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 APRIL 30, 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 June 1, 1997 the registrant had outstanding 22,759,592 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>
APRIL 30, July 31,
1997 1996
(UNAUDITED)
--------------------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and equivalents $ 1,200,000 $ 1,973,000
Short-term investments 37,730,000 48,307,000
Accounts receivable, net of allowance for doubtful
accounts of $285,000 and $203,000 at
April 30, 1997 and July 31, 1996 27,066,000 15,585,000
Inventories 14,128,000 15,004,000
Prepaid expenses and other current assets 1,070,000 1,597,000
----------- -----------
Total current assets 81,194,000 82,466,000
Property and equipment, net 15,290,000 13,906,000
Intangible assets, net 13,008,000 13,730,000
Other assets 3,351,000 1,801,000
----------- -----------
$112,843,000 $ 111,903,000
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,375,000 $ 9,831,000
Accrued compensation and benefits 1,639,000 1,529,000
Other accrued liabilities 1,042,000 2,241,000
Research and development advance 901,000 906,000
Deferred revenue 6,888,000 2,980,000
----------- -----------
Total current liabilities 18,845,000 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;
14,072,000 and 14,308,000 issued and outstanding at
April 30, 1997 and July 31, 1996 141,000 143,000
Additional paid-in capital 124,587,000 124,190,000
Treasury stock (1,928,000) -
Accumulated deficit (28,670,000) (30,068,000)
Cumulative translation adjustment (37,000) 151,000
Unearned compensation (95,000) -
----------- -----------
Total stockholders' equity 93,998,000 94,416,000
----------- -----------
$112,843,000 $ 111,903,000
============ ==============
</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 FOR THE
THREE MONTHS NINE MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
1997 1996 1997 1996
----------------------------------------------------------------
REVENUES:
<S> <C> <C> <C> <C>
Products $ 19,916,000 $ 16,118,000 $ 62,685,000 $ 50,301,000
Services and other 5,784,000 6,983,000 20,337,000 16,219,000
-------------- ------------- -------------- --------------
25,700,000 23,101,000 83,022,000 66,520,000
-------------- ------------- -------------- --------------
COST OF SALES:
Products 9,022,000 8,794,000 31,254,000 25,942,000
Services and other 4,345,000 5,140,000 14,542,000 11,338,000
-------------- ------------- -------------- --------------
13,367,000 13,934,000 45,796,000 37,280,000
-------------- ------------- -------------- --------------
Gross margin 12,333,000 9,167,000 37,226,000 29,240,000
-------------- ------------- -------------- --------------
Selling, general and administrative 9,427,000 8,956,000 27,604,000 24,029,000
Research and development 2,826,000 3,806,000 8,545,000 9,824,000
Amortization of intangible assets 240,000 240,000 720,000 400,000
-------------- ------------- -------------- --------------
Total operating expenses 12,493,000 13,002,000 36,869,000 34,253,000
-------------- ------------- -------------- --------------
Income (loss) from operations (160,000) (3,835,000) 357,000 (5,013,000)
-------------- ------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest income 558,000 877,000 1,756,000 2,162,000
Other 38,000 184,000 134,000 97,000
-------------- ------------- -------------- --------------
596,000 1,061,000 1,890,000 2,259,000
-------------- ------------- -------------- --------------
Net income (loss) before provision
for income taxes 436,000 (2,774,000) 2,247,000 (2,754,000)
Provision for income taxes - 3,000 (44,000) (21,000)
-------------- ------------- -------------- --------------
Net income (loss) $ 436,000 $ (2,771,000) $ 2,203,000 $ (2,775,000)
=============== ============== =============== ================
Net income (loss) per share $ 0.03 $ (0.19) $ 0.15 $ (0.21)
=============== ============== =============== ================
Weighted average shares outstanding 14,453,000 14,221,000 14,552,000 13,235,000
=============== ============== =============== ================
</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
NINE MONTHS ENDED
APRIL 30,
1997 1996
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 2,203,000 $(2,775,000)
Adjustments to reconcile net income (loss)
to net cash from operations:
Depreciation and amortization 5,683,000 4,320,000
Provision for doubtful accounts 80,000 25,000
Amortization of unearned compensation 111,000 10,000
Amortization of deferred gain (80,000) (72,000)
Foreign currency translation (gain) loss (65,000) (25,000)
(Increase) in accounts receivable (11,561,000) (1,736,000)
(Increase) decrease in inventories 876,000 (1,751,000)
Decrease in prepaid expenses and other current assets 527,000 1,096,000
Increase (decrease) in accounts payable (1,456,000) 2,098,000
Increase (decrease) in accrued expenses (1,014,000) 396,000
Increase in deferred revenues 3,908,000 299,000
---------- -----------
Net cash provided by (used in) operating activities (788,000) 1,885,000
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net short-term investment activity 10,577,000 (40,015,000)
Net purchase of property and equipment (6,345,000) (7,938,000)
Purchase of ICS - (10,557,000)
(Increase) in other assets (1,550,000) (174,000)
----------- -----------
Net cash provided by (used in) investing activities 2,682,000 (58,684,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations - (1,000)
Net proceeds from issuance of stock 1,197,000 57,861,000
Purchase of treasury stock (3,742,000) -
----------- -----------
Net cash provided by (used in) financing activities (2,545,000) 57,860,000
----------- -----------
Effect of translation exchange rates on cash (122,000) (217,000)
----------- -----------
Net increase (decrease) in cash and equivalents (773,000) 844,000
Cash and equivalents at beginning of period 1,973,000 2,283,000
----------- -----------
Cash and equivalents at end of period $ 1,200,000 $ 3,127,000
=========== ===========
</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 ("VTEL" or the "Company") designs, manufactures, and 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 April 30, 1997 and the results of the Company's operations and its
cash flows for the three and nine month periods ended April 30, 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 May 23, 1997, shareholders of VTEL and Compression Labs, Incorporated, a
Delaware corporation ("CLI"), approved the merger (the "Merger") of VTEL-Sub,
Inc., a Delaware corporation and direct wholly owned subsidiary of VTEL ("Merger
Sub"), with and into CLI, pursuant to an Agreement and Plan of Merger and
Reorganization (the "Merger Agreement"), 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"), were
converted into 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"), were 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
Agreement received approval by holders of a majority of the issued and
outstanding shares of CLI Common Stock, and a majority of the votes cast by
holders of VTEL Common Stock voted in favor of the Merger, and the Merger
received certain regulatory and governmental approvals. The Merger will be
accounted for as a pooling of interests.
5
<PAGE>
The following unaudited pro forma condensed combined financial information gives
effect to the Merger by combining the results of operations of VTEL and CLI for
the three and nine months ended April 30, 1997 as if the proposed Merger had
occurred as of the beginning of these periods. The unaudited pro forma condensed
combined financial information is subject to the assumptions, estimates and
adjustments in the accompanying footnotes to the pro forma condensed combined
financial information, and such information is not necessarily indicative of the
results of operations that would have occurred had the Merger been consummated
on the date for which the pro forma condensed combined financial information is
being presented.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED APRIL 30, 1997
PRO FORMA
VTEL CLI ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Revenues $ 25,700,000 $ 18,400,000 $ 44,100,000
Net income (loss) from
continuing operations $ 436,000 $ (4,276,000) $ (3,840,000)
Net income (loss) per share
from continuing operations $ 0.03 $ (0.27) $ (0.18)
Weighted average shares
outstanding 14,453,000 15,892,000 (8,582) (a) 21,349,000
(414) (b)
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED APRIL 30, 1997
PRO FORMA
VTEL CLI ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Revenues $ 83,022,000 $ 61,047,000 $ 144,069,000
Net income (loss) from
continuing operations $ 2,203,000 $ (13,783,000) $ (11,580,000)
Net income (loss) per share
from continuing operations $ 0.15 $ (0.87) $ (0.54)
Weighted average shares
outstanding 14,552,000 15,845,000 (8,556) (a) 21,290,000
(551) (b)
</TABLE>
- -----------------
(a) Net income (loss) per share amounts are based on the average number of
common shares of the combined companies outstanding during each period.
Shares of CLI have been adjusted to the equivalent shares of VTEL for each
period based on the exchange ratios provided by the Merger Agreement.
(b) The pro forma adjustment to weighted average shares outstanding represents
the elimination of common share equivalents in VTEL's calculation of
weighted average shares outstanding since a pro forma net loss is reflected
on a combined basis and such common share equivalents would be
anti-dilutive if not excluded from the calculation of pro forma earnings
per share.
6
<PAGE>
Note 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1997 1996
<S> <C> <C>
Raw materials $ 7,658,000 $ 8,959,000
Work in process 971,000 920,000
Finished goods 4,463,000 4,508,000
Finished goods held for evaluation 1,036,000 617,000
----------- ------------
$14,128,000 $ 15,004,000
=========== ============
</TABLE>
Finished goods held for evaluation consists of completed multi-media
conferencing 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
April 30, 1997, the Company had 239,359 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 nine month periods ended April 30, 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.
7
<PAGE>
In May 1996, the Company changed its fiscal year end from December 31 to July
31. As such, the quarter ended April 30, 1997 represents the third quarter of
the Company's 1997 fiscal year. The comparative information for the quarter
ended April 30, 1997 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 NINE
MONTHS ENDED MONTHS ENDED
APRIL 30, APRIL 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Gross margin 48 40 45 44
Selling, general and administrative 37 39 33 36
Research and development 11 16 10 15
Total operating expenses 49 56 44 51
Other income, net 2 5 2 3
Net income (loss) 2% (12)% 3% (4)%
</TABLE>
THREE AND NINE MONTHS ENDED APRIL 30, 1997 AND 1996
Revenues. Revenues for the three months ended April 30, 1997 increased to
$25,700,000 from $23,101,000 for the three months ended April 30, 1996, an
increase of $2,599,000 or 11%. Revenues for the nine months ended April 30, 1997
increased to $83,022,000 from $66,520,000 for the nine months ended April 30,
1996, an increase of $16,502,000 or 25%. The increase in revenues is due to an
increase in the number of units sold during the three and nine months ended
April 30, 1997 primarily as a result of new product introductions. The increase
in product revenues during the three and nine months ended April 30, 1997 was
partially offset by a decrease in service revenues as a result of a decline in
the company's integration business which is expected to recover to prior levels
experienced by the Company.
The following table summarizes the Company's group system unit sales activity:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
APRIL 30, APRIL 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Large group conferencing systems 480 353 1,611 1,037
Small group conferencing systems 62 29 184 171
Multipoint control units 21 23 80 75
----- ------ ------ ------
Total units 563 405 1,875 1,283
----- ------ ------ ------
</TABLE>
8
<PAGE>
The increase in sales of the Company's large group conferencing systems during
the three and nine months ended April 30, 1997 in comparison with the three and
nine months ended April 30, 1996 is due to the introduction of the Enterprise
Series Architecture (ESA(TM))-based Team Conferencing(TM) systems in February
1996 and the ESA(TM)-based Leadership Conferencing(TM) systems in January 1997.
Sales of these new products represented more than 80% of large group
conferencing revenues for the three and nine months ended April 30, 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 resulting in a net increase in unit sales of small group conferencing
systems during the three and nine months ended April 30, 1997 in comparison with
the three and nine months ended April 30, 1996.
The average selling price for a group system sold during the three months ended
April 30, 1997 was approximately $37,000 compared to $38,000 for the three
months ended April 30, 1996. Average selling prices for a group system increased
during the three months ended April 30, 1997 from $31,000 in the prior quarter
due to market acceptance of the ESA(TM)-based Leadership Conferencing(TM)
system, the LC 5000, which carries a higher average selling price.
In February 1996, the Company introduced its Personal Collaborator(TM)
videoconferencing kits as part of its desktop system product line. Desktop
system products represented 2% of product revenues for the three and nine months
ended April 30, 1997 and 5% and 3%, respectively, of product sales for the three
and nine months ended April 30, 1996.
International sales contributed approximately 22% and 23%, respectively, of
product revenues for the three and nine months ended April 30, 1997 as compared
to 20% and 18%, respectively, for the three and nine months ended April 30,
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.
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 focus of management resources
on merger-related issues could have an adverse effect on revenues. 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.
9
<PAGE>
Gross margin. Gross margin as a percentage of total revenues for the three
months ended April 30, 1997 was 48%, an increase from the 40% gross margin
generated for the three months ended April 30, 1996. Gross margin as a
percentage of total revenues for the nine months ended April 30, 1997 was 45%,
an increase from the 44% gross margin generated for the nine months ended April
30, 1996. The increase in the gross margin percentage 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. Also, the Company has experienced a shift in the product
sales mix towards higher margin products.
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 $471,000, or 5%, from $8,956,000 for the three months
ended April 30, 1996 to $9,427,000 for the three months ended April 30, 1997.
Selling, general and administrative expenses increased by $3,575,000, or 15%,
from $24,029,000 for the nine months ended April 30, 1996 to $27,604,000 for the
nine months ended April 30, 1997.
Selling, general and administrative expenses as a percentage of revenues were
37% and 33%, respectively, for the three and nine months ended April 30, 1997
and were 39% and 36%, respectively, for the three and nine months ended April
30, 1996. Selling, general and administrative expenses have decreased as a
percentage of revenues during the three and nine months ended April 30, 1997 in
comparison with the three and nine months ended April 30, 1996 as the Company
has managed its growth and implemented sales and marketing programs to cause
revenues to increase at a faster rate than the Company's selling, general and
administrative expenses have increased during these periods.
Research and development. Research and development expenses decreased by
$980,000, or 26%, from $3,806,000 for the three months ended April 30, 1996 to
$2,826,000 for the three months ended April 30, 1997. Research and development
expenses decreased by $1,279,000, or 13%, from $9,824,000 for the nine months
ended April 30, 1996 to $8,545,000 for the nine months ended April 30, 1997.
Research and development expenses have decreased 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.
10
<PAGE>
Research and development expenses as a percentage of revenues were 11% and 10%,
respectively, for the three and nine months ended April 30, 1997 and were 16%
and 15%, respectively, for the three and nine months ended April 30, 1996.
Research and development expenses decreased as a percentage of revenues from the
three and nine months ended April 30, 1996 to the three and nine months ended
April 30, 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. Additionally, research and development expenses as a
percentage of revenues have decreased as revenues have increased while research
and development expenses have declined.
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 $465,000, or 44%, from
$1,061,000 for the three months ended April 30, 1996 to $596,000 for the three
months ended April 30, 1997. Other income, net decreased by $369,000, or 16%,
from $2,259,000 for the nine months ended April 30, 1996 to $1,890,000 for the
nine months ended April 30, 1997. The decrease in other income, net from the
three and nine months ended April 30, 1996 to the three and nine months ended
April 30, 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
and nine months ended April 30, 1997.
Net income (loss). The Company generated net income of $436,000, or $.03 per
share, during the three months ended April 30, 1997 compared to a net loss of
$2,771,000, or $.019 per share, for the three months ended April 30, 1996. The
Company generated net income of $2,203,000, or $.15 per share, during the nine
months ended April 30, 1997 compared to a net loss of $2,775,000, or $.21 per
share, for the nine months ended April 30, 1996.
The increase in net income for the three and nine months ended April 30, 1997
compared to the three and nine months ended April 30, 1996 was the result of
revenues increasing at a faster rate than operating expenses and improvements in
the Company's gross margins.
On May 23, 1997, shareholders of VTEL and Compression Labs, Incorporated, a
Delaware corporation ("CLI"), approved the merger (the "Merger") of VTEL-Sub,
Inc., a Delaware corporation and direct wholly owned subsidiary of VTEL ("Merger
Sub"), with and into CLI, pursuant to an Agreement and Plan of Merger and
Reorganization (the "Merger Agreement"), 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"), were
converted into 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"), were 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
Agreement received approval by holders of a majority of the issued and
outstanding shares of CLI Common Stock, and a majority of the votes cast by
holders of VTEL Common Stock voted in favor of the Merger, and the Merger
received certain regulatory and governmental approvals. The Merger will be
accounted for as a pooling of interests.
11
<PAGE>
The following unaudited pro forma condensed combined financial information gives
effect to the Merger by combining the results of operations of VTEL and CLI for
the three and nine months ended April 30, 1997 as if the proposed Merger had
occurred as of the beginning of these periods. The unaudited pro forma condensed
combined financial information is subject to the assumptions, estimates and
adjustments in the accompanying footnotes to the pro forma condensed combined
financial information, and such information is not necessarily indicative of the
results of operations that would have occurred had the Merger been consummated
on the date for which the pro forma condensed combined financial information is
being presented.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED APRIL 30, 1997
PRO FORMA
VTEL CLI ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Revenues $ 25,700,000 $ 18,400,000 $ 44,100,000
Net income (loss) from
continuing operations $ 436,000 $ (4,276,000) $ (3,840,000)
Net income (loss) per share
from continuing operations $ 0.03 $ (0.27) $ (0.18)
Weighted average shares
outstanding 14,453,000 15,892,000 (8,582) (a) 21,349,000
(414) (b)
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED APRIL 30, 1997
PRO FORMA
VTEL CLI ADJUSTMENTS COMBINED
<S> <C> <C> <C> <C>
Revenues $ 83,022,000 $ 61,047,000 $ 144,069,000
Net income (loss) from
continuing operations $ 2,203,000 $ (13,783,000) $ (11,580,000)
Net income (loss) per share
from continuing operations $ 0.15 $ (0.87) $ (0.54)
Weighted average shares
outstanding 14,552,000 15,845,000 (8,556) (a) 21,290,000
(551) (b)
</TABLE>
- -----------------
(a) Net income (loss) per share amounts are based on the average number of
common shares of the combined companies outstanding during each period.
Shares of CLI have been adjusted to the equivalent shares of VTEL for each
period based on the exchange ratios provided by the Merger Agreement.
(b) The pro forma adjustment to weighted average shares outstanding represents
the elimination of common share equivalents in VTEL's calculation of
weighted average shares outstanding since a pro forma net loss is reflected
on a combined basis and such common share equivalents would be
anti-dilutive if not excluded from the calculation of pro forma earnings
per share.
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 during the transition period.
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 $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.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1997, the Company had working capital of $62,349,000, including
$38,930,000 in cash, cash equivalents and short-term investments. The primary
uses of cash during the nine months ended April 30, 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 nine months
ended April 30, 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 used in operating activities was $788,000 for the nine months ended April
30, 1997, as a result of an increase in accounts receivable, a decrease in
accounts payable and accrued expenses, offset by a decrease in inventories and
an increase in deferred revenues. Cash provided by operating activities was
$1,885,000 for the nine months ended April 30, 1996, as a result of a decrease
in prepaid expenses and other current assets and increase in accounts payable
and accrued expenses, offset by an increase in accounts receivable and
inventories.
13
<PAGE>
Cash flows from investing activities during the nine months ended April 30, 1997
were primarily the result of net capital expenditures of $6,345,000 and net
investment redemption activity of short-term investments which provided cash of
$10,577,000. 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 nine months ended April 30, 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, net capital expenditures
of $7,938,000 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 nine months ended April 30,
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 nine months ended April 30, 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 April 30, 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 April 30, 1997 consist of $38,930,000 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, adverse legal disputes and delays in purchases relating
to federal government procurement.
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.
14
<PAGE>
Generally, the shares issued by VTEL to consummate the Merger are freely
tradable, 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 are 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 Stock 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 have 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 relate
to future results or events and are based on the Company's current expectations.
There are many factors that affect the Company's business and results of
operations, all of which involve 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.
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.
15
<PAGE>
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
Federal Court in Dallas and intend to vigorously defend the claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of stockholders was duly held on May 23, 1997. At the meeting,
the stockholders voted in favor of the proposal to approve an Agreement and Plan
of Merger and Reorganization (the "Merger Agreement"), dated as of January 6,
1997, by and among the Company, VTEL-Sub, Inc. ("Merger Sub"), a Delaware
corporation and a direct wholly owned subsidiary of the Company, and Compression
Labs, Incorporated, a Delaware corporation ("CLI"), pursuant to which Merger Sub
was merged with and into CLI, with CLI becoming a direct wholly owned subsidiary
of the Company, upon the terms and subject to the conditions set forth in the
Merger Agreement. The results of the vote were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
<S> <C> <C> <C> <C>
6,102,412 562,617 72,450 1,551,891
</TABLE>
The stockholders voted to approve a proposal to amend the Company's Fourth
Amended and Restated Certificate of Incorporation to increase the number of
authorized shares of Common Stock from 25,000,000 to 40,000,000 as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
<S> <C> <C> <C> <C>
7,448,212 764,155 77,003 -
</TABLE>
The stockholders voted to approve a proposal to amend the Company's 1996 Stock
Option Plan to increase the number of shares of Common Stock authorized and
reserved for issuance upon exercise of stock options granted pursuant to the
1996 Plan by 2,000,000 shares as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTES
<S> <C> <C> <C> <C>
4,373,036 2,250,524 113,919 1,551,891
</TABLE>
ITEM 5. OTHER INFORMATION
None
16
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 - Financial Data Schedule (filed electronically only).
c) Reports on Form 8-K
The following Reports on Form 8-K have been filed:
EVENT REPORTED DATE OF REPORT
Consummation of Merger with Compression Labs, Inc. May 23, 1997
* * *
17
<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
June 11, 1997 By: /s/ Rodney S. Bond
------------------------
Rodney S. Bond
Vice President-Finance
(Chief Financial Officer
and Principal Accounting Officer)
18
<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
4/30/97, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 4/30/97 10-Q
FILING.
</LEGEND>
<CIK> 0000884144
<NAME> VTEL Corporation
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<CASH> 1,200,000
<SECURITIES> 37,730,000
<RECEIVABLES> 27,351,000
<ALLOWANCES> (285,000)
<INVENTORY> 14,128,000
<CURRENT-ASSETS> 81,194,000
<PP&E> 28,101,000
<DEPRECIATION> (12,811,000)
<TOTAL-ASSETS> 112,843,000
<CURRENT-LIABILITIES> 18,845,000
<BONDS> 0
0
0
<COMMON> 124,728,000
<OTHER-SE> (30,730,000)
<TOTAL-LIABILITY-AND-EQUITY> 112,843,000
<SALES> 25,700,000
<TOTAL-REVENUES> 25,700,000
<CGS> (13,367,000)
<TOTAL-COSTS> (12,493,000)
<OTHER-EXPENSES> 596,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 436,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 436,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 436,000
<EPS-PRIMARY> .030
<EPS-DILUTED> .03
</TABLE>
