SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 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 June 2, 1999 the registrant had outstanding 24,368,290 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)
April 30, July 31,
1999 1998
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 7,812 $ 15,191
Short-term investments 7,972 14,484
Accounts receivable, net of allowance for doubtful
accounts of $1,199 and $9,447 at
April 30, 1999 and July 31, 1998 34,181 40,527
Inventories 16,519 12,951
Prepaid expenses and other current assets 2,554 2,533
--------- ---------
Total current assets 69,038 85,686
Property and equipment, net 30,985 28,106
Intangible assets, net 16,191 11,812
Other assets 9,031 3,685
--------- ---------
$ 125,245 $ 129,289
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,766 $ 22,600
Accrued merger and other expenses 1,243 1,741
Accrued compensation and benefits 4,739 5,258
Other accrued liabilities 6,215 2,791
Deferred revenue 11,785 11,793
--------- ---------
Total current liabilities 39,748 44,183
Long-term liabililities:
Borrowings under revolving line of credit 11,200 -
Other long-term obligations 5,418 3,848
--------- ---------
Total long-term liabilities 16,618 3,848
--------- ---------
Commitments and contingencies - -
Stockholders' equity:
Common stock, $.01 par value; 40,000,000 authorized;
24,354,000 and 23,227,000 issued at April 30, 1999
and July 31, 1998 243 232
Additional paid-in capital 259,713 256,594
Treasury stock, at cost: 34,700 shares outstanding (123) -
Accumulated deficit (190,323) (175,455)
Accumulated other comprehensive loss (631) (113)
Total stockholders' equity 68,879 81,258
--------- ---------
$ 125,245 $ 129,289
========= =========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial
statements.
<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 Nine Months Ended
April 30, April 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues:
Products $ 22,658 $ 32,887 $ 71,736 $ 99,290
Services and other 13,999 12,113 39,491 32,691
--------------- ---------------- ------------- --------------
Total revenues 36,657 45,000 111,227 131,981
--------------- ---------------- ------------- --------------
Cost of sales:
Products 9,882 15,969 35,315 49,176
Services and other 8,232 7,944 24,969 21,316
--------------- ---------------- ------------- --------------
Total cost of sales 18,114 23,913 60,284 70,492
--------------- ---------------- ------------- --------------
Gross margin 18,543 21,087 50,943 61,489
--------------- ---------------- ------------- --------------
Operating expenses:
Selling, general and administrative 13,141 16,525 47,084 46,231
Research and development 4,427 4,786 14,301 14,755
Amortization of intangible assets 379 240 890 720
Restructuring expense 203 -- 3,118 --
--------------- ---------------- ------------- --------------
Total operating expenses 18,150 21,551 65,393 61,706
--------------- ---------------- ------------- --------------
Income (loss) from operations 393 (464) (14,450) (217)
--------------- ---------------- ------------- --------------
Other Income (expense):
Interest income 165 247 701 716
Interest expenses and other (193) 1,217 (492) 906
--------------- ---------------- ------------- --------------
(28) 1,464 209 1,622
--------------- ---------------- ------------- --------------
Net income (loss) before provision
for income taxes 365 1,000 (14,241) 1,405
Provision for income taxes -- (20) -- (37)
--------------- ---------------- ------------- --------------
Net income (loss) $ 365 $ 980 $ (14,241) $ 1,368
=============== ================ ============= ==============
Basic and diluted income (loss) per share: $ 0.02 $ 0.04 $ (0.61) $ 0.06
=============== ================ ============= ==============
Weighted average shares outstanding:
Basic 23,734 23,130 23,264 23,013
=============== ================ ============= ==============
Diluted 24,065 23,400 23,264 23,477
=============== ================ ============= ==============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
VTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
----------------------------------------------
(Unaudited)
(Dollars in thousands)
For the
Nine Months Ended
April 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (14,241) $ 1,368
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operations:
Depreciation and amortization 7,932 6,601
Provision for doubtful accounts 233 44
Amortization of unearned compensation 242 49
Foreign currency translation loss 68 87
Decrease in accounts receivable 6,520 3,039
(Increase) decrease in inventories (2,260) 6,568
(Increase) decrease in prepaid expenses and other current assets (13) 461
Decrease in accounts payable (8,259) (7,539)
Increase (decrease) in accrued expenses (916) (5,779)
Increase in deferred revenues 240 1,544
------------- -------------
Net cash (used in) provided by operating activities (10,454) 6,443
------------- -------------
Cash flows from investing activities:
Net short-term investments activity 6,512 6,012
Net purchase of property and equipment (7,060) (9,617)
Increase in capitalized software (4,677) --
Acquisition (230) --
Increase in other assets (465) (191)
------------- -------------
Net cash used in investing activities (5,920) (3,796)
------------- -------------
Cash flows from financing activities:
Borrowings under line of credit 11,200
Payments on notes payable (602)
Net proceeds from issuance of stock 220 1,165
Purchase of treasury stock (2,265) --
Sale of treasury stock 688 --
------------- -------------
Net cash provided by financing activities 9,241 1,165
------------- -------------
Effect of translation exchange rates on cash (246) (122)
------------- -------------
Net (decrease) increase in cash and equivalents (7,379) 3,690
Cash and equivalents at beginning of period 15,191 4,757
------------- -------------
Cash and equivalents at end of period $ 7,812 $ 8,447
============= =============
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial
statements.
<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 April 30, 1999 and July 31, 1998, the
results of the Company's operations for the three and nine month periods ended
April 30, 1999 and 1998 and cash flows for the nine month periods ended April
30, 1999 and 1998. The results for interim periods are not necessarily
indicative of results for a full fiscal year.
2
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Note 2- Acquisition
On March 9, 1999, the Company completed the acquisition of substantially
all of the assets of Vosaic LLP, an Internet video software and technology
company, for $3.2 million in cash, stock and warrants. The transaction has been
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). The common shares have been registered
with the Securities Exchange Commission as of May 14, 1999. Of these shares,
200,000 are to be held in escrow and additionally, 225,000 warrants remain
unearned pending the completion of certain obligations by Vosaic. VTEL acquired
the core team, originally associated with the University of Illinois, who has
developed scalable video delivery technologies to stream and store video
information securely with high quality of service. On June 8, 1999, the Company
announced the availability of, TurboCast (TM), a video streaming product that
utilizes the core technology acquired from Vosaic. As part of the purchase price
allocation associated with Vosaic, the Company recorded a charge to research and
development expense of $474,000 during the third fiscal quarter of 1999.
Note 3 - Restructuring Charge
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 in the first quarter of 1999 fell significantly below management's
estimates and resulted in significant losses. Subsequently, management estimates
were revised and appropriate actions were taken as discussed in the following
paragraphs.
In November 1998, management adopted a restructuring plan that is intended
to match the size and complexity of the organization with the planned path of
the Company. The plan included the involuntary reduction of 100 employees
(approximately 14%) in November 1998. In April 1999, the Company terminated an
additional 38 employees. Terminations were generally made in all departments,
including manufacturing, sales, development, management and accounting, and were
effective immediately for most employees upon announcement. The Company also
made the decision to reduce operating costs by exiting other activities and
reducing related overhead costs. These activities included the closure of
certain field sales offices and its Sunnyvale, California spare parts depot.
As a result of the restructuring, the Company recorded a charge of $2.9
million during the quarter ended January 31, 1999 and an additional charge of
$0.2 million in the quarter ended April 30, 1999. As of June 14, 1999,
substantially all of the termination and severance benefits had been paid. The
3
<PAGE>
transition of the spare parts depot in Sunnyvale was completed during the
quarter ended April 30, 1999. Substantially all of the Company's unoccupied
space at its facilities at 110 Wild Basin in Austin was subleased during the
three months ended April 30, 1999. The Company has not sublet its unoccupied
space in Sunnyvale. The Company expects to incur the balance of the accrued
facility closure costs (primarily non-cancelable lease obligations) on its
Sunnyvale facility by October 31, 1999.
The following schedule summarizes the components and activities of the
restructuring plan for the nine months ended April 30, 1999:
<TABLE>
<CAPTION>
Balance
Restructuring Expenditures Accrued at
Charge Incurred April 30, 1999
<S> <C> <C> <C>
Termination and
severance benefits $ 2,349 $ 2,209 $ 140
Facility closure and other
(primarily non-cancelable
lease obligations) 769 429 340
------- ------- -----
$ 3,118 $ 2,638 $ 480
======= ======= =====
</TABLE>
Note 4 - Inventories
Inventories consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
April 30, July 31,
1999 1998
<S> <C> <C>
Raw materials $ 7,359 $ 5,938
Work in process 1,866 517
Finished goods 6,904 5,833
Finished goods held for evaluation
and rental and loan agreements 390 663
------- -------
$16,519 $12,951
======= =======
</TABLE>
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 5 - Net Income (Loss) Per Share
Basic earnings per share (EPS) is computed by dividing net income
(loss) by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed by dividing net income (loss) by the weighted
average number of common shares and common share equivalents (if dilutive)
outstanding for the period.
4
<PAGE>
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 Three For the
Months Ended Nine Months Ended
April 30, April 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Weighted average shares Outstanding
- - basic 23,734 23,130 23,264 23,013
------ ------ ------ ------
Effect of dilutive securities:
Stock options 299 270 - 464
Stock warrants 32 - - -
------ ------ ------ ------
Dilutive potential common shares 331 270 - 464
------ ------ ------ ------
Weighted average shares
Outstanding - diluted 24,065 23,400 23,264 23,477
====== ====== ====== ======
Antidilutive securities 3,721 2,141 4,657 1,866
====== ====== ====== ======
</TABLE>
Note 6 - 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 income (loss) for the three and nine months ended April 30, 1999
was $.03 million and ($14.8 million), respectively, and comprehensive income for
the three and nine months ended April 30, 1998 was $0.9 million and $1.4
million, respectively, including the impact of other comprehensive gain or loss.
Note 7 - Line of Credit
On May 9, 1999 the Company renegotiated its line of credit facility
whereby a new lender replaced one of the previous lenders in the banking
syndicate. Under the amended and restated loan and security agreement, the
Company has a $20 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 April 30, 1999, the
Company had borrowed $11.2 million under its line of credit and an additional
amount of approximately $5.4 million was available to be drawn under the line of
credit.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
5
<PAGE>
The following review of the Company's financial position as of April
30, 1999 and 1998 and for the three months and nine months ended April 30, 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 Nine
Months Ended Months Ended
April 30, April 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Gross margin 51 47 46 47
Selling, general and administrative 36 37 42 35
Research and development 12 11 13 11
Restructuring expense 1 - 3 -
Total operating expenses 50 48 59 47
Income (loss) from operations 1 (1) (13) (.1)
Net income (loss) 1% 2% (13)% 1%
</TABLE>
Three and Nine Months Ended April 30, 1999 and 1998
Revenues. Revenues for the quarter ended April 30, 1999 decreased to
$36.7 million from $45.0 million in the quarter ended April 30, 1998, a decrease
of $8.3 million or 19%. Revenues for the nine months ended April 30, 1999
decreased to $111.2 million from $132.0 million for the nine months ended April
30, 1998, a decrease of $20.8 million or 16%. The primary reason for the
decrease in revenues for the three and nine month periods ended April 30, 1999
was the result of a decrease in unit sales of the Company's large group digital
visual communications systems, and to a lessor extent lower average selling
prices due to the shift in the product mix to products with lower average
selling prices. The decline in revenues also appears to 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) type phone lines to systems which run on
Internet Protocol (IP) packet based networks.
International sales represented approximately 23% , of product revenues
for both the three months and nine months ended April 30, 1999 compared to 18%
and 20% respectively, for the three months and nine months ended April 30, 1998.
The relative increase in international sales during the three and nine months
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<PAGE>
ended April 30, 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 nine months ended April 30, 1999 reseller sales were 74% and
80% of product sales, respectively. For the three months and nine months ended
April 30, 1998 reseller sales were 73% and 79% respectively. All other sales in
each period presented were made directly by the Company.
While the Company continues to strive 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 nine months ended April
30, 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 51%
and 46%, respectively, for the three and nine months ended April 30, 1999, as
compared to the gross margin as a percentage of revenues of 47% for both the
three and nine months ended April 30, 1998. The gross margin percentage for the
nine month period ended April 30, 1999 was 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. Margins were affected
favorably during the three months ended April 30, 1999 due to the combination of
acceptance revenues from sales made to China, favorable product mix shift to
more fully featured systems and through sales of refurbished systems.
While many customers continue to delay the purchase of higher cost
large group systems, some 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.
The Company believes this transition 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 may 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,
7
<PAGE>
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 significant fluctuations based on pricing, production costs
and sales mix.
Selling, general and administrative. Selling, general and
administrative expenses decreased by $3.4 million, or 20%, from $16.5 million
for the quarter ended April 30, 1998 to $13.1 million for the quarter ended
April 30, 1999. Selling, general and administrative expenses increased by $0.9
million, or 2%, from $46.2 million for the nine months ended April 30, 1998 to
$47.1 million for the nine months ended April 30, 1999. Selling, general and
administrative expenses as a percentage of revenues were 37% and 36% for the
three months ended April 30, 1998 and 1999, respectively, and were 35% and 42%
for the nine months ended April 30, 1998 and 1999, respectively. The Company's
expense levels are based, in part, on 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. For this reason,
the selling, general and administrative expenses were higher, as a percentage of
revenues, for the comparable nine month period as the Company had an unexpected
decrease in overall revenue during the first second quarters of fiscal 1999. For
the comparable three month periods ended April 30, 1998 and 1999, selling,
general and administrative expenses were lower, as a percentage of revenues as
the Company was able to reduce its expenses in alignment with expected revenue
levels.
The Company believes that the measures taken under its restructuring
activities (see "Restructuring Activities" below) have been successful in
reducing selling, general and administrative expenses to a level where the
Company can be profitable at expected short term revenue projections. This
belief is based on the selling, general and administrative expense level of the
three months ended April 30, 1999. The Company expects selling, general and
administrative expenses to remain level or decrease in the near term .
Research and development. Research and development expenses, net of
software capitalization decreased by $0.4 million, or 8%, from $4.8 million for
the quarter ended April 30, 1998 to $4.4 million for the quarter ended April 30,
1999. Research and development expenses, net of software capitalization
decreased by $0.5 million, or 3%, from $14.8 million for the nine months ended
April 30, 1998 to $14.3 million for the nine months ended April 30, 1999.
Research and development expenses as a percentage of revenues were 11% and 12%
for the three months ended April 30, 1998 and 1999, respectively, and were 13%
and 11%, respectively, for the nine months ended April 30, 1998 and 1999.
Research and development expenses included a charge of $474,000 during the three
months ended April 30, 1999 for in-process research and development related to
the acquired assets of Vosaic (see "Acquisition" below). The charge is based on
the Company's estimate of purchase price associated with research and
development that that was estimated to be in-process at the time of acquisition.
Capitalized software development costs totaled $1.7 million for the three months
ended April 30, 1999 and $4.5 million for the nine months ended April 30, 1999.
No software capitalization was recorded during the three and nine months ended
April 30, 1998. Software development costs are capitalized after a product is
determined to be technologically feasible and is in the process of being
developed for market. At the time of release, the capitalized software will be
amortized over the estimated economic life of the related projects.
Overall research and development expenditures (including capitalized
costs) increased during the quarter ended April 30, 1999 in comparison with the
quarter ended April 30, 1998, due to the development of an improved graphical
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
8
<PAGE>
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 (expense), net. Other income, net decreased by $1.5
million, or 102%, from $1.5 million for the quarter ended April 30, 1998 to a
net expense of $28,000 for the quarter ended April 30, 1999. Other income, net
decreased by $1.4 million, or 87%, from $1.6 million for the nine months ended
April 30, 1998 to $209,000 for the nine months ended April 30, 1999. The
decrease in Other income, net during the three months ended April 30, 1999
compared with the three months ended April 30, 1998 is attributable to an
increase in interest expense related to borrowings under the Company's revolving
line of credit (see "Liquidity and Capital Resources" below). In addition, both
the three month and nine month periods ended April 30, 1998 reflect income
generated from a planned non-recurring real estate transaction which eliminated
the corporate headquarters facility of CLI, one of the Company's wholly-owned
subsidiaries.
Net income (loss). The Company generated net income of $365,000, or
$0.02 per share, during the quarter ended April 30, 1999 compared to net income
of $980,000, or $0.04 per share, during the quarter ended April 30, 1998. The
Company generated a net loss of $14.2 million, or $0.61 per share, during the
nine months ended April 30, 1999 compared to net income of $1.4 million, or
$0.06 per share, during the nine months ended April 30, 1998. The decline in
sales of the Company's large group digital visual communications systems without
an immediate corresponding decline in the Company's operating expenses resulted
in the significant loss during the nine months ended April 30, 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"
below) and an additional net charge of $203,000 during the quarter ended April
30, 1999 as it was determined that additional reductions in work force were
necessary. The Company's restructuring activities were intended to reduce
operating expenses to a level such that the Company can generate net income at
lower revenue levels. If revenues should decline further however, or if the
product mix shifts to more lower-margin products than anticipated, the Company
could incur further substantial losses in the future which would have material
adverse effect 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 in the first quarter of 1999 fell significantly below management's
estimates and resulted in significant losses. Subsequently, management estimates
were revised and appropriate actions were taken as discussed in the following
paragraphs.
In November 1998, management adopted a restructuring plan that is
intended to match the size and complexity of the organization with the planned
path of the Company. The plan included the involuntary reduction of 100
employees (approximately 14%) in November 1998. In April 1999, the Company
terminated an additional 38 employees. Terminations were generally made in all
departments, including manufacturing, sales, development, management and
accounting, and were effective immediately for most employees upon announcement.
The Company also made the decision to reduce operating costs by exiting other
activities and reducing related overhead costs. These activities included the
closure of certain field sales offices and its Sunnyvale, California spare parts
depot.
9
<PAGE>
As a result of the restructuring, the Company recorded a charge of $2.9
million during the quarter ended January 31, 1999 and an additional charge of
$0.2 million in the quarter ended April 30, 1999.
As of June 14, 1999, substantially all of the termination and severance
benefits had been paid. The transition of the spare parts depot in Sunnyvale was
completed during the quarter ended April 30, 1999. Substantially all of the
Company's unoccupied space at its facilities at 110 Wild Basin in Austin was
subleased during the three months ended April 30, 1999. The Company has not
sublet its unoccupied space in Sunnyvale. The Company expects to incur the
balance of the accrued facility closure costs (primarily non-cancelable lease
obligations) on its Sunnyvale facility by October 31, 1999.
The following schedule summarizes the components and activities of the
restructuring plan for the nine months ended April 30, 1999:
<TABLE>
<CAPTION>
Restructuring Expenditures Balance Accrued at
Charge Incurred April 30, 1999
<S> <C> <C> <C>
Termination and severance $ 2,349 $ 2,209 $ 140
benefits
Facility closure and other
(primarily non-cancelable
lease obligations) 769 429 340
------- ------- -----
$ 3,118 $ 2,638 $ 480
======= ======= =====
</TABLE>
The following schedule summarizes the components of the restructure
accrual at January 31, 1999, the charge taken during the quarter, the amounts
paid out during the three months ended April 30, 1999, the reversal of certain
accruals and the remaining accrual recorded in accrued liabilities at April 30,
1999:
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 April 30, 1999, the
Company introduced a hardware solution using H.323
10
<PAGE>
compatibility for its ESA systems that enables the Company's customers to
conduct video conferences using internet protocol (IP) over local area networks,
wide area networks or the internet. 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 now scheduled during
calendar 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
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 affect 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 effect on the Company's
financial position and results of operations if not managed properly.
Acquisition
On March 9, 1999, the Company completed the acquisition of
substantially all of the assets of Vosaic LLP, an Internet video software and
technology company, for $3.2 million in cash, stock and warrants. The
transaction has been 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). The common
shares have been registered with the Securities Exchange Commission as of May
14, 1999. Of these shares, 200,000 are to be held in escrow and additionally,
225,000 warrants remain unearned pending the completion of certain obligations
by Vosaic. VTEL acquired the core team, originally associated with 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. On June 8, 1999, the Company
announced the availability of, TurboCast (TM), a video streaming product that
utilizes the core technology acquired from Vosaic. As part of the purchase price
allocation associated with Vosaic, the Company recorded a charge to research and
development expense of $474,000 during the third fiscal quarter of 1999.
11
<PAGE>
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. Prior to April
1999, the Company believed that its products were 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. In April 1999,
Microsoft announced that an upgrade kit would be made available that will make
Microsoft Windows (TM) Year 2000 compliant. The ability to make Windows (TM)
compliant affects favorably VTEL customers who are using older video
conferencing systems that run on Windows (TM) software. Thus, at this time, the
Company believes that all its products being shipped are Year 2000 compliant.
While the Company is not currently aware of any other Year 2000 compliance
issues with its products, no assurances can be made that problems will not arise
such as customer problems with other software programs, operating systems or
hardware that disrupt their use of the Company's products. There can be no
assurances that such disruption would not negatively impact costs and revenues
in future years. The Enterprise Resource Planning System, the Company's
management resource planning, transaction processing and financial accounting
system, was acquired in 1998. 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 other
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 estimated the total costs
of Year 2000 compliance and related contingency planning to be $200,000. The
Company has not accrued any amounts related to the expected costs as it intends
to expense Year 2000 costs as they are incurred. The Company plans to complete
the Year 2000 project during the fiscal period ending July 31, 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. In addition, Year 2000 issues may impact our customer's ability
to purchase products and therefore materially impact the Company's future
revenue stream. To the extent these potential revenue reductions cannot be
anticipated and/or the Company cannot reduce operating expenses correspondingly,
then the Company may experience severe unfavorable financial impact to its net
income. 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 April 30, 1999, the Company had working capital of $29.3 million,
including $15.8 million in cash, cash equivalents and short-term investments.
Cash used by operating activities was $10.4 million for
12
<PAGE>
the nine months ended April 30, 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. Cash provided by operating activities was $6.4 million for
the nine months ended April 30, 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 during the nine months ended April 30,
1998 includes amounts for Merger and other expenses which were accrued at July
31, 1997.
Net cash used in investing activities during the nine months ended
April 30, 1999 was $5.9 million and primarily resulted from an increase in net
property and equipment of $7.1 million and an increase in capitalized software
development costs of $4.7 million partially offset by cash proceeds from the
sale of short-term investments. Net cash used in investing activities during the
nine months ended April 30, 1998 was $3.8 million and primarily resulted from
the increase in net property and equipment of $9.6 million offset by cash
generated from the reduction of short-term investments of $6.0 million.
Cash flows provided by financing activities during the nine months
ended April 30, 1999 were $9.2 million and resulted from $11.2 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
stock repurchase program during the nine months ended April 30, 1999. Cash flows
provided by financing activities during the nine months ended April 30, 1998
were $1.2 million and related to sales of stock under the Company's employee
stock plans.
At April 30, 1999, the Company's principal source of liquidity was its
cash, cash equivalents and short-term investments totaling $15.8 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 line of credit will be sufficient to meet the Company's cash and
capital requirements for at least the next 12 months.
On May 9, 1999 the Company renegotiated its line of credit facility
whereby a new lender replaced one of the previous lenders in the banking
syndicate. Under the amended and restated loan and security agreement, the
Company has a $20 million line of credit facility in place with a banking
syndicate. At the Company's request, the $20 million line was reduced from the
$25 million available under the previous agreement. Amounts available under the
line of credit are subject to limitations based on the collateral as specified
in the agreement. At April 30, 1999, the Company had borrowed $11.2 million
under its line of credit and an additional amount of approximately $5.4 million
additional funds were available to be drawn under the line of credit.
Legal Proceedings
Compression Laboratories, Incorporated ("CLI"), a wholly owned
subsidiary of the Company, was previously engaged in several legal proceedings
relating to matters arising prior to the Merger between VTEL and CLI effective
May 23, 1997. 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 April 30, 1999. In the opinion
of management, such reserves should be sufficient to discharge the liabilities,
if any.
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 asserted that the equipment sold was defective
13
<PAGE>
and did not conform to contract specifications and express and implied
warranties. Keytech asserted damages in excess of $20 million based on its
allegations of breach of contract, breach of warranties and fraud. CLI filed an
answer denying liability and has asserted cross-claims against Keytech for
amounts due and unpaid for equipment sold by CLI to Keytech. In May 1999, a
settlement was reached between Keytech and CLI that resolved the pending claims
on terms providing that neither party would receive any consideration for its
claims in the lawsuit. The parties have filed a joint motion to dismiss the
lawsuit with prejudice.
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 alleged that CLI had breached its
obligations to Philips under these purported agreements and had 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, alleged that Philips
breached certain of its terms and was due money for certain activities expended
on behalf of the joint venture. Based on the allegations, Philips 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. On May 25, 1999, the Company announced a compromise settlement
agreement between Philips and CLI. The settlement agreement, valued at less than
$900,000, stipulates payment by CLI in the form of cash and a future payment
under a note as well as warrants for VTEL common stock. In addition, the
settlement mutually releases each party from all future claims, demands and
causes of action. The parties have filed a joint motion to dismiss the lawsuit
with prejudice.
During March 1999, by joint agreement of the Company and Polycom, Inc,
("Polycom") a lawsuit previously filed against the Company by Polycom was
dismissed without prejudice by the Superior Court of California in Santa Clara
County. Polycom's lawsuit was filed in response to the Company's lawsuit against
ViaVideo Communications, Inc., ViaVideo's founders 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
videoconferencing company, 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 in
California instead of Texas. Polycom's lawsuit in California has now been
dismissed without prejudice. The Company's 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.
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,
14
<PAGE>
changes in general economic conditions in any of the countries in which the
Company does business, adverse legal disputes and delays in purchases relating
to federal government procurement.
Due to the factors noted above and elsewhere in Management's Discussion
and Analysis of Financial Condition and Results of Operations, the Company's
past earnings and stock price has been, and future earnings and stock price
potentially may be, subject to significant volatility, particularly on a
quarterly basis. Past financial performance should not be considered a reliable
indicator of future performance and investors are cautioned in using historical
trends to anticipate results or trends in future periods. Any shortfall in
revenue or earnings from the levels anticipated by securities analysts could
have an immediate and significant 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, impact of Year 2000 related issues,
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 wholly owned
subsidiary of the Company, was previously engaged in several legal proceedings
relating to matters arising prior to the Merger. 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 April 30, 1999. In the opinion of management, such reserves should be
sufficient to discharge the liabilities, if any.
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 asserted that the equipment sold was defective
and did not conform to contract specifications and express and implied
warranties. Keytech asserted damages in excess of $20 million based on its
allegations of breach of contract, breach of warranties and fraud. CLI filed an
answer denying liability and has asserted cross-claims against Keytech for
amounts due and unpaid for equipment sold by CLI to Keytech. In May 1999,
a settlement was reached between Keytech and CLI that resolved the pending
claims on terms providing that neither party would receive any consideration for
its claims in the lawsuit. The parties have filed a joint motion to dismiss the
lawsuit with prejudice.
15
<PAGE>
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 alleged that CLI had breached its
obligations to Philips under these purported agreements and had 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, alleged that Philips
breached certain of its terms and was due money for certain activities expended
on behalf of the joint venture. Based on the allegations, Philips 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. On May 25, 1999, the Company announced a compromise settlement
agreement between Philips and CLI. The settlement agreement, valued at less than
$900,000, stipulates payment by CLI in the form of cash and a future payment
under a note as well as warrants for VTEL common stock. In addition, the
settlement mutually releases each party from all future claims, demands and
causes of action. The parties have filed a joint motion to dismiss the lawsuit
with prejudice.
During March 1999, by joint agreement of the Company and Polycom, Inc,
("Polycom") a lawsuit previously filed against the Company by Polycom was
dismissed without prejudice by the Superior Court of California in Santa Clara
County. Polycom's lawsuit was filed in response to the Company's lawsuit against
ViaVideo Communications, Inc., ViaVideo's founders 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
videoconferencing company, 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 in
California instead of Texas. Polycom's lawsuit in California has now been
dismissed without prejudice. The Company's 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 Holder
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
* * *
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VTEL CORPORATION
June 14, 1999 By: /s/ Rodney S. Bond
---------------------------------
Rodney S. Bond
Vice President-Finance
(Chief Financial Officer
and Principal Accounting Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from VTEL
Corporation's Balance Sheet & Income Statement for the Nine Months ended
April 30, 1999, 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-31-1999
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<EXCHANGE-RATE> 1
<CASH> 7,812
<SECURITIES> 7,972
<RECEIVABLES> 35,380
<ALLOWANCES> (1,199)
<INVENTORY> 16,519
<CURRENT-ASSETS> 69,038
<PP&E> 60,273
<DEPRECIATION> (29,288)
<TOTAL-ASSETS> 125,245
<CURRENT-LIABILITIES> 39,748
<BONDS> 0
0
0
<COMMON> 259,956
<OTHER-SE> (191,077)
<TOTAL-LIABILITY-AND-EQUITY> 125,245
<SALES> 36,657
<TOTAL-REVENUES> 36,657
<CGS> (18,114)
<TOTAL-COSTS> (18,150)
<OTHER-EXPENSES> (28)
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<INCOME-PRETAX> 365
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<NET-INCOME> 365
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
