<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1995
---------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------- ----------
For the Quarter ended SEPTEMBER 30, 1995 Commission File Number 1-9434
PICTURETEL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-2835972
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 Rosewood Drive, Danvers, MA 01923
- --------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number: 508-762-5000
- ------------------------------
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 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 last 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 practical date.
As of November 9, 1995 there were issued and outstanding 16,251,055 shares of
common stock of the registrant.
<PAGE> 2
<TABLE>
PICTURETEL CORPORATION
Consolidated Balance Sheets
($000's)
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................... $41,667 $ 24,347
Marketable securities.......................... 24,018 50,354
Accounts receivable less allowance for
doubtful accounts of $1,804 and $1,785....... 93,838 65,155
Inventories (Note 2)........................... 42,627 31,679
Deferred taxes, net............................ 4,956 5,131
Other current assets........................... 9,347 2,704
-------- --------
Total current assets....................... 216,453 179,370
Marketable securities.......................... 20,746 3,226
Deferred taxes, net............................ 3,272 3,272
Property and equipment, net.................... 21,688 19,417
Capitalized software costs, net (Note 3)....... 4,288 4,163
Other assets................................... 6,082 7,251
-------- --------
Total assets............................... $272,529 $216,699
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings.......................... $11,369 $ 6,969
Accounts payable............................... 24,489 18,335
Accrued compensation and benefits.............. 15,041 6,357
Accrued expenses............................... 17,042 10,677
Income taxes................................... - 922
Current portion of capital lease obligations... 2,420 3,483
Deferred revenue............................... 16,873 13,705
-------- --------
Total current liabilities.................. 87,234 60,448
Capital lease obligations...................... 1,079 2,860
Other long-term liabilities.................... - 155
Stockholders' equity (Note 4):
Preference stock, $.01 par value; 15,000,000
shares authorized; none issued................. - -
Common stock, $.01 par value; 80,000,000 shares
authorized; 32,309,588 and 30,717,800 shares
issued and outstanding September 30, 1995 and
December 31, 1994, respectively................ 323 306
Additional paid-in capital......................... 164,226 146,000
Retained earnings.................................. 20,262 7,796
Cumulative translation adjustment.................. (88) (452)
Unrealized loss on marketable securities, net...... (507) (414)
--------- --------
Total stockholders' equity..................... 184,216 153,236
-------- --------
Total liabilities and stockholders' equity..... $272,529 $216,699
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 3
<TABLE>
PICTURETEL CORPORATION
Consolidated Statements of Operations
($000's except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- -------------------------
September 30, October 1, September 30, October 1,
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues................... $90,098 $63,314 $244,743 $181,073
Cost of sales.............. 45,763 31,634 121,571 91,480
------ ------ ------- ------
Gross margin............... 44,335 31,680 123,172 89,593
Operating expenses:
Selling, general and
administrative.......... 25,921 20,610 74,368 60,029
Research and development. 11,994 10,167 33,565 27,786
------ ------ ------- ------
Total operating expenses. 37,915 30,777 107,933 87,815
------ ------ ------- ------
Income from operations..... 6,420 903 15,239 1,778
Interest income, net....... 522 462 1,839 1,290
Other income (expense),
net...................... 312 74 378 235
------ ------ ------- ------
Income before taxes........ 7,254 1,439 17,456 3,303
Provision for income taxes. 2,031 504 4,990 1,156
------ ------ ------- ------
Net income................. $5,223 $ 935 $12,466 $2,147
====== ====== ======= ======
Net income per share:
(Note 4)
Primary.................. $0.15 $0.03 $0.36 $0.07
====== ====== ======= ======
Fully diluted............ $0.15 $0.03 $0.36 $0.07
====== ====== ======= ======
Weighted average shares
outstanding: (Note 4)
Primary.................. 35,350 31,296 34,676 31,222
====== ====== ======= ======
Fully diluted............ 35,350 31,296 34,820 31,222
====== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 4
<TABLE>
PICTURETEL CORPORATION
Consolidated Statements of Cash Flows
($000's)
<CAPTION>
Nine Months Ended
-----------------
September 30, October 1,
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income..................................... $12,466 $ 2,147
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Depreciation and amortization.................. 13,805 13,287
Deferred taxes, net............................ - -
Gain on sales of assets........................ - (120)
(Gain) loss on foreign currency transactions,
net........................................... (298) (114)
Other non-cash items........................... - 35
Changes in operating assets and liabilities:
Accounts receivable............................ (28,241) (16,131)
Inventories.................................... (10,791) (5,406)
Other assets................................... (2,152) (2,731)
Accounts payable............................... 6,221 3,896
Accrued compensation and benefits and
accrued expenses.............................. 20,281 2,942
Income taxes, net.............................. (5,210) (1,046)
Deferred revenue............................... 3,107 3,730
Other Liabilities................................ (5,405) -
------- -------
Net cash provided by operating activities........ 3,783 489
Cash flows from investing activities:
Purchase of marketable securities.............. (34,052) (13,499)
Proceeds from sale of marketable securities.... 42,605 34,408
Additions to property and equipment............ (12,125) (11,356)
Additions to capitalized software costs........ (2,637) (2,365)
Purchase of intangible assets.................. - (1,413)
Net cash provided by (used in) investing ------- -------
activities..................................... (6,209) 5,775
Cash flows from financing activities:
Change in short-term borrowing................. 4,296 4,421
Proceeds from sale/leaseback equipment......... - 2,245
Proceeds from exercise of options and warrants. 18,244 787
Principal payments under capital lease
obligations.................................. (2,844) (4,114)
------- -------
Net cash provided by financing activities........ 19,696 3,339
Effect of exchange rate changes on cash.......... 50 (1,474)
------- -------
Net increase in cash and cash equivalents........ 17,320 8,129
Cash and cash equivalents at beginning of period. 24,347 6,921
------- -------
Cash and cash equivalents at end of period....... $41,667 $15,050
======= =======
Interest paid.................................... $ 720 $ 659
======= =======
Income taxes paid................................ $ 3,109 $ 2,126
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 5
PICTURETEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Management's Representation
---------------------------
The information furnished has been prepared from the accounts without
audit. In the opinion of management, the accompanying financial statements
contain all adjustments (consisting of normal and recurring accruals) necessary
to present fairly the consolidated financial statements. The financial
disclosures herein should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
2. Inventories
-----------
<TABLE>
Inventories consist of the following (in thousands):
<CAPTION>
September 30, December 31,
1995 1994
---- ----
<S> <C> <C>
Purchased Parts $12,152 $ 7,208
Work in Process 2,343 2,464
Finished Goods 28,132 22,007
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$42,627 $31,679
======= =======
</TABLE>
3. Capitalized Software Costs
--------------------------
Amortization of software costs totaled $822,000 and $1,020,000 for the
quarters ended September 30, 1995 and October 1, 1994, respectively, and
$2,513,000 and 3,060,000 for the nine- months ended September 30, 1995 and
October 1, 1994, respectively.
4. Stock Split
-----------
On October 18, 1995 the board of directors authorized a two-for-one
common stock split in the form of a 100% common stock dividend payable on
November 14, 1995 to stockholders of record October 30, 1995. All common share
and per share amounts, have been restated to reflect the split.
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
THREE-MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THREE-MONTHS ENDED
OCTOBER 1, 1994
REVENUES. The Company's revenues increased $26,784,000, or 42%, in the
three-month period ended September 30, 1995 from the comparable period in 1994.
The increase in revenue was primarily a result of increased videoconferencing
system unit shipments for both group and personal systems. Videoconferencing
system sales accounted for approximately 86% of the Company's revenues for the
three-month period ended September 30, 1995, compared to 85% for the comparable
period in 1994. Sales of group and desktop videoconferencing products
accounted for 70% and 16%, respectively, of revenues for the three-month period
ended September 30, 1995, compared to 75% and 10%, respectively, for the
comparable period in 1994. In addition, sales of bridge products accounted for
approximately 6% of the Company's revenues for the three-month period ended
September 30, 1995, which is consistent with the comparable period in 1994.
The balance of the revenues in 1995 and 1994 were primarily from maintenance
services and licensing/development agreements, as well as sales of stand-alone
codecs and video modems.
The Company's revenues from sales to foreign markets were approximately
$36,532,000 in the three-month period ended September 30, 1995 compared to
approximately $24,106,000 in the comparable period in 1994, representing 41%
and 38%, respectively, of total revenues. The Company expects that
international revenues will continue to account for a significant portion of
total revenues.
GROSS MARGIN. The Company's gross margin increased $12,655,000, or 40%,
in the three-month period ended September 30, 1995 from the comparable period
in 1994. Gross margin as a percentage of revenues decreased to 49% in the
three-month period ended September 30, 1995 from 50% in the comparable period
in 1994. The slight decrease in gross margin as a percentage of revenues was
primarily the result of a higher percentage of revenues coming from the
Company s lower-margin videoconferencing system products and an increased
percentage of volume through indirect channels.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $5,311,000, or 26%, in the three-month period ended
September 30, 1995 from the comparable period in 1994 and were 29% and 33%,
respectively, of total revenues. The dollar increase in spending resulted
primarily from the expansion of indirect distribution channels, worldwide
marketing programs associated with the 1995 new product launches, as well as
increased commission expense. In addition, the Company has provided additional
sales, general and administrative personnel in order to support the Company's
overall growth.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$1,827,000 or 18%, in the three-month period ended September 30, 1995 from the
comparable period in 1994 and were 13% and 16%, respectively, of revenues for
the three-month period ended September 30, 1995 and for the comparable period
in 1994. Research and development expenditures, prior to the capitalization of
software costs, were $13,100,000 in the three-month period ended September 30,
1995 and $10,900,000 for the comparable period in 1994 or 15% and 17% of
revenues, respectively. The dollar increase in expenditures primarily reflects
the Company's continuing investment in new product and software development for
existing and future videoconferencing products. The Company capitalized
software costs of $1,106,000 in the three-month period ended September 30, 1995
and $734,000 for the comparable period in 1994 representing 8% and 7% of
research and development expenditures, respectively.
NET INTEREST INCOME (EXPENSE). Net interest income increased to $522,000
in the three-month period ended September 30, 1995 from $462,000 for the
comparable period in 1994. The increase was primarily the result of higher
interest earning portfolio balances as well as lower capital lease obligations
throughout the three-month period ended September 30, 1995.
OTHER INCOME (EXPENSE). Other income (expense) for the three-month
period ended September 30, 1995 consists primarily of net gains on foreign
currency transactions, which is consistent with other income (expense) for the
three-month period ended October 1, 1994.
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
INCOME TAXES. The Company's effective tax rate for the quarters
ended September 30, 1995 and October 1, 1994 was 28% and 35%, respectively.
The Company's effective tax rate in 1995 is lower than the federal statutory
rate primarily due to the combined effects of research and development credits,
lower foreign tax rates and the utilization of foreign net operating loss tax
credit carry forwards, offset by the effect of state income taxes.
NINE-MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE-MONTHS ENDED
OCTOBER 1, 1994
REVENUES. The Company's revenues increased $63,670,000, or 35%, in the
nine-month period ended September 30, 1995 from the comparable period in 1994.
The increase in revenue was primarily a result of increased videoconferencing
system unit shipments. This growth was partially offset by a reduction in the
average selling price of videoconferencing systems resulting from a shift
towards lower priced models, as well as a shift in distribution channel mix.
Videoconferencing system sales accounted for approximately 85% of the Company's
revenues for the nine-month period ended September 30, 1995 which is consistent
with the comparable period in 1994. Sales of group and desktop
videoconferencing products accounted for 70% and 15%, respectively, of revenues
for the nine-month period ended September 30, 1995, compared to 76% and 9%,
respectively, for the comparable period in 1994. In addition, sales of bridge
products remained approximately 6% of the Company's revenues for the nine-month
period ended September 30, 1995 as well as for the comparable period in 1994.
The balance of the revenues in 1995 and 1994 were primarily from maintenance
services, licensing/development agreements and the sales of stand-alone codecs
and video modems.
The Company's revenues from sales to foreign markets were approximately
$101,656,000 in the nine-month period ended September 30, 1995 compared to
approximately $75,502,000 in the comparable period in 1994 representing 42% of
total revenues for both nine-month periods. The Company expects that
international revenues will continue to account for a significant portion of
total revenues.
GROSS MARGIN. The Company's gross margin increased $33,579,000 or 38%,
in the nine-month period ended September 30, 1995 from the comparable period in
1994. Gross margin as a percentage of revenues was 50% for the nine-month
period ended September 30, 1995 compared to 49% for the nine- month period
ended October 1, 1994.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $14,339,000, or 24%, in the nine-month period ended
September 30, 1995 from the comparable period in 1994 and were 30% and 33%,
respectively, of total revenues. The dollar increase in spending resulted
primarily from the expansion of the Company s indirect distribution channels,
worldwide marketing programs associated with the 1995 new product launches, as
well as increased commission expense. In addition, the company has added
sales, marketing and administrative personnel to support the Company s overall
growth.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$5,779,000, or 21%, in the nine-month period ended September 30, 1995 from the
comparable period in 1994 and were 14% and 15%, respectively, of revenues for
the nine-month period ended September 30, 1995 and for the comparable period in
1994. Research and development expenditures, prior to the capitalization of
software costs, were $36,202,000 in the nine-month period ended September 30,
1995 and $30,151,000 for the comparable period in 1994 or 15% and 17% of
revenues, respectively. The dollar increase in expenditures primarily reflects
the Company's continuing investment in new product and software development for
existing and future videoconferencing products. The Company capitalized
software costs of $2,637,000 in the nine-month period ended September 30, 1995
and $2,365,000 for the comparable period in 1994 representing 7% and 8% of
research and development expenditures, respectively.
NET INTEREST INCOME (EXPENSE). Net interest income increased to
$1,839,000 in the nine-month period ended September 30, 1995 from $1,290,000 for
the comparable period in 1994. The 43% increase was primarily the result of
higher interest earning portfolio balances as well as lower capital lease
obligations throughout the nine-month period ended September 30, 1995.
OTHER INCOME (EXPENSE). Other income (expense) for the nine-month period ended
September 30, 1995 consists primarily of net gains on foreign currency
transactions. Other income (expense) for the nine-month period ended October
1, 1994 consists primarily of gains from the sales of assets.
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
INCOME TAXES. The Company's effective tax rate for the nine-months ended
September 30, 1995 and October 1, 1994 was 29% and 35%, respectively. The
Company's effective tax rate in 1995 is lower than the federal statutory rate
primarily due to the combined effects of research and development credits,
lower foreign tax rates and the utilization of foreign net operating loss tax
credit carry forwards, offset by the effect of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 30, 1995, the Company had $41,667,000 in cash and cash
equivalents, $24,018,000 in short-term marketable securities and $20,746,000 in
long-term marketable securities. During the nine-month period ended September
30, 1995 the Company provided $3,783,000 in net cash from operating activities.
The primary use of cash during the nine-month period ended September 30, 1995
was to fund the growth in working capital items such as accounts receivable and
inventories, as well as capital expenditures. The Company expects to spend
approximately $16,500,000 for capital expenditures in 1995 of which $12,125,000
has been expended through September 30, 1995, primarily for the purchase of
computers and peripherals, as well as tooling, production and test equipment.
The Company has available for borrowing up to $12,000,000 under its revolving
credit agreement and approximately $3,426,000 available under local foreign
guaranteed lines of credit to certain of its foreign subsidiaries. At
September 30, 1995 there was $10,805,000 outstanding under the revolving credit
agreement and $564,000 outstanding under the foreign lines of credit. The
Company had $7,524,000 outstanding and $4,569,000 available to be borrowed
under various leasing lines at September 30, 1995.
The Company believes that funds from operations, equipment lease financings,
borrowings under its various credit agreements and existing cash, cash
equivalents and marketable securities will be sufficient to meet the Company's
foreseeable operating and capital requirements.
<PAGE> 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
As previously reported in the Company's 10-K, the Company was sued by Datapoint
Corporation in the United States District Court for the Northern District of
Texas. Datapoint is alleging that certain of the Company s products infringe
patent rights allegedly owned by Datapoint. The complaint seeks approximately
$51 million in damages for alleged past infringement and an injunction against
alleged future infringement. The Company believes that it has meritorious
defenses to the allegations of the complaint, and continues to vigorously
defend against the lawsuit. In the event the Company is found to be infringing
a valid patent or patents in such proceedings, the Company could be required to
pay damages for past infringement and cease the sale of products incorporating
the infringing feature (or be required to take a license and pay royalties with
respect to such patents). During the third quarter the Company s motion for
summary judgement was renewed and referred to a special master for decision.
While there can be no assurance that the Company will prevail, the Company
believes that it is unlikely that the outcome of the lawsuit would have a
material adverse effect on the business or the financial condition of the
Company.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
None
<PAGE> 10
SIGNATURE
---------
Pursuant to the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
PICTURETEL CORPORATION
/s/ Les B. Strauss
--------------------------------------------
Les B. Strauss
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
November 14, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PICTURETEL'S
BALANCE SHEET AND INCOME STATEMENT FOR THE QUARTER ENDED SEPTEMBER 30, 1995 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SEPTEMBER 30, 1995 10-Q
FILING.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1995 JAN-01-1994
<PERIOD-END> SEP-30-1995 OCT-01-1994
<EXCHANGE-RATE> 1 1
<CASH> 41,667 15,050
<SECURITIES> 44,764 51,985
<RECEIVABLES> 95,642 65,522
<ALLOWANCES> (1,804) (973)
<INVENTORY> 42,627 29,355
<CURRENT-ASSETS> 14,303 7,586
<PP&E> 63,960 49,054
<DEPRECIATION> (42,272) (28,986)
<TOTAL-ASSETS> 272,529 204,319
<CURRENT-LIABILITIES> 87,234 50,796
<BONDS> 0 0
<COMMON> 323 153
0 0
0 0
<OTHER-SE> 183,893 149,525
<TOTAL-LIABILITY-AND-EQUITY> 272,529 204,319
<SALES> 244,743 181,073
<TOTAL-REVENUES> 244,743 181,073
<CGS> 121,571 91,480
<TOTAL-COSTS> 121,571 91,480
<OTHER-EXPENSES> 107,933 87,815
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 17,456 3,303
<INCOME-TAX> 4,990 1,156
<INCOME-CONTINUING> 12,466 2,147
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 12,466 2,147
<EPS-PRIMARY> 0.36 0.14
<EPS-DILUTED> 0.36 0.14
</TABLE>
