily due to (i) an increase in the Reston Center's cost of revenues, excluding depreciation, of $1.0 million and $1.8 million for the three and six months ended June 30, 1999, respectively, resulting from increased telecommunications costs and personnel and related costs associated with increased call volumes, (ii) a net decrease in the combined Atlanta-Montgomery Center's cost of revenues, excluding depreciation, of $365,000 and $428,000 for the three and six months ended June 30, 1999, respectively, which consisted of decreases in the Atlanta Center of $862,000 and $1.5 million due 13 to the closing of the Atlanta Center in January, 1999, and increases in the Montgomery Center of $497,000 and $1.1 million related to the consolidation of the Atlanta and Montgomery Centers, (iii) an increase in the Cambridge Center's cost of reveneues, excluding depreciation, of $100,000 and $247,000 for the three and six months ended June 30, 1999, respectively, resulting from increased telecommunications costs associated with increased call volumes, and (iv) an increase of $1.5 million and $2.3 million for the three and six months ended June 30, 1999, respectively, 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 $2.2 million, or 50%, from $4.4 million to $6.6 million for the three months ended June 30, 1998 and 1999, respectively, and increased $3.5 million, or 45%, from $7.9 million to $11.4 million, for the six months ended June 30, 1998 and 1999, respectively. The increase was due to (i) an increase in selling expense of $413,000 and $1.2 million for the three and six months ended June 30, 1999, respectively, due to the deployment of a national sales force throughout 1998, (ii) an increase of $788,000 and $1.1 million for the three and six months ended June 30, 1999, respectively, 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, and (iii) an increase of approximately $1.2 million for the three and six months ended June 30, 1999 due to costs associated with the departure of the former Chief Executive Officer and other management staff. Depreciation and amortization expense. Depreciation and amortization expense increased $744,000 from $1.3 million to $2.0 million for the three months ended June 30, 1998 and 1999, respectively, and increased $1.2 million from $2.5 million to $3.7 million for the six months ended June 30, 1998 and 1999, respectively. The increase was primarily due to additions to property and equipment throughout 1998. In addition, amortization of goodwill and intangibles increased $376,000 and $578,000 for the three and six months ended June 30, 1999, respectively, which represents amortization expense related to the three Operating Centers acquired on February 10, 1999. Non-recurring charge. The results for the three months ended June 30, 1999 include a non-recurring charge of approximately $3.0 million related to the consolidation of four of the Company's Operating Centers. The Operating Centers affected include Oradell, New Jersey and Danbury, Connecticut, which the Company expects to close in the third quarter of 1999; and Houston, Texas, and Palm Springs, California, which are expected to close by the end of 1999. In conjunction with these closings, the Company is expanding its other facilities to accommodate the transitioned business. The Company anticipates that it will realize annual cost savings beginning in the year 2000 in the range of $1.5 million to $2.0 million as a result of the consolidation. In 1999, the Company anticipates that the cost savings will be offset by incremental costs associated with executing the consolidation plan. In addition, the Company plans to combine its Corporate offices and its Cambridge Center in the first half of 2000. The non-recurring charge includes (i) approximately $1.2 million associated with facility lease costs from the exit dates through the lease termination dates (net of estimated sublease income), (ii) $860,000 associated with personnel reductions of approximately 130 conference coordinators, customer service, technical support, and general and administrative positions, (iii) $683,000 associated with the impairment of intangible assets, (iv) $150,000 associated with legal fees and other exit costs, and (v) $114,000 associated with the write-off of leasehold improvements. No amounts have been paid as of June 30, 1999. Interest expense, net. Interest expense, net increased $230,000 from $3.1 million to $3.3 million for the three months ended June 30, 1998 and 1999, respectively, and increased $556,000 from $6.1 million to $6.7 million for the six months ended June 30, 1998 and 1999, respectively. The increase was primarily due to the following: (i) $154,000 and $298,000 for the three and six months ended June 30, 1999, respectively, of interest expense related to the Company's revolving credit facility executed in the fourth quarter of 1998, (ii) $44,000 14 and $89,000 for the three and six months ended June 30, 1999, respectively, of non-cash interest expense related to the amortization of deferred debt issuance costs, and (iii) decreased interest income of approximately $32,000 and $169,000 for the three and six months ended June 30, 1999, respectively, due to reduced cash balances. Liquidity and Capital Resources The Company generated positive cash flows of $1.2 million for the six months ended June 30, 1999 as compared to negative cash flows of $6.0 million for the six months ended June 30, 1998. For the six months ended June 30, 1999, the Company generated negative cash flows from operations of $642,000 compared to negative cash flows from operations of $2.4 million for the six months ended June 30, 1998. Cash used in investing activities of $33.4 million for the six months ended June 30, 1999 included $29.1 million related to the acquisitions of ABCC, CPI and ABCI, as well as $4.3 million related to the acquisition of property and equipment. Cash provided by financing activities of $35.2 million for the six months ended June 30, 1999 includes $33.4 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 June 30, 1999, the Company was in compliance with all covenants contained in the Indenture. On October 6, 1998, the Company executed a two year, $15.0 million credit facility (the "Credit Facility") with Coast Business Credit, a division of Southern Pacific Bank. The Credit Facility provides for (i) a term loan in the principal amount of $1.5 million, (ii) a term loan of up to 80% of the purchase price of new and used equipment, not to exceed $4.0 million, and (iii) a revolving loan based on a percentage of eligible accounts receivable. Loans under the Credit Facility bear interest at the higher of 7% or the Prime Rate plus 1 1/2%, and interest is based on a minimum outstanding principal balance of the greater of $5.0 million or 33% of the available Credit Facility. The Credit Facility includes certain early termination fees. The Credit Facility is secured by the assets of each of the 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 June 30, 1999, the Company was in compliance with such ratios and tests. As of June 30, 1999, the Company had outstanding $1.4 million on the term loan; $1.1 million on the equipment term loan; and $4.2 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, planned capital expenditures for property and equipment and payment of the cash portion of the non- recurring charges for the 15 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 Original Acquisitions were acquired, except for the Oradell Center, limit through 1999 the Company's ability to change the location of an Operating Center's facilities (except for the Montgomery Center), physically merge the Operating Center's operations with another operation, change the position of those employees who received employment agreements pursuant to the applicable Acquisition agreement, reduce the workforce or terminate employees (except as related to employee performance, the contemplated reorganization of the combined sales and marketing staff and the consolidation of certain accounting functions) without the approval of a majority in interest of the former stockholders of the affected Operating Center. 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. 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. In connection with the closing of the Danbury Center, the Company has obtained the approvals of a majority in interest of the former stockholders of the Danbury Center. Based on the term of these limitations and the fact that the Company has been growing and adding additional employees, the Company does not believe that these limitations will have a significant impact on the future results of operations and liquidity. The Company is highly leveraged at June 30, 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 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. The Company has substantially completed the repair or replacement and testing required for each internal system and component which was not Year 2000 compliant and has scheduled such repair or replacement for the few remaining systems or components which are not yet Year 2000 compliant. 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 September 30, 1999. 16 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. 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 30, 1999. The Company intends to prepare a contingency plan as it becomes aware of Year 2000 problems or risks. 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 Operating Centers and third party service providers could lessen any potential adverse impact. New Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use, and is effective for fiscal years beginning after December 31, 1998, with earlier application encouraged. The Company adopted SOP 98-1 on January 1, 1999, the adoption of which did not have a material 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 Exhibit 27--Financial Data Schedule (b)Reports on Form 8-K. A report on Form 8-K was filed on June 9, 1999 to report the appointment of Kim Mayyasi to the position of President and Chief Executive Officer, effective July 1, 1999. The Company also announced the resignation of Glenn Bolduc as President and CEO. 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: August 16, 1999 /s/ Kim Mayyasi _____________________________________ Kim Mayyasi, 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 VIALOG Corporation Calculation of Shares Used in Determining Loss Per Share (Unaudited) Three Months Ended June 30, Six Months Ended June 30, ---------------------------- -------------------------- 1998 1999 1998 1999 ------------- ------------- ------------ ------------ Common stock, beginning of period.............. 3,576,440 8,399,066 3,486,380 3,693,672 Weighted average common shares issued during period, net............ 51,632 163,183 98,990 3,446,474 Common stock options and warrants using the treasury stock method.. -- -- -- -- ------------- ------------- ------------ ------------ 3,628,072 8,562,249 3,585,370 7,140,146 ============= ============= ============ ============ Net loss (in thousands)............. $ (2,954) $ (5,208) $ (5,548) $ (6,925) ============= ============= ============ ============ Basic and diluted net loss per share......... $ (0.81) $ (0.61) $ (1.55) $ (0.97) ============= ============= ============ ============ 21