<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________
Commission file number: 0-25940
VIEW TECH, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0312442
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3760 Calle Tecate, Suite A
Camarillo, CA 93012
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (805) 482-8277
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the 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:
Number of Shares Outstanding
Class as of October 31, 1999
----- ----------------------
Common Stock, $.0001 par value 7,897,885
<PAGE>
TABLE OF CONTENTS
-----------------
Page Reference
--------------
PART I FINANCIAL INFORMATION
Balance Sheets
September 30, 1999 (unaudited) and December 31, 1998 1
Statements of Operations
Three Months, Nine Months Ended September 30, 1999
and 1998 (unaudited) 2
Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998 (unaudited) 3
Notes to Financial Statements (unaudited) 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION 17
SIGNATURES 18
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VIEW TECH, INC.
BALANCE SHEETS *
As of September 30, 1999 (unaudited) and December 31, 1998
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1999 1998
-------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 25,060 $ 302,279
Accounts receivable (net of reserves of $255,000 9,002,686 10,594,863
and $219,000 respectively
Inventory 4,149,129 4,223,390
Other current assets 1,265,711 509,797
Net assets of discontinued operations 4,052,493 4,455,351
------------ -----------
Total current assets 18,495,079 20,085,680
PROPERTY AND EQUIPMENT, net 2,318,167 1,948,662
OTHER ASSETS 879,563 588,227
------------ -----------
$ 21,692,809 $22,622,569
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 6,393,334 6,644,930
Current portion of long-term debt 4,394,387 130,794
Accrued payroll and related costs 1,542,093 956,982
Deferred revenue 2,973,287 1,940,579
Accrued restructuring costs 179,106 1,026,496
Other current liabilities 710,277 454,974
------------ -----------
Total current liabilities 16,192,484 11,154,755
------------ -----------
LONG-TERM DEBT 99,909 4,397,299
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.0001, authorized
5,000,000 shares, none issued or outstanding -- --
Common stock, par value $.0001, authorized 789 772
20,000,000 shares, issued and outstanding
7,897,885 and 7,722,277 shares, respectively
Additional paid-in capital 15,472,726 15,261,591
Accumulated deficit (10,073,099) (8,191,848)
------------ -----------
Total stockholders' equity 5,400,416 7,070,515
------------ -----------
$ 21,692,809 $22,622,569
============ ===========
</TABLE>
(*) See accompanying notes to financial statements.
-1-
<PAGE>
VIEW TECH, INC.
STATEMENTS OF OPERATIONS *
For the three and nine months ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Equipment $ 5,199,243 $ 8,130,760 $17,975,645 $20,945,803
Service 3,095,013 2,124,941 8,656,928 6,448,275
----------- ----------- ----------- -----------
Total revenues 8,294,256 10,255,701 26,632,573 27,394,078
----------- ----------- ----------- -----------
Cost of goods sold:
Equipment 3,688,022 5,744,061 12,573,125 14,914,518
Service 1,538,087 1,066,694 4,339,856 3,069,102
----------- ----------- ----------- -----------
Total cost of goods sold 5,226,109 6,810,755 16,912,981 17,983,620
----------- ----------- ----------- -----------
Gross margin 3,068,147 3,444,946 9,719,592 9,410,458
----------- ----------- ----------- -----------
Sales and marketing 2,478,460 2,012,901 6,985,460 5,645,654
General and administrative 1,590,162 1,373,398 4,028,162 4,363,263
Restructuring -- -- -- 3,303,998
----------- ----------- ----------- -----------
Loss from operations (1,000,475) 58,647 (1,294,030) (3,902,457)
Net interest expense (70,359) (61,000) (184,363) (187,000)
Provision for income taxes -- -- -- (3,900)
----------- ----------- ----------- -----------
Loss from continuing operations (1,070,834) (2,353) (1,478,393) (4,093,357)
Discontinued operations (262,000) 499,852 (402,858) 566,347
----------- ----------- ----------- -----------
Net income (loss) $(1,332,834) $ 497,499 $(1,881,251) $(3,527,010)
=========== =========== =========== ===========
Loss from continuing operations per share
Basic $ (0.14) $ (0.00) $ (0.19) $ (0.61)
=========== =========== =========== ===========
Diluted $ (0.14) $ (0.00) $ (0.19) $ (0.59)
=========== =========== =========== ===========
Income (Loss) from discontinued operations per share
Basic $ (0.03) $ 0.07 $ (0.05) $ 0.09
=========== =========== =========== ===========
Diluted $ (0.03) $ 0.07 $ (0.05) $ 0.09
=========== =========== =========== ===========
Net Income (Loss) per share
Basic $ (0.17) $ 0.07 $ (0.24) $ (0.52)
=========== =========== =========== ===========
Diluted $ (0.17) $ 0.07 $ (0.24) $ (0.51)
=========== =========== =========== ===========
Weighted average shares outstanding
Basic 7,889,241 6,833,329 7,827,311 6,746,100
=========== =========== =========== ===========
Diluted 7,889,241 6,968,904 7,827,311 7,003,024
=========== =========== =========== ===========
</TABLE>
(*) See accompanying notes to financial statements.
-2-
<PAGE>
VIEW TECH, INC.
STATEMENTS OF CASH FLOWS *
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,881,251) $(3,527,010)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization 462,124 377,646
Non-cash charges relating to restructuring -- 1,491,392
Provision for bad debts 90,000 101,829
Changes in assets and liabilities:
Accounts receivable 1,502,177 (1,819,332)
Inventory 74,261 (1,821,963)
Other assets (1,047,250) (177,939)
Accounts payable (251,596) 1,523,834
Accrued restructuring costs (847,390) 1,474,120
Accrued payroll and related costs 585,111 (274,582)
Deferred revenue 1,032,708 975,257
Other accrued liabilities 255,303 (70,200)
----------- -----------
Net cash used by operating activities (25,803) (1,746,948)
----------- -----------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 402,858 97,472
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (831,629) (471,044)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under lines of credit 48,056 1,082,106
Repayments of capital lease and other debt obligations (81,853) (73,198)
Issuance of common stock, net 211,152 407,580
----------- -----------
Net cash provided by financing activities 177,355 1,416,488
----------- -----------
NET DECREASE IN CASH (277,219) (704,032)
CASH, beginning of period 302,279 1,028,424
----------- -----------
CASH, end of period 25,060 324,392
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Operating activities reflect:
Interest paid $ 363,486 $ 457,001
=========== ===========
Taxes paid $ 53,286 $ 96,175
=========== ===========
Equipment acquired under capital leases $ -- $ 120,914
=========== ===========
Equipment transferred from inventory $ -- $ 117,742
=========== ===========
</TABLE>
(*) See accompanying notes to financial statements.
-3-
<PAGE>
VIEW TECH, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
- ----------------
View Tech, Inc., a Delaware corporation ("View Tech"), commenced operations in
July 1992 as a California corporation. Since its initial public offering of
Common Stock in June 1995, View Tech has grown through internal expansion and
acquisitions. In November 1996, View Tech merged with USTeleCenters, Inc., a
Massachusetts corporation ("UST" and together with View Tech, the "Company") and
the Company incorporated in Delaware. In November 1997, the Company, through its
wholly-owned subsidiary, acquired the net assets of Vermont Telecommunications
Network Services, Inc., a Vermont corporation headquartered in Burlington,
Vermont, ("NSI") which sells, manages and supports telecommunication network
solutions as an agent for Bell Atlantic. The Company currently has 33 offices
nationwide.
The Company is a leading, single source provider of voice, video and data
equipment, network services and bundled telecommunications solutions for
business customers nationwide. The Company has equipment distribution
partnerships with PictureTel Corporation, VTEL Corporation, PolyCom, Inc.,
Intel(r), Madge Networks, Fujitsu Business Communications Systems, Lucent
Technologies, Ezenia (VideoServer, Inc.), and Northern Telecom and markets
network services through agency agreements with Bell Atlantic, BellSouth, GTE,
Sprint and UUNET Technologies.
The Company is currently actively involved in discussions related to the
completion of a sale of the assets, or other disposal, of UST and NSI, and
accordingly, these operations are classified as discontinued in the accompanying
financial statements.
The information for the three months and the nine months ended September 30,
1999 and 1998 has not been audited by independent accountants, but includes all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, necessary for a fair presentation of the results for such
periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to the rules of the Securities and Exchange
Commission. The financial statements presented herein should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
NOTE 2 - DISCONTINUED OPERATIONS
- --------------------------------
On May 7, 1999, the Company executed a Letter of Intent to sell the assets of
UST and NSI. However, by the end of September, 1999, the negotiations with the
original purchaser relative to said sale were terminated without completing the
sale. The Company, in September, 1999, initiated discussions with alternative
parties which continue as of this date. The Company believes that the
transaction, if completed, may result in a loss; however, the terms of a deal
have not been finalized and, as such, the amount of the loss is not estimable.
The Company anticipates a transaction will occur by January 31, 2000. If the
transaction does not occur, the Company will seek other methods of disposing of
the assets of both UST and NSI.
The balance sheets, statements of operations, and statements of cash flows
have been restated to show the net effect of the discontinuance of the network
business. The assets of UST and NSI consist primarily of accounts receivable,
property, plant and equipment and goodwill. Operating results of UST and NSI are
shown separately in the accompanying statements of operations. Net sales of UST
and NSI were $2,956,278 and $4,561,160 for the quarters ended September 30, 1999
-4-
<PAGE>
and 1998. These amounts are not included in net sales in the accompanying
statements of operations. Assets and liabilities to be disposed of consists of
the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
Accounts receivable $ 2,090,899 $ 3,497,000
Other current assets 325,069 571,000
Property and equipment 1,213,171 1,600,000
Goodwill 2,165,064 2,300,000
Other Assets 95,837 100,351
Current liabilities (1,739,750) (3,380,000)
Long term liabilities (97,797) (233,000)
----------- -----------
Total $ 4,052,493 $ 4,455,351
=========== ===========
</TABLE>
Results of operations of UST and NSI are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $2,956,278 $4,561,160 $9,542,962 $15,931,996
Cost and expenses 3,160,278 3,998,843 9,774,238 15,134,972
---------- ---------- ----------- -----------
Operating income (loss) (204,000) 562,317 (231,276) 797,024
Interest expense 58,000 62,465 171,582 230,677
---------- ---------- ----------- -----------
Net income (loss) $ (262,000) $ 499,852 $ (402,858) $ 566,347
========== ========== =========== ===========
</TABLE>
NOTE 3 - EARNINGS (LOSS) PER SHARE
- ----------------------------------
Basic earnings (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share is computed by dividing net income (loss) by
the diluted weighted average number of common and potentially dilutive shares
outstanding during the period. The weighted average number of potentially
dilutive shares has been determined in accordance with the treasury stock
method.
The reconciliation of basic and diluted shares outstanding is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 7,889,241 6,833,329 7,827,311 6,746,100
Effect of dilutive options and warrants -- 135,574 -- 256,925
--------- --------- --------- ---------
Weighted average shares outstanding
including dilutive effect of securities 7,889,241 6,968,904 7,827,311 7,003,024
========= ========= ========= =========
</TABLE>
Options and warrants to purchase 2,123,050; 2,196,155; 2,113,314; and
2,294,153 shares of Common Stock were outstanding during the three-month and
nine-month periods ended September 30, 1999 and 1998, respectively, but were not
included in the computation of diluted EPS because the options' exercise price
was either greater than the average market price of the Common Stock or the
Company reported a net operating loss and their effect would have been anti-
dilutive.
-5-
<PAGE>
NOTE 4 - LINES OF CREDIT
- ------------------------
View Tech, Inc. and its wholly-owned subsidiary, UST, entered into a $15
million Credit Agreement (the "Agreement") with Imperial Bank and BankBoston
(now Fleet Bank) effective November 21, 1997. The Agreement provides for three
separate loan commitments consisting of (i) a Facility A Commitment of up to $7
million for working capital purposes; (ii) a Facility B Commitment of up to $5
million, which expired on December 1, 1998; and (iii) a Facility C Commitment of
up to $3 million for merger/acquisition activities. Amounts under the Agreement
are collateralized by the assets of the Company. Funds available under the
Agreement vary from time to time depending on many variables including, without
limitation, the amount of Eligible Trade Accounts Receivable and Eligible
Inventory of the Company, as such terms are defined in the Agreement. At
September 30, 1999, the funds available under the Agreement were approximately
$4,750,000. The interest charged on outstanding amounts vary between the Prime
Rate, plus the Prime Margin, or between the Eurodollar Rate, plus the Eurodollar
Rate Margin, depending on the Company's Leverage Ratio as defined in the
Agreement. At September 30, 1999, the interest rate on this Facility was 8.75%.
At September 30, 1999, amounts utilized under the Facility were $4,263,593.
On August 5, 1999, the Company received a Notice of Event of Default and
Notice of Reservations of Rights from the lenders. The Facility C Commitment was
terminated. On November 12, 1999, the Company received a commitment letter from
the Banks outlining the terms of a six-month forbearance agreement to be
implemented in conjunction with an infusion of $2.0 million in subordinated
debt. During the term of the forbearance period, the maximum aggregate amount of
the Facility A facility will be equal to $4.75 million subject to certain
collateral base adjustments. Subject to certain default provisions, which
include the failure to pay certain obligations, the departure of the current,
interim chief executive officer and president, or a particular material event
concerning the Company, the forbearance would continue until May 31, 2000.
Interest on the sum owed on Facility A is set at the Prime Rate plus 2-1/2
percent. Interest on any over-advances is the Prime Rate plus 4 percent.
In return, the Bank received the following consideration: The Bank's current
warrants, which amount to 80,000, and are not exercisable until November 21,
2004, are repriced at $1.63 as of the date of the commitment letter, November
12, 1999. The Bank, under the commitment letter, also stands to receive a
Supplemental Fee of $150,000.
The Company, as noted above, secured interim loans totaling $2.0 million, of
which $1.5 million came from individual investors, and up to $500,000 in credit
from one of the Company's suppliers. The individual investors are to be re-paid
in seven months with interest at the Prime Rate plus 2-1/2 percent for the $1.5
million loan. In return, the Company pledged all of its assets, in a junior
position to the Banks, to the subordinated lenders. Further, the Company will
issue up to 925,000 in 5-year exercisable warrants to the subordinated lenders,
on a proportional basis of each investor's investment, priced at $1.625 a share.
-6-
<PAGE>
NOTE 5 - RESTRUCTURING AND OTHER COSTS
- --------------------------------------
During 1998, the Company recorded a restructuring and asset impairment charge
of $4.2 million. The significant components of the restructuring charge are as
follows:
<TABLE>
<S> <C>
Impairment write-down of goodwill related to
previous acquisitions $1,465,000
Employee termination costs 1,793,000
Facility exit costs 157,000
Write-down of Plant, Property and Equipment 27,000
Travel related expenses 140,000
Consulting expenses 322,000
Other costs 297,013
----------
$4,201,013
==========
</TABLE>
The impairment write-down of goodwill relates to the Company's
determination that there was no future expected cash flows from two acquisitions
that represented $1,465,000 of goodwill. The employee termination costs relate
to approximately 33 employees and officers of the Company. The Company closed
one of its outside network sales offices. The Company also terminated its
internet service provider reseller agreement. In connection with these
decisions, the Company recorded employee termination and facility exit related
expenses, and a write-down of the leasehold improvements. In addition, the
Company's decision to eliminate duplicative corporate overhead functions
resulted in employee termination and travel related expenses. The Company
utilized the services of consultants in connection with the plan of
restructuring.
The total expected cash impact of the restructuring amounts to $2,709,621 of
which $179,106 is reflected in the accompanying financial statements at
September 30, 1999. The Company anticipates the balance of the restructuring
costs will be expended by February 29, 2000.
The following table summarizes the activity against the restructuring charge:
<TABLE>
<S> <C>
Restructuring Charge $ 4,201,013
Cash Paid (2,527,722)
Non-Cash Expenses (1,494,185)
-----------
Balance, September 30, 1999 $ 179,106
===========
</TABLE>
NOTE 6 - INVESTMENTS
- --------------------
During the quarter ended March 31, 1999, the Company made an investment in
Concept Five Technologies, Inc., an information technology services company. The
investment is carried at cost and is included in Other Assets on the
accompanying balance sheet.
NOTE 7 - COMMITMENTS
- --------------------
During the quarter ended September 30, 1999, the Company did not enter into
any material new operating lease agreements.
NOTE 8 - SUBSEQUENT EVENTS
- --------------------------
On or about October 9, 1999, the Company entered into a contract with
Nightingale & Associates ("N&A") to engage S. Douglas Hopkins, a principal of
N&A, as president and chief executive officer on an interim basis. In addition
to time and expense reimbursement, based upon N&A's standard fee schedules, Mr.
Hopkins and N&A will receive, pursuant to an addendum to the October 9, 1999
contract, a performance fee based upon value generated for the shareholders.
Upon termination of the assignment, Mr. Hopkins and N&A will receive a fee equal
in value to 156,000 shares of View Tech's common stock.
In conjunction with execution of their engagement letter, Mr. Hopkins has been
granted 195,000 non-qualified and non-statutory stock options, pursuant to one
of the Company's existing stock option plans. The stock options are priced at
$1.75.
-7-
<PAGE>
In response to various personnel departures, the Board of Directors, on or
about October 8, 1999, authorized management to provide financial or monetary
incentives to certain Company employees to remain with the Company for a
specified period of time, or until the occurrence of a particular material
event. The incentives covering employees were composed of $500,000 in contingent
stay bonuses and 497,500 stock options priced at $1.75 per share. The incentives
are not redeemable by each particular employee until after such particular
employee has fulfilled the requirements under the terms of the agreement. Each
particular agreement may also be subject to certain other conditions precedent
or other contingencies.
-8-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the Company's
financial statements and the notes thereto appearing elsewhere in this form
10-Q. Except for historical information contained herein, the statements in this
form 10-Q are forward-looking statements (including without limitation,
statements indicating that the Company "expects," "estimates," "anticipates," or
"believes" and all other statements concerning future financial results, product
offerings or other events that have not yet occurred), that are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995, Section 21E of the Securities Exchange Act of 1934, as amended and Section
27A of the Securities Act of 1933, as amended. Forward-looking statements
involve known factors, risks and uncertainties which may cause the Company's
actual results in future periods to differ materially from forecasted results.
General
The Company commenced operations in July 1992 as a California corporation.
Since its initial public offering of Common Stock in June 1995, the Company has
grown through internal expansion and acquisitions. In November 1996, concurrent
with a merger (the "Merger") of USTeleCenters, Inc., a Massachusetts corporation
("USTCenters"), with and into View Tech Acquisition, Inc., a Delaware
corporation and a wholly-owned subsidiary of the Company ("VTAI"), the Company
reincorporated in Delaware. Following the Merger, VTAI changed its name to
USTeleCenters, Inc. ("UST"). In November 1997, the Company acquired the net
assets of Vermont Telecommunications Network Services, Inc., a Vermont
corporation headquartered in Burlington, Vermont, which sells, manages and
supports telecommunication network solutions as an agent for Bell Atlantic. The
Company currently has 33 offices nationwide.
The Company is a leading, single source provider of voice, video and data
equipment, network services and bundled telecommunications solutions for
business customers nationwide. The Company has equipment distribution
partnerships with PictureTel Corporation, VTEL Corporation, PolyCom, Inc.,
Intel(r), Madge Networks, Fujitsu Business Communications Systems, Lucent
Technologies, Ezenia (VideoServer, Inc.), and Northern Telecom and markets
network services through agency agreements with Bell Atlantic, BellSouth, GTE,
Sprint and UUNET Technologies.
On May 7, 1999, the Company executed a letter of intent to sell the assets of
UST and NSI, subject to the completion of due diligence and funding, and
accordingly these operations are classified as discontinued in the accompanying
financial statements. However, as stated in Note 2 above, negotiations with the
prospective purchaser have been terminated. The Company is currently in
negotiations with other prospective purchasers for the sale of UST and NSI, or
portions of these subsidiaries.
-9-
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, information
derived from the Company's financial statements expressed as a percentage of the
Company's revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Equipment 62.7% 79.3% 67.5% 76.5%
Service 37.3 20.7 32.5 23.5
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
Cost of goods sold:
Equipment 44.5 56.0 47.2 54.4
Service 18.5 10.4 16.3 11.2
------ ------ ------ ------
Total cost of goods sold 63.0 66.4 63.5 65.6
------ ------ ------ ------
Gross margin 37.0 33.6 36.5 34.4
------ ------ ------ ------
Sales and marketing 29.9 19.6 26.3 20.6
General and administrative 19.2 13.4 15.1 15.9
Restructuring -- -- -- 12.1
------ ------ ------ ------
Income (loss) from operations (12.1) 0.6 (4.9) (14.2)
Net interest expense (0.8) (0.6) (0.7) (0.7)
------ ------ ------ ------
Income (loss) from continuing operations (12.9) -- (5.6) (14.9)
Discontinued operations (3.2) 4.9 (1.5) 2.0
------ ------ ------ ------
Net income (loss) (16.1)% 4.9% (7.1)% (12.9)%
====== ====== ====== ======
</TABLE>
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
Total revenues for the three months ended September 30, 1999 decreased by $2.0
million or 19% to $8.3 million from $10.3 million in the comparable period for
1998. Equipment revenues decreased by $2.9 million or 36% to $5.2 million in the
three months ended September 30, 1999 from $8.1 million in the comparable period
for 1998. The decrease in equipment revenues was substantially triggered by a
liquidity crisis in September which disrupted the Company's product supply and
resulted in a $1.8 million backlog of unshipped orders. Service revenues for the
three months ended September 30, 1999 increased by $1.0 million or 46% to $3.1
million from $2.1 million in the comparable period for 1998. The increase in
service revenues was due primarily to the growth in the installed customer base
and bridging services.
Gross margin for the three months ended September 30, 1999 decreased by $0.4
million to $3.1 million from $3.5 million in the comparable period of 1998.
Gross margin as a percentage of revenues increased by 3.4% from 33.6% in the
three months ended September 30, 1998 to 37% in the comparable period for
1999. The margin improvement is due to the favorable mix of higher margin
service revenue.
Sales and marketing expenses for the three months ended September 30, 1999
increased by $0.5 million or 23% to $2.5 million from $2.0 million in the
comparable period for 1998. Sales and marketing expenses as a percentage of
revenues increased to 29.9% in 1999 from 19.6% in the comparable period for
1998. The increase was primarily due to the opening of new sales offices and
hiring of additional sales and sales engineering personnel in anticipation of
continuing sales growth.
General and administrative expenses for the three months ended September 30,
1999 increased by $0.2 million or 16% to $1.6 million from $1.4 million in the
comparable period for 1998. General and administrative expenses as a percentage
of total revenues increased to 19.2% in the three months ended September 30,
1999 from 13.4% in the comparable period for 1998. The increase in general and
administrative expenses was attributable to management consulting fees incurred
during the three months ended September 30, 1999 not incurred in the comparable
period in 1998.
-10-
<PAGE>
Operating loss increased $1.1 million to a loss of $(1.0) million in the three
months ended September 30, 1999 from income of $0.1 million in the comparable
period for 1998. The increase in loss from operations for the three months ended
September 30, 1999 is related decline in gross margin and increases in sales and
marketing and general and administrative expenses described above.
Interest expense increased $9,359 from $61,000 in the three months ended
September 30, 1998 to $70,359 in the comparable period for 1999. The increase
was primarily due to slightly higher borrowings on the line of credit and an
increase in the prime rate of 1/2 percent.
Loss from discontinued operations increased by $0.8 million from income of
$0.5 million in the three months ended September 30, 1998 to a loss of $(0.3)
million in the comparable period for 1999. The increase in loss was primarily
due to commission rate cuts by the Regional Bell Operating Companies (RBOC's).
Net loss increased $1.8 million to a loss of $(1.3) million in the three
months ended September 30, 1999 from $0.5 million for the comparable period for
1998. Net loss as a percentage of revenues increased to (16.1)% for the three
months ended September 30, 1999 compared to 4.9% for the comparable period for
1998.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
Total revenues for the nine months ended September 30, 1999 decreased by $0.8
million or 3% to $26.6 million from $27.4 million in the comparable period for
1998. Equipment revenues fell by $3.0 million or 14% to $18.0 million from
$21.0 million in the comparable period for 1998. The decrease in equipment
revenues for the nine month period was driven by the shortfall experienced in
the third quarter of 1999. Service revenues for the nine months ended September
30, 1999 increased by $2.2 million or 34% to $8.7 million from $6.5 million in
the comparable period for 1998. The increase in service revenues was due
primarily to the growth in the installed customer base and bridging services.
Gross margin for the nine months ended September 30, 1999 increased by $0.3
million from $9.4 million in the comparable period for 1998 to $9.7 million in
1999. Gross margin as a percentage of revenues increased by 2.1% due to a
favorable equipment product mix and the overall increase in the mix of higher
margin service revenues.
Sales and marketing expenses for the nine months ended September 30, 1999
increased by $1.3 million or 24% to $7.0 million from $5.7 million in the
comparable period for 1998. Sales and marketing expenses as a percentage of
revenues increased to 26.3% in the nine months ended September 30, 1999 from
20.6% in the comparable period for 1998. The dollar increase was primarily due
to costs associated with the opening of new sales offices and the hiring of new
sales and sales engineering personnel.
General and administrative expenses for the nine months ended September 30,
1999 decreased by $0.3 million or 8% to $4.0 million from $4.3 million in the
comparable period for 1998. General and administrative expenses as a percentage
of total revenues decreased to 15.1% in the nine months ended September 30, 1999
from 15.9% in the comparable period for 1998. The decrease in general and
administrative expenses was primarily achieved as a result of the Company's
restructuring in 1998.
Operating loss decreased $2.6 million to a loss of $(1.3) million in the nine
months ended September 30, 1999 from a loss of $(3.9) million in the comparable
period for 1998. The decrease in loss from operations for the nine months ended
September 30, 1999 is primarily related to the restructuring charge in 1998.
-11-
<PAGE>
Interest expense decreased $2,637 from $187,000 in the nine months ended
September 30, 1998 to $184,363 in the comparable period for 1999.
Loss from discontinued operations increased by $1.0 million from income of
$0.6 million in the nine months ended September 30, 1998 to a loss of $(0.4)
million in the comparable period for 1999. The increase in loss was primarily
due to commission rate cuts by the RBOC's.
Net loss decreased $1.6 million to a loss of $(1.9) million in the nine
months ended September 30, 1999 from a loss of $(3.5) million for the comparable
period for 1998. Net loss as a percentage of revenues decreased to (7.1)% for
1999 compared to (12.9)% for 1998.
Liquidity and Capital Resources
The Company has financed its recent operations and expansion activities with
the proceeds from private placements of equity securities, bank debt, and vendor
credit arrangements. On November 10, 1998, the Company completed an offering of
$1,200,000 of Common Stock.
In November 1997, the Company entered into a $15 million Credit Agreement (the
"Agreement") which provided for a maximum credit line of up to $15 million for a
term of five (5) years with Imperial Bank and BankBoston (now Fleet Bank). The
Company is presently in default under various covenants of that Agreement. See
discussion in Note 4-Lines of Credit, for a more expansive discussion of current
status and the November 12, 1999 stand-still agreement executed by the Company
with the Banks.
Net cash used by operating activities for the nine months ended September 30,
1999 was approximately breakeven, primarily caused by the Company's net loss of
$1.9 million, an increase in other assets of $1.0 million, and a decrease in
accrued restructuring of $0.8 million partially offset by depreciation and
amortization of $0.4 million, a decrease in accounts receivable of $1.5 million,
an increase in deferred revenue of $1.0 million, an increase in accrued payroll
and related costs of $0.6 million, and an increase in other accrued liabilities
of $0.3 million.
The Company is currently engaged in documenting a $2.0 subordinated debt
infusion and a forbearance agreement with its senior lenders.
Net cash provided by discontinued operations for the nine months ended
September 30, 1999 was $0.4 million, primarily due to the decrease in the
receivables of the discontinued operation.
Net cash used by investing activities for the nine months ended September 30,
1999 was $0.8 million, relating to the purchase of office furniture, computer
and bridging equipment.
Net cash provided by financing activities for the nine months ended September
30, 1999 was $0.2 million primarily related to the issuance of common stock.
The Company believes that its available funds are not sufficient to meet the
funding and working capital requirements for its continuing operations unless
new funding alternatives are in place when the Line of Credit Agreement is
actually terminated. The Company is exploring avenues for a long-term
recapitalization of the Company in conjunction with its investment advisor, H.C.
Wainwright. The Company's liquidity constraints remain significant. There can be
no assurance that additional financing or capital will be available, or on
acceptable terms.
-12-
<PAGE>
RISK FACTORS
Future Financing Requirements
The Company will require additional funds for its continued operations, to
implement its expansion and improve its infrastructure in order to efficiently
operate its business. The Company is currently in the process of raising
additional funds in the form of leasing facilities, credit facilities and debt
financing, or other forms of financing. There can be no assurance that such
funding facilities or financing will occur or that sufficient funds will be
raised. In July 1999, the Company announced that it had hired H.C. Wainwright as
its investment banker. Through H.C. Wainwright, the Company is seeking capital
investments, additional funding, strategic partnerships or other arrangements.
The failure to raise sufficient, or any, funding, on terms acceptable to the
Company, will adversely affect the Company's business, financial condition and
results of operations.
Dependence Upon Key Personnel
The Company depends to a considerable degree on the continued services of
certain of its management and employees. Nevertheless, future changes in current
management could have a material adverse affect on the Company, including, but
not limited to, a default in the stand-still agreement with the Company's Banks
relating to the Company's line of credit (see Note 4 of the Financial Notes in
this 10Q filing).
The compensation agreement with N&A and Mr. Hopkins and retention incentives
to key employees are believed to provide an adequate assurance of key personnel
continuity at this time.
Between the time of the last 10-Q filing and October 15, 1999, the Company
lost twelve (12) sales and technical service personnel which may have had an
effect on the third quarter sales in certain regions of the country in which the
Company does business. The Company has continued to hire replacements for such
personnel. Most of the persons who have left the Company appear to have gone to
a new competitor of the Company, or an already existing competitor of the
Company.
Limited History of Profitable Operations; Significant Fluctuations in Operating
Results and non-Recurring Items; Future Results of Operations
View Tech and UST have operated since 1992 and 1987, respectively. Since
November 29, 1996, the Company has operated on a combined basis. The Company
reported a net loss of $1,332,834 and $1,881,251, respectively, for the three
months and nine months ended September 30, 1999. The Company may continue to
experience significant fluctuations in operating results as a result of a number
of factors, including, without limitations, delays in product enhancements and
new product introductions by its suppliers, further commission rate cuts by Bell
Atlantic and GTE, market acceptance of new products and services and reduction
in demand for existing products and services as a result of introductions of new
products and services by its competitors or by competitors of its suppliers. The
Company also has new competition and expanded competition that includes former
personnel from the Company.
The Company's videoconferencing business model, due to most of its existing
contracts, is such that the Company does not receive payment from its customers
until over 100 days after it purchases the equipment for sale to the Customer.
This is due to the custom and practice in the videoconferencing industry that
customers do not pay for the equipment until the last end point is in place, and
further, after what is commonly called an "acceptance period." Although the
Company has been working to change this model throughout 1999, pressures of
competition and contract terms from large businesses and government agencies, in
large part, work against changing this model through the present.
-13-
<PAGE>
In addition, the Company's operating results will continue to significantly
vary depending on the mix of products and services comprising its revenues in
any period. There can be no assurance that the Company will achieve revenue
growth or will be profitable on a quarterly or annual basis in the future, or at
all. Further, the Company may be required to file for bankruptcy protection if
the Company does not secure sufficient funding, if there is a default on the
stand-still agreement, or if any of the risks previously described, relating to
the Company's financial situation, occur.
Dependence on Suppliers
View Tech is a non-exclusive distributor on behalf of multiple manufacturers
of video-conferencing equipment. The various distribution agreements can be
terminated without cause upon written notice by the suppliers, subject to
certain notification requirements. There can be no assurance that these
agreements will not be terminated, or that they will be renewed on terms
acceptable to the Company. These suppliers have no affiliation with the Company
and are competitors of the Company.
Competition
The video communications industry is highly competitive. The Company competes
with manufacturers of video communications equipment, which include PictureTel,
PolyCom, Inc., VTEL Corporation, and Lucent Technologies, and their networks of
dealers and distributors, telecommunications carriers and other large
corporations, as well as other independent distributors. Other
telecommunications carriers and other corporations that have entered the video
communications market include, AT&T, MCI, some of the RBOC's, Minnesota Mining &
Manufacturing Corporation, Intel Corporation, Microsoft, Inc., Sony Corporation
and British Telecom. Many of these organizations have substantially greater
financial and other resources than the Company, furnish many of the same
products and services provided by the Company and have established relationships
with major corporate customers that have policies of purchasing directly from
them. More recently, former personnel from the Company have either created or
joined new competition in the area of videoconferencing sales and services.
Management believes that as the demand for video communications systems
continues to increase, additional competitors, many of which may have greater
resources than the Company, may continue to enter the video communications
market.
The Company believes that customer purchase decisions are influenced by
several factors, including cost of equipment and services, video communication
system features, connectivity and compatibility, a system's capacity for
expansion and upgrade, ease of use and services provided by a vendor. Management
believes its comprehensive knowledge of the operations of the industries it has
targeted, the quality of the equipment the Company sells, the quality and depth
of its services, its nationwide presence and ability to provide its customers
with all of the equipment and services necessary to ensure the successful
implementation and utilization of its video communications systems enable the
Company to compete successfully in the industry.
The telecommunications industry is also highly competitive. The Company
competes with many other companies in the telecommunications business which have
substantially greater financial and other resources than the Company, selling
both the same and similar services. The Company's competitors in the sale of
network services include RBOCs such as BellSouth, Bell Atlantic, and GTE, long
distance carriers such as AT&T Corporation, MCI Communications Corporation,
Sprint Corporation, other long distance and communications companies such as
Qwest Communications International Inc. and IXC Communications Inc., by-pass
companies and other agents. There can be no assurance that the Company will be
able to compete successfully against such companies.
Failure to Complete the Sale of USTeleCenters, Inc. and Network Services, Inc.
The Company failed to complete the sale of the subsidiaries UST and NSI to
Cortel USA, LLC ("Cortel"). The Company, however, is still actively involved in
negotiations with other parties for the sale of all or part of the subsidiaries.
The Company is also reviewing its options as to any other disposal of the assets
of the subsidiaries.
-14-
<PAGE>
The failure to complete the sale of any or all of the subsidiaries is expected
to have a material adverse impact on the Company for many reasons, including,
but not limited to: delaying, hindering or disrupting the Company's plans;
potential loss of employees of the subsidiaries who seek alternative employment;
a material adverse affect on quarterly or annual earnings; and, possible
negative impact in the relationship between the Company and Bell Atlantic and/or
GTE, which could be reflected in further commission reductions, cancellation of
contracts or supplies, or other economic or financial considerations.
Year 2000 Update
The Company has been engaged in its Year 2000 readiness effort for the last
year and has assembled an internal team to ensure that its objectives are
achieved. This team has identified the Company's internal information systems,
suppliers, business partners, and auxiliary (non-IT) systems that are to be
evaluated with reference to the status of Year 2000 compliance. The initial
phases of research and risk assessment were completed on March 31, 1999. Please
see the Company's Form 10-K filed on or about March 31, 1999 and the Company's
Form 10-Q filed on or about May 17, 1999 for earlier discussions "Risk Factors-
Year 2000" Compliance project status.
Two of our eight mission critical internal information systems were deemed not
compliant. Final testing, which began early in the third quarter, of the two
mission critical systems in the video unit was completed prior to September 30,
1999. The remaining hardware redemption, for the video unit, is relegated to
low-end, non-mission critical workstations.
For UST/NSI, the hardware upgrades/replacements that are remaining are not
expected to begin until the Company is certain whether UST or NSI is going to be
sold. The Company does have a contingency plan for UST/NSI if the potential sale
of either or both is not completed by the end of 1999.
Besides applications, the other two significant cost categories include
PC/Server hardware and telecommunications systems. The breakdown for costs yet
to be incurred are as follows: Video - hardware $40,000, telecom $8,000; UST -
hardware $123,000, telecom $37,000, application development $28,000. This
estimate totals $236,000.
The Company also maintains an on-going relationship with our main
suppliers or product manufacturers in relation to both their Year 2000
readiness and the compliance of their product/service offerings. Further, the
Company's Customer Service continues to handle client requests for upgrades,
repairs, and/or replacements as they arise.
Rapidly Changing Technology and Obsolescence
The market for communications products and services is characterized by
rapidly changing technology, evolving industry standards and the frequent
introduction of new products and services. The Company's future performance
will depend in significant part upon its ability to respond effectively to
these developments. New products and services are generally characterized by
improved quality and function and are frequently offered at lower prices than
the products and services they are intended to replace. The introduction of
products embodying new technologies and the emergence of new industry
standards can render the Company's existing products and services obsolete,
unmarketable or noncompetitive. The Company's ability to implement its growth
strategies and remain competitive will depend upon its ability to successfully
-15-
<PAGE>
(i) maintain and develop relationships with manufacturers of new and enhanced
products that include new technology, (ii) achieve levels of quality,
functionality and price acceptability to the market, and (iii) maintain a high
level of expertise relating to new products and the latest in communications
systems technology.
Control by Executive Officers and Directors
As of September 30, 1999, the Company's officers and directors
beneficially owned approximately 33% (assuming all options held by executive
officers and directors are exercised) of the outstanding Common Stock of the
Company). If the executive officers and directors act collectively, assuming
they continue to own all their shares, there is a substantial likelihood that
such holders will be able to elect all of the directors of the Company and to
determine the outcome of all corporate actions requiring the approval of the
holders of the majority of shares, such as mergers and acquisitions.
-16-
<PAGE>
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.
As stated in (1) Item 1, Note 4-Lines of Credit, and (2) Item 2, in the
section entitled, Liquidity & Capital Resources, the Company disclosed that it
received a Notice of Default and Reservation of Rights from its Banks that
currently hold the Company's Line of Credit Agreement. This form 10-Q also
provides an update on the default situation, including a discussion of the
November 12, 1999 stand-still agreement between the Banks and the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) May 25, 1999 Annual Meeting, Westlake, CA;
(b) Franklin A. Reece, III was re-elected to the Board of Directors
as a Class 1 Director. His term is until the annual meeting of
stockholders in 2002. There were no other nominations besides
Mr. Reece.
(c) There were four matters voted upon at the annual meeting of
stockholders:
1. The re-election of Franklin A. Reece as a Class 1 Director.
Votes in favor: 6,720,969. Votes withheld: 36,286.
2. Proposal to approve an amendment to the Employee Stock
Purchase Plan to increase the shares of Common Stock of the
Company reserved for issuance under the Plan by 400,000 to
a total of 500,000 shares. Votes in favor: 3,513,378. Votes
against: 445,546. Votes to abstain: 7,900. Broker non-
votes: 2,790,431.
3. Proposal to approve an amendment to the 1997 Stock
Incentive Plan to convert any unissued stock options, as
well as any options returned unexercised, from the 1995
Stock Option Plan to the 1997 Stock Incentive Plan, and
ultimately, terminate the 1995 Plan. Votes in favor:
6,426,994. Votes against: 321,161. Votes to abstain: 9,100.
Broker non-votes: Zero.
4. To ratify the selection of Arthur Andersen LLP as the
Company's independent accountants for the year ending
December 31, 1999. Votes in favor: 6,736,955. Votes
against: 11,576. Votes to abstain: 8,724.
(d) Not applicable.
Item 5. Other Information.
See Item 3 above.
Item 6. Exhibits
(a) Exhibits
27.1 Financial Data Schedule
-17-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VIEW TECH, INC.
Date: November 22, 1999 By: /s/ Christopher Zigmont
-------------------------------
Christopher Zigmont
Chief Financial Officer
-18-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 25,060 25,060
<SECURITIES> 0 0
<RECEIVABLES> 9,257,686 9,257,686
<ALLOWANCES> 255,000 255,000
<INVENTORY> 4,149,129 4,149,129
<CURRENT-ASSETS> 18,495,079 18,495,079
<PP&E> 3,972,890 3,972,890
<DEPRECIATION> 1,654,723 1,654,723
<TOTAL-ASSETS> 21,692,809 21,692,809
<CURRENT-LIABILITIES> 16,192,484 16,192,484
<BONDS> 0 0
0 0
0 0
<COMMON> 789 789
<OTHER-SE> 5,399,627 5,399,627
<TOTAL-LIABILITY-AND-EQUITY> 21,692,809 21,692,809
<SALES> 8,294,256 26,632,573
<TOTAL-REVENUES> 8,294,256 26,632,573
<CGS> 5,226,109 16,912,981
<TOTAL-COSTS> 9,294,731 27,926,603
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 70,359 184,363
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,070,834) (1,478,393)
<DISCONTINUED> (262,000) (402,858)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,332,834) (1,881,251)
<EPS-BASIC> (0.17) (0.24)
<EPS-DILUTED> (0.17) (0.24)
</TABLE>
