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 JANUARY 31, 1997
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 February 27, 1997 the registrant had outstanding 14,025,209 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>
JANUARY 31, JULY 31,
1997 1996
(UNAUDITED)
ASSETS
Current assets:
<S> <C> <C>
Cash and equivalents $ 1,474,000 $ 1,973,000
Short-term investments 41,213,000 48,307,000
Accounts receivable, net of allowance for doubtful
accounts of $274,000 and $203,000 at
January 31, 1997 and July 31, 1996 26,913,000 15,585,000
Inventories 10,533,000 15,004,000
Prepaid expenses and other current assets 1,139,000 1,597,000
--------------------------------
Total current assets 81,272,000 82,466,000
Property and equipment, net 14,535,000 13,906,000
Intangible assets, net 13,248,000 13,730,000
Other assets 2,579,000 1,801,000
================================
$111,634,000 $ 111,903,000
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,157,000 $ 9,831,000
Accrued compensation and benefits 1,430,000 1,529,000
Accrued warranty expense 606,000 697,000
Other accrued liabilities 789,000 1,544,000
Research and development advance 906,000 906,000
Deferred revenue 6,535,000 2,980,000
--------------------------------
Total current liabilities 18,423,000 17,487,000
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 authorized;
none issued or outstanding - -
Common stock, $.01 par value; 25,000,000 authorized;
14,017,000 and 14,308,000 issued and outstanding at
January 31, 1997 and July 31, 1996 140,000 143,000
Additional paid-in capital 124,952,000 124,190,000
Treasury stock (3,351,000) -
Accumulated deficit (28,411,000) (30,068,000)
Cumulative translation adjustment (6,000) 151,000
Unearned compensation (113,000) -
--------------------------------
Total stockholders' equity 93,211,000 94,416,000
--------------------------------
$111,634,000 $ 111,903,000
================================
<FN>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
</FN>
</TABLE>
2
<PAGE>
VTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
1997 1996 1997 1996
REVENUES:
<S> <C> <C> <C> <C>
Products $ 21,807,000 $ 15,773,000 $ 42,769,000 $ 34,183,000
Services and other 7,316,000 8,136,000 14,553,000 9,236,000
---------------------------------------------------------------
29,123,000 23,909,000 57,322,000 43,419,000
---------------------------------------------------------------
COST OF SALES:
Products 11,159,000 7,979,000 22,232,000 17,148,000
Services and other 5,402,000 5,779,000 10,197,000 6,198,000
---------------------------------------------------------------
16,561,000 13,758,000 32,429,000 23,346,000
---------------------------------------------------------------
Gross margin 12,562,000 10,151,000 24,893,000 20,073,000
---------------------------------------------------------------
Selling, general and administrative 9,310,000 7,953,000 18,177,000 15,073,000
Research and development 2,801,000 3,049,000 5,719,000 6,018,000
Amortization of intangible assets 240,000 160,000 480,000 160,000
---------------------------------------------------------------
Total operating expenses 12,351,000 11,162,000 24,376,000 21,251,000
---------------------------------------------------------------
Income (loss) from operations 211,000 (1,011,000) 517,000 (1,178,000)
---------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 589,000 924,000 1,198,000 1,285,000
Other 38,000 (46,000) 96,000 (87,000)
---------------------------------------------------------------
627,000 878,000 1,294,000 1,198,000
---------------------------------------------------------------
Net income (loss) before provision
for income taxes 838,000 (133,000) 1,811,000 20,000
Provision for income taxes (25,000) (3,000) (44,000) (24,000)
===============================================================
Net income (loss) $ 813,000 $ (136,000) $ 1,767,000 $ (4,000)
===============================================================
Net income (loss) per share $ 0.06 $ (0.01) $ 0.12 $ (0.00)
===============================================================
Weighted average shares outstanding 14,606,000 14,109,000 14,595,000 12,739,000
===============================================================
<FN>
The accompanying notes are an integral part of
these condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
VTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
JANUARY 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 1,767,000 $ (4,000)
Adjustments to reconcile net income (loss)
to net cash from operations:
Depreciation and amortization 3,883,000 2,578,000
Provision for doubtful accounts 70,000 10,000
Amortization of unearned compensation 93,000 10,000
Amortization of deferred gain (64,000) (48,000)
Foreign currency translation (gain) loss (33,000) 130,000
(Increase) decrease in accounts receivable (11,398,000) 1,857,000
(Increase) decrease in inventories 4,471,000 (2,371,000)
(Increase) decrease in prepaid expenses
and other current assets 458,000 959,000
Increase (decrease) in accounts payable (1,674,000) 924,000
Increase (decrease) in accrued expenses (881,000) 816,000
Increase in deferred revenues 3,555,000 172,000
--------------------------
Net cash provided by operating activities 247,000 5,033,000
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net short-term investment activity 7,094,000 (46,174,000)
Net purchase of property and equipment (4,030,000) (4,683,000)
Purchase of ICS - (10,557,000)
(Increase) in other assets (778,000) (158,000)
--------------------------
Net cash provided by (used in) investing 2,286,000 (61,572,000)
activities --------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations - (1,000)
Net proceeds from issuance of stock 833,000 57,746,000
Purchase of treasury stock (3,742,000) -
--------------------------
Net cash provided by (used in) financing (2,909,000) 57,745,000
activities --------------------------
Effect of translation exchange rates on cash (123,000) (200,000)
--------------------------
Net increase (decrease) in cash and equivalents (499,000) 1,006,000
Cash and equivalents at beginning of period 1,973,000 2,283,000
==========================
Cash and equivalents at end of period $ 1,474,000 $ 3,289,000
==========================
<FN>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
VTEL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
VTEL Corporation ("VTEL" or 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 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 facsimiles. 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 January 31, 1997 and the results of the Company's operations and
its cash flows for the three and six month periods ended January 31, 1997. 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 1996 Transition Report on Form 10-K
filed with the Securities and Exchange Commission on November 13, 1996.
NOTE 2 - AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
On January 6, 1997, VTEL, VTEL-Sub, Inc., a Delaware corporation and direct
wholly- owned subsidiary of VTEL ("Merger Sub"), and Compression Labs,
Incorporated, a Delaware corporation ("CLI"), entered into an Agreement and Plan
of Merger and Reorganization (the "Merger Agreement"), pursuant to which Merger
Sub will merge with and into CLI (the "Merger"), with CLI becoming a direct
wholly-owned subsidiary of VTEL. As a result of the Merger, (a) the outstanding
shares of CLI's common stock, par value $.001 per share ("CLI Common Stock"),
will be converted into the right to receive 0.46 shares of common stock of VTEL,
par value $.01 per share ("VTEL Common Stock"), per share of CLI Common Stock
converted (or cash in lieu of fractional shares otherwise deliverable in respect
thereof), and (b) the outstanding shares of CLI Series C Preferred Stock, par
value $.001 per share ("CLI Preferred Stock"), will be converted into the right
to receive 3.15 shares of VTEL Common Stock per share of CLI Preferred Stock
converted (or cash in lieu of fractional shares otherwise deliverable in respect
thereof). The Merger is conditioned upon, among other things, approval by
holders of a majority of VTEL Common Stock, approval by holders of a majority of
CLI Common Stock, and upon receipt of certain regulatory and governmental
approvals. If the merger is approved as planned, the Company will issue
approximately 8.4 million shares to the CLI shareholders, who will own
approximately 37.7% of the Company's outstanding shares following the Merger.
Simultaneously with their execution and delivery of the Merger Agreement, VTEL
and CLI entered
5
<PAGE>
into a stock option agreement (the "Stock Option Agreement") pursuant to which
CLI granted VTEL the right, upon the terms and subject to the conditions set
forth therein, to purchase up to 3,120,500 shares of CLI Common Stock at a price
of $4.6575 per share. The Merger is intended to be accounted for as a
"pooling-of-interests" under generally accepted accounting principles.
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1997 1996
<S> <C> <C>
Raw materials $ 5,920,000 $ 8,959,000
Work in process 422,000 920,000
Finished goods 3,536,000 4,508,000
Finished goods held for evaluation 655,000 617,000
----------- ------------
$10,533,000 $ 15,004,000
=========== ============
</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.
NOTE 4 - 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.
NOTE 5 - TREASURY STOCK
During the fiscal period ended July 31, 1996, the Company adopted a share
repurchase program whereby the Company could repurchase shares of its Common
Stock in the open market provided that the aggregate purchase price of the
shares repurchased did not exceed $8.4 million and the repurchase price for any
shares did not exceed $12 per share. The repurchased shares will be issued from
time to time to fulfill requirements for the Company's Common Stock under its
employee stock plans. The Company repurchased 455,200 shares of its Common Stock
for $3,742,000 under the repurchase program. On February 28, 1997, the Company
terminated the stock repurchase program in order to be in compliance with
pooling of interests requirements for the pending merger of VTEL and CLI. At
January 31, 1997, the Company had 294,445 shares of treasury stock. The Company
applies the cost method of accounting for its treasury stock.
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 and six month periods ended January 31, 1997 and 1996
should be read in conjunction with the Company's 1996 Transition Report on Form
10-K filed with the Securities and Exchange Commission on November 13, 1996.
6
<PAGE>
In May 1996, the Company changed its fiscal year end from December 31 to July
31. As such, the quarter ended January 31, 1997 represents the second quarter of
the Company's 1997 fiscal year. The comparative information for the quarter
ended January 31, 1996 has been restated from the information presented in prior
Quarterly Reports on Form 10-Q to conform to the Company's newly adopted fiscal
quarters.
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 FOR THE SIX
MONTHS ENDED MONTHS ENDED
JANUARY 31, JANUARY 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Gross margin 43 42 43 46
Selling, general and administrative 32 33 32 35
Research and development 10 13 10 14
Total operating expenses 42 47 43 49
Other income, net 2 4 2 3
Net income (loss) 3% (1)% 3% 0%
</TABLE>
THREE AND SIX MONTHS ENDED JANUARY 31, 1997 AND 1996
Revenues. Revenues for the three months ended January 31, 1997 increased to
$29,123,000 from $23,909,000 for the three months ended January 31, 1996, an
increase of $5,214,000 or 22%. Revenues for the six months ended January 31,
1997 increased to $57,322,000 from $43,419,000 for the six months ended January
31, 1996, an increase of $13,903,000 or 32%. The increase in revenues is due to
an increase in the number of units sold during the three and six months ended
January 31, 1997 and additional videoconferencing-related revenues generated
during the three and six months ended January 31, 1997 by the Company's systems
integration and service operations which were acquired in November 1995.
The following table summarizes the Company's group system unit sales activity:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JANUARY 31, JANUARY 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Large group conferencing systems 612 320 1,131 908
Small group conferencing systems 53 62 122 133
Multipoint control units 28 23 59 52
-------------------------------------------------
Total units 693 405 1,312 1,093
=================================================
</TABLE>
7
<PAGE>
The increase in sales of the Company's large group conferencing systems during
the three and six months ended January 31, 1997 in comparison with the three and
six months ended January 31, 1996 is due to the introduction of the
MediaMax(TM)-based Leadership Conferencing(TM) systems in December 1995 and the
Enterprise Series Architecture (ESA(TM))-based Team Conferencing(TM) systems in
February 1996. Sales of these new products represented more than 90% of large
group conferencing revenues for the three and six months ended January 31, 1997.
The Company has experienced an increase in unit sales of its small group
ESA(TM)-based Team Conferencing(TM) Model 1000 system since its introduction in
July 1996 and a decrease in unit sales of its small group S-Max(TM) products due
to the discontinuance of this product line, resulting in a net decline in unit
sales of small group conferencing systems during the three and six months ended
January 31, 1997 in comparison with the three and six months ended January 31,
1996.
The average selling price for a group system sold during the three months ended
January 31, 1997 was approximately $30,000 compared to $36,000 for the three
months ended January 31, 1996. The decrease in the average selling price is
attributable to the transition from shipments of the Company's higher margin
MediaMax(TM)-based products during the three months ended January 31, 1996 to
shipments of the ESA(TM)-based Team Conferencing(TM) systems during the three
months ended January 31, 1997, which generally carry a lower average selling
price than the MediaMax(TM)-based products.
In February 1996, the Company introduced its Personal Collaborator(TM)
videoconferencing kits as part of its desktop system product line. Desktop
system products represented 3% of product revenues for the three and six months
ended January 31, 1997 and 3% and 2%, respectively, of product sales for the
three and six months ended January 31, 1996.
International sales contributed approximately 24% of product revenues for the
three and six months ended January 31, 1997 as compared to 21% and 18%,
respectively, for the three and six months ended January 31, 1996.
While the Company strives for consistent revenue growth, there can be no
assurance that consistent revenue growth or profitability can be achieved.
Consistent with many companies in the technology industry, the Company's
business model is characterized by a very high degree of operating leverage. 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. Because expense levels
are based on the Company's expectations as to future revenues, the Company's
expense base is relatively fixed in the short term. If revenue levels are below
expectations, operating results may be materially and adversely affected and net
income is likely to be disproportionately 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. There can be no assurance that the Company will be able to increase
or even maintain its current level of revenues on a quarterly or annual basis in
the future. Due to all of the foregoing factors, it is possible that in one or
more future quarters the Company's operating results will be below the
expectations of public securities market analysts. In such event, the price of
the Company's Common Stock would likely be materially adversely affected.
8
<PAGE>
Gross margin. Gross margin as a percentage of total revenues for the three
months ended January 31, 1997 was 43%, a slight increase from the 42% gross
margin generated for the three months ended January 31, 1996. The consistency in
the gross margin percentage despite lower average selling prices for the
Company's products is the result of lower costs per unit for the Company's newer
product lines and higher unit volumes sold, which results in an incremental
decrease in the cost per unit of the Company's products as fixed manufacturing
costs are spread over a larger number of units produced.
Gross margin as a percentage of total revenues for the six months ended January
31, 1997 was 43%, a decrease from the 46% gross margin generated for the six
months ended January 31, 1996. The change in the gross margin percentage relates
to the incremental revenues generated by the Company's systems integration and
service operations, which were acquired in November 1995. Revenues from the
Company's systems integration and service operations generally carry a lower
gross margin than product revenues resulting in a lower overall blended gross
margin.
Although the Company expects gross margins to improve during fiscal year 1997,
it continues to expect gross margin pressures due to price competitiveness in
the industry, shifts in the product sales mix and anticipated offerings of new
products which may carry a lower gross margin. 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. 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 $1,357,000, or 17%, from $7,953,000 for the three months
ended January 31, 1996 to $9,310,000 for the three months ended January 31,
1997. Selling, general and administrative expenses increased by $3,104,000, or
21%, from $15,073,000 for the six months ended January 31, 1996 to $18,177,000
for the six months ended January 31, 1997.
Selling, general and administrative expenses as a percentage of revenues were
32% for the three and six months ended January 31, 1997 and were 33% and 35%,
respectively, for the three and six months ended January 31, 1996. Selling,
general and administrative expenses have remained a consistent percentage of
revenues as the Company has managed its growth to ensure that selling, general
and administrative expenses do not grow faster than the growth in revenues.
Selling, general and administrative expenses as a percentage of revenues have
declined during the six months ended January 31, 1997 in comparison with the six
months ended January 31, 1996 as the Company's sales and marketing programs have
caused revenues to increase at a faster rate than the Company's selling, general
and administrative expenses have during these periods.
Research and development. Research and development expenses decreased by
$248,000, or 8%, from $3,049,000 for the three months ended January 31, 1996 to
$2,801,000 for the three months ended January 31, 1997. Research and development
expenses decreased by $299,000, or 5%, from $6,018,000 for the six months ended
January 31, 1996 to $5,719,000 for the six months ended January 31, 1997.
Research and development expenses have remained substantially consistent during
these periods as the Company has focused its research and development resources
and effort under the Customer Business Unit organization allowing a more
efficient and productive use of research and development resources.
9
<PAGE>
Research and development expenses as a percentage of revenues were 10% for the
three and six months ended January 31, 1997 and were 13% and 14%, respectively,
for the three and six months ended January 31, 1996. Research and development
expenses decreased as a percentage of revenues from the three and six months
ended January 31, 1996 to the three and six months ended January 31, 1997 due to
the incremental systems integration and service revenues generated subsequent to
the acquisition of the systems integration and service operations in November
1995, 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. Future research and
development expenses are anticipated to increase as revenues increase. All of
the Company's research and development costs and internal software development
costs have been expensed as incurred.
Other income, net. Other income, net decreased by $251,000, or 29%, from
$878,000 for the three months ended January 31, 1996 to $627,000 for the three
months ended January 31, 1997. Other income, net increased by $96,000, or 8%,
from $1,198,000 for the six months ended January 31, 1996 to $1,294,000 for the
six months ended January 31, 1997. The decrease in other income, net from the
three months ended January 31, 1996 to the three months ended January 31, 1997
is due to the decrease in interest income earned as a result of lower cash and
investment balances maintained by the Company during the three months ended
January 31, 1997. The increase in other income, net from the six months ended
January 31, 1996 to the six months ended January 31, 1997 is due to the Company
generating foreign currency exchange gains during the six months ended Janaury
31, 1997 compared with foreign currency exchange losses incurred during the six
months ended January 31, 1996, slightly offset by less interest income earned on
lower cash and investment balances during the six months ended January 31, 1997.
Net income (loss). The Company generated net income of $813,000, or $.06 per
share, during the three months ended January 31, 1997 compared to a net loss of
$136,000, or $.01 per share, for the three months ended January 31, 1996. The
Company generated net income of $1,767,000, or $.12 per share, during the six
months ended January 31, 1997 compared to a net loss of $4,000, or $.00 per
share, for the six months ended January 31, 1996.
The increase in net income for the three and six months ended January 31, 1997
compared to the three and six months ended January 31, 1996 was the result of
revenues increasing at a faster rate than operating expenses.
Improvement in the Company's financial performance during the remainder of
fiscal year 1997 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. There
can be no assurances that the Company will be successful in achieving these
objectives during the remainder of fiscal year 1997.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1997, the Company had working capital of $62,849,000, including
$42,687,000 in cash, cash equivalents and short-term investments. The primary
uses of cash during the six months ended January 31, 1997 were to repurchase
shares of the Company's Common Stock under a stock repurchase program (see Note
5 to the Condensed Consolidated Financial Statements), to purchase property and
equipment and leasehold improvements and to fund working capital needs required
to support the Company's growth. The primary uses of cash during the six months
ended January 31, 1996 were to purchase the Integrated Communications Systems
(ICS) group from Peirce-Phelps, Inc., to purchase property and equipment and
leasehold improvements, to fund working capital needs required to support the
Company's growth and to invest the proceeds from the sale of the Company's
Common Stock in a secondary offering completed in October 1995.
Cash provided by operating activities was $247,000 for the six months ended
January 31, 1997, as a result of a decrease in inventories and an increase in
deferred revenues, offset by an increase in accounts receivable and a decrease
in accounts payable. Cash provided by operating activities was $5,033,000 for
the six months ended January 31, 1996, as a result of a decrease in accounts
receivable and prepaid expenses and other current assets and an increase in
accounts payable, accrued expenses and deferred revenues, offset by an increase
in inventories.
Cash flows from investing activities during the six months ended January 31,
1997 were primarily the result of capital expenditures of $4,030,000 and net
investment redemption activity of short-term investments which provided cash of
$7,094,000. The Company periodically utilizes cash from short-term investments
to provide cash needed to support the Company's growth. Cash flows from
investing activities during the six months ended January 31, 1996 were primarily
the result of the investment of the proceeds of the Company's secondary offering
which netted approximately $57,000,000 to the Company, capital expenditures of
$4,683,000 and the purchase of the ICS group from Peirce-Phelps, Inc. requiring
the payment of approximately $10,557,000 in cash.
Cash flows used in financing activities during the six months ended January 31,
1997 relate to the repurchase of 455,200 shares of the Company's Common Stock
for $3,742,000 under a share repurchase program (see Note 5 to the Condensed
Consolidated Financial Statements). Cash flows provided by financing activities
for the six months ended January 31, 1996 relate to the completion by the
Company of a secondary offering whereby the Company netted approximately
$57,000,000 from the sale of 3,000,000 shares of its Common Stock.
At January 31, 1997, 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 January 31, 1997 consist of $42,687,000 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.
11
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
On January 6, 1997, VTEL Corporation, VTEL-Sub, Inc., a Delaware corporation and
direct wholly- owned subsidiary of VTEL ("Merger Sub"), and Compression Labs,
Incorporated, a Delaware corporation ("CLI"), entered into an Agreement and Plan
of Merger and Reorganization (the "Merger Agreement"), pursuant to which Merger
Sub will merge with and into CLI (the "Merger"), with CLI becoming a direct
wholly-owned subsidiary of VTEL. As a result of the Merger, (a) the outstanding
shares of CLI's common stock, par value $.001 per share ("CLI Common Stock"),
will be converted into the right to receive 0.46 shares of common stock of VTEL,
par value $.01 per share ("VTEL Common Stock"), per share of CLI Common Stock
converted (or cash in lieu of fractional shares otherwise deliverable in respect
thereof), and (b) the outstanding shares of CLI Series C Preferred Stock, par
value $.001 per share ("CLI Preferred Stock"), will be converted into the right
to receive 3.15 shares of VTEL Common Stock per share of CLI Preferred Stock
converted (or cash in lieu of fractional shares otherwise deliverable in respect
thereof). The Merger is conditioned upon, among other things, approval by
holders of a majority of VTEL Common Stock, approval by holders of a majority of
CLI Common Stock, and upon receipt of certain regulatory and governmental
approvals. If the merger is approved as planned, the Company will issue
approximately 8.4 million shares to the CLI shareholders, who will own
approximately 37.7% of the Company's outstanding shares following the Merger.
Simultaneously with their execution and delivery of the Merger Agreement, VTEL
and CLI entered into a stock option agreement (the "Stock Option Agreement")
pursuant to which CLI granted VTEL the right, upon the terms and subject to the
conditions set forth therein, to purchase up to 3,120,500 shares of CLI Common
Stock at a price of $4.6575 per share. The Merger is intended to be accounted
for as a "pooling-of-interests" under generally accepted accounting principles.
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, adverse legal disputes and delays in purchases relating
to federal government procurement.
12
<PAGE>
The integration of operations following the Merger will require the dedication
of management resources which will temporarily detract from attention to the
day-to-day business of the combined company. The difficulties of integration may
be increased by the necessity of integrating personnel with disparate business
backgrounds and combining two different corporate cultures. Following the
Merger, VTEL intends to seek to reduce expenses by the elimination of
duplicative or unnecessary facilities, employees, marketing programs and other
expenses. Subsequent to such reductions, VTEL intends to reinvest much of these
cost savings in programs aligned with its current strategic initiatives. There
can be no assurance that VTEL will be able to reduce expenses in this fashion,
that there will not be high costs associated with such activities, that such
reductions will not result in a decrease in revenues or that there will not be
other material adverse effects of such activities. Such effects could materially
reduce the earnings of the combined company. Following the Merger, VTEL also
intends to seek to sell to CLI customers VTEL products that have higher gross
profit margins than the CLI products currently being purchased by such
customers. There can be no assurance that this effort at product transition or
that the integration of the product lines of the two companies will not have
material adverse effects on results of operations. Subsequent to the Merger,
VTEL expects to incur a charge in the quarter ending July 31, 1997, currently
estimated to be in the range of $15 million to $25 million, to reflect the
combination of the two companies, including the elimination of duplicate
facilities, severance costs relating to employee terminations, the write-off of
certain intangibles, property and equipment, receivables and inventories,
discharge of contingent liabilities and payment of transaction costs. This
amount is a preliminary estimate only and is therefore subject to change. In
addition, there can be no assurance that VTEL will not incur additional charges
in subsequent quarters to reflect costs associated with the Merger.
There can be no assurance that the present and potential customers of VTEL and
CLI will continue their current buying patterns without regard to the Merger,
and any significant delay or reduction in orders could have an adverse effect on
the near-term business and results of operations of the combined company.
As a result of the Merger, it is anticipated that VTEL will issue approximately
8.4 million VTEL Common Shares. In general, these shares will be freely tradable
following the Merger, subject to certain resale restrictions for affiliates of
CLI or VTEL pursuant to Rules 144 or 145 under the Securities Act. An aggregate
of approximately 1.1 million of the shares issued in the Merger will be
beneficially owned by affiliates of CLI and therefore, subject to resale
restrictions. However, VTEL has agreed to provide certain registration rights to
the holders of such shares. The sale of a significant number of the foregoing
shares may cause substantial fluctuations in the price of VTEL Common Shares
over short time periods.
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 affect 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.
Further, this report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that involves
risks and uncertainties that could cause actual results to differ materially
from those reflected in those forward-looking statements, including the risks
discussed above under "General" and elsewhere herein.
13
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 22, 1997, Datapoint Corporation ("Datapoint") initiated a lawsuit
against VTEL and CLI in the Supreme Court for the County of New York alleging,
among other things, that on December 30, 1996 CLI agreed to settle Datapoint's
patent infringement action pending against CLI in the United States District
Court for the Northern District of Texas in exchange for a payment and a license
of Datapoint patented technology to CLI. Although no settlement agreement or
license agreement was entered into and CLI denies it ever agreed to settle the
pending patent infringement action, Datapoint maintains it reasonably expected
that a settlement agreement and license agreement would be entered into with CLI
and maintains that VTEL has willfully and intentionally interfered and prevented
Datapoint from obtaining the settlement and license that Datapoint sought.
Datapoint also asserts that VTEL's actions amounted to a prima facie tort.
Datapoint seeks from VTEL an amount equal to the benefit that it would have
recieved from CLI under the alleged settlement and license and punitive damages
of at least $3 million.
Datapoint also has asserted a cause of action against CLI for fraud based on
allegations that it was deceived by misrepresentations made by CLI in connection
with the alleged settlement and license negotiations. Specifically, Datapoint
maintains that it would not have agreed to the terms of the alleged license
agreement covering its patented technology had it known of the Merger, since
VTEL's license from Datapoint of the same technology would preclude Datapoint
from obtaining future royalties from CLI on sales of products that allegedly
infringed Datapoint's patent. Datapoint seeks unspecified money damages from CLI
based on the alleged fraud and additional punitive damages of $3 million.
CLI maintains that it never agreed to settle the pending infringement action and
therefore, there was not any agreement. Because no agreements were ever entered
into, VTEL maintains that it cannot be liable for allegedly interfering with a
non-existent agreement, or in any case agreements whose existence were unknown
to VTEL. Because no agreements were ever entered into, CLI maintains that it
cannot be liable for defrauding Datapoint in entering into a non-existent
license agreement. VTEL and CLI have removed the action to the United States
District Court for the Southern District of New York and intend to vigorously
defend the claims.
ITEM 5. OTHER INFORMATION
None
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 - Agreement and Plan of Merger and Reorganization dated as of
January 6, 1997 by and among VTEL, VTEL-Sub, Inc. and CLI
(incorporated by reference to the Exhibit 1 of VTEL's Report on
Form 8-K dated January 6, 1997).
27.1 - Financial Data Schedule (filed electronically only).
(b) Reports on Form 8-K
The following Reports on Form 8-K have been filed:
EVENT REPORTED DATE OF REPORT
Agreement and Plan of Merger and Reorganization January 6, 1997
* * *
15
<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
March 12, 1996 By: /s/Rodney S. Bond
-------------------------
Rodney S. Bond
Vice President-Finance
(Chief Financial Officer
and Principal Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VTEL
CORPORATION'S BALANCE SHEET & INCOME STATEMENT FOR THE THREE MONTHS ENDED
1/31/97, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 1/31/97
10-Q FILING.
</LEGEND>
<CIK> 0000884144
<NAME> VTEL CORPORATION
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JAN-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,474,000
<SECURITIES> 41,213,000
<RECEIVABLES> 27,187,000
<ALLOWANCES> (274,000)
<INVENTORY> 10,533,000
<CURRENT-ASSETS> 81,272,000
<PP&E> 25,824,000
<DEPRECIATION> (11,289,000)
<TOTAL-ASSETS> 111,634,000
<CURRENT-LIABILITIES> 18,423,000
<BONDS> 0
0
0
<COMMON> 125,092,000
<OTHER-SE> (31,881,000)
<TOTAL-LIABILITY-AND-EQUITY> 111,634,000
<SALES> 29,123,000
<TOTAL-REVENUES> 29,123,000
<CGS> (16,561,000)
<TOTAL-COSTS> (12,351,000)
<OTHER-EXPENSES> 627,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 838,000
<INCOME-TAX> (25,000)
<INCOME-CONTINUING> 813,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 813,000
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
