<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 MARCH 30, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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For the Quarter ended MARCH 30, 1996 Commission File Number 1-9434
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PICTURETEL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-2835972
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(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
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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 May 8, 1996, there were issued and outstanding 33,133,992 shares of common
stock of the registrant.
<PAGE> 2
PICTURETEL CORPORATION
<TABLE>
Consolidated Balance Sheets
($000's)
<CAPTION>
March 30, December 31,
1996 1995
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 37,536 $ 39,476
Marketable securities 13,833 20,463
Accounts receivable less allowance for doubtful accounts
of $1,871 and $1,791 102,710 97,735
Inventories (Note 2) 43,089 43,791
Deferred taxes, net 6,513 6,665
Other current assets 12,022 5,781
-------- --------
Total current assets 215,703 213,911
Marketable securities 43,931 34,084
Deferred taxes, net 6,000 6,000
Property and equipment, net 28,971 22,515
Capitalized software costs, net (Note 3) 5,620 5,073
Other assets 3,884 6,558
-------- --------
Total assets $304,109 $288,141
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 541 $ 557
Accounts payable 29,607 25,639
Accrued compensation and benefits 9,902 9,881
Accrued expenses 23,129 16,646
Current portion of capital lease obligations 1,801 2,283
Deferred revenue 16,149 19,509
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Total current liabilities 81,129 74,515
Long-term borrowings 9,691 12,226
Capital lease obligations 339 578
Stockholders' equity:
Preference stock, $.01 par value; 15,000,000
shares authorized; none issued
Common stock, $.01 par value; 80,000,000 shares
authorized; 33,028,061 and 32,723,744 shares
issued and outstanding at March 30, 1996 and
December 31, 1995, respectively 330 328
Additional paid-in capital 177,817 173,379
Retained earnings 34,891 27,422
Cumulative translation adjustment (595) (531)
Unrealized gain on marketable securities, net 507 224
-------- --------
Total stockholders' equity 212,950 200,822
-------- --------
Total liabilities and stockholders' equity $304,109 $288,141
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 3
PICTURETEL CORPORATION
<TABLE>
Consolidated Statement of Income
($000's except per share amounts)
<CAPTION>
Three Months Ended
------------------
March 30, April 1,
1996 1995
<S> <C> <C>
Revenues $105,001 $74,156
54,109 36,358
Cost of sales
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Gross margin 50,892 37,798
Operating expenses:
Selling, general and
administrative 27,738 23,947
Research and development 13,924 10,393
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Total operating expenses 41,662 34,340
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Income from operations 9,230 3,458
Interest income, net 1,077 617
Other income, net 677 275
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Income before taxes 10,984 4,350
Provision for income taxes 3,515 1,262
-------- -------
Net income $ 7,469 $ 3,088
======== =======
Net income per common and common
equivalent share $ 0.21 $ 0.09
======== =======
Weighted average common and common
equivalent shares outstanding 36,115 33,202
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 4
PICTURETEL CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's)
<CAPTION>
Three Months Ended
March 30, April 1,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................ $ 7,469 $ 3,088
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................... 4,545 4,886
Deferred taxes, net ............................... 152 --
Other non-cash items .............................. (195) (269)
Changes in operating assets and liabilities:
Accounts receivable ............................... (5,622) (1,511)
Inventories ....................................... 539 (2,843)
Other assets ...................................... (4,838) (130)
Accounts payable .................................. 4,075 (2,132)
Accrued compensation and benefits and
accrued expenses .............................. 6,625 4,288
Income taxes, net ................................. 242 (803)
Deferred revenue .................................. (3,309) 1,078
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Net cash provided by operating
activities ........................................ 9,683 5,652
Cash flows from investing activities:
Purchase of marketable securities ................. (11,321) (6,385)
Proceeds from marketable securities ............... 9,770 4,085
Additions to property and equipment ............... (10,077) (4,007)
Capitalized software costs ........................ (1,348) (882)
-------- -------
Net cash used in investing
activities ........................................ (12,976) (7,189)
Cash flows from financing activities:
Change in short-term borrowings ................... (16) 993
Payments on long-term borrowings ................. (2,535) --
Principal payments under capital lease
obligations..................................... (721) (1,100)
Proceeds from exercise of stock options ......... 3,538 2,777
Proceeds from stock purchase plan ................ 883 --
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Net cash provided by financing activities ........... 1,149 2,670
Effect of exchange rate changes on cash ............. 204 (436)
-------- -------
Net increase (decrease) in cash and cash
equivalents ....................................... (1,940) 697
Cash and cash equivalents at beginning of period .... 39,476 24,347
======== =======
Cash and cash equivalents at end of period .......... $ 37,536 $25,044
======== =======
Interest paid ....................................... $ 158 $ 129
======== =======
Income taxes paid ................................... $ 584 $ 1,090
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 5
PICTURETEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, 1995.
2. Inventories
-----------
<TABLE>
Inventories consist of the following (in thousands):
<CAPTION>
March 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Purchased Parts $11,238 $11,492
Work in Process 2,832 3,252
Finished Goods 29,019 29,047
------- -------
$43,089 $43,791
======= =======
</TABLE>
3. Capitalized Software Costs
--------------------------
Amortization of software costs totaled $801,000 and $913,000 for the
quarters ended March 30, 1996 and April 1, 1995, respectively.
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
THREE MONTHS ENDED MARCH 30, 1996 COMPARED TO THREE MONTHS ENDED APRIL 1, 1995
REVENUES. The Company's revenues increased $30,845,000 or 42%, in the
three month period ended March 30, 1996 from the comparable period in 1995. 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, especially the personal desktop products, as well as a shift in
distribution channel mix with approximately 76% of revenue now coming from the
indirect channels. Videoconferencing system sales accounted for approximately
83% of the Company's revenues for the three month period ended March 30, 1996
and 84% for the comparable period in 1995. Sales of group and desktop
videoconferencing products accounted for 64% and 19%, respectively, of revenues
for the three month period ended March 30, 1996 compared with 72% and 12%,
respectively, for the comparable period in 1995. In addition, sales of bridge
products accounted for approximately 8% of the Company's revenues for the three
month period ended March 30, 1996 compared to approximately 6% for the
comparable period in 1995. The balance of the revenues in 1996 and 1995 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
$50,610,000 in the three month period ended March 30, 1996 compared to
approximately $31,507,000 from the comparable period in 1995, representing 48%
and 42%, 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 $13,094,000 or 35%, in
the three month period ended March 30, 1996 compared to the comparable period in
1995. Gross margin as a percentage of revenues was 48% for the three month
period ended March 30, 1996 compared with 51% for the comparable period in 1995.
Gross margin as a percentage of revenues decreased slightly as a result of the
increased percentage of volume through the indirect channels and a reduction in
the average selling price of videoconferencing systems. These two trends are
expected to continue and may impact future gross margins.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $3,791,000 or 16% from the comparable period in 1995 and
decreased as a percentage of revenues to 26% from 32%. The dollar increase in
spending resulted primarily from the worldwide marketing focus associated with
expanding indirect channels and 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
$3,531,000, or 34% in the three month period ended March 30, 1996 from the
comparable period in 1995 and were 13% and 14%, respectively, of revenues for
the three month period ended March 30, 1996 and the comparable period in 1995.
Research and development expenditures, prior to the capitalization of software
costs, were $15,309,000 in the three month period ended March 30, 1996 and
$11,275,000 in the comparable period in 1995 or 15% 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 $1,348,000
in the three month period ended March 30, 1996 and $882,000 in the comparable
period in 1995 representing 9% and 8% of research and development expenditures,
respectively.
OPERATING INCOME. Although gross margin as a percentage of sales was less
than the comparable period in 1995, operating income as a percentage of sales
increased due to a decline in operating expenses as a percentage of sales.
NET INTEREST INCOME. Net interest income increased to $1,077,000 in the
three month period ended March 30, 1996 from $617,000 in the comparable period
in 1995. The increase was primarily the result of higher portfolio balances and
lower interest expense.
OTHER INCOME, NET. Other income, net of $677,000 in the three month period
ended March 30, 1996 consists primarily of gains on sales of securities and net
gains on foreign currency transactions. Other income of $275,000 in the
comparable period in 1995 consists primarily of net gains on foreign currency
transactions.
<PAGE> 7
INCOME TAXES. The Company's effective tax rate for the three month period
ended March 30, 1996 and the comparable period in 1995 was 32% and 29%
respectively, and the rate for the three month period ended March 30, 1996 was
lower than the federal statutory rate primarily due to state tax credits,
foreign tax rates and foreign losses not tax benefited.
FORWARD-LOOKING STATEMENTS. This section includes certain forward-looking
statements about the Company's business and new products, sales and expenses,
effective tax rate and operating and capital requirements. Any such statements
are subject to risks that could cause the actual results or needs to vary
materially. These risks are discussed in Management's Discussion and Analysis of
Financial Condition and Results of Operations in the Company's Report on Form
10-K for the year ended December 31, 1995.
Liquidity and Capital Resources
- -------------------------------
At March 30, 1996 the Company had $37,536,000 in cash and cash equivalents,
$13,833,000 in short-term marketable securities and $43,931,000 in long-term
marketable securities. During the three month period ended March 30, 1996 the
Company generated $9,683,000 in net cash from operating activities. The primary
use of cash during the three month period ended March 30, 1996 was to fund the
growth in working capital items such as accounts receivable, as well as
additions to property and equipment. Capital expenditures for 1996 are projected
to be approximately $30,000,000 including leasehold improvements related to the
newly leased property for the Company's corporate office and manufacturing
facilities, of which $3,930,000 was spent in the first quarter.
The Company has available for borrowing up to $17,000,000 under its
revolving credit agreement and approximately $4,341,000 available under local
foreign guaranteed lines of credit to certain of its foreign subsidiaries. At
March 30, 1996 there was $9,691,000 outstanding under the revolving credit
agreement and $541,000 outstanding under the foreign lines of credit. At March
30, 1996, the Company had $2,140,000 outstanding and $15,000,000 available to be
borrowed under various leasing lines.
The Company believes that funds from operations, equipment lease
financing, 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> 8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
- --------------------------
In December 1993, the Company was sued by Datapoint Corporation in the
United States District Court for the Northern District of Texas. Datapoint
alleges 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. On April 25, 1996, a special master appointed by the Court to
consider the Company's motion for summary judgment of non-infringement filed his
report, which is subject to review by the court, recommending that the Company's
motion be denied on the grounds that the Company's claims raise factual issues
that cannot be decided without a trial. The Company has objected to certain
aspects of the master's report 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). 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> 9
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)
May 14, 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PICTURETEL'S
BALANCE SHEET & INCOME STATEMENT FOR THE PERIOD ENDED MARCH 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q FILING.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-30-1996
<EXCHANGE-RATE> 1
<CASH> 37,536
<SECURITIES> 57,764
<RECEIVABLES> 104,581
<ALLOWANCES> (1,871)
<INVENTORY> 43,089
<CURRENT-ASSETS> 18,535
<PP&E> 76,294
<DEPRECIATION> (47,323)
<TOTAL-ASSETS> 304,109
<CURRENT-LIABILITIES> 81,129
<BONDS> 0
<COMMON> 330
0
0
<OTHER-SE> 212,620
<TOTAL-LIABILITY-AND-EQUITY> 212,950
<SALES> 105,001
<TOTAL-REVENUES> 105,001
<CGS> 54,109
<TOTAL-COSTS> 54,109
<OTHER-EXPENSES> 41,662
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,984
<INCOME-TAX> 3,515
<INCOME-CONTINUING> 7,469
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,469
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0
</TABLE>
