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, 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 March 1, 1998 the registrant had outstanding 23,114,289 shares of its Common
Stock, $0.01 par value.
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
VTEL Corporation
CONDENSED CONSOLIDATED BALANCE SHEET
------------------------------------
(Dollars in thousands)
----------------------
January 31, July 31,
1998 1997
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 6,252 $ 4,757
Short-term investments 13,718 20,299
Accounts receivable, net of allowance for doubtful
accounts of $10,662 and $11,735 at
January 31, 1998 and July 31, 1997 37,754 43,707
Inventories 18,248 22,244
Prepaid expenses and other current assets 3,017 2,891
---------------- ---------------
Total current assets 78,989 93,898
Property and equipment, net 23,884 21,660
Intangible assets, net 12,288 12,768
Other assets 3,213 2,809
----------------- ---------------
$ 118,374 $ 131,135
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,872 $ 25,699
Accrued merger and other expenses 5,547 9,704
Accrued compensation and benefits 4,325 4,552
Other accrued liabilities 2,642 3,070
Deferred revenue 12,833 11,345
----------------- ---------------
Total current liabilities 40,219 54,370
----------------- ---------------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 authorized;
none issued or outstanding - -
Common stock, $.01 par value; 40,000,000 authorized;
23,063,000 and 22,873,000 issued and outstanding
at January 31, 1998 and July 31, 1997 230 229
Additional paid-in capital 255,822 254,880
Accumulated deficit (177,846) (178,234)
Cumulative translation adjustment (10) 5
Unearned compensation (41) (115)
----------------- ---------------
Total stockholders' equity 78,155 76,765
----------------- ---------------
$ 118,374 $ 131,135
================= ===============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
VTEL Corporation
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
----------------------------------------------
(Unaudited)
(Amounts in thousands, except per share amounts)
For the For the
Three Months Ended Six Months Ended
January 31, January 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Products $ 32,091 $ 40,568 $ 66,403 $ 79,679
Services and other 10,661 10,542 20,578 21,197
-------------- --------------- ------------- -------------
42,752 51,110 86,981 100,876
-------------- --------------- ------------- -------------
Cost of sales:
Products 15,429 23,492 33,207 45,876
Services and other 6,893 8,237 13,372 15,506
-------------- --------------- ------------- -------------
22,322 31,729 46,579 61,382
-------------- --------------- ------------- -------------
Gross margin 20,430 19,381 40,402 39,494
-------------- --------------- ------------- -------------
Selling, general and administrative 15,185 17,893 29,706 33,594
Research and development 4,843 6,058 9,969 12,176
Amortization of intangible assets 240 240 480 480
-------------- --------------- ------------- -------------
Total operating expenses 20,268 24,191 40,155 46,250
-------------- --------------- ------------- -------------
Income (loss) from operations 162 (4,810) 247 (6,756)
-------------- --------------- ------------- -------------
Other income (expense):
Interest income 248 589 469 1,201
Interest expense and other (137) (746) (311) (1,073)
-------------- --------------- ------------- -------------
111 (157) 158 128
-------------- --------------- ------------- -------------
Income (loss) from continuing operations
before benefit (provision) for income 273 (4,967) 405 (6,628)
taxes
Benefit (provision) for income taxes (5) 31 (17) 12
-------------- --------------- ------------- -------------
Income (loss) from continuing operations 268 (4,936) 388 (6,616)
Loss from discontinued operations - (6,698) - (6,698)
-------------- --------------- ------------- -------------
Net income (loss) $ 268 $ (11,634) $ 388 $ (13,314)
============== =============== ============= =============
Basic income (loss) per share:
Continuing operations $ 0.01 $ (0.16) $ 0.02 $ (0.22)
Discontinued operations - (0.22) - (0.00)
============== =============== ============= =============
Net income (loss) per share $ 0.01 $ (0.38) $ 0.02 $ (0.44)
============== =============== ============= =============
Diluted income (loss) per share:
Continuing operations $ 0.01 $ (0.16) $ 0.02 $ (0.22)
Discontinued operations - (0.22) - (0.22)
================ ================= ============= =============
Net income (loss) per share $ 0.01 $ (0.38) $ 0.02 $ (0.44)
================ ================= ============= =============
Weighted average shares outstanding:
Basic 23,042 30,485 22,957 30,356
================ ================= ============= =============
Diluted 23,510 30,485 23,483 30,356
================ ================= ============= =============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
VTEL Corporation
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
----------------------------------------------
(Unaudited)
(Dollars in thousands)
For the
Six Months Ended
January 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 388 $ (13,314)
Adjustments to reconcile net income (loss)
to net cash from operations:
Depreciation and amortization 4,175 6,423
Provision for doubtful accounts 100 72
Amortization of unearned compensation 74 -
Foreign currency translation (gain) loss 72 (33)
(Increase) decrease in accounts receivable 5,853 (3,325)
Decrease in inventories 3,996 7,726
Increase in prepaid expenses and other current assets (126) (191)
Decrease in accounts payable (10,825) (2,215)
Increase (decrease) in accrued expenses (4,812) 160
Increase in deferred revenues 1,488 2,506
Decrease in accrued expenses, discontinued operations - (557)
------------ ------------
Net cash provided by (used in) operating activities 383 (2,748)
------------ ------------
Cash flows from investing activities:
Net short-term investment activity 6,581 7,094
Net purchase of property and equipment (5,919) (5,421)
Increase in other assets (404) (804)
------------ -------------
Net cash provided by investing activities 258 869
------------ -------------
Cash flows from financing activities:
Repayments under line of credit agreements - (2,425)
Net proceeds from issuance of stock 941 8,236
Purchase of treasury stock - (3,742)
Sale of treasury stock - 280
------------ -------------
Net cash provided by financing activities 941 2,349
------------ -------------
Effect of translation exchange rates on cash (87) (124)
------------ -------------
Net increase in cash and equivalents 1,495 346
Cash and equivalents at beginning of period 4,757 1,973
------------ -------------
Cash and equivalents at end of period $ 6,252 $ 2,319
============ =============
</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 the incorporation of new functions through software upgrades,
thereby extending the useful life of the user's investment.
The Company primarily distributes its systems to a domestic and
international marketplace through third party resellers. 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, 1998 and the results of the Company's operations and
its cash flows for the three month period and six month period ended January 31,
1998. The results for interim periods are not necessarily indicative of results
for a full fiscal year.
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 were converted into the right to receive 0.46 shares of
common stock of VTEL for each share of CLI common stock converted (or cash in
lieu of fractional shares otherwise deliverable in respect thereof), and (b) the
5
<PAGE>
outstanding shares of CLI Series C Preferred Stock were converted into the right
to receive 3.15 shares of VTEL common stock for each share of CLI preferred
stock converted (or cash in lieu of fractional shares otherwise deliverable in
respect thereof). The CLI shares were exchanged for a total of 8,424,741 shares
of VTEL common stock.
The acquisition was accounted for as a pooling of interests and
accordingly, the consolidated financial statements have been restated for all
periods to include the accounts of CLI. 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 1997 Annual
Report on Form 10-K filed with the Securities and Exchange Commission on
November 12, 1997.
Note 2 - Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
January 31, July 31,
1998 1997
(Dollars in thousands)
<S> <C> <C>
Raw materials $ 8,447 $ 9,493
Work in process 1,032 4,143
Finished goods 7,865 7,490
Finished goods held for evaluation
and rental and loan agreements 904 1,118
--------- ---------
$ 18,248 $ 22,244
========= =========
</TABLE>
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.
6
<PAGE>
Note 3 - Net Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." The new
standard, which is effective for financial statements issued for periods ending
after December 31, 1997, establishes standards for computing and presenting
earnings per share (EPS) and requires restatement of all prior period EPS data
presented upon adoption. The Company has implemented this standard in the second
quarter of fiscal 1998. The implementation of SFAS No. 128 results in the
presentation of a basic EPS presented in the consolidated financial statements
as well as a diluted EPS for the periods presented.
Basic 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. All prior years' earnings per share data
in this report have been recalculated to reflect the provisions of SFAS No. 128.
At January 31, 1998, options and warrants to acquire 1.9 million shares of
common stock were not included in the computations of diluted earnings per share
because the effect of including the options and warrants would have been
anti-dilutive. At January 31, 1997, options and warrants to acquire 4.1 million
shares of common stock were not included in the computations of diluted earnings
per share because the effect of including the options and warrants would have
been anti-dilutive.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 were converted into the right to receive 0.46 shares of
common stock of VTEL for each 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 were converted into the right
to receive 3.15 shares of VTEL common stock for each share of CLI preferred
stock converted (or cash in lieu of fractional shares otherwise deliverable in
respect thereof). The CLI shares were exchanged for a total of 8,424,741 shares
of VTEL common stock. The acquisition was accounted for as a pooling of
interests and accordingly, the consolidated financial statements have been
restated for all periods to include the accounts of CLI.
The restatement of the consolidated financial information combines the
financial information of VTEL and CLI giving retroactive effect to the Merger as
if the two companies had operated as a single company for the three and six
months ended January 31, 1998. However, the two companies operated independently
prior to the Merger, and the historical changes and trends in the financial
condition and results of operations of these two companies resulted from
independent activities. Nonetheless, the following management's discussion and
analysis of financial condition and results of operations attempts to relate the
activities which resulted in the changes in financial condition and results of
operations of the combined company, taking into consideration that a trend or
change in the historical results of the combined entity was caused by many
events related to each individual company operating independently as
competitors. The financial information presented on a historical restated basis
is not indicative of the financial condition and results of operations that may
have been achieved in the past or will be achieved in the future had the
companies operated historically as a single entity.
7
<PAGE>
The following review of the Company's financial position and results of
operations for the three and six month periods ended January 31, 1998 and 1997
should be read in conjunction with the Company's 1997 Annual Report on Form 10-K
filed with the Securities and Exchange Commission on November 12, 1997.
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,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Gross margin 48 38 46 39
Selling, general and administrative 36 35 34 33
Research and development 11 12 11 12
Total operating expenses 47 47 46 46
Other expense, net - - - -
Net income (loss) from continuing operations 1 (10) - (7)
Net income (loss) from discontinued operations - (13) - (7)
Net income (loss) 1% (23)% -% (13)%
</TABLE>
Three and Six Months Ended January 31, 1998 and 1997
Revenues. Revenues for the quarter ended January 31, 1998 decreased to
$42.8 million from $51.1 million in the quarter ended January 31, 1997, a
decrease of $8.3 million or 16%. Revenues for the six months ended January 31,
1998 decreased to $87.0 million from $100.9 million for the six months ended
January 31, 1997, a decrease of $13.9 million or 14%. The decrease in revenues
is the result of a decrease in the total number of unit sales of the Company's
systems primarily led by a decline in the sale of the products of the Company's
wholly-owned subsidiary, CLI, during the three and six month periods ended
January 31, 1998 as a result of the transition by the combined Company to the
sale of the Company's Enterprise System Architecture( (ESA)-based products.
The following table summarizes the Company's group system unit sales activity:
<TABLE>
<CAPTION>
For the three months ended For six
months
ended
July 31, October 31, January 31, January 31,
1997 1997 1998 1998
<S> <C> <C> <C> <C>
Large group digital visual communication systems 699 751 583 1,334
Small group digital visual communication systems 175 75 140 215
MCU II( - second-generation mMultipoint control 43 16 42 58
units
Total systems 917 842 765 1,607
</TABLE>
International sales contributed approximately 25% and 23%, respectively, of
product revenues for the three and six months ended January 31, 1998 as compared
to 24% of product revenues for the three and six months ended January 31, 1997.
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
8
<PAGE>
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.
Gross margin. Gross margin as a percentage of total revenues was 48% and
46%, respectively, for the three and six months ended January 31, 1998, an
increase from the gross margin as a percentage for revenues of 38% and 39%,
respectively, for the three and six months ended January 31, 1997. During the
three months and six months ended January 31, 1998, the products that were
previously developed by the Company's wholly-owned subsidiary, CLI, represented
a smaller proportion of total product revenues due to the transition of the
Company's combined product offering to the Company's ESA-based products. The
products of the Company's wholly-owned subsidiary, CLI, generally have a lower
gross margin than the ESA-based products. During the three months and six months
ended January 31, 1997, the Company's restated combined revenues consisted of a
higher proportion of revenues from CLI, which resulted in a lower gross margin
on a combined basis. The higher proportion of products revenues from the ESA
platform products resulted in a higher blended gross margin.
Although the Company expects gross margins to remain consistent during
fiscal 1998, 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 decreased by $2.7 million, or 15%, from $17.9 million for the quarter
ended January 31, 1997 to $15.2 million for the quarter ended January 31, 1998.
Selling, general and administrative expenses decreased by $3.9 million, or 12%,
from $33.6 million for the six months ended January 31, 1997 to $29.7 million
for the six months ended January 31, 1998. Selling, general and administrative
expenses as a percentage of revenues were 35% and 36% for the three months ended
January 31, 1997 and 1998, respectively, and were 33% and 34% for the six months
ended January 31, 1997 and 1998, respectively. Selling, general and
administrative expenses as a percentage of revenues were slightly higher during
the three and six month periods ended January 31, 1998 in comparison with the
three and six month periods ended January 31, 1997 due to a larger percentage
decrease in revenues than the decrease in selling, general and administrative
expenses, partially due to expenditures made during the three months ended
January 31, 1998 to develop product brand recognition. The Company is directing
marketing spending from its prior marketing strategy to its current strategy
which is focused on company and product branding. Revenues may be affected
during the transition period in which the Company is implementing the branding
campaign such that the expected increase in revenues from the new marketing
strategy may not coincide with potential changes in revenues due to the decline
in marketing spending under the former marketing strategy. The result could be a
decline in revenues during the transition period.
Research and development. Research and development expenses decreased by
$1.3 million, or 21%, from $6.1 million for the quarter ended January 31, 1997
to $4.8 million for the quarter ended January 31, 1998. Research and development
expenses decreased by $2.2 million, or 18%, from $12.2 million for the six
months ended January 31, 1997 to $10.0 million for the six months ended January
31, 1998. Research and development expenses as a percentage of revenues were 12%
and 11% for the three months ended January 31, 1997 and 1998, respectively, and
were 11% and 12%, respectively, for each of the six months ended January 31,
1998 and 1997. The decrease in the amount of research and development expenses
is due to the combination of VTEL and its wholly-owned subsidiary, CLI,
subsequent to the Merger such that the Company is focusing its research and
development activities on a single product platform, the ESA platform. The
Company was able to reduce total research and development expenses by limiting
its development efforts to the development of its family of products on a single
product platform while still investing a higher amount in research and
development activities related to its ESA platform. The Company has redirected a
portion of the research and development expenses related to the products
9
<PAGE>
developed by its wholly-owned subsidiary, CLI, to the ESA platform thereby
leveraging the development activities of both companies. The Company experienced
a decline in revenues during the three and six months ended January 31, 1998
compared with the three and six months ended January 31, 1997 which resulted in
research and development expenses as a percentage of revenues remaining
consistent during these periods despite a decline in the amount of research and
development expenses incurred during the three and six months ended January 31,
1998.
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 revenues increase. These
expenditures will be largely devoted to improving the Company's system user
interface and the development of the next generation product platform.
Other income, net. Other income, net increased by $0.27 million, or 169%,
from a net expense of $0.16 million for the quarter ended January 31, 1997 to
income of $0.11 million for the quarter ended January 31, 1998. Other income,
net increased by $0.03 million, or 23%, from $0.13 million for the six months
ended January 31, 1997 to $0.16 million for the six months ended January 31,
1998.
The change in other income, net is attributable to a decrease in interest
expense related to a decrease of the debt of the Company's wholly-owned
subsidiary, CLI, subsequent to the Merger, slightly offset by lower interest
income earned during the three and six months ended January 31, 1998 on the
Company's cash and investment balances as a result of a decrease in such
balances due to the planned cash requirements associated with the combination of
VTEL and CLI subsequent to the Merger.
Net income (loss). The Company generated net income of $0.3 million, or
$0.01 per share, during the quarter ended January 31, 1998 compared to a net
loss of $11.6 million, or $0.38 per share, during the quarter ended January 31,
1997. The Company generated net income of $0.4 million, or $0.02 per share,
during the six months ended January 31, 1998 compared to a net loss of $13.3
million, or $0.22 per share, during the six months ended January 31, 1997.
During the quarter ended January 31, 1997, the Company's wholly-owned
subsidiary, CLI, incurred a net loss on a stand-alone basis of $12.4 million,
including a $6.7 million loss from discontinued operations, and VTEL generated
net income on a stand-alone basis of $0.8 million, which resulted in a restated
combined net loss of $11.6 million. During the six months ended January 31,
1997, the Company's wholly-owned subsidiary, CLI, incurred a net loss on a
stand-alone basis of $15.1 million, including a $6.7 million loss from
discontinued operations, and VTEL generated net income on a stand-alone basis of
$1.8 million, which resulted in a combined net loss of $13.3 million. Subsequent
to the Merger, VTEL's management reduced the operating expenses of the combined
company by eliminating duplicate operating costs and leveraging the research and
development and selling, general and administrative expenses of the two
companies such that these expenses were focused on a single company development
platform and sales and marketing strategy. The result was a reduction in the
combined costs incurred by the two companies, which were investing amounts in
implementing two corporate strategies when the companies operated as
competitors, and an increase in the amount of funds available to invest in a
single company plan. Additionally, the Company has been able to improve gross
margins by transitioning the combined Company to the sale of the Company's
higher gross margin ESA-based products.
Improvement in the Company's financial performance during the remainder of
fiscal year 1998 will depend on the Company's ability to increase revenues
10
<PAGE>
through growth in the Company's distribution channels, introduce its new
products which should generate revenue growth, and control the growth of
operating expenses. There can be no assurances that the Company will be
successful in achieving these objectives.
Liquidity and Capital Resources
At January 31, 1998, the Company had working capital of $38.8 million,
including $20.0 million in cash, cash equivalents and short-term investments.
Cash provided by operating activities was $0.38 million for the six months ended
January 31, 1998 and primarily results from decreases in inventories and
accounts receivable and an increase in deferred revenues, offset by a decrease
in accounts payable and accrued liabilities. The reduction in accounts payable
and accrued liabilities includes amounts for Merger and other expenses which
were accrued at July 31, 1997. Cash used in operating activities was $2.7
million for the six months ended January 31, 1997, primarily due to a net loss
of $13.3 million coupled with an increase in accounts receivable and a decrease
in accounts payable, offset by a decrease in inventories and an increase in
deferred revenues.
Net cash provided by investing activities during the six months ended
January 31, 1998 was $0.26 million and primarily resulted from cash generated by
a reduction in short-term investments of $6.6 million offset by an increase in
net property and equipment of $5.9 million. Cash provided by investing
activities during the six months ended January 31, 1997 was $0.87 million and
primarily resulted from cash generated by a reduction of short-term investments
of $7.1 million offset by an increase in net property and equipment of $5.4
million.
Cash flows provided by financing activities during the six months ended
January 31, 1998 were $0.97 million and related to sales of stock under the
Company's employee stock plans. Cash flows provided by financing activities
during the six months ended January 31, 1997 were $2.3 million and related
primarily to sale of approximately $7.0 million of preferred stock by the
Company's wholly-owned subsidiary, CLI, the sale of stock under employee stock
purchase plans totaling approximately $1.2 million, the repayment of borrowings
made by the Company's wholly-owned subsidiary, CLI, totaling approximately $2.4
million and the purchase of treasury stock totaling $3.7 million.
At January 31, 1998, the Company had a $25.0 million revolving line of
credit with a banking syndicate. The Company has issued a letter of credit
totaling $1.2 million under its revolving line of credit as a lease deposit on
one of its facilities. No amounts have been drawn under the syndicated line of
credit.
The Company's principal sources of liquidity at January 31, 1998 consist of
$20.0 million 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 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.
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 priods of time.
11
<PAGE>
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 should
nohistorical 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.
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 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
CLI'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
12
<PAGE>
claims prior to the quarter ended January 31, 1998 and such contingent
liabilities are reflected as accrued expenses at January 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 a complaint filed on December 20, 1993 in the United States District
Court in Dallas, Texas, Datapoint Corporation ("Datapoint") alleged that CLI had
infringed two United States patents owned by Datapoint relating to video
conferencing networks. The complaint seeks a judgment of infringement, monetary
damages, injunctive relief and attorneys' fees. CLI responded to the complaint
by denying the material allegations of the complaint and asserting affirmative
defenses. Discovery has commenced in the case. On September 27, 1995, CLI filed
a motion to construe the scope of the patent claims at issue in the litigation
so as to elucidate whether Datapoint could assert that CLI is infringing the
patents in suit. In April 1996, a Special Master submitted a report which did
not recommend that the Court adopt CLI's position set forth in the motion. The
case is expected to be set for trial in the fall of 1998. CLI is vigorously
defending the claims.
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.
Item 4. Submission of Matters to a Vote of Security Holders
On December 18, 1997, an annual meeting of the stockholders was held
whereby shareholders voted on the following proposals:
1. Proposal for the election of eight directors to hold office until the next
annual meeting of stockholders or until their respective successors are
duly elected and qualified. The stockholders voted to approve the proposal
by the following vote:
<TABLE>
<CAPTION>
Nominee For Withheld Broker Non-votes
<S> <C> <C> <C>
F.H. (Dick) Moeller 18,166,894 825,227 -
Jerry S. Benson, Jr. 18,182,120 810,001 -
Eric L. Jones 18,169,998 822,123 -
Gordon H. Matthews 18,171,920 820,201 -
Max D. Hopper 18,182,643 809,478 -
T. Gary Trimm 18,171,808 820,313 -
Arthur G. Anderson 18,214,108 778,013 -
Richard Snyder 18,215,781 776,340 -
</TABLE>
2. Proposal to approve an amendment to the Company's Employee Stock Purchase
Plan (the "ESPP") to increase the number of shares of the Company's Common
Stock issuable under the ESPP upon the exercise of stock options granted
pursuant to the ESPP from 450,000 to 950,000 shares. The stockholders voted
to approve the proposal by the following vote:
For Against Abstain Broker Non-votes
17,700,695 881,493 98,350 311,583
13
<PAGE>
3. Proposal to approve an amendment of the Company's 1992 Director Stock
Option Plan (the "Director Plan") to increase the number of shares of the
Company's Common Stock issuable under the Director Plan upon the exercise
of stock options granted pursuant to the Director Plan from 100,000 to
150,000 shares. The stockholders voted to approve the proposal by the
following vote:
For Against Abstain Broker Non-votes
16,132,391 2,774,372 115,358 -
4. Proposal to ratify the Board of Directors' appointment of Price Waterhouse
LLP, independent accountants, as the Company's independent auditors for the
year ending July 31, 1998. The stockholders voted to approve the proposal
by the following vote:
For Against Abstain Broker Non-votes
18,785,755 116,173 90,193 -
Item 5. Other Information
None
Item 6. Exhibits and 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
March 16, 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 six months ended January 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> JUL-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<EXCHANGE-RATE> 1
<CASH> 6,252
<SECURITIES> 13,718
<RECEIVABLES> 49,489
<ALLOWANCES> (11,735)
<INVENTORY> 23,884
<CURRENT-ASSETS> 78,989
<PP&E> 31,842
<DEPRECIATION> (20,581)
<TOTAL-ASSETS> 118,374
<CURRENT-LIABILITIES> 40,219
<BONDS> 0
0
0
<COMMON> 256,052
<OTHER-SE> (177,897)
<TOTAL-LIABILITY-AND-EQUITY> 118,374
<SALES> 42,752
<TOTAL-REVENUES> 42,752
<CGS> (22,322)
<TOTAL-COSTS> (20,268)
<OTHER-EXPENSES> 111
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 273
<INCOME-TAX> (5)
<INCOME-CONTINUING> 268
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 268
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
