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, 1996
Commission file number 0-20008
VTEL CORPORATION
A DELAWARE CORPORATION IRS EMPLOYER ID NO. 74-2415696
108 WILD BASIN ROAD
AUSTIN, TEXAS 78746
(512) 314-2700
The registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and
has been subject to such filing requirements for the past 90 days.
At December 1, 1996 the registrant had outstanding 13,940,567 shares of its
Common Stock, $0.01 par value.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VTEL Corporation
CONDENSED CONSOLIDATED BALANCE SHEET
------------------------------------
October 31, July 31,
1996 1996
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 1,502,000 $ 1,973,000
Short-term investments 40,666,000 48,307,000
Accounts receivable, net of allowance for doubtful
accounts of $240,000 and $203,000 at
October 31, 1996 and July 31, 1996 23,539,000 15,585,000
Inventories 13,723,000 15,004,000
Prepaid expenses and other current assets 1,241,000 1,597,000
------------ ------------
Total current assets 80,671,000 82,466,000
Property and equipment, net 14,066,000 13,906,000
Intangible assets, net 13,488,000 13,730,000
Other assets 1,742,000 1,801,000
------------ ------------
$109,967,000 $111,903,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,942,000 $ 9,831,000
Accrued compensation and benefits 1,510,000 1,529,000
Other accrued liabilities 1,693,000 2,241,000
Research and development advance 906,000 906,000
Deferred revenue 5,082,000 2,980,000
------------ ------------
Total current liabilities 18,133,000 17,487,000
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 authorized;
none issued or outstanding - -
Common stock, $.01 par value; 25,000,000 authorized;
13,904,000 and 14,308,000 issued and outstanding at
October 31, 1996 and July 31, 1996 139,000 143,000
Additional paid-in capital 124,477,000 124,190,000
Treasury stock (3,351,000) -
Accumulated deficit (29,224,000) (30,068,000)
Cumulative translation adjustment (1,000) 151,000
Unearned compensation (206,000) -
------------ ------------
Total stockholders' equity 91,834,000 94,416,000
------------ ------------
$109,967,000 $111,903,000
============ ============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
2
VTEL Corporation
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
----------------------------------------------
(Unaudited)
For the
Three Months Ended
October 31,
1996 1995
Revenues:
Products $20,962,000 $18,410,000
Services and other 7,237,000 1,100,000
----------- -----------
28,199,000 19,510,000
----------- -----------
Cost of sales:
Products 11,073,000 9,169,000
Services and other 4,795,000 419,000
----------- -----------
15,868,000 9,588,000
----------- -----------
Gross margin 12,331,000 9,922,000
----------- -----------
Selling, general and administrative 8,867,000 7,120,000
Research and development 2,918,000 2,969,000
Amortization of intangible assets 240,000 -
----------- -----------
Total operating expenses 12,025,000 10,089,000
----------- -----------
Income (loss) from operations 306,000 (167,000)
----------- -----------
Other income (expense):
Interest income 609,000 361,000
Other 58,000 (41,000)
----------- -----------
667,000 320,000
----------- -----------
Net income before provision
for income taxes 973,000 153,000
Provision for income taxes (19,000) (21,000)
----------- -----------
Net income $ 954,000 $ 132,000
=========== ===========
Net income per share $ 0.07 $ 0.01
=========== ===========
Weighted average shares outstanding 14,575,000 13,054,000
=========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
VTEL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
----------------------------------------------
(Unaudited)
For the
Three Months Ended
October 31,
1996 1995
Cash flows from operating activities:
Net income $ 973,000 $ 132,000
Adjustments to reconcile net income
to net cash from operations:
Depreciation and amortization 1,972,000 851,000
Provision for doubtful accounts 35,000 6,000
Amortization of unearned compensation (206,000) 5,000
Amortization of deferred gain (24,000) (24,000)
Foreign currency translation (gain) loss (39,000) 69,000
(Increase) decrease in accounts receivable (7,989,000) 3,108,000
(Increase) decrease in inventories 1,281,000 (2,183,000)
(Increase) decrease in prepaid expenses and other current asse 356,000 (381,000)
Increase (decrease) in accounts payable (889,000) 908,000
Increase (decrease) in accrued expenses (562,000) 707,000
Increase (decrease) in deferred revenues 2,102,000 (127,000)
----------- -----------
Net cash provided by (used in) operating activities (2,990,000) 3,071,000
----------- -----------
Cash flows from investing activities:
Net short-term investment activity 7,641,000 (56,573,000)
Net purchase of property and equipment (1,890,000) (1,767,000)
(Increase) decrease in other assets 59,000 (166,000)
----------- -----------
Net cash provided by (used in) investing activities 5,810,000 (58,506,000)
----------- -----------
Cash flows from financing activities:
Principal payments under capital lease obligations - (1,000)
Net proceeds from issuance of stock 563,000 57,590,000
Purchase of treasury stock (3,742,000) -
----------- -----------
Net cash provided by (used in) financing activities (3,179,000) 57,589,000
----------- -----------
Effect of translation exchange rates on cash (112,000) (106,000)
----------- -----------
Net increase (decrease) in cash and equivalents (471,000) 2,048,000
Cash and equivalents at beginning of period 1,973,000 2,283,000
----------- -----------
Cash and equivalents at end of period $ 1,502,000 $ 4,331,000
=========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
VTEL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
VTEL Corporation (the "Company") designs, manufactures, markets,services and
supports integrated, multi-media videoconferencing systems which operate over
private and switched digital communication networks. The Company distributes
its systems to a domestic and international marketplace through third
parties.
The Company's systems integrate traditional video and audio conferencing
with additional functions including the sharing of PC software applications
and the transmission of high-resolution images and facsimiles. Through the
use of the Company's multi-media conferencing systems, users are able to
replicate more closely the impact and effectiveness of face-to-face meetings.
The Company's headquarters and production facilities are in Austin, Texas.
NOTE 1 - GENERAL AND BASIS OF FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission and accordingly, do not include all information and
footnotes required under generally accepted accounting principles for
complete financial statements. In the opinion of management, these interim
financial statements contain all adjustments, consisting of only normal,
recurring adjustments, necessary for a fair presentation of the financial
position of the Company as of October 31, 1996 and the results of the
Company's operations and its cash flows for the three month period ended
October 31, 1996. The results for interim periods are not necessarily
indicative of results for a full fiscal year. These condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements (including the notes thereto) contained in
the Company's 1996 Transition Report on Form 10-K filed with the Securities
and Exchange Commission on November 13, 1996.
NOTE 2 - INVENTORIES
Inventories consist of the following:
OCTOBER 31, JULY 31,
1996 1996
Raw materials $ 8,327,000 $ 8,959,000
Work in process 1,920,000 920,000
Finished goods 2,855,000 4,508,000
Finished goods held for evaluation 621,000 617,000
----------- -----------
$13,723,000 $15,004,000
=========== ===========
Finished goods held for evaluation consists of completed multi-media
communication systems used for demonstration and evaluation purposes, which
are generally sold during the next 12 months.
5
NOTE 3 - NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares and common share equivalents
outstanding (if dilutive) during each period.
NOTE 4 - TREASURY STOCK
During the fiscal period ended July 31, 1996, the Company adopted a share
repurchase program whereby the Company may repurchase shares of its Common
Stock in the open market provided that the aggregate purchase price of the
shares repurchased does not exceed $8.4 million and the repurchase price for
any shares does not exceed $12 per share. The repurchased shares will be
issued from time to time to fulfill requirements for the Company's Common
Stock under its employee stock plans. During the quarter ended October 31,
1996, the Company repurchased 455,200 shares of its Common Stock for
$3,742,000. At October 31, 1996, the Company has 407,848 shares of treasury
stock. The Company applies the cost method of accounting for its treasury
stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following review of the Company's financial position and results of
operations for the three month periods ended October 31, 1996 and 1995 should
be read in conjunction with the Company's 1996 Transition Report on Form 10-K
filed with the Securities and Exchange Commission on November 13, 1996.
In May 1996, the Company changed its fiscal year end from December 31 to July
31. As such, the quarter ended October 31, 1996 represents the first quarter
of the Company's 1997 fiscal year. The comparative information for the
quarter ended October 31, 1995 has been restated from the information
presented in prior Quarterly Reports on Form 10-Q to conform to the Company's
newly adopted fiscal quarters.
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated the
percentage of revenues represented by certain items in the Company's
Condensed Consolidated Statement of Operations:
FOR THE THREE
MONTHS ENDED
OCTOBER 31,
1996 1995
Revenues 100% 100%
Gross margin 44 51
Selling, general and administrative 31 37
Research and development 10 15
Total operating expenses 43 52
Other income, net 2 2
Net income (loss) 3% 1%
6
THREE MONTHS ENDED OCTOBER 31, 1996 AND 1995
Revenues. Revenues for the quarter ended October 31, 1996 increased to
$28,199,000 from $19,510,000 in the quarter ended October 31, 1995, an
increase of $8,689,000 or 45%. The increase in revenues is due to an increase
in the number of units sold during the quarter ended October 31, 1996 and
additional videoconferencing-related revenues generated during the quarter
ended October 31, 1996 by the Company's systems integration and service
operations which were acquired in November 1995.
The following table summarizes the Company's group system unit sales
activity:
FOR THE THREE
MONTHS ENDED
OCTOBER 31,
1996 1995
Large group conferencing systems 484 377
Small group conferencing systems 104 75
Multipoint control units 31 33
---- ----
Total units 619 485
==== ====
The increase in sales of the Company's large group conferencing systems
during the quarter ended October 31, 1996 in comparison with the quarter
ended October 31, 1995 is due to the introduction of the MediaMax-based
Leadership Conferencing systems during the fourth calendar quarter of 1995
and the Lynx-based Team Conferencing systems during the second calendar
quarter of 1996. Sales of these new products represented almost 80% of large
group conferencing revenues for the quarter ended October 31, 1996. The
increase in sales of the Company's small group conferencing systems during
the quarter ended October 31, 1996 in comparison with the quarter ended
October 31, 1995 is due to the introduction of the small group Lynx-based
Team Conferencing Model 1000 system during the second calendar quarter of
1996.
The average selling price for a group system sold in the quarters ended
October 31, 1996 and 1995 was approximately $33,000 and $41,000,
respectively. The decrease in the average selling price is attributable to
the increase in shipments during the quarter ended October 31, 1996 of the
Lynx-based Team Conferencing systems which generally carry a lower average
selling price than the Company's MediaMax-based products.
During the first calendar quarter of 1996, the Company introduced its
Personal Collaborator videoconferencing kits as part of its desktop system
product line. Desktop system products represented 3% and 1% of products
sales for the quarters ended October 31, 1996 and 1995, respectively.
International sales contributed approximately 24% of product revenues for the
quarter ended October 31, 1996 as compared to 16% in the quarter ended
October 31, 1995.
While the Company strives for consistent revenue growth, there can be no
assurance that consistent revenue growth or profitability can be achieved.
Consistent with many companies in the technology industry, 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.
7
Because expense levels are based on the Company's expectations as to future
revenues, the Company's expense base is relatively fixed in the short term.
If revenue levels are below expectations, operating results may be materially
and adversely affected and net income is likely to be disproportionately
adversely affected. In addition, the Company's quarterly and annual results
may fluctuate as a result of many factors, including price reductions, delays
in the introduction of new products, delays in purchase decisions due to new
product announcements by the Company or its competitors, cancellations or
delays of orders, interruptions or delays in supplies of key components,
changes in reseller base, customer base, business or product mix and seasonal
patterns and other shifts of capital spending by customers. There can be no
assurance that the Company will be able to increase or even maintain its
current level of revenues on a quarterly or annual basis in the future. Due
to all of the foregoing factors, it is possible that in one or more future
quarters the Company's operating results will be below the expectations of
public securities market analysts. In such event, the price of the Company's
Common Stock would likely be materially adversely affected.
Gross margin. Gross margin as a percentage of total revenues in the quarter
ended October 31, 1996 was 44%, a decrease from the 51% gross margin
generated in the quarter ended October 31, 1995. Approximately half of the
change in the gross margin percentage relates to the incremental revenues
generated by the Company's systems integration and service operations, which
were acquired in the fourth calendar quarter of 1995. Revenues from the
Company's systems integration and service operations generally carry a lower
gross margin than product revenues. The remaining decrease in the gross
margin percentage is the result of a shift in the product sales mix such that
the Company's higher margin MediaMax-based products declined to approximately
20% of the Company's product revenues during the quarter ended October 31,
1996 as sales of the Company's new products have increased. Price competition
in certain of the Company's older products also contributed to lower gross
margins in the quarter ended October 31, 1996.
Although the Company expects gross margins to improve during fiscal 1997, it
continues to expect gross margin pressures due to price competitiveness in
the industry, shifts in the product sales mix and anticipated offerings of
new products which may carry a lower gross margin. The Company expects that
overall price competitiveness in the industry will continue to become more
intense as users of videoconferencing systems attempt to balance performance,
functionality and cost. The Company's gross margin is subject to fluctuation
based on pricing, production costs and sales mix.
Selling, general and administrative. Selling, general and administrative
expenses increased by $1,747,000 or 25% from $7,120,000 in the quarter ended
October 31, 1995 to $8,867,000 in the quarter ended October 31, 1996.
Selling, general and administrative expenses as a percentage of revenues were
31% and 36% for the three months ended October 31, 1996 and 1995,
respectively. The increase in the amount of these expenses is due to
additional investments made by the Company in sales and marketing programs
related to new product introductions, incremental expenses required to
support the Company's overall revenue growth, and incremental expenses
incurred during the quarter ended October 31, 1996 which relate to the
Company's systems integration and service operations which were acquired in
the fourth calendar quarter of 1995. Selling, general and administrative
expenses as a percentage of revenues has declined during the three months
ended October 31, 1996 in comparison with the three months ended October 31,
1995 as the Company's sales and marketing programs have caused revenues to
increase at a faster rate than the Company's selling, general and
administrative expenses have.
8
Research and development. Research and development expenses decreased by
$51,000, or 2%, from $2,969,000 in the quarter ended October 31, 1995 to
$2,918,000 in the quarter ended October 31, 1996. Research and development
expenses as a percentage of revenues were 10% and 15% for the three months
ended October 31, 1996 and 1995, respectively. Research and development
expenses are consistent from the three months ended October 31, 1995 to the
three months ended October 31, 1996 as the Company has focused its research
and development resources and effort under the Customer Business Unit
organization resulting in a more efficient and productive use of research and
development resources. Research and development expenses decreased as a
percentage of revenues from the quarter ended October 31, 1995 to the quarter
ended October 31, 1996 due to the incremental systems integration and service
revenues generated in the quarter ended October 31, 1996, which do not carry
any related research and development costs.
Although the percentage of revenues invested by the Company in research and
development may vary from period to period, the Company is committed to
investing in its research and development programs. Future research and
development expenses will increase as revenues increase. All of the Company's
research and development costs and internal software development costs have
been expensed as incurred.
During the third calendar quarter of 1993, the Company entered into a
Development and License Agreement ("Development Agreement") with Intel
Corporation ("Intel"). As a part of this Development Agreement, Intel agreed
to advance the Company $3 million of funds in order to enable the Company to
jointly research and develop videoconferencing products with Intel. Of the
$3 million advance, $906,000 remains at October 31, 1996 for future
development projects. As of October 31, 1996, the Company had no research
and development activities in process or planned related to the Development
Agreement.
Other income, net. Other income, net increased by $347,000, or 108%, from
$320,000 in the quarter ended October 31, 1995 to $667,000 in the quarter
ended October 31, 1996. The increase in other income, net is attributable to
higher interest income earned during the quarter ended October 31, 1996 on
the Company's cash and investment balances. The cash and investment balances
increased as a result of the cash provided by the completion of a secondary
offering in the fourth calendar quarter of 1995.
Net income (loss). The Company generated net income of $954,000, or $.07
per share, during the quarter ended October 31, 1996 compared to net income
of $132,000, or $.01 per share, during the quarter ended October 31, 1995.
The increase in net income in the quarter ended October 31, 1996 compared to
the quarter ended October 31, 1995 was the result of revenues increasing at a
faster rate than operating expenses.
Improvement in the Company's financial performance during the remainder of
fiscal year 1997 will depend on the Company's ability to continue to
significantly increase revenues through growth in the Company's distribution
channels and the successful introduction of its new products, to generate
improving gross margins and to control the growth of operating expenses.
There can be no assurances that the Company will be successful in achieving
these objectives during the remainder of fiscal year 1997.
9
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1996, the Company had working capital of $62,538,000,
including $42,168,000 in cash, cash equivalents and short-term investments.
The primary uses of cash during the quarter ended October 31, 1995 were to
purchase property and equipment and leasehold improvements and to fund
working capital needs required to support the Company's growth. The primary
uses of cash during the quarter ended October 31, 1996 were to repurchase
shares of the Company's Common Stock under a stock repurchase program (see
Note 4 to the Condensed Consolidated Financial Statements), to purchase
property and equipment and leasehold improvements and to fund working capital
needs required to support the Company's growth.
Cash used in operating activities was $2,990,000 for the quarter ended
October 31, 1996, due to an increase in accounts receivable as a result of
revenue growth during the quarter and decreases in accounts payable and
accrued liabilities, slightly offset by a decrease in inventories. Cash
provided by operating activities was $3,071,000 for the quarter ended October
31, 1995, due to a decrease in accounts receivable and increases in accounts
payable and accrued liabilities, slightly offset by an increase in
inventories.
Cash flows from investing activities during the quarter ended October 31,
1996 were the result of capital expenditures of $1,890,000 and net investment
activity from short-term investments which generated cash of $7,641,000. The
Company periodically generates cash from short-term investments, as such
investments are utilized from time to time to provide cash needed to support
the Company's growth. Cash flows from investing activities during the
quarter ended October 31, 1995 were the result of the investment of the
proceeds of the Company's secondary offering which netted approximately
$57,000,000 to the Company and capital expenditures of $1,767,000. The
increase in capital expenditures during the quarters ended October 31, 1996
and 1995 is related to increases in demonstration and support
videoconferencing systems acquired to support the Company's growth.
Cash flows used in financing activities during the quarter ended October 31,
1996 relate to the repurchase of 455,200 shares of the Company's Common Stock
for $3,742,000 under a share repurchase program (see Note 4 to the Condensed
Consolidated Financial Statements). Cash flows provided by financing
activities relate to the completion by the Company of a secondary offering
whereby the Company netted approximately $57,000,000 from the sale of
3,000,000 shares of its Common Stock.
At October 31, 1996, the Company had a $10,000,000 revolving line of credit
available with a financial institution. No amounts have been drawn or are
outstanding under the line of credit. The Company's principal sources of
liquidity at October 31, 1996 consist of $42,168,000 of cash, cash
equivalents and short-term investments and amounts available under the
Company's revolving line of credit. The Company believes that existing cash
and cash equivalent balances, short-term investments, cash generated from
product sales 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.
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.
10
The Company's future results of operations and financial condition could be
impacted by the following factors, among others: trends in the
videoconferencing market, introduction of new products by competitors,
increased competition due to the entrance of other companies into the
videoconferencing market - especially more established companies with greater
resources than those of the Company, delay in the introduction of higher
performance products, market acceptance of new products introduced by the
Company, price competition, interruption of the supply of low-cost products
from third-party manufacturers, changes in general economic conditions in any
of the countries in which the Company does business, adverse legal disputes
and delays in purchases relating to federal government procurement.
Due to the factors noted above and elsewhere in Management's Discussion and
Analysis of Financial Condition and Results of Operations, the Company's past
earnings and stock price has been, and future earnings and stock price
potentially may be, subject to significant volatility, particularly on a
quarterly basis. Past financial performance should not be considered a
reliable indicator of future performance and investors are cautioned in using
historical trends to anticipate results or trends in future periods. Any
shortfall in revenue or earnings from the levels anticipated by securities
analysts could have an immediate and significant affect on the trading price
of the Company's Common Stock in any given period. Also, the Company
participates in a highly dynamic industry which often contributes to the
volatility of the Company's Common Stock price.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
* * *
11
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 12, 1996 By: /s/ Rodney S. Bond
--------------------------------
Rodney S. Bond
Vice President-Finance
(Chief Financial Officer
and Principal Accounting Officer)
12
5
3-MOS
JUL-31-1997
AUG-01-1996
OCT-31-1996
1,502,000
40,666,000
23,779,000
(240,000)
13,723,000
80,671,000
24,362,000
(10,296,000)
109,967,000
18,133,000
0
0
0
121,265,000
(29,431,000)
109,967,000
28,199,000
28,199,000
(15,868,000)
(12,025,000)
667,000
0
0
973,000
(19,000)
973,000
0
0
0
954,000
.07
.07
