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ACT TELECONFERENCING, INC.

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Commission file number 0-27560

ACT Teleconferencing, Inc.
(Exact name of registrant as specified in its charter)

        Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of October 31, 2002, 8,952,623 shares of the issuer's common stock were outstanding.

ACT TELECONFERENCING, INC.

FORM 10-Q

PART I—Financial Information

ACT Teleconferencing, Inc.

Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

ACT Teleconferencing, Inc.

Consolidated Statements of Operations

(Unaudited)

See accompanying notes to consolidated financial statements.

ACT Teleconferencing, Inc.

Consolidated Statements of Shareholders' Equity

(Unaudited)

See accompanying notes to consolidated financial statements.

ACT Teleconferencing, Inc.

Consolidated Statements of Cash Flow

(Unaudited)

See accompanying notes to financial statements.

ACT Teleconferencing, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1-Basis of Presentation and Significant Accounting Policies

        The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the nine-month and three-month periods ending September 30, 2002, are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. For further information, refer to the financial statements and footnotes included in our annual report on Form 10-K for the year ended December 31, 2001, and its amendments and subsequent filings.

        The consolidated financial statements include the accounts of ACT Teleconferencing, Inc., and its wholly-owned domestic and worldwide subsidiaries. With the exception of ACT Business Solutions Limited, which is 96.7% held, ACT owns 100% of all of its subsidiaries. Significant intercompany accounts and transactions have been eliminated.

Business

        ACT Teleconferencing, Inc. is a full-service provider of audio, video, data and web-based teleconferencing services to businesses and organizations in North America, Europe, and Asia Pacific. The Company's conferencing services enable its clients to cost-effectively conduct remote meetings by linking participants in geographically dispersed locations. The Company is present in ten countries, with sales and service delivery centers in nine countries and a sales office and European regional headquarters in Belgium. ACT Teleconferencing Inc.'s primary focus is to provide high value-added conferencing services to organizations such as professional service firms, investment banks, high tech companies, law firms, investor relations firms, and other domestic and multinational companies. The Company also provides outsourced or managed services to major telecommunication companies.

Goodwill

        The Company has adopted SFAS 142, which requires nonamortization of goodwill and intangible assets that have indefinite useful lives and annual impairment tests of those assets. The statement also provides specific guidance about how to determine and measure goodwill and intangible asset impairments, and requires additional disclosure of information about goodwill and other intangible assets. Goodwill and intangible assets acquired after June 30, 2001 were subject to the nonamortization provisions of the statement. The Company is currently in the process of having an external goodwill impairment test performed and expects to have the results of this analysis prior to December 31, 2002. The following presents the three months and nine months ended September 30, 2001 net income and per share amounts exclusive of goodwill amortization:

        Other intangibles includes a non-compete agreement with one of our subsidiary officers in the amount of approximately $1.5 million less accumulated amortization of $477,000 at September 30, 2002. The estimated future aggregate amortization expense for existing other intangible assets is $300,000 annually through December 31, 2005.

        At September 30, 2002, goodwill recorded at the segment reporting level was $6.9 million in audio services and $13.4 million in video services.

Foreign Currency Conversion

        The financial statements of the Company's foreign subsidiaries have been translated into United States dollars at the weighted average exchange rate during the quarter for the statements of operations and quarter-end rate for the balance sheets.

Internal Use Software

        The Company capitalizes costs of materials, consultants, and payroll and payroll-related costs which are incurred in developing internal-use computer software, beginning once the application development stage is attained and continuing until the post-implementation/operation stage is achieved. Costs incurred prior to and after the establishment of the application development stage are charged to general and administrative expenses. The Company capitalized internal use software development costs of $625,000 and $722,000 for the nine months ended September 30, 2002 and 2001, respectively.

Reclassifications

        Certain reclassifications have been made to the 2001 financial statements presentation in order to conform to the 2002 presentation.

2. Related Party Transaction

        In July 2001, the Company entered into an incentive arrangement with one of the Company's officers for the issuance of 32,000 shares of restricted common stock as part of his incentive package. Under the original terms of the agreement, the common stock vests in four equal amounts over four years. Through April 30, 2002, we recognized compensation expense of $96,000 and on May 16, 2002, the board accelerated vesting of the balance of the stock under this agreement and an additional $32,000 in compensation expense was recorded. Additional shares may be issued each year for a four year period based on various profit based performance criteria and would have the same vesting and selling restrictions.

3. Litigation

        On January 29, 2002, the Company received a complaint, filed in the District Court of Colorado, alleging breach of contract pursuant to a term sheet executed between the Company and a prospective lender. The Company was in negotiations to obtain a loan from said lender and due to various circumstances the transaction was not completed.

        On July 3, 2002, the Company also received a complaint, filed in the Superior Court of New Jersey, from a former audio conferencing employee claiming damages and lost commissions on sales made to a large videoconferencing customer.

        The Company intends to vigorously defend these lawsuits and believes these claims are entirely without merit and does not expect them to become material events.

4. Acquisitions

        On October 10, 2001, with an effective date of October 1, 2001, ACT Videoconferencing, Inc., a wholly owned subsidiary of the Company, closed on the acquisition of substantially all of the assets of PictureTel Corporations' 1414c worldwide videoconferencing service delivery business ("the Videoconferencing Business").

        The selected unaudited pro forma combined financial information presented below has been derived from the audited historical financial statements of the Company and reflects management's present estimate of pro forma adjustments, including the purchase price allocations. The unaudited pro forma condensed combined financial statements may not be indicative of the results that actually would have occurred if the transaction described above had been completed and in effect for the periods indicated or the results that may be obtained in the future. The unaudited pro forma condensed combined financial data presented below should be read in conjunction with the audited historical financial statements and related notes thereto of the Company and the Videoconferencing business.

        This acquisition was accounted for under the purchase method of accounting. The pro forma unaudited results of operations for 2001, assuming consummation of the purchase as of January 1, 2001, is as follows:

5. Preferred Stock

        On May 17, 2002, the Company issued 500 shares of 6.5% Series C Convertible Preferred Stock for $4,600,000, net of $400,000 of financing and legal fees. The Company also issued warrants to the investors to purchase 279,885 shares of common stock, of which 229,885 are callable at $5.00 per share and have an expiration date of May 17, 2007. The warrants were valued at $689,000 using the Black Scholes model and, along with the financing and legal fees of $400,000, will be amortized as non-cash preferred dividends over the 18 month term of the agreement. The preferred stockholders may, at their election, convert their shares of outstanding preferred stock into shares of the Company's common stock at a fixed price of $5.00 per share. If this conversion occurs with respect to all outstanding preferred shares prior to any remaining liquidating redemptions by the Company, it would result in 866,667 shares of common stock being issued. The stock is subject to 15 mandatory monthly liquidating redemptions of $333,333 commencing on August 17, 2002, for a total of $5.0 million. As of September 30, 2002, the Company has made the August and September 2002 liquidating redemption payments in cash. At the Company's election, redemption payments may be made in cash or by delivering shares of the Company's common stock based on a 10% discount to the five day volume weighted average market price of the common stock at that time. The preferred stockholders have the right to defer any payment that we elect to be made in common stock until one month following the latest scheduled (deferred) payment. Terms of the investment prevent the preferred stock investors from holding more than 10 percent of the Company's outstanding common stock at any point in time, which will also limit potential dilution. These terms would require redemption payments to be made in cash if prior redemptions in common stock are greater than anticipated.

6. Earnings Per Share

        The following table sets forth the computation of basic and diluted earnings per share for the three months and the nine months ended September 30, 2001. The remaining periods presented in the statement of operations have no dilutive effect.

7. Business Segment Analysis

        The Company's decisions on resource allocation and performance assessment are primarily based on the market potential of each regional operating location. Each of the locations offers the same products and services, has similar customers and equipment, and is managed directly by the Company's executives, allowing all locations to be aggregated under the guidelines of FASB Statement No. 131 resulting in one reportable line of business to the extent that services are separately identifiable. Prior to October 2001, audio conferencing services comprised approximately 90% of total services, while video and other conferencing services were approximately 10% of total revenues.

        In October 2001, the Company acquired the assets of PictureTel Corporation's 1414c worldwide videoconferencing service delivery business. In association with this acquisition, the Company's decisions on resource allocation and performance continue to be based on regional market potential but also on the separate operating segments of audio, video, and internet teleconferencing services.

        The following summary provides financial data for the Company's operating segments for the nine months ended September 30, 2002. It is impracticable for the Company to present comparative information for the nine months ended September 30, 2001 because the information, other than revenue figures, does not exist as the Company assessed performance based on geographic markets rather than product markets.

For the nine months ended September 30, 2002: