SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2000
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 November 30, 2000 the registrant had outstanding 24,824,352 shares of its
Common Stock, $0.01 par value.
VTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
October 31, July 31,
2000 2000
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 4,855 $ 6,868
Short-term investments 34,764 39,742
Accounts receivable, net of allowance for doubtful
accounts of $1,349 and $888 at October 31, 2000
and July 31, 2000 14,935 23,368
Inventories 16,647 14,733
Prepaid expenses and other current assets 1,561 1,803
--------------- ---------------
Total current assets 72,762 86,514
Property and equipment, net 17,230 19,275
Intangible assets, net 11,664 11,994
Capitalized software, net 4,270 4,728
Other assets 942 1,022
--------------- ---------------
$ 106,868 $ 123,533
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,982 $ 14,957
Accrued compensation and benefits 4,784 4,773
Other accrued liabilities 3,975 3,981
Notes payable, current portion 25 610
Deferred revenue 11,345 11,886
--------------- ---------------
Total current liabilities 33,111 36,207
Long-term liabilities:
Other long-term obligations 4,133 4,665
--------------- ---------------
Total long-term liabilities 4,133 4,665
Stockholders' equity:
Preferred stock, $.01 par value; 10,000
authorized; none issued or outstanding - -
Common stock, $.01 par value; 40,000 authorized;
24,835 and 24,847 issued and outstanding at
October 31, 2000 and July 31, 2000 248 248
Additional paid-in capital 261,657 261,712
Accumulated deficit (203,157) (189,368)
Unearned compensation - (4)
Accumulated other comprehensive income 10,876 10,073
--------------- ---------------
Total stockholders' equity 69,624 82,661
--------------- ---------------
$ 106,868 $ 123,533
=============== ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
VTEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
For the
Three Months Ended
October 31,
2000 1999
(Unaudited)
Revenues:
Products $ 14,086 $ 24,375
Services and other 10,444 10,691
---------------- ---------------
Total revenues 24,530 35,066
---------------- ---------------
Cost of sales:
Products 9,501 14,518
Services and other 7,786 7,424
---------------- ---------------
Total cost of sales 17,287 21,942
---------------- ---------------
Gross margin 7,243 13,124
---------------- ---------------
Operating expenses:
Selling, general and administrative 13,843 14,025
Research and development 5,679 3,768
Restructuring charge 1,708 -
Amortization of intangible assets 328 364
---------------- ---------------
Total operating expenses 21,558 18,157
---------------- ---------------
Loss from operations (14,315) (5,033)
---------------- ---------------
Other income (expense):
Interest income 509 80
Interest expense and other 17 (391)
---------------- ---------------
526 (311)
---------------- ---------------
Net loss before income taxes (13,789) (5,344)
Income taxes - -
---------------- ---------------
Net loss $ (13,789) $ (5,344)
================ ===============
Net loss per share-basic and diluted $ (0.56) $ (0.22)
================ ===============
Weighted average shares outstanding:
Basic and diluted 24,835 24,298
================ ===============
The accompanying notes are an integral part
of these consolidated financial statements
3
VTEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
- --------------------------------------------------------------------------------
For the
Three Months Ended
October 31,
2000 1999
(Unaudited)
Cash flows from operating activities:
Net loss $ (13,789) $ (5,344)
Adjustments to reconcile net loss
to net cash provided by (used in)
operations:
Depreciation and amortization 3,303 2,620
Provision for doubtful accounts 719 259
Amortization of unearned compensation 4 75
Non-cash restructuring charge 343 -
Foreign currency translation gain (17) (2)
Gain on sale of fixed assets (34) (42)
Decrease in accounts receivable 7,714 8,496
Increase in inventories (1,914) (447)
Decrease in prepaid expenses and other current assets 242 135
Decrease in accounts payable (1,976) (3,883)
Decrease in accrued expenses (378) (912)
Decrease in deferred revenues (924) (374)
------------- ---------------
Net cash (used in) provided by operating activities (6,707) 581
------------- ---------------
Cash flows from investing activities:
Net sales of short-term investments 5,466 2,938
Net purchases of property and equipment (383) (914)
(Issuance) collection of notes receivable (44) 12
Increase in capitalized software - (1,702)
(Increase) decrease in other assets (154) 92
------------- ---------------
Net cash provided by investing activities 4,885 426
------------- ---------------
Cash flows from financing activities:
Net proceeds from issuance of stock 119 111
Proceeds from sale of treasury stock - 12
Borrowings under line of credit - 2,800
Payments on notes payable (642) (453)
------------- ---------------
Net cash (used in) provided by financing activities (523) 2,470
------------- ---------------
Effect of translation exchange rates on cash 332 (6)
------------- ---------------
Net (decrease) increase in cash and equivalents (2,013) 3,471
Cash and equivalents at beginning of period 6,868 7,805
------------- ---------------
Cash and equivalents at end of period $ 4,855 $ 11,276
============= ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share, per share, and employee data unless
otherwise noted)
- --------------------------------------------------------------------------------
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 accounting principals generally
accepted in the United States 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 VTEL as of October 31, 2000 and the result of
operations and cash flows for the three months ended October 31, 2000 and 1999.
The results for interim periods are not necessarily indicative of results for a
full fiscal year.
Note 2 - Inventories
Inventories consist of the following:
October 31, July 31,
2000 2000
Raw materials $ 10,144 $ 8,394
Work in process 1,269 669
Finished goods 4,224 4,480
Finished goods held for evaluation
and rental and loan agreements 1,010 1,190
--------- ---------
$ 16,647 $ 14,733
========= =========
Finished goods held for evaluation consist of completed digital visual
communications systems used for demonstration and evaluation purposes.
Note 3 - Restructuring Activities
On August 23, 2000, VTEL announced a new business charter and the
restructuring of its organization. The new business charter is intended to
execute a change in business strategy that leverages VTEL's solutions and
systems integration capabilities in order to become the industry leader in
providing visual communication solutions over broadband enterprise networks. The
restructuring involves the involuntary termination of approximately 200
employees globally, or 34% of the Company's workforce and the consolidation of
leased office space in Austin, Texas, Sunnyvale, California and other remote
facilities. These workforce reductions and consolidations of office space are
intended to reduce costs and focus resources on efforts to support the new
business charter. The Company anticipates completing all terminations by January
31, 2001. During the three months ended October 31, 2000, the Company recorded a
restructuring charge of $1,708.
5
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share, per share, and employee data unless
otherwise noted)
- --------------------------------------------------------------------------------
The following schedule summarizes the components and activities of the
restructuring plan:
Restructuring Expenditures Balance Accrued at
Charge Incurred October 31, 2000
Termination and severance
benefits $ 1,565 $ 1,365 $ 200
Facility closure and other
(primarily non-cancelable lease
obligations) 143 - 143
----------------- -------------- ---------------
$ 1,708 $ 1,281 $ 343
================= ============== ===============
Note 4 - Comprehensive Loss
Our comprehensive income (loss) is comprised of net income (loss),
foreign currency translation adjustments and unrealized gains and losses on
marketable securities held as available-for-sale investments. Comprehensive
losses for the three months ended October 31, 2000 and 1999 were $12,986 and
$5,434, respectively.
Note 5 - Derivative Instruments and Hedging Activities
On August 31, 2000 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS 133 requires the recognition of all derivatives as either
assets or liabilities in the statement of financial position and the measurement
of those instruments at fair value. The Company utilizes forward currency
exchange contracts to reduce the exposure to fluctuations in foreign currency
exchange rates related to the European Euro and the Australian Dollar. These
contracts have historically been recorded at fair value in the statement of
financial condition with changes reflected in the statement of operations. Other
than these contracts, the Company does not maintain derivatives as defined in
SFAS 133. Therefore the adoption of this standard had no effect on the Company's
statement of financial position or results of operations for the quarter ended
October 31, 2000.
Note 6 - Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements,"
which provides guidance on revenue recognition issues. VTEL is required to
implement SAB 101 beginning on May 1, 2001. The Company has not determined the
effect of implementing SAB 101 on its financial position or its results of
operations.
6
Note 7 - Segment Information
The Company manages its business primarily on a products, solutions
(formerly services) and Internet ventures basis and these are the reportable
segments. The Products segment provides multi-media visual communication
(commonly referred to as videoteleconferencing) products to customers primarily
through a network of resellers, and to a lesser extent directly to end-users.
The Solutions segment provides custom integrated systems, installations and
product support services to customers. The Internet Ventures are business units
established to focus on delivering visual communications products and services
for the World Wide Web.
The Company evaluates the performance of its segments and allocates resources to
them based on revenue and operating income; however, there is a charge to
allocate corporate operating expenses to the segments. The prior year's segment
information has been restated to present the Company's reportable segments.
The table below presents segment information about revenue from
unaffiliated customers, depreciation and operating income (loss) for the three
month periods ended October 31, 2000 and 1999:
Internet Unallocated
Products Solutions Ventures Items Total
------------ ----------- ----------- -------------- ------------
For the three-month period
ending October 31, 2000
Revenues from unaffiliated customers $ 14,086 $ 10,444 $ - $ 24,530
Depreciation and amortization 1,834 1,278 191 3,303
Operating income (loss) (9,230) 258 (4,287) (1,056) (14,315)
Total assets $ 58,445 $ 43,333 $ 5,090 - $ 106,868
For the three-month period
ending October 31, 1999
Revenues from unaffiliated customers $ 24,375 $ 10,691 $ - $ 35,066
Depreciation and amortization 1,692 884 44 2,260
Operating income (loss) (3,303) 445 (2,175) (5,033)
Total assets $ 75,871 $ 33,278 $ 6,916 - $ 116,065
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following review of VTEL's financial position as of October 31,
2000 and July 31, 2000 and for the three months ended October 31, 2000 and 1999
should be read in conjunction with our 2000 Annual Report on Form 10-K filed
with the Securities and Exchange Commission on October 30, 2000.
Results of Operations
The following table provides the percentage of revenues represented by
certain items in VTEL's Condensed Consolidated Statements of Operations:
For the Three
Months Ended
October 31,
2000 1999
Product revenues 57% 70%
Services and other revenues 43 30
Gross margin 30 37
Selling, general and administrative 56 40
Research and development 23 11
Restructuring expense 7 -
Total operating expenses 88 52
Other income (expense), net 2 (1)
Net loss (56)% (15)%
Three Months Ended October 31, 2000 and 1999
Revenues. Revenue for the quarter ended October 31, 2000 decreased by
$10.6 million, or 30%, to $24.5 million from $35.1 million for the quarter ended
October 31, 1999.
The decline in overall revenue is primarily the result of a decline in
product sales of videoconferencing units whereas service revenue has remained
stable as compared to similar periods. On August 23, 2000, VTEL announced a new
business charter and strategy that leverages VTEL's strengths in services,
systems integration, network management and software development ("New
Charter"). By executing this change in business strategy, our goal is to become
the industry leader in providing visual communication solutions over broadband
enterprise networks. We believe we can execute this change in business strategy
by doing the following:
o Expand on current product offerings, by actively marketing other
manufacturers' products that deliver visual communication solutions
athrough our Multi-Vendor Partners program ("MVP");
o Expand our customer service and systems integration capabilities to cover
other visual communication products available within the industry;
o Focus our research and development efforts to enhance our Smart Video Net
Manager ("SVNM") network management software platform that will
interoperate in a multi-vendor environment to manage visual communication
traffic over IP networks;
o Build on our existing services and integration businesses by marketing and
delivering additional but related services such as system design,
implementation, management and training.
8
The decision to pursue the New Charter was based in part on a declining
trend within the industry of sales of high-end videoconferencing products. The
sale of high-end videoconferencing products historically has been a key
component of our revenue structure. Because this trend in product sales has
occurred over several quarters, it magnifies the product sales decline when
reporting periods are compared year over year as opposed to sequential quarters.
As we anticipated a decline in product revenues, we made the decision during the
quarter to avoid additional product discounting in favor of maintaining stronger
gross margins on our most popular models which contributed to the decline in
revenue for the three months ended October 31, 2000.
For the Company to better meet the needs of its customers, resellers and
strategic partners, as well as to return to profitability, we announced on
November 11, 2000 the creation of two separate stand-alone business units for
our Products and Solutions businesses, respectively. The separation is intended
to leverage the strengths of our existing services, integration and sales teams
to offer the best-in-class visual communication solutions in the emerging
broadband marketplace, while also allowing the Products business unit to remain
focused on the design, development, manufacture, marketing, and sales of our
videoconferencing equipment. We believe the visual communications industry will
continue to shift towards software solutions, but also expect continued downward
price pressure on videoconferencing products. As a result, we will continue to
pursue aggressive efforts to reduce product costs as well as operating expenses.
The Products business unit's goals are to return to profitability, to
preserve our current market position for the VTEL brand and customer base, to
establish long-term plans for the Galaxy(TM) product line and beyond, and to
grow the business. We believe the separation of the Company's core businesses
will allow the Products business unit to concentrate on these goals. Indicators
to verify this business unit's progress include certain contract wins involving
the internet protocol H.323 technology and the upcoming Galaxy 2.02 release,
which include international capabilities and enhanced stability. As the Products
unit's emphasis shifts from the circuit switched H.320 technology to the H.323
technology, we expect to experience a decline in product revenue in the short
term. However, the Company expects future increased product revenue as we pursue
H.323 opportunities.
For the three month periods ended October 31, 2000 and 1999, service
and other revenue, as a percent of total revenues, was 43% and 30%,
respectively. Service and other revenue, totaling $10.4 million during the
quarter ended October 31, 2000, declined by $0.2 million in the three months
ended October 31, 2000, compared to the three months ended October 31, 1999.
Service revenue represents the combined revenues of our Solutions business unit
that provides installation and maintenance services as well as custom
videoconferencing integration solutions.
The ability of our Solutions business unit to maintain consistent
revenue streams from service and maintenance contracts despite declining product
revenues reflects the quality of our service performance. Additionally, we
believe the industry lacks a player to provide integrated solutions that address
the overall Internet Protocol (IP) environment. Therefore, the Solutions
business is focusing on the continued establishment of profitable growth
propositions, introducing new prominent customers and developing a next
generation network management platform. During the three months ended October
31, 2000 the Company pursued these goals by creating the Multi-Vendor Partners
Program(TM) (MVP), which allows VTEL to market and distribute various vendor
9
products through its Solutions business. Charter members include PictureTel,
Polycom, Ezenia, and several others. By bidding the multiple products within the
MVP portfolio, the business unit is establishing new relationships and
re-energizing old relationships with market partners and network players.
International sales represented approximately 27% of product revenues
for the three months ended October 31, 2000 compared to 21% for the three months
ended October 31, 1999. These revenue percentages represent export sales from
our domestic operations, as well as sales from our foreign subsidiaries that are
installed in foreign locations. The increase in international sales for the
three months ended October 31, 2000 is due primarily to several large orders
from our China operations. Our European operations have strictly focused on the
VTEL product line, which impaired their competitiveness as the demand in Europe
for videoconferencing products shifted toward low-end products even more rapidly
than in the United States. As a result, during the first quarter of fiscal 2001
we have substantially reduced the scope of European operating activities, while
maintaining an emphasis on European customer service activities.
VTEL sells its products primarily through resellers. For the three
months ended October 31, 2000 and 1999, reseller sales were 81% and 76% of
product sales, respectively. All other sales of our products are made directly
to the end user customer. We expect that VTEL developed videoconferencing
endpoints will continue to be sold predominately through reseller sales
channels. However, as we develop our new business model, which includes sales of
a broader range of third-party visual communications software and equipment, we
expect that a larger percentage of our overall revenues will become more direct
in nature.
We have made decisions regarding the business based on certain revenue
expectations with respect to our core products. There can be no assurance that
product revenues will not decline faster than we have predicted, nor can we be
certain that our service revenues will increase as intended. Our expense levels
are based, in part, on our expectations as to future revenue levels, which are
difficult to predict. Our expense base is relatively fixed in the short term. If
revenue levels are below expectations, operating results may be materially and
adversely affected and net income is likely to be disproportionately adversely
affected.
Gross margin. Gross margin as a percentage of total revenues was 30%
and 37% for the three months ended October 31, 2000 and 1999, respectively.
Product margins were 33% for the three months ended October 31, 2000
and 40% for the three months ended October 31, 1999. This decline is due
primarily to a one-time expense of $0.7 million that was classified as product
cost of sales. Excluding the effect of these non-recurring expenses, product
margin for the three months ended October 31, 2000 was 38% and the decrease in
margin was due primarily to a less favorable product mix, as compared to the
product margin for the three months ended October 31, 1999. To return to
profitability in our Products business, we intend to focus our manufacturing
process on the most profitable and highly demanded product configurations as
well as taking measures to reduce our cost of products sold. We intend to
minimize deep product discounting practices that were used to remain competitive
and to maintain market share. It is our belief that we can manage our inventory
levels and thus our costs more effectively by generating predictable sales
volume of our most popular product configurations.
Service margins were 25% for the three months ended October 31, 2000
and 31% for the three months ended October 31, 1999. The gross margins generated
by our Global Services division, which provides maintenance and systems
integration revenues, have historically been lower than the gross margins from
our product sales. Whereas service costs are relatively fixed, integration
10
margins are subject to product mix shifts based on the types of integration
solutions we produce. The decline in service margins during the three months
ended October 31, 2000 was attributable to cost overruns on several large
integration projects. In addition to helping deliver segment profitability and
generating in-house solutions expertise, the integration business also acts as a
conduit to deliver service maintenance contracts on the projects we deliver.
We believe that, as part of our new charter, service revenues can grow
as we offer our service capabilities to a broader range of third-party visual
communications products. Despite apparent lower gross margins, service revenues
do not carry the associated cost of sales that product sales do. Therefore, we
believe the Solutions business will contribute greater overall profitability.
Selling, general and administrative. Selling, general and
administrative expenses were $13.8 million during the quarter ended October 31,
2000 and $14.0 million during the quarter ended October 31, 1999. The decreased
was $0.2 million, or 1%. Selling, general and administrative expenses as a
percentage of revenues were 56% and 40% for the three months ended October 31,
2000 and 1999, respectively.
While selling, general and administrative expenses for the comparable
periods remained relatively flat, the substantial increase as a percentage of
revenue includes non-recurring consulting costs totaling $1.1 million associated
with the development and initial execution of the New Charter and $0.4 million
in stay bonuses paid to certain employees. We are committed to reducing selling,
general and administrative expenses to be in line with expected future revenue
levels. The reduction in workforce and office space as part of the restructuring
efforts initiated during the quarter ended October 31, 2000 are two significant
steps that the Company has taken to reduce its overhead expenses (see
Restructuring Charge below). The impact of these cost reduction measures will be
realized in future quarters.
Research and development. Research and development expenses were $5.7
million for the quarter ended October 31, 2000 and $3.8 million for the quarter
ended October 31, 1999. The increase was $1.9 million, or 51%.
The increase in research and development expenses is due primarily to
$1.7 million in software development costs that were capitalized during the
three months ended October 31, 1999. Overall research and development
expenditures (including capitalized costs) remained relatively stable during the
three months ended October 31, 2000 in comparison with the three months ended
October 31, 1999. The research and development projects that were capitalized in
1999 were related to the user interface software resident in our Galaxy product,
and software for visual communications over IP networks. In October 1999, the
user interface software was released with our new Galaxy line of visual
communication systems. No such costs were capitalized during the period ended
October 31, 2000, as the projects under development in fiscal 2001 had not
reached technologically feasibility. Research and development expenses as a
percentage of revenues were 23% and 11% for the three months ended October 31,
2000 and 1999, respectively.
Our ability to successfully develop software solutions to visually
enable broadband enterprise networks will be a significant factor in VTEL's
success. As we shift our research and development strategy, we anticipate
additional costs associated with the recruiting and retention of engineering
professionals adept at broadband technologies. We will also maintain sustaining
engineering efforts on our existing product lines, including our flagship
endpoint product, Galaxy. We will attempt to effectively manage research and
development expenses to be in-line with expected revenue levels in the future.
11
Restructuring Charge. On August 23, 2000, VTEL announced a new business
charter and the restructuring of its organization and recorded a $1.7 million
charge during the quarter ended October 31, 2000. The restructuring charge was
less than the estimated range of $6 to $8 million provided in our fiscal 2000
Annual Report. This difference is due to the unanticipated delay in the
reduction of some of the workforce, unexpected success in subletting certain
facilities, and non-recurring costs totaling $2.2 million that have been
classified as either product costs or selling, general and administrative.
The restructuring involves the involuntary termination of
approximately 200 employees globally, or 34% of the Company's workforce, and the
consolidation of leased office space in Austin, Texas and Sunnyvale, California.
The consolidation of the office space resulted in a 120,000 square feet
reduction, or 40% of the office space occupied. The Company's affected leases
will be terminated or subleased to other tenants. These workforce reductions and
consolidations of office space are intended to reduce costs and focus resources
on efforts to support the new business charter. As a result of the terminations
and office space reduction, the Company anticipates saving approximately $4.0
million in personnel costs and approximately $1.0 million in occupancy expense
per quarter, starting in the third quarter of fiscal 2001.
Net loss. VTEL generated a net loss of $13.8 million, or $0.56 per
share, during the quarter ended October 31, 2000 compared to a net loss of $5.3
million, or $.22 per share, during the quarter ended October 31, 1999. Losses
from operations during the three months ended October 31, 2000 are the result of
declining revenues against costs that remain relatively fixed prior to the
restructuring efforts taken during the quarter.
Approximately $4.3 million of the total operating loss for the three
months ended October 31, 2000 is made up of our continued investment in our
Internet businesses. Despite successful Pixelgram(TM) beta testing and other
products doing well in the testing phase for Onscreen24(TM), the market
acceptance has been slow and external funding has been less than expected due to
the decline in the venture capital market. We have made the decision not to
commit our resources to the substantial infrastructure necessary to distribute
the Pixelgram(TM) product. Based on this decision, our intention is to find
licensing partners for the intellectual property developed by Onscreen24(TM).
Meanwhile, Articulearn(TM) has made progress in spite of the difficult market by
delivering products and developing business partners and customers. In addition,
Articulearn has won recent critical acclaim within E-Learning industry for its
Web Hosting design. Articulearn anticipates the delivery of third party funding
during fiscal 2001. Although we plan to continue supporting these Internet
businesses, we intend to focus on less cash intensive strategies in order to
preserve cash for our core businesses.
While we hope that our efforts to change the business will be
successful, there can be no assurances that this business strategy will succeed
in generating net operating income in the future, or that our Internet
businesses will prove successful. If revenues decline by more than we expect, or
if the product mix shifts to lower margin products, the Company could incur
further losses in the future and may need to consider additional restructuring
charges in future quarters that may have a material adverse affect on VTEL's
financial position and results of operations.
12
Introduction of New Product Lines and Services
VTEL continually strives to introduce the latest technology in visual
communications. In October 1999, we introduced our latest line of
videoconferencing products, the Galaxy visual communication systems. The
software within the Galaxy line is H.323 capable for videoconferencing over
Internet Protocol networks and/or H.320 capable for videoconferencing over
traditional circuit switched networks. The Galaxy product line provides
state-of-the-art audio and video with high resolution slide capture and send
graphics. Within this product family there are solutions that support single or
dual monitor configurations, with data rates from 128Kbps to 1920Kbps (T1/E1).
Despite our plans to embark on a broader array of visual communications
products, we intend to continue to develop the features of Galaxy in order to
support our customers who have already invested in this feature-rich product.
Such developments include the newest release of Galaxy product line, which we
will introduce in the second quarter of fiscal 2001. The 2.02 release contains
international capabilities and a Serial Applications Program Interface (SAPI).
The SAPI permits the customization of the user interface and thereby permits the
integration of Galaxy with other hardware and software products. Additionally,
the Company is building new network management platforms and plans to release
the SmartVideoNetManager(TM) 3.0 in the next quarter. Although this current
architecture is primarily VTEL based, the Company is looking at options for a
new platform which can accommodate all of the products within the MVP(TM)
portfolio.
Liquidity and Capital Resources
At October 31, 2000, VTEL had working capital of $39.7 million,
including $39.6 million in cash, cash equivalents and short-term investments.
Cash used in operating activities was $6.7 million for the three months ended
October 31, 2000 and primarily resulted from operating losses (including the
restructuring and other one-time charges of $3.9 million) and changes in
accounts receivable, inventories and accounts payable. Cash provided by
operating activities was $0.6 million for the three months ended October 31,
1999 and primarily resulted from significant cash collections during that
quarter. For the three months ended October 31, 2000, the Company's days sales
outstanding was 55 days, a 22 days reduction from the 77 days sales outstanding
for the same period ended October 31, 1999. This improvement reflects the
Company's commitment to aggressively collect outstanding receivables in order to
better manage cash flow.
Net cash provided by investing activities during the three months ended
October 31, 2000 was $4.9 million and primarily resulted from the net sales of
short-term investments. Net cash provided by investing activities during the
three months ended October 31, 1999 was $0.4 million and primarily resulted from
net sales of short-term investments, which were offset by investments in
capitalized software development costs and net investments in fixed assets. The
Company's capital budget for fiscal 2001 is $3.0 million, which will be used
principally to support on going operations and demonstration systems and
facilities. At October 31, 2000, the Company had incurred $0.3 million in net
capital expenditures.
Cash used in financing activities during the three months ended October
31, 2000 was $0.5 million and primarily resulted from payments on notes payable.
Cash provided by financing activities during the three months ended October 31,
1999 was $2.5 million and related primarily to borrowings under the Company's
line of credit agreements. In March 2000, the Company repaid the outstanding
balance on its line of credit with a banking syndicate. At October 31, 2000, we
did not have a line of credit in place but management expects to obtain an
alternative line of credit during the current fiscal year.
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Our principal sources of liquidity at October 31, 2000 consisted of
$39.6 million of cash, cash equivalents and short-term investments. The $39.6
million includes $11.2 million in common stock of Accord Networks (Accord), a
networking equipment manufacturer. The 1.3 million shares of Accord are
available for sale upon completion of a regulatory holding period of not less
than six months after the invested company's initial public offering in June
2000. At October 31, 2000, the Company recorded the unrealized gain of $10.5
million related to the Accord stock as part of other comprehensive income.
Legal Matters
VTEL is the defendant or plaintiff in various actions that arose in the
normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on our
financial condition or results of operations.
General
The markets for our 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 we attempt 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.
VTEL'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 ours; delay in the
introduction of higher performance products; market acceptance of new products
we introduce; 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 we do business; or adverse legal disputes and delays in
purchases related 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, VTEL's past
earnings and stock price have been, and future earnings and stock price
potentially may be, subject to significant volatility, particularly on a
quarterly basis. Past financial performance should not be considered a reliable
indicator of future performance and investors are cautioned in using historical
trends to anticipate results or trends in future periods. Any shortfall in
revenue or earnings from the levels anticipated by securities analysts could
have an immediate and significant effect on the trading price of our common
stock in any given period. Also, we participate in a highly dynamic industry,
which often contributes to the volatility of our 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 VTEL. Our actual
results could differ materially from those indicated by the forward-looking
statements because of various risks and uncertainties including, without
limitation, changes in demand for our 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 our business, and other risks indicated in our filings
with the Securities and Exchange Commission. These risks and uncertainties are
beyond the ability of our control, and in many cases, we 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
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this report, the words "believes," "estimates," "plans," "expects,"
"anticipates" and similar expressions as they relate to VTEL or its management
are intended to identify forward-looking statements.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
VTEL is the defendant or plaintiff in various actions that arose in the
normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on our
financial condition or results of operations.
Item 2.
None
Item 4. Submission of Matters to a Vote of Security Holders
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
* * *
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VTEL CORPORATION
December 15, 2000 By: /s/ Stephen L. Von Rump
----------------------------------------
Stephen L. Von Rump
Chief Executive Officer
By: /s/ Jay C. Peterson
----------------------------------------
Jay C. Peterson
interim Chief Financial Officer
(Principal Accounting Officer)
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