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, 1999
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 9, 1999 the registrant had outstanding 24,264,537 shares of its Common
Stock, $0.01 par value.
<PAGE>
<TABLE>
<CAPTION>
VTEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
------------------------------------
(Amounts in thousands, except share and per share amounts)
January 31, July 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 8,042 $ 15,191
Short-term investments 15,483 14,484
Accounts receivable, net of allowance for doubtful accounts of $1,032
and $9,447 at January 31, 1999 and July 31, 1998 35,221 40,527
Inventories 16,504 12,951
Prepaid expenses and other current assets 2,739 2,533
----------- -----------
Total current assets 77,989 85,686
Property and equipment, net 30,835 28,106
Intangible assets, net 13,949 11,812
Other assets 7,481 3,635
----------- -----------
$130,254 $129,289
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,914 $ 22,600
Accrued merger and other expenses 1,433 1,741
Accrued compensation and benefits 5,267 5,258
Other accrued liabilities 7,380 2,791
Deferred revenue 11,940 11,793
----------- ----------
Total current liabilities 43,934 44,183
Long-term liabilities:
Borrowings under revolving line of credit 15,000 -
Other long-term obligations 5,530 3,848
------------ ----------
Total long-term liabilities 20,530 3,848
------------ ----------
Commitments and contingencies - -
Stockholders' equity:
Common stock, $.01 par value; 40,000,000 authorized; 23,116,000
and 23,227,000 issued at January 31, 1999 and
July 31, 1998 231 232
Additional paid-in capital 257,223 256,594
Treasury stock, at cost: 124,400 shares outstanding (561) -
Accumulated deficit (190,537) (175,455)
Accumulated other comprehensive loss (566) (113)
------------ -----------
Total stockholders' equity 65,790 81,258
------------ -----------
$130,254 $129,289
============ ===========
</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,
----------------------------------- -----------------------------------------
1999 1998 1999 1998
----------------------------------- -----------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Products $ 24,550 $ 32,091 $ 49,078 $ 66,403
Services and other 13,085 10,661 25,492 20,578
--------- --------- --------- ----------
37,635 42,752 74,570 86,981
--------- --------- --------- ----------
Cost of sales:
Products 13,206 15,429 25,433 33,207
Services and other 8,549 6,893 16,737 13,372
--------- --------- --------- ---------
21,755 22,322 42,170 46,579
--------- --------- --------- ---------
Gross margin 15,880 20,430 32,400 40,402
--------- --------- --------- ---------
Selling, general and administrative 15,704 15,185 33,944 29,706
Research and development 4,638 4,843 9,874 9,969
Amortization of intangible assets 259 240 511 480
Restructuring expense 2,915 - 2,915 -
--------- --------- --------- ---------
Total operating expenses 23,516 20,268 47,244 40,155
--------- --------- --------- ---------
Income (loss) from operations (7,636) 162 (14,844) 247
--------- --------- --------- ---------
Other income (expense):
Interest income 248 248 536 469
Interest expense and other (251) (137) (299) (311)
--------- --------- --------- ---------
(3) 111 237 158
--------- --------- --------- ---------
Net income (loss) before provision for
income taxes (7,639) 273 (14,607) 405
Provision for income taxes - (5) - (17)
--------- --------- --------- ---------
Net income (loss) $ (7,639) $ 268 $(14,607) $ 388
========= ========= ========= =========
Basic and diluted income (loss) per
share: $ (0.33) $ 0.01 $ (0.63) $ 0.02
========= ========= ========= =========
Weighted average shares outstanding:
Basic 22,987 23,042 23,036 22,957
========= ========= ========= =========
Diluted 22,987 23,510 23,036 23,483
========= ========= ========= =========
</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,
-----------------------------------------
1999 1998
---------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (14,607) $ 388
Adjustments to reconcile net income (loss) to net cash used in
operations:
Depreciation and amortization 5,297 4,175
Provision for doubtful accounts 60 100
Amortization of unearned compensation 120 74
Foreign currency translation loss 19 72
Decrease in accounts receivable 5,503 5,853
(Increase) decrease in inventories (2,245) 3,996
Increase in prepaid expenses and other current assets (198) (126)
Decrease in accounts payable (7,000) (10,825)
Increase (decrease) in accrued expenses 2,071 (4,812)
Increase in deferred revenues 166 1,488
-------------- --------------
Net cash (used in) provided by operating activities (10,814) 383
-------------- --------------
Cash flows from investing activities:
Net short-term investment activity (999) 6,581
Net purchase of property and equipment (4,655) (5,919)
Increase in capitalized software (2,993) -
Increase in other assets (665) (404)
-------------- --------------
Net cash (used in) provided by investing activities (9,312) 258
-------------- --------------
Cash flows from financing activities:
Borrowings under line of credit 15,000 -
Payments on notes payable (367) -
Net proceeds from issuance of stock 216 941
Purchase of treasury stock (2,265) -
Sale of treasury stock 402 -
-------------- --------------
Net cash provided by financing activities 12,986 941
-------------- --------------
Effect of translation exchange rates on cash (9) (87)
-------------- --------------
Net (decrease) increase in cash and equivalents (7,149) 1,495
Cash and equivalents at beginning of period 15,191 4,757
-------------- --------------
Cash and equivalents at end of period $ 8,042 $ 6,656
============== ==============
</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,
services and supports multimedia digital visual communications systems. The
Company's systems integrate traditional video and audio conferencing with
additional functions, including the sharing of PC-based software applications
and the transmission of high-resolution images and facsimiles. Through the use
of the Company's multimedia digital visual communications 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 based on industry-standard, PC-compatible open
hardware and software architecture. By leveraging this open architecture design,
the Company is able to integrate PC-compatible hardware and software
applications into the videoconference, allowing customers to custom configure
their systems to meet their unique needs. The PC-based architecture also
provides a natural pathway to connect the Company's digital visual
communications 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 data and
telecommunications industry standards which permits 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 domestic and international
markets through third party resellers. The Company's headquarters and primary
production facilities are located 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 normal, recurring adjustments,
necessary for a fair presentation of the financial position of the Company as of
January 31, 1999 and July 31, 1998, the results of the Company's operations for
the three and six month period ended January 31, 1999 and 1998 and cash flows
for the six month period ended January 31, 1999 and 1998. The results for
interim periods are not necessarily indicative of results for a full fiscal
year.
5
<PAGE>
Note 2 - Restructuring Charge
In November 1998, the Company adopted a restructuring plan which resulted in the
reduction of 100 employees (approximately 14%) of the Company. While
terminations were effective immediately for most employees upon announcement in
November 1998, all employees terminated in the restructuring had left the
Company during the third fiscal quarter. The Company also made the decision to
reduce operating costs by exiting other activities and reducing the related
overhead costs. These activities include the closure or consolidation of certain
field sales offices, its Sunnyvale, California spare parts depot and technical
assistance center. The transition of the technical assistance center and the
spare parts depot were completed during the third fiscal quarter. Efforts to
sublease office space downsized in the restructure and the closure of the field
sales offices should be completed by the end of the 1999 fiscal year. As a
result of the restructuring, the Company recorded a restructuring charge of $2.9
million during the second fiscal quarter of 1999. These restructuring activities
are intended to reduce overhead and therefore are expected to have little or no
effect on future revenues. The following schedule summarizes the components of
that charge, the amounts paid out during the three months ended January 31, 1999
and the remaining accrual recorded in accrued liabilities at January 31, 1999:
<TABLE>
<CAPTION>
Balance Accrued
Restructuring Expenditures at
Charge Incurred January 31, 1999
<S> <C> <C> <C>
Termination and severance benefits $ 1,756 $ 1,190 $ 566
Facility closure and other (primarily
non-cancelable lease obligations) 1,159 167 992
--------------- --------------- ---------------
$ 2,915 $ 1,357 $ 1,558
=============== =============== ===============
</TABLE>
Note 3 - Inventories
Inventories consist of the following (amounts in thousands):
January 31, July 31,
1999 1998
Raw materials $ 7,926 $ 5,938
Work in process 2,149 517
Finished goods 5,995 5,833
Finished goods held for evaluation
And rental and loan agreements 434 663
------- -------
$16,504 $12,951
======= =======
Finished goods held for evaluation consist of completed digital visual
communications systems used for demonstration and evaluation purposes, which are
generally sold during the next 12 months.
Note 4 - 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
6
<PAGE>
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 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 (amounts in thousands):
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
January 31, January 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Weighted average shares
Outstanding - basic
22,987 23,042 23,036 22,957
Effect of dilutive securities:
Stock options - 468 - 526
Dilutive potential common shares - 468 - 526
Weighted average shares
------ ------ ------ ------
22,987 23,510 23,036 23,483
Outstanding - diluted ====== ====== ====== ======
Antidilutive securities 4,512 1,893 4,351 1,847
====== ====== ====== ======
</TABLE>
Note 5 - Comprehensive Income
During the first fiscal quarter of 1999, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
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 three and six months ended January 31, 1999 was $7.9 million and
$15.1 million, respectively, and comprehensive income for the three and six
months ended January 31, 1998 was $0.2 million and $0.4 million, respectively,
including the impact of other comprehensive loss.
Note 6 - Line of Credit
The Company has a $25 million line of credit facility in place with a banking
syndicate. Amounts available under the line of credit are subject to limitations
based on the collateral as specified in the agreement. At January 31, 1999, the
Company had borrowed $15.0 million under its current line of credit and
approximately $1.5 million additional funds were available to be drawn under the
line of credit as of January 31, 1999. The Company is in the process of
renegotiating the line of credit facility whereby a new lender may replace one
of the current lenders in the banking syndicate.
7
<PAGE>
Note 7- Acquisition
Subsequent to January 31, 1999 the Company completed the acquisition of
substantially all of the assets of Vosaic LLP, an Internet video software and
technology company on March 9, 1999 for approximately $3.3 million in cash,
stock and warrants. The transaction will be accounted for as a purchase of
assets. The acquisition involved the issuance of 1,149,000 shares (equivalent to
approximately 5% of the outstanding shares of the Company's stock as of March 9,
1999). Of these shares, 200,000 are to be held in escrow pending the completion
of certain obligations by Vosaic. The shares will be submitted for registration
with the Securities Exchange Commission within 60 days. VTEL acquired the core
team, originally from the University of Illinois, who pioneered the first
multimedia Web Browser, and has refined scalable video delivery technologies to
stream and store video information securely with high Quality of Service (QoS).
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 January 31, 1999
and 1998 and for the three months and six months ended January 31, 1999 and 1998
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:
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
January 31, January 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues 100 % 100 % 100 % 100 %
Gross margin 42 48 43 46
Selling, general and administrative 41 36 46 34
Research and development 12 11 13 11
Restructuring expense 8 4
Total operating expenses 61 47 63 45
Net income (loss) (20)% 1 % (20)% - %
Three and Six Months Ended January 31, 1999 and 1998
</TABLE>
8
<PAGE>
Revenues. Revenues for the quarter ended January 31, 1999 decreased to $37.6
million from $42.8 million in the quarter ended January 31, 1998, a decrease of
$5.2 million or 12%. Revenues for the six months ended January 31, 1999
decreased to $74.6 million from $87.0 million for the six months ended January
31, 1998, a decrease of $12.4 million or 14%. The decrease in revenues for the
three and six month periods ended January 31, 1999 is the result of a decrease
in unit sales of the Company's large group digital visual communications
systems, and lower average selling prices due to the shift in the product mix to
products with lower average selling prices. The decline in revenues can also be
attributed to delays or shifts in purchasing decisions of customers resulting
from 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 digital (ISDN) phone lines to
systems which run on Internet Protocol (IP) networks.
International sales represented approximately 28% and 22% respectively, of
product revenues for the three months and six months ended January 31, 1999
compared to 25% and 23% respectively, for the three months and six months ended
January 31, 1998. The relative increase in international sales during the three
months ended January 31, 1999 reflects additional sales from the Company's
subsidiaries in Germany and France. These subsidiaries were acquired in the
fourth quarter of fiscal 1998 and the first quarter of fiscal 1999,
respectively. The Company includes in its calculations of international sales,
sales to foreign end-users some of which are originated from the Company's
domestic operations. The percentages of international sales to total revenue
therefore, do not necessarily reflect the results of the Company's combined
foreign subsidiaries.
The Company primarily sells its products through resellers. For the three months
and six months ended January 31, 1999 reseller sales were 82% and 83% of product
sales, respectively. For the three months and six months ended January 31, 1998
reseller sales were 75% and 76% respectively. All other sales in each period
presented were made by the Company directly.
While the Company strives for revenue growth, there can be no assurance that
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 primarily
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 three and six months ended January 31, 1999, 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.
Gross margin. Gross margin as a percentage of total revenues was 42% and 43%,
respectively, for the three and six months ended January 31, 1999, a decrease
from the gross margin as a percentage for revenues of 48% and 46%, respectively,
for the three and six months ended January 31, 1998. The gross margin percentage
for the three and six month periods ended January 31, 1999 were the result of
the shift by the Company's customers to the purchase of lower margin product
segments. Additionally, product margins were affected unfavorably by excess
capacity in the Company's Austin-based manufacturing facility. During the
comparable period of the three and six moths ended January 31, 1998, the Company
9
<PAGE>
was experiencing a period of higher margins as it completed its transition from
lower margin legacy CLI systems to higher margin Enterprise Series
Architecture(TM) (ESA) products.
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 during the perceived industry transition, which the Company
believes will be driven by the shift to digital visual communications 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 $0.5 million, or 3%, from $15.2 million for the quarter
ended January 31, 1998 to $15.7 million for the quarter ended January 31, 1999.
Selling, general and administrative expenses increased by $4.2 million, or 14%,
from $29.7 million for the six months ended January 31, 1998 to $33.9 million
for the six months ended January 31, 1999. Selling, general and administrative
expenses as a percentage of revenues were 36% and 41% for the three months ended
January 31, 1998 and 1999, respectively, and were 34% and 46% for the six months
ended January 31, 1998 and 1999, 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 three month and six month periods ended January 31, 1999,
the Company's selling, general and administrative expenses as a percentage of
revenues increased significantly during the quarter ended January 31, 1999.
VTEL has taken steps to restructure the Company's operations to reduce operating
expenses in an attempt to operate the Company profitably 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 are expected to decrease
in future periods.
Research and development. Research and development expenses decreased by $0.2
million, or 4%, from $4.8 million for the quarter ended January 31, 1998 to $4.6
million for the quarter ended January 31, 1999. Research and development
expenses decreased by $0.1 million, or 1%, from $10.0 million for the six months
ended January 31, 1998 to $9.9 million for the six months ended January 31,
1999. Research and development expenses as a percentage of revenues were 11% and
12% for the three months ended January 31, 1998 and 1999, respectively, and were
11% and 13%, respectively, for the six months ended January 31, 1998 and 1999.
Capitalized software development costs totaled $1.7 million for the three months
ended January 31, 1999 and $2.9 million for the six months ended January 31,
1999. Software development costs are capitalized after a product is determined
to be technologically feasible and is in the process of being developed for
market.
Overall research and development expenditures (including capitalized costs)
increased during the quarter ended January 31, 1999 in comparison with the
quarter ended January 31, 1998 due to the development of an improved graphical
10
<PAGE>
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.
Other income, net. Other income, net decreased by $114,000, or 103%, from
$111,000 for the quarter ended January 31, 1998 to a net expense of $3,000 for
the quarter ended January 31, 1999. Other income, net increased by $79,000, or
50%, from $158,000 for the six months ended January 31, 1998 to $237,000 for the
six months ended January 31, 1999. The decrease in Other income, net during the
three months ended January 31, 1999 compared with the three months ended January
31, 1998 is attributable to increase in interest expense related to borrowings
under the Company's revolving line of credit. The increase in Other income, net
during the six months ended January 31, 1999 compared with the six months ended
January 31, 1998 is attributable to higher interest income earned on invested
cash balances and changes in foreign currency exchange rates that were favorable
to the Company
Net income (loss). The Company generated a net loss of $7.6 million, or $0.33
per share, during the quarter ended January 31, 1999 compared to net income of
$0.3 million, or $0.01 per share, during the quarter ended January 31, 1998. The
Company generated a net loss of $14.6 million, or $0.63 per share, during the
six months ended January 31, 1999 compared to net income of $0.4 million, or
$0.02 per share, during the six months ended January 31, 1998. 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 and six months ended January 31, 1999. The
Company adopted a restructuring plan during the quarter ended January 31, 1999
and recorded a restructuring charge of $2.9 million (see "Restructuring
Activities"). The Company's restructuring activities are intended to reduce
operating expenses to a level such that the Company can generate net income at
lower revenue levels. There can be no assurance that the restructuring
activities will successfully lower operating expenses sufficiently to generate
net income at lower revenue levels. If revenues decline by more than the Company
expects, if the product mix shifts to lower margin products or if the Company
was not able to reduce operating expenses sufficiently to generate profitable
operations, the Company could incur further substantial losses in the future and
may have to consider additional restructuring measures in future quarters which
will have material adverse affect on the Company's financial position and
results of operations.
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 $7.6 million and $14.6 million during the three months and six
months ended January 31, 1999. In November 1998, the Company adopted a
restructuring plan which resulted in the reduction of 100 employees
(approximately 14%) of the Company. While terminations were effective
immediately for most employees upon announcement in November 1998, all employees
terminated in the restructuring had left the Company during the third fiscal
11
<PAGE>
quarter. The Company also made the decision to reduce operating costs by exiting
other activities and reducing the related overhead costs. These activities
include the closure or consolidation of certain field sales offices, its
Sunnyvale, California spare parts depot and its Sunnyvale technical assistance
center. The transition of the technical assistance center and the spare parts
depot in Sunnyvale were completed during the third fiscal quarter. Efforts to
sublease office space downsized in the restructure and the closure of the field
sales offices should be completed by the end of the 1999 fiscal year. As a
result of the restructuring, the Company recorded a restructuring charge during
the second fiscal quarter of 1999 of $2.9 million. These restructuring
activities are intended to reduce overhead and therefore are expected to have
little or no effect on future revenues. The following schedule summarizes the
components of that charge, the amounts paid out during the three months ended
January 31, 1999 and the remaining accrual recorded in accrued liabilities at
January 31, 1999:
<TABLE>
<CAPTION>
Balance Accrued
Restructuring Expenditures at
Charge Incurred January 31, 1999
<S> <C> <C> <C>
Termination and severance benefits $ 1,756 $ 1,190 $ 566
Facility closure and other (primarily
non-cancelable lease obligations) 1,159 167 992
--------- --------- ---------
$ 2,915 $ 1,357 $ 1,558
========= ========= =========
</TABLE>
There can be no assurance that the restructuring activities will reduce
operating expenses sufficiently to maintain profitable operations at current or
lower revenue levels. 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 due to
declining average sales prices, delays or shifts in customer purchases or shifts
in capital expenditures of the Company's customers. Due to all of the foregoing
factors there can be no assurances that the Company can operate profitably on a
quarterly or annual basis in the future. 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.
Introduction of New Product Lines
The Company continually strives to introduce the latest technology in digital
visual communications. During the three months ended January 31, 1999, the
Company began shipping it's latest product featuring Intel's (TM) 400 MHz
processor. The Company is currently working to complete a planned new product
line featuring a graphical user interface that is more intuitive and easier to
use. The new product line was planned for release during the third quarter of
fiscal 1999. However, delays in the product development schedule have resulted
in a planned release that is new scheduled during and calender year 1999. As
with any anticipated new product transition, the Company's customers may delay
their purchase decision of existing products in anticipation of the new product.
In the event that the new product line is further delayed, the Company may
experience additional quarterly results with reduced revenue levels.
Quarterly Revenue Cycle
Historically, a significant percentage of the Company's sales occur in the last
few weeks of the quarter. By compressing most of its shipments into a short
period of time at the end of each quarter, the Company will incur overtime
costs, sharply increase its inventory levels in anticipation of this demand and
deplete or exhaust its backlog of customer orders. The Company's sales cycle is
12
<PAGE>
difficult to predict and manage. It is possible that management's estimates of
product demand will be inaccurate and as a result the Company could experience a
rise in inventory levels and a decline in expected revenue levels in any given
quarter.
Management's estimates of future product revenue are derived from its analysis
of market conditions and reports from its sales force of customer leads and
prospective interest. Backlog of customer product orders cannot be relied upon
to forecast future revenue levels. Because of the short cycle time between
customer order and shipment, it is also possible that unanticipated delays from
the Company's vendors can disrupt shipments and adversely effect the results in
a given quarter. This is especially an issue due to the Company's reliance on a
limited number of highly specialized suppliers. The above factors represent
uncertainties which can have a material adverse affect on the Company's
financial position and results of operations if not managed properly.
Acquisition
Subsequent to January 31, 1999 the Company completed the acquisition of
substantially all of the assets of Vosaic LLP, an Internet video software and
technology company on March 9, 1999 for approximately $3.3 million in cash,
stock and warrants. The transaction will be accounted for as a purchase of
assets. The acquisition involved the issuance of 1,149,000 shares (equivalent to
approximately 5% of the outstanding shares of the Company's stock as of March 9,
1999). Of these shares, 200,000 are to be held in escrow pending the completion
of certain obligations by Vosaic. The shares will be submitted for registration
with the Securities Exchange Commission within 60 days. VTEL acquired the core
team, originally from the University of Illinois, who pioneered the first
multimedia Web Browser, and has refined scalable video delivery technologies to
stream and store video information securely with high Quality of Service (QoS).
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(TM) 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
13
<PAGE>
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 of 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 January 31, 1999, the Company had working capital of $34.1 million, including
$23.5 million in cash, cash equivalents and short-term investments. Cash used by
operating activities was $10.8 million for the six months ended January 31, 1999
and primarily resulted from the net operating loss incurred, increases in
inventories and prepaid expenses and a decrease in accounts payable which were
partially offset by a decrease in accounts receivable. During the three months
ended January 31, 1999, the Company wrote off accounts receivable deemed to be
uncollectable totaling $8.5 million. These receivables related to the Company's
wholly owned subsidiary CLI and had been reserved for prior to July 31, 1998.
Cash provided by operating activities was $0.38 million for the six months ended
January 31, 1998 and primarily resulted 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.
Net cash used in investing activities during the six months ended January 31,
1999 was $9.3 million and primarily resulted from an increase in net property
and equipment of $4.7 million and an increase in capitalized software
development costs. 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 flows provided by financing activities during the six months ended January
31, 1999 were $13.0 million and resulted from $15.0 million being drawn on the
Company's revolving line of credit. The Company repurchased approximately
525,000 shares of its own stock for $2.3 million as part of its planned stock
repurchase program during the six months ended January 31, 1999. Cash flows
provided by financing activities during the six months ended January 31, 1998
were $0.94 million and related to sales of stock under the Company's employee
stock plans.
14
<PAGE>
At January 31, 1999, the Company's principal source of liquidity was its cash,
cash equivalents, short-term investments totaling $23.5 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.
The Company has a $25 million line of credit facility in place with a banking
syndicate. Amounts available under the line of credit are subject to limitations
based on the collateral as specified in the agreement. At January 31, 1999, the
Company had borrowed $15.0 million under its current line of credit and
approximately $1.5 million additional funds were available to be drawn under the
line of credit as of January 31, 1999. The Company is in the process of
renegotiating the line of credit facility whereby a new lender may replace one
of the current lenders in the banking syndicate.
See the discussion of "Legal Proceedings" under Part II Item 1. of this Form
10-Q filed on March 22, 1999.
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
15
<PAGE>
revenue or earnings from the levels anticipated by securities analysts could
have an immediate and significant effect on the trading price of the Company's
Common Stock in any given period. Also, the Company participates in a highly
dynamic industry which often contributes to the volatility of the Company's
Common Stock price.
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 filings 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
Compression Laboratories, Incorporated ("CLI"), a 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 during fiscal 1997 and such contingent liabilities are
reflected as accrued merger and other expenses at January 31, 1999. 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.
Philips Electronics North America Corporation ("Philips") filed a lawsuit
against 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. CLI, in turn, alleges that Philips has
breached certain of its terms and is due money for certain activities expended
on behalf of the joint venture. Based on the allegations, Philips has
16
<PAGE>
asserted causes of action for breach of contract, breach of covenant of good
faith and fair dealing and a claim of unfair trade practices under the
California Unfair Competition Act. Philips seeks awards and damages for CLI's
alleged breach of the purported agreements, including general, consequential and
incidental or special damages and other damages. Following service of the
lawsuit CLI and Philips have engaged in settlement discussions and have agreed
to defer CLI's answer date to the lawsuit pending completion of these settlement
discussions. The parties to the suit have agreed to mediation discussion before
an impartial mediator in a non-binding hearing that is scheduled for late March
1999. There can be no assurance that the outcome of the settlement discussions
between the Company and Philips will result in an agreement between the
parties.
During March 1999, a lawsuit previously filed against the Company by Polycom,
Inc. was dismissed by the Superior Court of California in Santa Clara County.
Polycom's lawsuit was filed in response to the Company's $100 million lawsuit
against ViaVideo Communications, Inc., and Polycom. In its lawsuit filed in the
State District Court in Austin, Texas, the Company alleges that ViaVideo and
five of its founders breached contracts with VTEL and violated various duties to
VTEL when they secretly set up a separate competing video conferencing product,
using confidential, propriety information and trade secrets of VTEL. Polycom,
which subsequently acquired ViaVideo, responded by filing suit in California,
seeking to have VTEL's claims adjudicated and dismissed. Polycom's lawsuit in
California has now been dismissed. The Company's $100 million suit against
Polycom and the other Defendants continues in Texas. Discovery is in process and
a trial date is expected to be set some time in the fourth quarter of calendar
1999.
Item 4. Submission of Matters to a Vote of Security Holders
On December 17, 1998, an annual meeting of the stockholders was held whereby
shareholders voted on the following proposals:
1. Proposal for the election of seven 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 19,831,366 1,693,403 -
Jerry S. Benson, Jr. 19,824,263 1,700,506 -
Eric L. Jones 19,831,777 1,692,992 -
Gordon H. Matthews 19,826,429 1,698,340 -
Max D. Hopper 19,826,742 1,698,027 -
T. Gary Trimm 19,826,429 1,698,340 -
Richard Snyder 19,826,751 1,698,018 -
</TABLE>
2. Proposal to approve the Company's 1998 Restricted Stock Plan (the "1998
Plan") which authorizes up to 1,000,000 shares of the Company's Common
Stock to be available to afford the Company with another means to provide
key employees of the Company with a propriety interest in the Company.
Details of this plan are incorporated by reference to the Company's proxy
statement of December 17, 1998.
<TABLE>
<CAPTION>
For Against Abstain Broker Non-votes
<S> <C> <C> <C> <C>
17,575,924 3,829,311 119,535 -
</TABLE>
17
<PAGE>
3. Proposal to ratify the Board of Directors' appointment of Pricewaterhouse
Coopers LLP, independent accountants, as the Company's independent auditors
for the year ending July 31, 1999. The stockholders voted to approve the
proposal by the following vote:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-votes
<S> <C> <C> <C> <C>
21,215,120 257,886 51,763 -
</TABLE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
18
<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 22, 1999 By: /s/Rodney S. Bond
---------------------------------
Rodney S. Bond
Vice President-Finance
(Chief Financial Officer
and Principal Accounting Officer)
<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, 1999, and is qualified in
its entirety by reference to such quarterly report
on Form 10-Q filing.
</LEGEND>
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