<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission file number 0-20008
VTEL Corporation
A Delaware Corporation IRS Employer ID No. 74-2415696
108 Wild Basin Road
Austin, Texas 78746
(512) 314-2700
The registrant 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
has been subject to such filing requirements for the past 90 days.
At May 1, 1996 the registrant had outstanding 14,237,301 shares of its Common
Stock, $0.01 par value.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VTEL Corporation
CONDENSED CONSOLIDATED BALANCE SHEET
------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 1,881,000 $ 2,910,000
Short-term investments 58,297,000 59,984,000
Accounts receivable, net of allowance for doubtful
accounts of $182,000 and $185,000 at
March 31, 1996 and December 31, 1995 21,797,000 18,875,000
Inventories 9,856,000 9,731,000
Prepaid expenses and other current assets 942,000 1,041,000
---------------- ----------------
Total current assets 92,773,000 92,541,000
Property and equipment, net 11,799,000 9,650,000
Intangible assets, net 14,089,000 14,285,000
Other assets 1,928,000 1,832,000
---------------- ----------------
$ 120,589,000 $ 118,308,000
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,393,000 $ 5,150,000
Accrued compensation and benefits 2,653,000 1,752,000
Accrued warranty expense 999,000 1,061,000
Other accrued liabilities 1,133,000 1,351,000
Research and development advance 906,000 906,000
Deferred revenue 4,685,000 4,250,000
---------------- ----------------
Total current liabilities 18,769,000 14,470,000
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 authorized;
none issued or outstanding - -
Common stock, $.01 par value; 25,000,000 authorized;
14,200,000 and 13,766,000 issued and outstanding at
March 31, 1996 and December 31, 1995 142,000 138,000
Additional paid-in capital 123,810,000 123,712,000
Accumulated deficit (22,143,000) (20,169,000)
Cumulative translation adjustment 11,000 157,000
---------------- ----------------
Total stockholders' equity 101,820,000 103,838,000
---------------- ----------------
$ 120,589,000 $ 118,308,000
================ ================
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
2
<PAGE>
VTEL Corporation
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
----------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Revenues $ 22,931,000 $ 15,189,000
Cost of sales 13,622,000 7,207,000
----------------- ---------------
Gross margin 9,309,000 7,982,000
----------------- ---------------
Selling, general and administrative 8,427,000 5,346,000
Research and development 3,656,000 2,667,000
Amortization of intangible assets 240,000 -
----------------- ---------------
Total operating expenses 12,323,000 8,013,000
----------------- ---------------
Loss from operations (3,014,000) (31,000)
----------------- ---------------
Other income, net 1,040,000 501,000
----------------- ---------------
Net income (loss) before provision for income taxes (1,974,000) 470,000
Provision for income taxes - (16,000)
----------------- ---------------
Net income (loss) $ (1,974,000) $ 454,000
================= ===============
Net income (loss) per share $ (0.13) $ 0.04
================= ===============
Weighted average shares outstanding 14,992,000 11,021,000
================= ===============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
<PAGE>
VTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
----------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,974,000) $ 454,000
Adjustments to reconcile net income (loss)
to net cash from operations:
Depreciation and amortization 1,698,000 651,000
Provision for doubtful accounts 12,000 3,000
Amortization of unearned compensation - 6,000
Amortization of deferred gain (24,000) (25,000)
Foreign currency translation gain (177,000) (170,000)
(Increase) in accounts receivable (2,934,000) (2,392,000)
(Increase) in inventories (125,000) (552,000)
(Increase) decrease in prepaid expenses
and other current assets 99,000 (39,000)
Increase in accounts payable 3,243,000 1,218,000
Increase (decrease) in accrued expenses 645,000 (892,000)
(Decrease) in research and development advance - (171,000)
Increase in deferred revenues 435,000 278,000
--------------- --------------
Net cash provided by (used in)
operating activities 898,000 (1,631,000)
--------------- --------------
Cash flows from investing activities:
Net short-term investment activity 1,687,000 975,000
Net purchase of property and equipment (3,607,000) (1,888,000)
(Increase) decrease in other assets (96,000) 129,000
--------------- --------------
Net cash used in investing activities (2,016,000) (784,000)
--------------- --------------
Cash flows from financing activities:
Principal payments under capital lease obligations - (1,000)
Net proceeds from issuance of stock 58,000 436,000
--------------- --------------
Net cash provided by financing activities 58,000 435,000
--------------- --------------
Effect of translation exchange rates on cash 31,000 207,000
--------------- --------------
Net decrease in cash and equivalents (1,029,000) (1,773,000)
Cash and equivalents at beginning of period 2,910,000 4,185,000
--------------- --------------
Cash and equivalents at end of period $ 1,881,000 $ 2,412,000
=============== ==============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
<PAGE>
VTEL Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
VTEL Corporation (the "Company") designs, manufactures, markets, services
and supports integrated, multi-media videoconferencing systems which operate
over private and switched digital communication networks. The Company
distributes its systems to a domestic and international marketplace primarily
through third parties.
The Company's systems integrate traditional video and audio conferencing with
additional functions including the sharing of PC software applications and
the transmission of high-resolution images and facsimile. Through the use of
the Company's multi-media conferencing systems, users are able to replicate
more closely the impact and effectiveness of face-to-face meetings. The
Company's headquarters and production facilities are in Austin, Texas.
Note 1 - General and Basis of Financial Statements
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission and accordingly, do not include all information and
footnotes required under generally accepted accounting principles for
complete financial statements. In the opinion of management, these interim
financial statements contain all adjustments, consisting of only normal,
recurring adjustments, necessary for a fair presentation of the financial
position of the Company as of March 31, 1996 and the results of the Company's
operations and its cash flows for the three month period ended March 31,
1996. The results for interim periods are not necessarily indicative of
results for a full fiscal year. These condensed consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements (including the notes thereto) contained in the Company's
1995 Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 30, 1996.
Note 2 - Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
Raw materials $7,025,000 $6,074,000
Work in process 254,000 161,000
Finished goods 2,104,000 2,895,000
Finished goods held for evaluation 473,000 601,000
---------- ----------
$9,856,000 $9,731,000
========== ==========
</TABLE>
Finished goods held for evaluation consists of completed multi-media
communication systems used for demonstration and evaluation purposes, which
are generally sold during the next 12 months.
5
<PAGE>
Note 3 - Net Income (Loss) Per Share
Net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares and common share equivalents
outstanding (if dilutive) during each period.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following review of the Company's financial position and results of
operations for the three month periods ended March 31, 1996 and 1995 should
be read in conjunction with the Company's 1995 Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 30, 1996.
Results of Operations
The following table sets forth for the fiscal periods indicated the
percentage of revenues represented by certain items in the Company's
Condensed Consolidated Statement of Operations:
<TABLE>
<CAPTION>
For the three
months ended
March 31,
1996 1995
<S> <C> <C>
Revenues 100% 100%
Gross margin 41 53
Selling, general and administrative 37 35
Research and development 16 18
Total operating expenses 54 53
Other income, net 5 3
Net income (loss) (9)% 3%
</TABLE>
Three Months Ended March 31, 1996 and 1995
Revenues. Revenues for the first quarter of 1996 increased by $7,742,000 or
51% from $15,189,000 in the first quarter of 1995 to $22,931,000 in the first
quarter of 1996. The increase in the first quarter of 1996 as compared to the
first quarter of 1995 is primarily due to additional videoconferencing-
related revenues generated by the Company's systems integration and service
operations which were acquired in the fourth quarter of 1995.
6
<PAGE>
The following table summarizes the Company's group system unit sales
activity:
<TABLE>
<CAPTION>
For the three
months ended
March 31,
1996 1995
<S> <C> <C>
Large group conferencing systems 354 281
Small group conferencing systems 28 92
Multipoint control units 23 28
----- -----
Total units 405 401
===== =====
</TABLE>
The increase in sales of the Company's large group conferencing systems
during the first quarter of 1996 in comparison with the first quarter of 1995
is due to the introduction of the MediaMax(TM)-based Leadership
Conferencing(TM) systems during the fourth quarter of 1995 and the Lynx(TM)-
based Team Conferencing(TM) systems during the first quarter of 1996. Sales
of these new products represented almost 50% of large group conferencing
revenues for the first quarter of 1996. The decrease in sales of the
Company's small group conferencing systems during the first quarter of 1996
in comparison with the first quarter of 1995 is due to the anticipation of
the Company's new products. The average selling price for a group system sold
in the first quarter of 1996 and 1995 was $38,000.
During the first quarter of 1996, the Company introduced its Personal
Collaborator(TM) videoconferencing kits as part of its desktop system product
line. Desktop system products represented 4% and 1% of products sales for
the quarters ended March 31, 1996 and 1995, respectively.
International sales contributed approximately 18% of product revenues for the
first quarter of 1996 as compared to 22% in the first quarter of 1995.
While the Company strives for consistent revenue growth, there can be no
assurance that consistent revenue growth or profitability can be achieved.
The Company's expense levels are based, in part, on its expectations as to
future revenue levels, which are difficult to predict, partly due to the
Company's strategy of distributing its products through resellers.
Historically, a significant portion of the Company's shipments have been made
in the last month of each quarter. As a result, a shortfall in revenue
compared to expectations may not evidence itself until late in the quarter.
If revenue levels are below expectations, operating results may be materially
and adversely affected. In addition, the Company's quarterly and annual
results may fluctuate as a result of many factors, including price
reductions, delays in the introduction of new products, delays in purchase
decisions due to new product announcements by the Company or its competitors,
cancellations or delays of orders, interruptions or delays in supplies of key
components, changes in reseller base, customer base, business or product mix
and seasonal patterns and other shifts of capital spending by customers.
7
<PAGE>
Gross margin. Gross margin as a percentage of total revenue in the first
quarter of 1996 was 41%, a decrease from the first quarter of 1995 gross
margin of 53%. The decrease in gross margin results primarily from a shift
in the sales mix such that product revenues represented a smaller percentage
of total revenues in the first quarter of 1996 due to the incremental
revenues generated by the Company's systems integration and service
operations which were acquired in the fourth quarter of 1995. Additionally,
the Company experienced a shift in the sales of its older products during the
first quarter of 1996 such that sales of lower margin products represented a
larger percentage of product sales. Price competition in certain of the
Company's older products also contributed to lower gross margins in the first
quarter of 1996. The Company anticipates that the introduction of the Team
Conferencing(TM) product line, based on the Lynx(TM) platform, will provide a
more competitive product in the more deeply discounted product range.
As discussed above, the Company anticipates that product gross margins will
continue to be lower than those generated in 1995. The Company expects that
overall price competitiveness in the industry will continue to become more
intense as users of videoconferencing systems attempt to balance performance,
functionality and cost.
In addition, due to the incremental revenues generated by the Company's
systems integration and service operations which were acquired in the fourth
quarter of 1995, the gross margin generated in 1996 will not be comparable to
the gross margin generated in 1995, which was mostly derived from product
sales. The Company's gross margin is subject to fluctuation based on pricing,
production costs and sales mix.
Selling, general and administrative. Selling, general and administrative
expenses increased by $3,081,000 or 58% from $5,346,000 in the first quarter
of 1995 to $8,427,000 in the first quarter of 1996. Selling, general and
administrative expenses as a percentage of revenues were 37% and 35% for the
three months ended March 31, 1996 and 1995, respectively. The increase in
these expenses is primarily due to the incremental selling, general and
administrative expenses incurred during the first quarter of 1996 which
relate to the Company's systems integration and service operations which were
acquired in the fourth quarter of 1995.
Research and development. Research and development expenses increased by
$989,000, or 37%, from $2,667,000 in the first quarter of 1995 to $3,656,000
in the first quarter of 1996. Research and development expenses as a
percentage of revenues were 16% and 18% for the three months ended March 31,
1996 and 1995, respectively. Research and development expenses increased
during the first quarter of 1996 in comparison with the first quarter of 1995
primarily due to the Company's efforts related to the development of its new
products which were introduced in the fourth quarter of 1995 and the first
quarter of 1996. Additionally, the increase in research and development
expenses resulted from the reassignment during 1995 of Company research and
development personnel who had been involved with the Intel joint development
projects to the Company's other projects. Research and development expenses
decreased as a percentage of revenues from the first quarter of 1995 to the
first quarter of 1996 due to the incremental systems integration and service
revenues generated in the first quarter of 1996 which do not carry any
related research and development costs.
Although the percentage of revenues invested by the Company in research and
development may vary from period to period, the Company is committed to
investing in its research and development programs. All of the Company's
research and development costs and internal software development costs have
been expensed as incurred.
8
<PAGE>
During the third quarter of 1993, the Company entered into a Development and
License Agreement ("Development Agreement") with Intel Corporation ("Intel").
As a part of this Development Agreement, Intel agreed to advance the Company
$3 million of funds in order to enable the Company to jointly research and
develop videoconferencing products with Intel. Of the $3 million advance,
$906,000 remains at March 31, 1996 for future development projects. As of
March 31, 1996, the Company had no research and development activities in
process or planned related to the Development Agreement.
Other income, net. Other income, net increased by $539,000, or 108%, from
$501,000 in the first quarter of 1995 to $1,040,000 in the first quarter of
1996. The increase in other income, net is primarily attributable to
interest income earned during the first quarter of 1996 on the Company's cash
and investment balances. This increase was a result of the completion of a
secondary offering in the fourth quarter of 1995, which netted approximately
$57,000,000 to the Company.
Net income (loss). The Company generated a net loss of $1,974,000, or $.13
per share, in the first quarter of 1996 compared to net income of $454,000,
or $.04 per share, during the first quarter of 1995. The net loss incurred
during the first quarter of 1996 was the result of lower gross margins
generated by the Company, incremental operating expenses related to the
growth in the Company's operations and revenues and the Company's systems
integration and service operations which were acquired in the fourth quarter
of 1995. The net income in the first quarter of 1995 was the result of
revenues increasing at a faster rate than operating expenses and of higher
gross margins generated by the Company.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting and Disclosure of Stock-Based Compensation." SFAS No. 123
introduces a fair-value based method of accounting for stock-based
compensation. It encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options, and other equity
instruments to employees based on their estimated fair market value on the
date of grant. Companies that choose not to adopt the new rules will continue
to apply the existing accounting rules contained in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." If the fair
value accounting rules are not adopted, SFAS No. 123 requires the disclosure
of pro forma net income and earnings per share as if the new method had been
adopted. SFAS No. 123 is effective for fiscal years beginning after December
15, 1995. The Company has elected not to adopt the new fair value accounting
rules provided by SFAS No. 123. As such, SFAS No. 123 will not have any
effect on the Company's financial position or results of operations.
Improvement in the Company's financial performance during the remainder of
1996 will depend on the Company's ability to continue to significantly
increase revenues through growth in the Company's distribution channels and
the successful introduction of its new products, to generate improving gross
margins, and to control the growth of operating expenses in 1996. There can
be no assurances that the Company will be successful in achieving these
objectives during the remainder of 1996.
9
<PAGE>
Liquidity and Capital Resources
At March 31, 1996, the Company had working capital of $74,004,000, including
$60,178,000 in cash, cash equivalents and short-term investments. The primary
uses of cash during the quarters ended March 31, 1996 and 1995 were to
purchase property and equipment and leasehold improvements and to fund
working capital needs required to support the Company's growth. Cash
provided by operating activities was $898,000 for the quarter ended March
31, 1996, primarily due to an increase in accounts payable and accrued
liabilities, slightly offset by an increase in accounts receivable. Cash
used in operating activities was $1,631,000 for the quarter ended March 31,
1995, primarily due to an increase in accounts receivable and inventories and
a decrease in accrued expenses, slightly offset by an increase in accounts
payable.
The increases in accounts receivable and accounts payable are indicative of a
higher level of sales in the latter part of the quarter, which is partly
related to the seasonal nature of the Company's business, especially during
the last quarter of each calendar year.
Cash flows from investing activities were the result of capital expenditures
of $3,607,000 and $1,888,000 for the quarters ended March 31, 1996 and 1995,
respectively. The increase in capital expenditures is primarily related to
increases in demonstration and support videoconferencing systems acquired
during the first quarter of 1996. Cash was provided by investing activities
related to short-term investments as such investments are periodically
utilized to provide cash needed to support the Company's growth.
At March 31, 1996, the Company had a $10,000,000 revolving line of credit
available with a financial institution. No amounts have been drawn or are
outstanding under the line of credit. The Company's principal sources of
liquidity at March 31, 1996 consist of $60,178,000 of cash, cash equivalents
and short-term investments and amounts available under the Company's
revolving line of credit. The Company believes that existing cash and cash
equivalent balances, short-term investments, cash generated from product
sales and its revolving line of credit will be sufficient to meet the
Company's cash and capital requirements for at least the next 12 months.
General
The markets for the Company's products are characterized by a highly
competitive and rapidly changing environment in which operating results are
subject to the effects of frequent product introductions, manufacturing
technology innovations and rapid fluctuations in product demand. While the
Company attempts to identify and respond to these changes as soon as
possible, prediction of and reaction to such events will be an ongoing
challenge and may result in revenue shortfalls during certain periods of
time.
The Company's future results of operations and financial condition could be
impacted by the following factors, among others: trends in the
videoconferencing market, introduction of new products by competitors,
increased competition due to the entrance of other companies into the
videoconferencing market - especially more established companies with greater
resources than those of the Company, delay in the introduction of higher
performance products, market acceptance of new products introduced by the
Company, price competition, interruption of the supply of low-cost products
from third-party manufacturers, changes in general economic conditions in any
of the countries in which the Company does business, and adverse legal
disputes and delays in purchases relating to federal government procurement .
10
<PAGE>
Due to the factors noted above and elsewhere in Management's Discussion and
Analysis of Financial Condition and Results of Operations, the Company's past
earnings and stock price has been, and future earnings and stock price
potentially may be subject to significant volatility, particularly on a
quarterly basis. Past financial performance should not be considered a
reliable indicator of future performance and investors are cautioned in using
historical trends to anticipate results or trends in future periods. Any
shortfall in revenue or earnings from the levels anticipated by securities
analysts could have an immediate and significant effect on the trading price
of the Company's Common Stock in any given period. Also, the Company
participates in a highly dynamic industry which often contributes to the
volatility of the Company's Common Stock price.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
* * *
11
<PAGE>
SIGNATURES
Pursuant to the requirements of 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.
VTEL CORPORATION
May 13, 1996 By: /s/ Rodney S. Bond
--------------------------
Rodney S. Bond
Vice President-Finance
(Chief Financial Officer
and Principal Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 1,881,000 2,910,000
<SECURITIES> 58,297,000 59,984,000
<RECEIVABLES> 21,979,000 19,060,000
<ALLOWANCES> (182,000) (185,000)
<INVENTORY> 9,856,000 9,731,000
<CURRENT-ASSETS> 92,773,000 92,541,000
<PP&E> 19,585,000 16,243,000
<DEPRECIATION> (7,786,000) (6,593,000)
<TOTAL-ASSETS> 120,589,000 118,308,000
<CURRENT-LIABILITIES> 18,769,000 14,470,000
<BONDS> 0 0
0 0
0 0
<COMMON> 123,952,000 123,850,000
<OTHER-SE> (22,132,000) (20,012,000)
<TOTAL-LIABILITY-AND-EQUITY> 120,589,000 118,308,000
<SALES> 22,931,000 15,189,000
<TOTAL-REVENUES> 22,931,000 15,189,000
<CGS> (13,622,000) (7,207,000)
<TOTAL-COSTS> (12,323,000) (8,013,000)
<OTHER-EXPENSES> 1,040,000 501,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (1,974,000) 470,000
<INCOME-TAX> 0 (16,000)
<INCOME-CONTINUING> (1,974,000) 454,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,974,000) 454,000
<EPS-PRIMARY> (.13) .04
<EPS-DILUTED> 0 0
</TABLE>
