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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark One)

          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 [ X ]   No [   ]

          Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of July 31, 2002, 8,980,523 shares of the issuer’s common stock were outstanding.

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ACT TELECONFERENCING, INC.

FORM 10-Q

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PART I – Financial Information

ACT Teleconferencing, Inc.
Consolidated Balance Sheets

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ACT Teleconferencing, Inc.
Consolidated Statements of Operations
(Unaudited)

See accompanying notes to consolidated financial statements.

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ACT Teleconferencing, Inc.
Consolidated Statements of Shareholders’ Equity
(Unaudited)

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ACT Teleconferencing, Inc.
Consolidated Statements of Cash Flow
(Unaudited)

See accompanying notes to financial statements.

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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 six-month and three-month periods ending June 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 internet-based teleconferencing services to businesses and organizations in North America, Europe, and Asia Pacific. Our conferencing services enable our clients to cost-effectively conduct remote meetings by linking participants in geographically dispersed locations. We are present in ten countries with sales and service delivery centers in nine countries and a sales office and European regional headquarters in Belgium. Our 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. We also provide outsourced or managed services to major telecommunication companies.

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ACT Teleconferencing, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

Note 1-Basis of Presentation and Significant Accounting Policies (continued)

Recent Pronouncements

             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 has internally completed the transitional goodwill impairment test required by SFAS 142 and a significant write-down of goodwill is not currently expected. The Company will review this on a periodic basis. The following presents the three months and six months ended June 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 $396,000 at June 30, 2002. The estimated future aggregate amortization expense for existing other intangible assets is $300,000 annually through December 31, 2005.

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

             The Financial Accounting Standards Board (FASB) adopted Statement 145 Recission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections for fiscal years beginning after May 15, 2002. The Company does not believe this will have a significant effect.

            The FASB adopted statement 146 Accounting for Costs Associated with Exit or Disposal Activities for activities initiated after December 31, 2002 with early adoption encouraged. The Company does not believe this will have a significant effect.

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.

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ACT Teleconferencing, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

Note 1-Basis of Presentation and Significant Accounting Policies (continued)

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 $402,000 and $297,000 for the six months ended June 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 and is restricted 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.   Debt

             A subsidiary of the Company is in technical violation of certain financial covenants with one of its lenders. The lender has not currently waived the violations but has issued a letter stating it does not intend to take action at this time. The Company is in the process of renegotiating these financial covenants with the lender.

4.   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 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 audioconferencing 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.

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ACT Teleconferencing, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

5.   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 video conferencing service delivery business (the Videoconferencing Business).

             The following 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:

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ACT Teleconferencing, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

6.   Preferred Stock

             On May 17, 2002, we issued 500 shares of 6.5% Series C Convertible Preferred Stock for $4,600,000, net of financing and legal fees of $400,000. We 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 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 our common stock at a fixed price of $5.00 per share. If this conversion occurred with respect to all outstanding preferred shares prior to any liquidating redemptions by us, it would result in 1,000,000 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. At our election, we may make redemption payments in cash or by delivering shares of our common stock based on a 10% discount to the five day volume weighted average market price of our 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 our outstanding common stock at any point in time, which will also limit potential dilution. This would require us to make redemption payments in cash if prior redemptions in common stock are greater than anticipated.

7.   Earnings Per Shares

             The following table sets forth the computation of the denominator for the calculation of basic and diluted earnings per share for the six months ended June 30, 2001. The remaining periods presented in the statements of operations have no dilutive effect. The numerator in the computation of earnings per share is the same as that displayed on the face of the statements of operations.

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ACT Teleconferencing, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

8.   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. Video and other conferencing services were approximately 10% of total revenues.

             In October 2001, the Company acquired the assets of PictureTel Corporations’ 1414c worldwide video conferencing 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 six months ended June 30, 2002. It is impracticable for the Company to present comparative information for the six months ended June 30, 2001 as the information, other than revenue figures, does not exist as the Company assessed performance based on geographic markets rather than product markets.

For the six months ended June 30, 2002:

             The following summary provides financial data for significant geographic markets in which the Company operates.

For the six months ended June 30, 2002:

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ACT Teleconferencing, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

8.   Business Segment Analysis (continued)

For the six months ended June 30, 2001:

             For the six months ended June 30, 2002, the United States comprises approximately 89% of the North American total revenue, the United Kingdom comprises approximately 89% of the European total revenue, and Australia comprises approximately 71% of the Asia Pacific total revenue.

             The Company’s largest customer accounted for 8% and 9% of consolidated revenues and the Company’s second largest customer accounted for 7% and 27% of consolidated revenues for the six months ended June 30, 2002 and 2001, respectively.

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Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

             This quarterly report on Form 10-Q contains certain forward-looking statements that involve risks and uncertainties. These statements refer to objectives, expectations, intentions, future events, or our future financial performance, and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, level of activity, performance, or achievements to be materially different from any results expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by words such as “may,” “will,” “should,” “could,” “expects,” “anticipates,” “intends,” “plans,” “believe,” “estimates,” “predicts,” “potential,” and similar expressions. Our actual results could differ materially from those included in forward-looking statements.

Recent Events

Business Operations

             For the six months ended June 30, 2002, our revenue was $25.7 million, an increase of $2.4 million or 10 percent over the same period in the prior year. The increase was due to our two acquisitions, which increased revenues by approximately $6.8 million but was offset by a $4.1 million reduction in revenue from Concert, previously our largest customer, and a slight reduction in equipment sales.

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             Our financial model has changed substantially as a result of our recent videoconferencing company acquisitions, PictureTel and Proximity. A higher volume of video conferencing revenues relative to total conferencing revenues reduced our gross profit to 35 percent of revenues for the first half of 2002 compared to 47 percent in the first half of 2001. We experienced higher telecommunications network costs associated with videoconferencing services.

             Selling, general and administrative expenses also increased in the first half of 2002 due to our recent acquisitions, which added $1.0 million to these expenses and an additional $1.0 million was incurred to support and grow the existing business. Additional revenue attributable to these acquisitions was offset by the decrease in the Concert business, causing selling, general and administrative expenses to increase to 44 percent of revenues for the first half of 2002 compared to 40 percent in the first half of 2001.

             We are presently achieving an estimated annual revenue run rate of between $50 million to $55 million for the year excluding new volume increases. For the remainder of 2002, we are estimating that variable telecommunication costs will run at approximately 21 percent of revenue, other variable costs at approximately 3 percent of revenue, and fixed cash costs and depreciation and amortization will run at approximately $3.2 million and $400,000 per month, respectively, compared with variable telecommunication costs of 20 percent, other variable costs at 3 percent, average fixed cash costs of $3.3 million per month, and average depreciation and amortization of $400,000 per month for the six months ended June 30, 2002.

             See “Significant Business Activities” and “Results of Operations” below for a more detailed analysis.

Components of Major Revenue and Expense Items

             Revenues. We earn revenues from fees charged to clients for audio, video, data and internet-based teleconference bridging services, from charges for enhanced services, room rental charges, and from rebilling certain long-distance telephone costs. We also earn nominal revenue on conferencing product sales.

             Cost of Sales. Cost of sales consists of long distance telephony costs, depreciation on our teleconferencing bridges and equipment, equipment product costs, operator and operations management salaries and office expenses for operations staff.

             Selling, General, and Administration expense. Selling, general, and administration expense consist of salaries, benefits, professional fees, and office expenses of our selling and administrative organizations.

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             The following table outlines certain items in our income statement as a percentage of sales:

Volume Trends

             The following table shows recent quarterly volume trends for the first and second quarter of 2002 by major product:

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Revenue Trends

             Our individual geographic regions experience trends similar to our overall business trends. The following table shows quarterly revenue trends by major product: