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 October 31, 1998
Commission file number 0-20008
VTEL Corporation
A Delaware Corporation IRS Employer ID No. 74-2415696
108 Wild Basin Road
Austin, Texas 78746
(512) 437-2700
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 December 1, 1998 the registrant had outstanding 22,927,567 shares of its
Common Stock, $0.01 par value.
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<TABLE>
<CAPTION>
VTEL CORPORATION
CONSOLIDATED BALANCE SHEET
(Amounts in thousands, except share and per share amounts)
October 31, July 31,
1998 1998
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 5,363 $ 15,191
Short-term investments 14,594 14,484
Accounts receivable, net of allowance for doubtful
accounts of $9,452 and $9,447 at
October 31, 1998 and July 31,1998 38,602 40,527
Inventories 18,189 12,951
Prepaid expenses and other current assets 3,539 2,533
------------ -----------
Total current assets 80,287 85,686
Property and equipment, net 32,289 28,106
Intangible assets, net 12,285 11,812
Other assets 5,738 3,685
------------ -----------
$ 130,599 $ 129,289
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,726 $ 22,600
Accrued merger and other expenses 1,604 1,741
Accrued compensation and benefits 4,619 5,258
Other accrued liabilities 6,370 2,791
Deferred revenue 10,954 11,793
------------ -----------
Total current liabilities 44,273 44,183
Long-term liabililities:
Borrowings under revolving line of credit 7,500 -
Other long-term obligations 5,642 3,848
------------ -----------
Total long-term liabilities 13,142 3,848
------------ -----------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 authorized;
none issued or outstanding - -
Common stock, $.01 par value; 40,000,000 authorized;
22,926,000 and 23,227,000 issued and outstanding
at October 31, 1998 and July 31, 1998 229 232
Additional paid-in capital 256,979 256,594
Treasury stock, 303,900 outstanding (1,260) -
Accumulated deficit (182,423) (175,455)
Accumulated other comprehensive loss (341) (113)
----------- -----------
Total stockholders' equity 73,184 81,258
----------- -----------
$ 130,599 $ 129,289
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
2
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<TABLE>
<CAPTION>
VTEL Corporation
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share amounts)
For the
Three Months Ended
October 31,
1998 1997
<S> <C> <C>
Revenues:
Products $ 24,528 $ 34,312
Services and other 12,407 9,917
-------- --------
36,935 44,229
-------- --------
Cost of sales:
Products 12,227 17,778
Services and other 8,188 6,479
-------- --------
20,415 24,257
-------- --------
Gross margin 16,520 19,972
-------- --------
Selling, general and administrative 18,240 14,521
Research and development 5,236 5,126
Amortization of intangible assets 252 240
-------- --------
Total operating expenses 23,728 19,887
-------- --------
Income (loss) from operations (7,208) 85
-------- --------
Other income (expense):
Interest income 288 221
Other (48) (174)
-------- --------
240 47
-------- --------
Net income (loss) before provision
for income taxes (6,968) 132
Provision for income taxes - (12)
-------- --------
Net income (loss) $ (6,968) $ 120
======== ========
Basic and diluted income (loss) per common share $ (0.30) $ 0.01
======== ========
Weighted average shares outstanding:
Basic 23,085 22,895
======== ========
Diluted 23,085 23,492
======== ========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
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<TABLE>
<CAPTION>
VTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
For the
Three Months Ended
October 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,968) $ 120
Adjustments to reconcile net income (loss)
to net cash used in operations:
Depreciation and amortization 2,535 2,192
Provision for doubtful accounts 33 22
Amortization of unearned compensation 39 61
Foreign currency translation (gain) loss (33) 119
Decrease in accounts receivable 2,693 3,823
Increase in inventories (3,873) (206)
(Increase) decrease in prepaid expenses and
other current assets (1,006) 464
Decrease in accounts payable (3,340) (7,627)
Increase (decrease) in accrued expenses 495 (2,756)
Increase (decrease) in deferred revenues (346) 672
-------- -------
Net cash used in operating activities (9,771) (3,116)
-------- -------
Cash flows from investing activities:
Net short-term investment activity (110) 6,771
Net purchase of property and equipment (3,495) (2,965)
Decrease in capitalized software (1,241) -
(Increase)decrease in other assets (772) 678
-------- -------
Net cash (used in) provided by investing activities (5,618) 4,484
-------- -------
Cash flows from financing activities:
Borrowings under line of credit 7,500 -
Net proceeds from issuance of stock 21 37
Purchase of treasury stock (2,265) -
Sale of treasury stock 178 -
-------- -------
Net cash provided by financing activities 5,434 37
-------- -------
Effect of translation exchange rates on cash 127 (64)
-------- -------
Net (decrease) increase in cash and equivalents (9,828) 1,341
Cash and equivalents at beginning of period 15,191 4,757
-------- -------
Cash and equivalents at end of period $ 5,363 $ 6,098
======== =======
</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, markets
and supports multi-media digital visual communication systems. 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 digital visual communication systems, users are able to
replicate more closely the impact and effectiveness of face-to-face meetings,
education and training classes and certain medical consultations.
The Company's systems are built upon a system platform which is based on
industry-standard, PC-compatible open hardware and software architecture. By
leveraging this open architecture design, the Company is able to integrate into
the videoconference PC-compatible hardware and software applications which allow
users to customize the systems to meet their unique needs. The PC-architecture
also provides a natural pathway to connect the Company's digital visual
communication systems onto local area networks (LANs) and wide area networks
(WANs) thereby leveraging the rapidly expanding network infrastructures being
deployed in organizations throughout the world. Also complementing this open
architecture is the Company's compliance with emerging industry standards. The
Company's open architecture and compliance with data and telecommunications
standards permit customers to incorporate new functions through software
upgrades, thereby lowering the cost of ownership by extending the useful life of
the investment.
The Company primarily distributes its systems to a domestic and
international marketplace through third party resellers. The Company's
headquarters and primary 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 October 31, 1998 and the results of the Company's operations and
its cash flows for the three month period ended October 31, 1998. The results
for interim periods are not necessarily indicative of results for a full fiscal
year.
5
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Note 2 - Inventories
Inventories consist of the following:
Oct. 31, July 31,
1998 1998
(Unaudited)
(Dollars in thousands)
Raw materials $ 6,949 $ 5,938
Work in process 4,317 517
Finished goods 5,928 5,833
Finished goods held for evaluation
and rental and loan agreements 995 663
-------- --------
$ 18,189 $ 12,951
======== ========
Finished goods held for evaluation consists of completed digital visual
communication systems used for demonstration and evaluation purposes, which are
generally sold during the next 12 months.
Note 3 - Net Income (Loss) Per Share
Basic Earnings per Share (EPS) is computed by dividing net income (loss) by
the weighted average number of common shares outstanding for the period. Diluted
EPS is computed by dividing net income (loss) by the weighted average number of
common shares and common share equivalents (if dilutive) outstanding for the
period. Stock options and warrants are the only dilutive potential shares that
the Company has outstanding for all periods presented. EPS data for prior
periods presented in this report have been recalculated to reflect the
provisions of Statement of Financial Accounting Standards No. 128 "Earnings per
Share".
The calculation of the number of weighted average shares outstanding for
basic and dilutive earnings (loss) per share for each of the periods presented
is as follows:
For the
Three Months Ended
October 31,
(Amounts in thousands)
1998 1997
Weighted average shares
outstanding - basic 23,085 22,895
-------- --------
Effect of dilutive securities:
Stock options - 597
-------- --------
Dilutive potential common shares - 597
-------- --------
Weighted average shares
outstanding - diluted 23,085 23,492
======== ========
Antidilutive securities 4,173 1,259
======== ========
6
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Note 4 - Comprehensive Income
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," during the first fiscal quarter of 1999.
SFAS No.130 establishes standards for reporting comprehensive income and its
components. The Company's comprehensive income (loss) is comprised of net income
(loss), foreign currency translation and unearned compensation. Comprehensive
loss for the quarter ended October 31, 1998 of $7.2 million and comprehensive
income for the quarter ended October 31, 1997 of $0.2 million were not
materially different from reporting net income (loss) for these periods.
Note 5 - Subsequent Events
Subsequent to October 31, 1998, the Company adopted a restructuring plan
which will result in a reduction in workforce of approximately 14%. The Company
will also reduce operating costs by exiting other activities which involve
excess, idle or non-productive assets or excess or non-productive overhead
costs. As a result of the restructuring, the Company anticipates a restructuring
charge during the second fiscal quarter of 1999 in the range of approximately
$2.5 million to $3.5 million.
As a result of the restructuring activities that are in process, the
Company will generate a net loss for the second quarter of fiscal year 1999
which will likely exceed the maximum quarterly loss allowable by the terms of
the Company's revolving line of credit agreement (Credit Agreement). The Company
is currently negotiating with its lenders the execution of an amendment to the
Credit Agreement to eliminate or modify the covenants such that the Company will
be able to avoid noncompliance with the terms of the Credit Agreement.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following review of the Company's financial position as of October 31,
1998 and 1997 and for the three months ended October 31, 1998 and 1997, should
be read in conjunction with the Company's 1998 Annual Report on Form 10-K filed
with the Securities and Exchange Commission on October 22, 1998.
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:
For the three
months ended
October 31,
1998 1997
Revenues 100% 100%
Gross margin 45 45
Selling, general and administrative 49 33
Research and development 14 12
Total operating expenses 64 45
Other income, net 1 -
Net income (loss) (19)% -%
7
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Three Months Ended October 31, 1998 and 1997
Revenues. Revenues for the quarter ended October 31, 1998 decreased to
$36.9 million from $44.2 million in the quarter ended October 31, 1997, a
decrease of $7.3 million or 17%. The decrease in revenues for the three month
period ended October 31, 1998 is the result of a decrease in the number of unit
sales of the Company's large group digital visual communication systems, and
lower average selling prices due to the shift in the product mix to products
with lower selling prices. The decline in revenues is the result of delays or
shifts in purchasing decisions of customers due to new product announcements by
the Company and its competitors, shifts of capital spending by customers and
customers increasingly delaying purchases of large group systems while they
evaluate the impact of converting from videoconferencing systems which currently
run on ISDN platforms to systems which run on an Internet Protocol (IP)
platform. Significantly lower sales of large group systems in the first fiscal
quarter are attributed to this extension of the purchasing cycle, as well as a
further decline in sales in international markets - particularly Asia and Latin
America. International sales represented approximately 18% of product revenues
for the quarter ended October 31, 1998 compared to 22% for the quarter ended
October 31, 1997.
The following table summarizes the Company's group system unit sales
activity:
For the three
months ended
October 31,
1998 1997
Large group digital visual
communication systems 614 751
Small group digital visual
communication systems 161 75
Multipoint control units 36 16
---- ----
Total systems 811 842
==== ====
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 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 of future revenues, the
Company's expense base is relatively fixed in the short term. If revenue levels
are below expectations as was the case for the quarter ended October 31, 1998,
operating results may be materially and adversely affected and net income is
likely to be 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 was 45%
for the three months ended October 31, 1998 and 1997. The gross margin
percentage for the quarter ended October 31, 1997 is the result of the sales mix
of VTEL's higher margin products blended with sales of the lower margin legacy
products of VTEL's wholly-owned subsidiary, Compression Labs, Inc, which was
acquired in May 1997. As the Company transitioned to a single product platform,
the Enterprise Series Architecture( (ESA) products, gross margins began to
increase during fiscal 1998 as the Company replaced sales of lower margin legacy
CLI products with higher margin ESA products. The gross margin percentage for
the quarter ended October 31, 1998 represents a decline from the preceding three
quarters. The decline in the gross margin percentage is the result of a shift in
the sales mix from higher margin large group systems to lower margin small group
systems.
While customers are delaying the purchase of higher cost large group
systems, they are shifting to the purchase of lower cost small group systems in
order to maintain their digital visual communications networks with only a
moderate continued investment until the anticipated industry breakout, which
will be driven by the shift to digital visual communication systems which
function within an IP network environment.As such, the Company anticipates that
the gross margin percentage will decline as customers shift their purchases from
higher margin large group systems to lower margin small group systems. 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 during this time of industry uncertainty.
This could significantly reduce future product average selling prices and
subsequently even further reduce the gross margins generated from these 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 $3.7 million, or 26%, from $14.5 million
for the quarter ended October 31, 1997 to $18.2 million for the quarter ended
October 31, 1998. Selling, general and administrative expenses as a percentage
of revenues were 49% and 33% for the three months ended October 31, 1998 and
1997, respectively. The Company's expense levels are based, in part, on its
expectations as to revenue levels. Because expense levels are based on the
Company's expectations of future revenues, the Company's expense base is
relatively fixed in the short term. As a result of the decline in revenues
during the quarter ended October 31, 1998, the Company's selling, general and
administrative expenses as a percentage of revenues increased significantly
during the quarter ended October 31,1998.
Selling, general and administrative expenses increased during the quarter
ended October 31, 1998 in comparison with the quarter ended October 31, 1997 as
a result of investments made by the Company during the quarter ended October 31,
1998 related to marketing and branding campaigns. These campaigns were designed
to provide brand awareness for VTEL's products and to position VTEL to be the
industry leader in digital visual communications in anticipation of an industry
breakout.
VTEL has taken steps to restructure the Company's operations to reduce
operating expenses in order to sustain profitability during the perceived
industry transition period while continuing to strive to strengthen essential
areas of the business such as new technology and product development and
customer service and response (see "Restructuring Activities"). As such, the
Company's selling, general and administrative expenses will decrease in future
periods.
9
<PAGE>
Research and development. Research and development expenses increased
by $0.1 million, or 2%, from $5.1 million for the quarter ended October 31, 1997
to $5.2 million for the quarter ended October 31, 1998. Research and development
expenses as a percentage of revenues were 14% and 12% for the three months ended
October 31, 1998 and 1997, respectively. In addition, $1.2 million of software
development costs were capitalized during the three months ended October 31,
1998.
Research and development expenditures increased during the quarter ended
October 31, 1998 in comparison with the quarter ended October 31, 1997 due to
the development of a new user interface which is designed to be more intuitive
and easy to use, and the activities related to the development of the Company's
next generation digital visual communications platform which will be designed to
function within an IP network environment.
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 expected to increase as the Company strives to
develop leading edge technology.
Other income, net. Other income, net increased by $150,000, or 411%, from
$50,000 for the quarter ended October 31, 1997 to $240,000 for the quarter ended
October 31, 1998. The increase in Other income, net during the three months
ended October 31, 1998 compared with the three months ended October 31, 1997 is
attributable to changes in foreign currency exchange rates.
Net income (loss). The Company generated a net loss of $7.0 million, or
$0.30 per share, during the quarter ended October 31, 1998 compared to a net
income of $0.1 million, or $0.01 per share, during the quarter ended October 31,
1997. The decline in sales of the Company's large group digital visual
communications systems without a corresponding decline in the Company's
operating expenses resulted in the significant loss during the three months
ended October 31, 1998. The Company has adopted a restructuring plan during the
second fiscal quarter of 1999 and anticipates a restructuring charge in the
range of approximately $2.5 million to 3.5 million (see "Restructuring
Activities"). As a result of the restructuring activities that are in process,
the Company will not generate a quarterly net income at the anticipated reduced
revenue levels prior to the third fiscal quarter of 1999.
Restructuring Activities
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.
Revenues for the quarter ended October 31, 1998 were significantly below
expectations; as a result, operating results were adversely affected and the
Company generated a net loss of $7.0 million during the quarter ended October
31, 1998. VTEL has taken steps to restructure the Company's operations to reduce
operating expenses in order to sustain profitability during the perceived
industry transition period while continuing to strive to strengthen essential
areas of the business such as new technology and product development and
customer service and response. Subsequent to October 31, 1998, the Company
adopted a restructuring plan which will result in a reduction in workforce of
approximately 14%. The Company will also reduce
10
<PAGE>
operating costs by exiting other activities which involve excess, idle or
non-productive assets or excess or non-productive overhead costs. As a result of
the restructuring, the Company anticipates a restructuring charge during the
second fiscal quarter of 1999 in the range of approximately $2.5 million to $3.5
million.
There can be no assurance that the restructuring activities will reduce
operating expenses sufficiently to maintain profitable operations at current or
lower revenue levels. Additionally, there can be no assurance that the Company
will be able to maintain its current level of revenues or even a lower level of
revenues at which the Company can operate profitably on a quarterly or annual
basis in the future. As a result of the restructuring activities that are in
process, the Company will not generate a quarterly net income at the anticipated
reduced revenue levels prior to the third fiscal quarter of 1999. 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.
Year 2000 Evaluation
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the Year 2000 in order to remain functional. The Company believes that
its products are Year 2000 compliant with minor exceptions due to the
incorporation of third party software such as Microsoft Windows which is year
2000 compliant with minor exceptions. While the Company is not currently aware
of any Year 2000 compliance issues with its products, no assurances can be made
that problems will not arise such as customer problems with other software
programs, operating systems or hardware that disrupt their use of the Company's
products. There can be no assurances that such disruption would not negatively
impact costs and revenues in future years. The Company has been assured by the
vendor of its Enterprise Resource Planning System that the system is Year 2000
compliant. The Company began assessing Year 2000 issues and Year 2000 testing of
its significant management information systems during fiscal 1998.
The Company presently believes that with modifications to existing software
and conversions to new software, the Year 2000 issue can be mitigated. It is not
anticipated that there will be a significant increase in costs as much of the
Year 2000 activities will be a continuation of the on-going process to improve
all the Company's systems. The Company has not estimated the total costs of Year
2000 compliance and related contingency planning as Year 2000 compliance
assessments are still in process. However, the company does not anticipate that
Year 2000 issues will result in material incremental costs to the Company. The
Company plans to complete the Year 2000 project during fiscal 1999. However, if
such modifications and conversions are not made, or are not completed in a
timely manner, the Year 2000 issue could have a material impact on the
operations of the Company. Specific factors that might cause a material impact
include, but are not limited to, availability and cost of personnel trained in
this area, the ability to locate and correct all relevant computer codes,
failure by third parties to timely convert their systems, and similar
uncertainties. The Company will be developing contingency plans as its Year 2000
evaluation progresses and the results of its testing are known.
Liquidity and Capital Resources
At October 31, 1998, the Company had working capital of $36.0 million,
including $20.0 million in cash, cash equivalents and short-term investments.
Cash used by operating activities was $9.8 million for the three months ended
October 31, 1998 and primarily results from the net operating loss incurred.
Increases in inventories, prepaid expenses and decrease in accounts payable
were partially offset by a decrease in accounts receivable. Cash used in
operating activities was $3.1 million for the three months ended October 31,
1997 and primarily related to the decreases in accounts payable and accrued
liabilities offset by a decrease in accounts receivable. The reduction in
accrued liabilities included the payment of Merger and other-related expenses
which were accrued at July 31, 1997.
Net cash used in investing activities during the three months ended October
31, 1998 was $5.6 million and primarily resulted from an increase in net
property and equipment of $3.5 million and an increase in capitalized software
development costs. Cash generated by investing activities of $4.5 million for
the three months ended October 31, 1997 resulted from net investing activity
from short-term investments which generated cash of $6.8 million offset by
capital expenditures of $3.0 million.
Cash flows provided by financing activities during the three months
ended October 31, 1998 were $5.4 million and resulted from $7.5 million being
drawn on the Company's revolving line of credit offset by the repurchase of
approximately 525,000 shares of its own stock for $2.3 million as part of its
planned stock repurchase program. Cash flows provided by financing activities
during the quarter ended October 31, 1997 were $0.04 million and related to
sales of stock under the Company's employee stock plans.
11
<PAGE>
At October 31, 1998, the Company's principal source of liquidity was its
cash, cash equivalents, short-term investments totaling $20.0 million and
amounts available under its revolving line of credit with a banking syndicate.
The Company believes that existing cash and cash equivalent balances, short-term
investments, cash generated from sales of products and services and its
revolving lines of credit will be sufficient to meet the Company's cash and
capital requirements for at least the next 12 months.
As a result of the restructuring activities that are in process, the
Company will generate a net loss for the second quarter of fiscal year 1999
which will likely exceed the maximum quarterly loss allowable by the terms of
the Company's revolving line of credit agreement (Credit Agreement). The Company
is currently negotiating with its lenders the execution of an amendment to the
Credit Agreement to eliminate or modify the covenants such that the Company will
be able to avoid noncompliance with the terms of the Credit Agreement.
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.
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.
12
<PAGE>
Cautionary Statement Regarding Risks and Uncertainties That May Affect Future
Results
Certain portions of this report contain forward-looking statements
about the business, financial condition and prospects of the Company. The actual
results of the Company could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties including,
without limitation, changes in demand for the Company's products and services,
changes in competition, economic conditions, interest rates fluctuations,
changes in the capital markets, changes in tax and other laws and governmental
rules and regulations applicable to the Company's business, and other risks
indicated in the Company's filing with the Securities and Exchange Commission.
These risks and uncertainties are beyond the ability of the Company to control,
and in many cases, the Company cannot predict all of the risks and uncertainties
that could cause its actual results to differ materially from those indicated by
the forward-looking statements. When used in this report, the words "believes,"
"estimates," "plans," "expects," "anticipates" and similar expressions as they
relate to the Company or its management are intended to identify forward-looking
statements.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
CLI, the Company's wholly owned subsidiary, is currently engaged in
several legal proceedings relating to matters arising prior to the Merger. There
can be no assurance that CLI's legal proceedings can be resolved favorably to
CLI or VTEL. Such legal proceedings, if continued for an extended period of
time, could have an adverse effect upon the Company's working capital and
management's ability to concentrate on its business. The Company had recorded an
estimate of the costs to defend and discharge the claims prior to the quarter
ended October 31, 1998 and such contingent liabilities are reflected as accrued
expenses at October 31, 1998. In the opinion of management, such reserves should
be sufficient to discharge the liabilities, if any. However, an unexpected
outcome in any one or several such legal proceedings could have a material
adverse effect on CLI and hence, VTEL.
In June 1997, Keytech, S.A. ("Keytech") filed suit against CLI in the
United States District Court in Tampa, Florida. Keytech was a distributor of
satellite encoder and decoder products manufactured by a division of CLI which
CLI sold in June 1996. Keytech has asserted that the equipment sold was
defective and did not conform to contract specifications and express and implied
warranties. Keytech has asserted damages in excess of $20 million based on its
allegations of breach of contract, breach of warranties and fraud. CLI has filed
an answer denying liability and has asserted cross-claims against Keytech for
amounts due and unpaid for equipment sold by CLI to Keytech. Phillips and
Platinum.
Philips Electronics North America Corporation ("Philips") filed a lawsuit
against Compression Laboratories, Incorporated ("CLI") on November 6, 1998,
alleging damages owed by CLI to Philips based on a series of agreements between
Philips and CLI purported to have been entered into for the purpose of jointly
developing, manufacturing and marketing consumer premises equipment. Philips has
alleged that CLI has breached its obligations to Philips under these purported
agreements and has refused to pay Philips more than $4.4 million in development
costs and other amounts alleged to be owed by CLI under the parties' agreements.
Based on such allegations, Philips has asserted causes of action for breach of
contract, breach of a covenant of good faith and fair dealing and a claim of
unfair trade practices under the California Unfair Competition Act. Philips
seeks an award of damages for CLI's alleged breach of the purported agreements,
including general, consequential and incidental or special damages and other
damages. Because the lawsuit was only recently filed, we are not able to comment
on the anticipated ultimate outcome.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
***
14
<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
December 15, 1998 By: /s/ Rodney S. Bond
---------------------------------------
Rodney S. Bond
Vice President-Finance
(Chief Financial Officer
and Principal Accounting Officer)
15
<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
October 31, 1998, and is qualified in its entirety by reference to such
quarterly report on Form 10-Q filing.
</LEGEND>
<CIK> 0000884144
<NAME> VTEL Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<EXCHANGE-RATE> 1
<CASH> 5,363
<SECURITIES> 14,594
<RECEIVABLES> 48,054
<ALLOWANCES> (9,452)
<INVENTORY> 18,189
<CURRENT-ASSETS> 81,149
<PP&E> 70,997
<DEPRECIATION> (38,688)
<TOTAL-ASSETS> 130,599
<CURRENT-LIABILITIES> 44,273
<BONDS> 0
0
0
<COMMON> 257,289
<OTHER-SE> (184,105)
<TOTAL-LIABILITY-AND-EQUITY> 130,599
<SALES> 36,935
<TOTAL-REVENUES> 36,935
<CGS> (20,415)
<TOTAL-COSTS> (23,728)
<OTHER-EXPENSES> 160
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (80)
<INCOME-PRETAX> (6,968)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,968)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
