1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1997
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
Securities registered pursuant to section 12 (b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the registrant (1) 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 (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filings pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. ( ).
The aggregate market value of 21,111,265 shares of the registrant's Common
Stock held by nonaffiliates on September 30, 1997 was approximately
$157,675,813. For purposes of this computation all officers, directors and 5%
beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed an admission that such officers, directors
and beneficial owners are, in fact, affiliates of the registrant.
At October 9, 1997 there were 22,926,104 shares of the registrant's Common
Stock, $.01 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
A list of all Exhibits to this Annual Report on Form 10-K is located
at pages 49 through 53.
2
PART I.
ITEM 1. BUSINESS
GENERAL
VTEL Corporation ("VTEL" or the "Company") designs, manufactures and
markets multi-media digital visual communication systems. The Company's systems
integrate traditional video and audio conferencing with additional functions,
including the sharing of PC software applications and the transmission of
high-resolution images and facsimiles. Through the use of the Company's
multi-media digital visual communication systems, users are able to replicate
more closely the impact and effectiveness of face-to-face meetings, education
and training classes, and certain medical consultations. The Company's Pen Pal
Graphics(TM) and AppsView(TM) user interfaces make its multi-media digital
visual communication systems simple to use. The Company's systems are built
upon a system platform which is based on industry-standard, PC-compatible open
hardware and software architecture. By leveraging this open architecture
design, the Company is able to integrate into the videoconference PC-compatible
hardware and software applications which allow users to customize the systems
to meet their unique needs. The PC-architecture also provides a natural pathway
to connect the Company's digital visual communication systems onto local area
networks (LANs) and wide area networks (WANs) thereby leveraging the rapidly
expanding network infrastructures being deployed in organizations throughout
the world. Also complementing this open architecture is the Company's
compliance with emerging industry standards. The Company's open architecture
and compliance with data and telecommunications standards permit the
incorporation of new functions through software upgrades, thereby extending the
useful life of the user's investment.
The cornerstone of the Company's business strategy is to identify
end-user customer markets that can most benefit from the advanced functionality
of the Company's multi-media digital visual communication systems and to focus
a substantial portion of its sales and marketing efforts on these targeted
markets. Consistent with this strategy, the Company has targeted the education,
government, health care and certain segments of the commercial markets. VTEL
distributes its systems through third-party resellers which include major
telecommunications providers such as Ameritech, GTE, MCI, Norstan, PacBell,
Southwestern Bell, Sprint, US West and other value-added resellers. The Company
has built an extensive marketing and sales organization to support its
third-party resellers. This organization provides marketing programs; field
support personnel including sales managers, system engineers, and business
development managers; and personnel with industry expertise to implement the
Company's targeted market strategy. Since the Company's inception, it has sold
over 24,000 group digital visual communication systems.
In November 1995, the Company completed the acquisition of certain
assets and a specified work force of the Integrated Communications Systems
Group ("ICS") of Peirce-Phelps, Inc. (the "ICS Transaction"). As part of
Peirce- Phelps, ICS was a value-added reseller of systems manufactured by
several videoconferencing manufacturers, including the Company, and also
provided integration, installation and maintenance services to certain of the
end-users of these manufacturers. The completion of the acquisition allowed the
Company to significantly enhance its ability to support the Company's
resellers' abilities to offer systems integration, installation and end-user
support to the ultimate purchaser of the Company's products, thereby allowing
the resellers to more effectively provide an essential part of the services
that are integral to the purchase of the Company's products.
On May 23, 1997, shareholders of VTEL and Compression Labs,
Incorporated, a Delaware corporation ("CLI"), approved the merger (the
"Merger") of VTEL-Sub, Inc., a Delaware corporation and direct wholly-owned
subsidiary of VTEL ("Merger Sub"), with and into CLI, pursuant to an Agreement
and Plan of Merger and Reorganization (the "Merger Agreement"), with CLI
becoming a direct wholly-owned subsidiary of VTEL. As a result of the Merger,
(a) the outstanding shares of CLI's common stock, par value $.001 per share
("CLI Common Stock"), were converted into the right to receive 0.46 shares of
common stock of VTEL, par value $.01 per
2
3
share ("VTEL Common Stock"), per share of CLI Common Stock converted (or cash
in lieu of fractional shares otherwise deliverable in respect thereof), and (b)
the outstanding shares of CLI Series C Preferred Stock, par value $.001 per
share ("CLI Preferred Stock"), were converted into the right to receive 3.15
shares of VTEL Common Stock per share of CLI Preferred Stock converted (or cash
in lieu of fractional shares otherwise deliverable in respect thereof). The CLI
shares were exchanged for a total of 8,424,741 shares of VTEL Common Stock. The
acquisition was accounted for as a pooling of interests.
The Merger was completed for the following reasons, among others:
1. The Merger permits VTEL to broaden and diversify its product lines with
complementary technology, creating additional opportunities for overall
growth and reducing the risk of dependence on individual products.
2. The economies of scale that can be realized by the combined companies in
development, administration, marketing and sales and the improvement in
product gross margins that may also be realized by the combined companies.
Historically, VTEL's gross profit margins have been significantly higher
than CLI's, and a material portion of the combined companies revenues may
shift to higher margin products.
3. VTEL's experienced management team and product development organization, in
combination with key CLI managers, will provide a strong management team
with greater depth and experience to lead the combined company.
The synergy created as a result of the Merger was first demonstrated
with the introduction of StandardsPlus Video, the next generation of video
quality that is based on industry standards, but vastly improves the image
quality through innovation and software coding techniques. StandardsPlus Video
improves video quality in terms of motion handling and image clarity while
maintaining interoperability with standards-based systems.
The Company's executive offices are located at 108 Wild Basin Road,
Austin, Texas 78746, and its telephone number is (512) 314-2700.
INDUSTRY BACKGROUND
Videoconferencing enables users at remote locations to hold
face-to-face meetings, education and training classes, or to perform certain
medical consultations through the use of digital visual and audio
telecommunications, increasing the area in which certain services may be
offered and eliminating travel time and expenses. A videoconference entails the
transmission of video and audio signals between two or more locations over a
digital telephone connection. A video image contains a large amount of
information. In order to transmit that image over digital telephone lines, the
video and audio signals must be digitized and compressed without substantially
reducing the information content. Improved compression algorithms have
increased video and audio quality while reducing transmission costs by allowing
more information to be sent over lower capacity digital telephone lines. This
improved quality and lower cost of both systems and transmission has made
videoconferencing systems more attractive to a broader group of users. Also
contributing to the wider use of videoconferencing is the increased
availability of switched ("dial-up") digital telephone service which allows a
videoconference to be initiated with nearly the ease of a normal telephone
call. In the last few years, switched digital telephone service has become
increasingly accessible. Growth in the availability of Integrated Services
Digital Network ("ISDN") lines for basic rate service is also increasing in the
world. In the absence of switched services, videoconferencing users must have
dedicated telephone circuits installed.
As digital networks have been built and capacity has increased, the
price of switched digital circuits has decreased significantly, thereby
lowering the cost of using videoconferencing systems. In addition to the lower
cost of using videoconferencing systems, the cost of the videoconferencing
systems themselves has decreased due to the availability and lower cost of
components, including the increased use of very large scale integration
semiconductor technology.
3
4
Videoconferencing systems are also becoming simpler to use. In the
past, videoconferencing systems required trained operators and specialized
dedicated conference rooms. Current videoconferencing systems can be configured
as "roll-about" room systems that can be used without the need for trained
operators or special room requirements. In general, the videoconferencing
market can be grouped into three complementary categories: personal
conferencing, workgroup conferencing, and group conferencing. The personal
conferencing market is targeted at the individual. As such, solutions are
typically priced in the $1,000 to $6,000 range. The workgroup conferencing
market is targeted at the project team or executive office. Solutions in this
market range from $6,000 to $15,000. The group conferencing market is targeted
at larger groups, typically eight or more individuals. Application uses vary
greatly from boardrooms to large classrooms. These group systems are priced at
$15,000 and above.
Another factor contributing to the growth of videoconferencing is the
continuing emergence of international industry standards designed to allow
interoperability of videoconferencing systems manufactured by different
vendors. The International Telecommunications Union ("ITU-T") sets
international standards for interactive video communication (the most common of
which is known as the "H.320 standard") for coding and decoding audio and video
images for transmission over digital networks at data transmission rates from
64 Kbps to 2.048 Mbps and for the T.120 standard which provides for
interoperability in data collaboration. Data collaboration comprises various
applications including file sharing, whiteboard usage, and the simultaneous
sharing of application software. With this technology, users can jointly
collaborate on a piece of work even if they are not in the same location. In
February 1992, the Company began shipping its software implementation of the
H.320 standard. Since 1992, the Company's primary competitors have also shipped
products complying with the H.320 standard, and the Company and its competitors
have demonstrated video and audio interoperability among the Company's products
and competing products. In April 1997, the Company introduced the T.120
standard into its desktop videoconferencing solution, the SmartStation.
Following this, in October 1997, the T.120 standard was also introduced into
the workgroup conferencing line, the WG500. The Company plans to offer T.120
support with all of its products to provide data interoperability across the
product line.
While technological advances and market receptivity have increased the
use of videoconferencing, traditional audio and video videoconferencing alone
lacks the functionality and effectiveness of face-to-face meetings in many
applications. The Company believes that, for certain applications, users are
seeking conferencing features, in addition to audio and video, that allow for
the exchange of information and interaction through a variety of media. For
example, engineers can communicate and solve problems more effectively by
supplementing the videoconference with shared media, such as graphics with
annotations, computer programs, document exchanges and whiteboards, which
results in a better replication of the impact and effectiveness of a
face-to-face meeting. VTEL has taken a leadership position in this exact form
of high-value digital visual communication technology due to its open PC
platform and flexible architecture.
CORPORATE STRATEGY
The Company's primary focus is on high-value digital visual
communication systems which provide high functionality tailored to the needs of
markets targeted by the Company. This results in a range of offerings from the
desktop to the boardroom. The following are the components of the Company's
corporate strategy:
PRODUCT DIFFERENTIATION. The Company's strategy is to differentiate
its products from the products marketed by its competitors. Key elements of
this strategy are as follows:
Open Architecture. Each of the Company's current multi-media digital
visual communication systems is built upon a system platform which integrates
video, audio and data compression technologies in a PC-compatible open hardware
and software architecture. This open architecture allows the Company to
accelerate the development process through the use of commonly available,
low-cost hardware and software components and the incorporation of third-party
technological developments. The Company's PC-based systems platforms are
field-upgradable and easily accommodate software upgrades, thereby extending
the useful life of the customer's investment and providing the Company with
incremental revenues through these upgrade sales.
4
5
Centralized Management and Administration. Using the industry standard
SNMP protocol, VTEL is able to centrally manage and administer large,
distributed digital visual communication networks. Announced in August 1997,
the Company's SmartVideoNet Manager product sets the standard for management in
the videoconferencing industry. It leverages the industry standard SNMP for
statistics, controls, and alerts. These functions allow for centralized problem
determination and resolution, thereby eliminating the requirement for on-site
expert personnel to support the system. An additional benefit of SmartVideoNet
Manager is the ability to establish video calls from a centralized console with
no local user intervention. Using this, meeting participants simply arrive at
the conference room or classroom and the video call is already in session
waiting for their participation.
Consistent Operating Platform. The Company introduced the Enterprise
Series in late 1995 and the SmartStation architecture (SSA) in the second
calendar quarter of 1997.
An important characteristic of each product in the family is the
consistent use of Microsoft Windows 95(R) as the operating system. This
consistency combines the PC-microprocessor architecture with a recognized
software platform and provides a familiar look and feel for the user throughout
the product family architecture. Windows 95(R) supports a wide variety of
software and hardware applications that can be integrated into a
videoconference as stand-alone features or as shared applications by digital
visual communication users through the Company's collaboration capability.
Multi-media Functionality. The Company's digital visual communication
systems provide a wide range of functions that enable users to exchange
information and interact through a variety of media and, as such, more closely
replicate the impact and effectiveness of face-to-face meetings. These
functions, referred to by the Company as digital visual communication
technology, combine video and audio, document exchange, shared whiteboard, and
computer application sharing. The Company strives to make this functionality
easily accessible to the user. The Company's Pen Pal Graphics(TM) and
AppsView(TM) user interfaces are designed to make the Company's group systems
easy to use. AppsView(TM), which was introduced in early 1995 and is now fully
integrated into all of the Company's products, is a customizable user interface
that runs on the Microsoft Windows 95(R) operating system. AppsView(TM)
integrates all application functions under a set of software-defined icons
which can be customized by the user to meet specific needs. This same user
interface is used across the entire product family for consistency,
commonality, and ease of use.
Standards Compliance. The Company believes the continued adoption and
implementation of industry standards for interoperability are critical to the
continued growth of the videoconferencing market. All of the Company's digital
visual communication systems and multipoint products comply with the leading
ITU-T standards for videoconferencing. The Company believes that it was the
first manufacturer in the United States to deliver to its users products which
were fully compliant with the H.320 standard. The Company's platforms also
comply with an extensive array of additional communications and computer
industry standards, both formal and de facto (such as ISA, PCI, Intel x86,
SNMP, and MS- Windows), involving video, audio, graphics, communications,
computers, peripherals, and network management.
The T.120 standard is an ITU-T series of recommendations for
multipoint data and graphics protocols. The highest level of the T.120
specifications, or the application level, provides for interoperability in
still frame, annotation, and data file transmission. The Company plans to offer
T.120 protocols and applications for its AppsView(TM) operating environment and
Windows 95(R) -based products across the entire VTEL product line. During 1997,
T.120 support was introduced into the Company's personal digital visual
communication line (SmartStation in April 1997) as well as its workgroup
digital visual communication line (WG500 in October 1997).
The Company has been an active participant on the appropriate ITU-T
committees and intends to continue to promote both acceptance of the standards
by all vendors and formal compliance testing to assure interoperability.
5
6
Network Integration Capabilities. The PC-based open architecture
design of the Company's products provides a natural pathway to connect the
Company's digital visual communication systems onto local area networks (LANs)
and wide area networks (WANs), thereby leveraging the rapidly expanding network
infrastructures being deployed in organizations throughout the world. The
Company believes that not only will such networks continue to expand globally,
but the capability to centrally manage large internationally dispersed networks
will become a requirement for the successful establishment of such networks.
The Company believes that development of network integration and network
management capabilities will be an important success factor to the Company's
strategy.
Service and Systems Integration Capabilities. The Company determined
that it would be advantageous to establish the capacity to offer installation,
integration and support services to resellers of its products, which could be
resold by the resellers to the ultimate purchasers of the Company's products.
By enhancing the Company's resellers' abilities to offer systems integration,
installation and end-user support to the ultimate purchasers of the Company's
products, the Company believes that it would enhance its resellers' ability to
sell the Company's digital visual communication systems as well as generate
additional revenues to the Company from the sales of such services to the
Company's resellers.
In November 1995, the Company completed the ICS Transaction (see
"Business - General"). The completion of the ICS Transaction allows the Company
to significantly enhance its ability to support the Company's resellers'
abilities to offer systems integration, installation and end-user support to
the ultimate purchaser of the Company's products, thereby allowing the
resellers to more effectively provide an essential part of the services that
are integral to the purchase of the Company's products.
TARGETED MARKETS. The cornerstone of the Company's business strategy
is to identify end-user customer markets that can most benefit from the
advanced functionality of the Company's multi-media digital visual
communication systems, and to focus a substantial portion of its sales and
marketing efforts on these targeted markets. Consistent with this strategy, the
Company has targeted the education, government, health care and certain
segments of the commercial markets (currently finance and manufacturing). The
Company intends to focus its product strategy in its targeted markets in which
the Company is currently the leader and in other markets in which the Company
believes it has the highest potential for increasing its market share.
In order to deliver the highest level of customer support and to
sustain the successful strategy of focusing on key targeted markets, the
Company reorganized in 1996 by adding dedicated industry vertical support
units. These units support customer segments in education, government, health
care, service and commercial markets. The objective of these industry vertical
organizations is to align closely with the customer segments in all areas of
support ranging from marketing, business development, product requirements and
customer satisfaction. Through this close coupling with the customer segments,
the Company believes that it will be able to rapidly respond to customers with
customized solutions that match unique customer requirements. Additionally, in
1997 the Company added increased emphasis to the lifecycle management of key
platforms and services. As such, Strategic Business Units (SBUs) were defined
for Personal and Workgroup Systems, Networking Systems, Groups Systems, and
Value Added Services. These SBUs will be responsible for product management,
marketing, and development. Additionally, the SBUs will have product line
profit and balance sheet responsibility.
DISTRIBUTION STRATEGY. The Company relies on third parties to sell,
install and support its digital visual communication systems in an effort to
leverage the sales forces of the resellers which provide telecommunications and
support services to potential purchasers of digital visual communication
systems. The Company has established relationships with many of the leading
telecommunications providers in the United States, including Ameritech, GTE,
MCI, Norstan, PacBell, Southwestern Bell, Sprint, and US West. Consistent with
its focus on its targeted market segments, the Company works with a number of
value added resellers ("VARs") that specialize in specific applications,
geographic areas and markets such as education, health care, project management
and government procurement. The Company has built an extensive marketing and
sales organization to support its third-party resellers. This organization
provides marketing programs; field support personnel including sales managers,
system engineers and business development managers; and personnel with industry
expertise to implement the Company's targeted market strategy.
6
7
VTEL also sells products directly to certain end user customers,
generally large global end user customers which have sophisticated global
digital visual communication networks and require and demand much more
involvement of the Company to support the sale, installation and maintenance of
the network.
PRODUCTS
The Company offers a complete line of interoperable multi-media
digital visual communication systems. The Company differentiates its systems
from competitive products by a high level of advanced functionality, such as
presentation graphics and access to PC-based software and hardware peripherals.
Because all VTEL systems are based on open PC architecture, and most
functionality is contained in software, many system upgrades are accomplished
via software, enabling customers to protect their investment. VTEL systems may
be configured with local area network ("LAN") connections so that data and
presentations may be created at an individual PC workstation, stored on the LAN
and retrieved by the digital visual communication system for presentation or
transfer to the remote location during a videoconference.
Videoconferences can range from simple point-to-point connections
between two locations of a single organization to connections between multiple
locations of multiple organizations in several countries. The Company's
Enterprise Series family of digital visual communication systems are based upon
one of two architectures, either its SmartStation Architecture (SSA) for
personal and workgroup digital visual communication or its Enterprise Series
Architecture (ESA) for group conferencing.
ENTERPRISE SERIES ARCHITECTURE (ESA)(TM) PLATFORM. VTEL's Enterprise
Series Architecture(TM), referred to as ESA, is the hardware and software
platform for a family of products designed to meet the needs of large and small
groups. The ESA platform is a PC-based, open architecture digital visual
communication system configured around an Intel Pentium(TM) PC chassis
containing the ESA video-audio processing boardset. The ESA system contains, in
addition to the standard internal disk drive and 3.5 inch floppy drive, a
CD-ROM drive as well as an expansion chassis which contains all the audio and
video input/output ports. The ESA platform utilizes the Microsoft Windows 95(R)
operating system as its software platform and incorporates the AppsView(TM)
software user interface and control system. Through AppsView(TM), the user
controls all conference functions with on-screen software icons which may be
customized for each user or application. The ESA platform contains open PC card
slots for application-specific peripherals.
The ESA platform supports the H.320 industry standards for video and
audio compression and is interoperable with any other system supporting the
H.320 standard. The ESA platform is also capable of supporting the T.120 suite
of standards via a future software upgrade. The platform operates over digital
communication bandwidths transmitting at data rates from 56 Kbps to T1 or E1
rates in point-to-point and multipoint conferences. ESA connections can be made
over public dial-up digital networks or private digital dedicated facilities.
Configurations of the ESA platform include the Company's Team
Conferencing(TM) and Leadership Conferencing(TM) Systems. The Team Conferencing
or "TC" systems are single or dual monitor systems built on the ESA platform
and designed to provide mid-range products for users seeking high quality video
and audio and digital visual communication capability in a small to mid-sized
group setting. Data rates from 56 Kbps to 512 Kbps are provided. The systems
provide higher performance PC-based functionality through the use of the Intel
Pentium(TM) microprocessor, inclusion of a CD-ROM drive, the Microsoft Windows
95(R) operating system and the AppsView(TM) user interface. Product features
include LAN connectivity, Internet access, both document and computer
conferencing, 30 frame per second video and capability of including software
applications designed for Windows 95(R) as part of the videoconference. The TC
systems have suggested list prices of $21,495 to $46,995.
The Leadership Conferencing or "LC5000" system is the industry-leading
Smart Videoconferencing system that makes advanced features the standard for
performance, clarity and ease of use. The LC5000 is the flagship model of the
ESA platform. Support for high-speed data rates up to T1 or E1 delivers
extremely sharp, smooth video. A document stand with VTEL's SmartView software
lets users utilize printed material as easily as using an overhead projector.
LC5000 configurations vary in price from $53,995 to $57,995.
7
8
WG500. The WG500 is a series of workgroup digital visual communication
systems targeted at the project team or executive office where work is
performed. As such, it is designed to utilize industry leading collaborative
multi-media tools such as Microsoft NetMeeting. The WG500 fills the price-point
and functionality gap between the personal desktop conferencing market and the
group conferencing market. Based on the award-winning Gateway 2000 Destination
Big Screen PC/TV, the WG500 is a joint integration and joint marketing effort
between VTEL and Gateway 2000. Sold through authorized VTEL resellers, the
WG500 has suggested list prices of $9,995 to $14,995.
SMARTSTATION. The SmartStation(TM) converts a Windows 95-based PC into
a Smart Videoconferencing system for personal use. Incorporating the
performance and elegance of the VTEL Enterprise Series with its high-quality
audio and video, SmartStation is the smart way for users to collaborate while
still leveraging the power and versatility of their desktop PC. In one
easy-to-install package, SmartStation includes VTEL's AppsView graphical
conference control interface for consistent operation across all of VTEL's
digital visual communication solutions. SmartStation supports data rates up to
384 Kbps for high-quality desktop conferencing and supports the T.120 standard
for data collaboration by integrating Microsoft NetMeeting 2.0.
MULTIPOINT CONTROL UNITS. Multipoint control units, or "MCUs", connect
two or more videoconferencing units in a multi-way conference.
Videoconferencing users often purchase a MCU to act as their video network hub.
VTEL currently carries two MCU product lines. VTEL's MCU II(TM) is fully
interoperable with the Enterprise Series family of digital visual communication
systems and also supports the H.320 standard to enable multipoint
videoconferences with any standards-compliant system. The MCU II(TM) supports
up to 20 ports (one port equals one end-point connection) on a single chassis,
and multiple MCU II(TM) units may be connected to multi-way conferences in
excess of 20 participants if desired. The MCU II(TM) has a PC-based, open
architecture and can support numerous multi-location meetings simultaneously.
The MCU II(TM) has a list price of $49,995 for a four-port configuration and
$146,990 for a 20-port configuration. VTEL also carries a line of MCU's under
the brand name "SmartLink". The SmartLink series of MCUs supports the T.120
standard for data collaboration. Additionally, this series supports a
multipoint technology known as "continuous presence". Continuous presence
allows multiple video images to be displayed simultaneously at each site. In
other words, if five sites were in a conference, each site would see the other
four sites on the display simultaneously in a "Hollywood Squares" format.
SmartLink base configurations vary in price from $19,400 to $67,500.
PRODUCT DEVELOPMENT
The Company's product development strategy is to design and develop
core systems capabilities and leverage the availability of hardware peripherals
and application software from third parties and to efficiently integrate such
third-party resources into its systems. To the extent that market needs cannot
be met by available third-party resources, the Company may undertake the
development of such resources. The following represent development efforts that
have been undertaken by the Company:
SOFTWARE SYSTEM PLATFORM. The SmartStation Architecture and Enterprise
Series Architecture platforms are implemented through a software architecture.
The characteristics of the Company's products are developed and implemented
primarily through software, facilitating upgrades for users and the rapid
incorporation of new technologies. Upgrades are modular in nature, allowing
additional licensed program products to be added incrementally to the user's
basic system. The Company's software products are developed primarily in "C", a
commonly-used, high-level programming language, to provide future portability
to other hardware platforms. Development resources are being applied to the
creation of new system software and program products for increased
functionality and flexibility of the platform.
USER INTERFACE. The Company has developed a Microsoft
Windows(TM)-based user interface called AppsView(TM). The feature is software
driven and provides a customized menu of application icons that the user
creates. This user interface runs on the Microsoft Windows 95(R) operating
system and is OLE-2 compatible. AppsView(TM) is now available on all of the
Company's digital visual communication systems.
8
9
PERSONAL DIGITAL VISUAL COMMUNICATION SYSTEMS. Increased performance
of semiconductor processors specifically designed for video and image
processing allow for the cost-effective design and packaging of small group
digital visual communication systems and high functionality personal desktop
systems which are compatible with small and large group digital visual
communication systems. The Company recently introduced the SmartStation digital
visual communication cardset which was developed utilizing the capability of
the Company's digital visual communication software to be ported to a suitable
hardware platform. The principal hardware-related resource commitment from
development is the effort to search for, find and test boardset candidates for
suitability for the software function. Thus, the time to develop and introduce
a product is shorter and the cost to develop is smaller.
AUDIO COMPRESSION/ECHO CANCELLATION. Audio quality is an important
element in any long-distance conference. At lower transmission rates, the
amount of bandwidth allocated to audio decreases, thereby requiring audio
compression algorithms to maintain acceptable audio quality. In 1988, the
Company produced its own proprietary, integrated echo canceller to improve
audio quality. In 1993, the Company introduced a higher fidelity audio
subsystem called TrueTalk(TM) 7. The Company offers audio compression
capability at allocated bandwidths of 8, 12, 32 and 74 Kbps through the
TrueTalk(TM) audio subsystem. In 1995, the Company introduced an upgrade to
TrueTalk(TM) 7. This audio subsystem was further enhanced in 1996 with VTEL's
Tech96(TM).
VIDEO/IMAGE COMPRESSION. Both the Company's H.320 standard-based video
compression algorithm and its proprietary algorithm are products of compression
research started in 1988. The Company's continuing video compression
development activity is focused on the refinement of both algorithms for higher
resolution video capabilities and the integration of that technology. In fact,
shortly following the merger with CLI, VTEL announced StandardsPlus Video which
represents the industry's best video quality using standards. Significant video
quality improvements using industry technology standards was achieved via a
collaborative development effort between VTEL video engineers in Austin and San
Jose.
SMARTVIDEONET MANAGER. In the summer of 1997, VTEL introduced the
industry's first standards-based management and administration platform for
distributed digital visual communication networks. Using the SNMP standard,
SmartVideoNet Manager allows VTEL customers to centrally control their digital
visual communication network for functions such as problem determination,
problem resolution, call setup and conference statistics. Using this management
framework, conference support can be provided centrally with no requirement for
local user intervention, even for networks with hundreds of digital visual
communication system endpoints.
DEVELOPMENT AGREEMENT
On October 22, 1993, VTEL entered into a Development and License
Agreement (the "Development Agreement") with Intel Corporation ("Intel"),
pursuant to which the companies agreed to engage in a series of development
efforts with respect to video compression software as well as other video
technology such as processes and designs. The agreement contains certain
provisions for licensing agreements and royalties between the two companies for
the use of the technology developed under the agreement.
The initial term of the Development Agreement has renewed until
December 31, 1997 and will continue to automatically renew thereafter for
successive terms of one year unless written notice is given by either party six
months prior to the expiration of the initial term or any successor term.
VTEL was advanced $3.0 million under the agreement to be used for the
initial reimbursements of research and development costs incurred by VTEL in
performing the work specified in the Development Agreement. Actual costs
reimbursed totaled $2.1 million for specified projects under the agreement that
were completed prior to December 31, 1995. In May 1997, VTEL issued 155,040
shares of Common Stock to Intel in lieu of repayment of the remaining $0.90
million.
9
10
SALES AND MARKETING
VTEL believes that a well-positioned distribution channel is critical
to marketing success. The Company primarily relies on third parties to sell,
install and support its digital visual communication systems in an effort to
leverage the sales forces of the resellers which are already providing
telecommunications and systems integration services to potential purchasers of
videoconferencing equipment. The Company believes that its early commitment to
indirect distribution has resulted in a relatively comprehensive, well-trained
group of resellers, many of which are leading telecommunications providers in
their respective countries. All of its major resellers maintain demonstration
networks, with trained sales and support personnel motivated by quotas and
commissions for marketing the Company's products. The use of resellers is
expected to continue to account for a large percentage of the Company's
revenues in the foreseeable future.
Consistent with its focus on its targeted market segments, the Company
works with a number of VARs that specialize in specific applications,
geographic areas and markets such as education, health care, project management
and government procurement. Typically, the Company's agreements with its
resellers and VARs involve non-exclusive arrangements which may be canceled by
either party at will and contain no minimum purchase requirements on the part
of the resellers.
VTEL also sells products directly to certain end user customers,
generally large global end user customers which have sophisticated global
digital visual communication networks and require much more involvement of the
Company to support the sale, installation and maintenance of the network.
PRODUCT SUPPORT AND EXPANSION OF SUPPORT CAPABILITIES
Currently, end-user support and installation of the Company's products
are provided by the resellers and VARs, by ING., C., Olivetti & C., S.p.A.
("Olivetti"), Dictaphone and Lucent Technologies ("Lucent") as third-party
service providers or directly by the Company in order to provide a
comprehensive service offering for its worldwide customer base. The Company
trains the staffs of Olivetti, Dictaphone, Lucent and VTEL's resellers on
diagnostics and service of its products. Olivetti, Dictaphone, Lucent and the
reseller service network are supported by trained technicians at the Company's
Technical Assistance Center.
In 1995, the Company determined that it would be advantageous to
establish the capacity to offer installation, integration and support services
to resellers of its products, which could be resold by the resellers to the
ultimate purchasers of the Company's products. By enhancing the Company's
resellers' abilities to offer systems integration, installation and end-user
support to the ultimate purchasers of the Company's products, the Company
believes that it will enhance its resellers' ability to sell the Company's
digital visual communication systems as well as generate additional revenues to
the Company from the sales of such services to the Company's resellers.
In November 1995, the Company completed the ICS Transaction (see
"Business - General"). The completion of the acquisition allowed the Company to
significantly enhance its ability to support the Company's resellers' abilities
to offer systems integration, installation and end-user support to the ultimate
purchaser of the Company's products, thereby allowing the resellers to more
effectively provide an essential part of the services that are integral to the
purchase of the Company's products.
The Company completed the ICS Transaction with the payment of $10.7
million in cash, which includes $0.14 million of transaction expenses, and the
issuance of 260,000 shares of the Company's unregistered Common Stock with an
estimated market value of $3.7 million. The Company also assumed certain ICS
liabilities (see Note 3 to the Consolidated Financial Statements).
10
11
COMPETITION
The videoconferencing industry is highly competitive. The Company
believes that the principal competitive factors in the industry are product
architecture, ease of use, video and audio quality, functionality, service and
support, market visibility, and price. The Company faces competition from a
number of companies that market communications systems for videoconferencing.
Currently in the United States PictureTel Corporation, Sony Corporation, Nippon
Electric Corporation, and Tandberg are marketing roll-about group
videoconferencing systems and multipoint control units, among others.
Internationally, videoconferencing systems are available from, among others,
British Telecommunications plc., PictureTel Corporation, Sony Corporation,
Nippon Electric Corporation, Mitsubishi, Ltd., Fujitsu, Ltd., Panasonic Ltd.,
and Tandberg. Intel Corporation also entered the low-end work group system
market in mid- year 1997.
A new class of group system, referred to as work group products, has
emerged and is expected to be a major area of growth. VTEL's entry into this
market segment is referred to as the WG500. Major competitors in this product
space include PictureTel, Sony, Tandberg, and Intel.
Certain of the Company's competitors have devoted significant
resources to the development and marketing of person-to-person visual
communications products, such as desktop videoconferencing systems, set-top
systems, and software-based Internet/Intranet visual communications systems,
which may help to increase awareness in the value of visual communications
products while also resulting in increased competition. Microsoft has
introduced visual components to its NetMeeting Release 2.0 product, PictureTel
has announced intent to deliver a client/server architected brand of desktop
videoconferencing, and Intel has delivered a minimal set of video and audio
extensions in the MMX extensions to its Pentium microprocessors. In order to
compete in the market for business personal videoconferencing systems, the
Company introduced the VTEL VPC cardset, which began shipping in the first
calendar quarter of 1996, and the SmartStation cardset, which began shipping in
the second calendar quarter of 1997. Rather than expend significant resources
in the low-cost personal systems segment of the conferencing market, the
Company forms strategic alliances with other companies to participate in the
development of these low-cost systems. The Company intends to continue its
focus on large-, small-, and work-group digital visual communication systems,
in addition to gateways and other products, where the Company believes it can
add significant value through software, user interfaces, integrated
environments, and applications designed to meet the needs of its targeted
markets.
The Company's competitors and many of its potential competitors are
more established, benefit from greater market recognition, and have greater
financial, technological, production, and marketing resources than the Company.
These factors have an impact on the Company's competitive position.
MANUFACTURING
The Company's manufacturing operations consist of integration and
testing of subsystems and assemblies. The Company's manufacturing strategy is
to contract work to established vendors, with the Company fulfilling the
quality and materials management functions. Substantially all of the integrated
circuits, subsystems and assemblies used in the Company's products are made to
Company specifications by third parties under contract. The Company establishes
the relationship with the component vendors, qualifies the vendors and arranges
for shipment to the Company or directly to the vendor responsible for the next
level of integration. Systems must pass several levels of testing, including
testing with current-release software, prior to shipment. The Company's
manufacturing quality system was certified in December 1994 as meeting the
standards of ISO 9002 as set by the International Standards Organization. The
Company has passed subsequent audits with no corrective action needed.
The Company relies on outside vendors for supplying substantially all
of its electronic components, subsystems and assemblies. Although the Company
uses standard parts and components for its products that are generally
available from multiple vendors, certain components are currently available
only from sole sources and embody such parties' proprietary technology. The
Company depends upon its suppliers to deliver products which are free from
defects, competitive in functionality and price and in accordance with the
Company's specifications and delivery schedules. The failure of a supplier to
provide such products could delay or interrupt the Company's
11
12
manufacture and delivery of products and thereby adversely affect the Company's
business and operating results. The Company endeavors to mitigate the potential
adverse effect of supply interruptions by carefully qualifying vendors on the
basis of quality and dependability and by maintaining adequate inventories of
certain components, but there can be no assurance that such components will be
readily available when needed. Similarly, excessive rework costs associated
with defective components or process errors could adversely affect the
Company's business and operating results. The Company does not have contracts
with many of its suppliers ensuring continued availability of key components.
The Company attempts to forecast orders and to purchase certain long
lead-time components in advance of receipt of purchase orders from customers to
enable the Company to provide timely deliveries to customers when customer
orders are received. In addition, the Company from time to time enters into
development arrangements with other third parties to develop and incorporate
new features and functions into the Company's products. As such, the Company is
dependent upon these third parties to fulfill their respective obligations
under these development arrangements, and failure of these third parties to do
so could have a material adverse effect on the Company's results of operations.
PATENTS AND TRADEMARKS
The Company has twelve patents issued by the United States Patent and
Trademark Office and nine patent applications pending related to the Company's
technology.
There can be no assurance that the pending patents will be issued or
that issued patents can be defended successfully. However, the Company does not
consider patent protection crucial to its success. The Company believes that,
due to the rapid pace of technological change in the videoconferencing
industry, legal protection for its products are less significant than factors
such as the Company's use of an open architecture, the success of the Company's
distribution strategy, the Company's ongoing product innovation and the
knowledge, ability and experience of the Company's employees.
The Company has been issued two trademarks and two service marks by
the United States Patent and Trademark Office covering the "VTEL" mark and the
Company's logo.
EMPLOYEES
At July 31, 1997, the Company employed 734 full-time employees as
follows:
NUMBER OF
FUNCTION EMPLOYEES
Sales and marketing 241
Research and development 159
Service, support and
systems integration 133
Manufacturing 119
Finance and administration 82
----------
Total 734
==========
The Company's continued success will depend, in large part, on its
ability to attract and retain trained and qualified personnel who are in great
demand throughout the industry. None of the Company's employees is represented
by a labor union. The Company believes that its employee relations are good.
The Company's development, management of its growth and other
activities depend on the efforts of key management and technical employees.
Competition for such personnel is intense. The Company uses incentives,
including competitive compensation and stock option plans, to attract and
retain well-qualified employees. There can be no assurance, however, that the
Company will continue to attract and retain personnel with the requisite
capabilities and
12
13
experience. The loss of one or more of the Company's key management or
technical personnel also could materially and adversely affect the Company. The
Company generally does not have employment agreements with its key management
personnel or technical employees. The Company's future success is also
dependent upon its ability to effectively attract, retain, train, motivate and
manage its employees. Failure to do so could have a material adverse effect on
the Company's business and operating results.
EXECUTIVE OFFICERS
The Company's executive officers are as follows:
JERRY S. BENSON, JR., age 41, joined the Company in May 1997 as
President and Chief Operating Officer. Prior to joining VTEL, Mr. Benson spent
10 years at NEC Technologies, Inc., the last two years as President and Chief
Operating Officer of NEC Technologies, Inc. in Chicago, Illinois. Mr. Benson
also served in the Office of the Chairman and Board of Directors of NEC
Technologies and represented NEC, the majority shareholder of Packard Bell, by
serving as a director on the Board of Directors of Packard Bell. Prior to his
role as President and Chief Operating Officer at NEC Technologies, Mr. Benson
held a number of significant operational and general management roles at NEC
Technologies. These included general management positions in several NEC
groups, divisions and Strategic Business Units. Before NEC, he held marketing
and sales management positions at Wyse, Amdek, and Ericsson.
RODNEY S. BOND, age 53, joined the Company in May 1990 as Chief
Financial Officer, Vice President - Finance and Assistant Secretary and
Treasurer. He has served as Secretary of the Company since February 1993. From
1989 until he joined the Company, he served as Managing Director of Sherman
Partners, a Dallas-based private investment and consulting firm. From September
1985 to October 1988, Mr. Bond served as Chief Financial Officer and Executive
Vice President of Advanced Business Communications, Inc., a telecommunications
equipment manufacturer.
CHARLES M. DENTON, age 57, joined the Company in May 1993 as the Area
Vice President of Sales for the Eastern Area of the United States based in
Washington D. C. In July 1996, he was named Vice President - Indirect Sales
responsible for channel strategy and operations based in Austin, Texas. In July
1997, Mr. Denton was named to his current position of Vice President - North
American Sales where he is responsible for the overall sales operations
including indirect channels as well as direct sales. Mr. Denton has held
various Sales Management positions with Ascend Communications, PictureTel and
Motorola.
DENNIS M. EGAN, age 46, joined the Company in November 1995 as Vice
President - Service. From January 1993 to November 1995, Mr. Egan served as
Senior Vice President of Peirce-Phelps, Inc. From June 1985 to January 1993,
Mr. Egan was Vice President and General Manager of the Integrated
Communications Systems Group of Peirce-Phelps. Mr. Egan's pre- 1985 experience
includes 13 years serving in various sales and management positions with
Peirce-Phelps.
FRANK S. KAPLAN, age 42, joined the Company in September 1995 as Vice
President - International Sales and Marketing. Prior to joining VTEL, Mr.
Kaplan spent seven years at Compression Labs, Inc., the last two years as
Regional Vice President - Sales for Asia Pacific and Latin America. Mr.
Kaplan's previous experience includes working for AT&T for seven years in
various sales positions, the last two years as District Sales Manager in San
Francisco, California.
F.H. (DICK) MOELLER, age 52, joined the Company in October 1989 and is
currently Chairman of the Board of Directors and Chief Executive Officer. From
May 1982 to October 1989, Mr. Moeller served as the founder and President of
ProfitMaster Computer Systems, Inc., a computer software firm specializing in
real-time financial management systems for retail point-of-sale applications.
Prior to founding such firm, Mr. Moeller spent 12 years with Texas Instruments,
Inc. during which he held a variety of management positions, most recently
serving as Advanced Systems Manager of its Computer Systems Division. In 1995,
Mr. Moeller was elected to the Board of Directors of Accord Telecommunications,
Ltd., a strategic partner of the Company.
13
14
ROBERT L. ROMANO, age 41, joined the Company in December 1994 as the
Director of Finance. In April 1996, he was named Director of Desktop Systems
where he led the final development, marketing and launch of VTEL's first
desktop digital visual communication system. In January 1997, Mr. Romano was
named to his current position of Vice President of Product Management where he
is responsible for the life cycle management of all of VTEL's products. Prior
to joining VTEL, Mr. Romano worked at IBM for 14 years during which he led a
variety of management positions in sales, marketing, business planning and
finance, both in the U.S. and internationally.
BOB R. SWEM, age 60, joined the Company in September 1992 as Vice
President - Manufacturing and now serves as the Company's Vice President -
Manufacturing. From June 1981 to July 1992, Mr. Swem held various positions
with the Austin Division of Tandem Computers, Inc., ranging from Manager of
Manufacturing to Director of Operations.
JUDY A. WALLACE, age 46, joined the Company in March 1997 as Vice
President - Human Resources. Prior to joining the Company, Ms. Wallace was the
Director of Human Resources with Falcon Seaboard Holdings L.P. She previously
spent five years at Enron Corp. as Human Resource Manager and 11 years at
Weatherford International as Human Resource Supervisor.
ITEM 2. PROPERTIES
The Company's headquarters, product development, and sales and
marketing facility occupies approximately 105,000 square feet in Austin, Texas
under a lease which expires in April 2002. As part of this lease, the Company
has rights of first refusal on adjacent space with a total potential expansion,
subject to current leases, of an additional 25,000 square feet. The Company
believes that these facilities are adequate to meet its current requirements,
and that suitable additional space will be available, as needed, to accommodate
further physical expansion of corporate and development operations and for
additional sales and marketing offices. The Company occupies approximately
50,000 square feet of a facility that is situated in a light industrial area in
Austin, Texas where the Company's manufacturing and training operations are
located. As part of this lease, the Company has rights to lease an additional
7,500 square feet in the same facility. The Company's manufacturing facilities
and equipment are currently utilized generally on a one shift per day basis.
Should additional manufacturing capacity be needed during the next year, the
Company believes that it could provide the necessary manufacturing capacity
through the addition of work shifts or subcontractors and additional warehouse
space.
The Company occupies 140,000 square feet in San Jose, California which
was the former headquarters of CLI prior to the Merger. The lease expires in
June 2001. The Company maintains research and development, manufacturing
configuration and repair, and technical service groups in the San Jose
facility.
The Company's service and system integration operations occupy a
facility of approximately 41,000 square feet in the Philadelphia, Pennsylvania
vicinity.
ITEM 3. LEGAL PROCEEDINGS
CLI is currently engaged in several legal proceedings relating to
matters arising prior to the Merger. There can be no assurance that CLI's legal
proceedings can be resolved favorably to CLI or VTEL. Such legal proceedings,
if continued for an extended period of time, could have an adverse effect upon
CLI's working capital and management's ability to concentrate on its business.
An unfavorable outcome in any one or several such legal proceedings could have
a material adverse effect on CLI and hence, VTEL.
In a complaint filed on December 20, 1993 in the United States
District Court in Dallas, Texas, Datapoint Corporation ("Datapoint") alleged
that CLI had infringed two United States patents owned by Datapoint relating to
video conferencing networks. The complaint seeks a judgment of infringement,
monetary damages, injunctive relief and attorneys' fees. CLI responded to the
complaint by denying the material allegations of the complaint and asserting
affirmative defenses. Discovery has commenced in the case. On September 27,
1995,
14
15
CLI filed a motion to construe the scope of the patent claims at issue in the
litigation so as to elucidate whether Datapoint could assert that CLI is
infringing the patents in suit or whether Datapoint's patents are invalid in
light of the prior art. In April 1996, a Special Master submitted a report
which did not recommend that the Court adopt CLI's position set forth in the
motion. The Court in September 1996 adopted the report of the Special Master
that the claims of the patents in suit be construed in a manner favorable to
the plaintiff. The case has been set for trial in the fall of 1997. CLI is
vigorously defending the claims.
In June 1997, Keytech, S.A. ("Keytech") filed suit against CLI in the
United States District Court in Tampa, Florida. Keytech was a distributor of
satellite encoder and decoder products manufactured by a division of CLI which
was sold by CLI in June 1996. Keytech has asserted that the equipment sold was
defective and did not conform to contract specifications and express and
implied warranties. Keytech has asserted damages in excess of $20 million based
on its allegations of breach of contract, breach of warranties and fraud. CLI
has filed an answer denying liability and has asserted cross-claims against
Keytech for amounts due and unpaid for equipment sold by CLI to Keytech.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 23, 1997 a special meeting of the stockholders was held whereby
shareholders voted on the following proposals:
1. Proposal for the approval and adoption of an Agreement and Plan of Merger
and Reorganization, dated as of January 6, 1997, by and among VTEL,
VTEL-Sub, Inc. ("Merger Sub"), a direct wholly-owned subsidiary of the
Company, and Compression Labs, Incorporated ("CLI"), pursuant to which
Merger Sub would be merged with and into CLI, with CLI becoming a direct
wholly-owned subsidiary of VTEL. The stockholders voted to approve the
proposal by the following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTES
VTEL 6,102,412 562,617 72,450 1,551,891
CLI 8,424,203 137,158 65,245 -
2. Proposal for the approval of an amendment to the Company's Fourth Amended
and Restated Certificate of Incorporation to increase the number of
authorized shares. The stockholders voted to approve the proposal by the
following vote:
FOR AGAINST ABSTAIN BROKER NON-VOTES
7,448,212 764,155 77,003 -
3. Proposal for the approval of an amendment to the Company's 1996 Stock
Option Plan to increase the number of shares reserved for issuance
thereunder. The stockholders voted to approve the proposal by the following
vote:
FOR AGAINST ABSTAIN BROKER NON-VOTES
4,373,036 2,250,524 113,919 1,551,891
15
16
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since April 7, 1992, the Company's Common Stock has been traded in the
NASDAQ-National Market System under the symbol "VTEL". The following table sets
forth the range of high and low closing prices for each fiscal quarter of 1995,
1996 and 1997:
CALENDAR YEAR CALENDAR YEAR FISCAL YEAR
1995 1996 1997
HIGH LOW HIGH LOW HIGH LOW
1st Quarter $ 12.000 $ 8.125 $17.250 $ 8.813 $ 10.625 $ 6.625
2nd Quarter $ 13.375 $ 8.375 $12.625 $ 9.500 $ 11.000 $ 8.250
3rd Quarter $ 26.000 $ 13.250 $ - $ - $ 8.625 $ 4.875
4th Quarter $ 25.125 $ 16.625 $ - $ - $ 7.125 $ 5.500
In May 1996, the Company changed its fiscal year end from December 31
to July 31. Therefore, the above quarterly information for 1996 reflects the
first two calendar quarters of the year and the information relating to the
remainder of calendar 1996 is included in the fiscal 1997 quarters (the first
fiscal quarter beginning on August 1, 1996), except for July 1996 which had a
low stock price of $6.375 and a high stock price of $9.6875.
The Company has not paid cash dividends on its Common Stock and
presently intends to continue a policy of retaining earnings, if any, for
reinvestment in its business.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth consolidated financial data for VTEL as
of the dates and for the periods indicated. All such data reflects the Merger
with CLI on May 23, 1997, which was accounted for as a pooling of interests.
The consolidated operations data for the years ended December 31, 1994 and
1995; the seven months ended July 31, 1996, and the year ended July 31, 1997
has been derived from the audited consolidated financial statements of VTEL
included elsewhere herein. The consolidated operations data for the year ended
December 31, 1993 has been derived from the audited consolidated financial
statements of VTEL not included herein. The consolidated operations data for
the year ended December 31, 1992 has been derived from the unaudited
consolidated financial statements of VTEL not included herein.
The consolidated balance sheet data as of July 31, 1996 and 1997 has
been derived from the audited consolidated financial statements of VTEL
included elsewhere herein. The consolidated balance sheet data as of December
31, 1992, 1993, 1994 and 1995 has been derived from the audited consolidated
financial statements of VTEL not included herein.
16
17
The consolidated financial data as of July 31, 1995 and for the seven
months then ended have been derived from the unaudited consolidated financial
statements of VTEL not included herein. The unaudited consolidated financial
data include all adjustments, consisting of normal recurring adjustments, which
VTEL considers necessary for a fair presentation of its financial position as
of such dates and the results of operations and cash flows for such periods.
The selected financial data should be read in conjunction with the consolidated
financial statements of VTEL and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
FOR THE FOR THE
FOR THE YEARS SEVEN MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, JULY 31, JULY 31,
1992 1993 1994 1995 1995 1996 1997
UNAUDITED UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues $121,098 $126,547 $169,189 $191,074 $ 98,079 $ 96,962 $ 191,023
Gross margin 40,326 39,089 66,380 66,843 39,971 35,980 74,702
Net loss from continuing operations (1,931) (21,518) (4,816) (17,301) (4,335) (18,507) (44,271)
Net income (loss) (1,796) (12,817) 169 (53,843) (3,811) (18,507) (52,054)
Net loss per share from
continuing operations (0.14) (1.51) (0.27) (0.90) (0.24) (0.87) (2.10)
Net income (loss) per share (0.13) (0.90) 0.01 (2.81) (0.21) (0.87) (2.45)
BALANCE SHEET DATA:
Working capital $ 67,064 $ 85,335 $ 85,088 $ 93,330 $ 76,023 $ 77,091 $ 39,528
Total assets 137,010 170,469 178,086 223,061 182,082 175,092 131,135
Long-term debt 10 1,020 494 985 1,278 - -
Stockholders' equity 95,183 117,595 124,185 139,512 126,739 122,238 76,765
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
On May 23, 1997, shareholders of VTEL and CLI approved the Merger of
VTEL-Sub, Inc., a Delaware corporation and direct wholly-owned subsidiary of
VTEL ("Merger Sub"), with and into CLI, pursuant to an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement"), with CLI becoming a direct
wholly-owned subsidiary of VTEL. As a result of the Merger, (i) the outstanding
shares of CLI's common stock, par value $.001 per share ("CLI Common Stock"),
were converted into the right to receive 0.46 shares of common stock of VTEL,
par value $.01 per share ("VTEL Common Stock"), per share of CLI Common Stock
converted (or cash in lieu of fractional shares otherwise deliverable in
respect thereof), and (ii) the outstanding shares of CLI Series C Preferred
Stock, par value $.001 per share ("CLI Preferred Stock"), were converted into
the right to receive 3.15 shares of VTEL Common Stock per share of CLI
Preferred Stock converted (or cash in lieu of fractional shares otherwise
deliverable in respect thereof). The CLI shares were exchanged for a total of
8,424,741 shares of VTEL Common Stock. The acquisition was accounted for as a
pooling of interests and accordingly, the consolidated financial information
has been restated for all periods to include the accounts of both VTEL and CLI.
17
18
The restatement of the consolidated financial information combines the
financial information of VTEL and CLI giving retroactive effect to the Merger
as if the two companies had operated as a single company for all periods
presented. However, the two companies operated independently prior to the
Merger and the historical changes and trends in the financial condition and
results of operations of these two companies resulted from independent
activities. Nonetheless, the following management's discussion and analysis of
financial condition and results of operations attempts to relate the activities
which resulted in the changes in financial condition and results of operations
of the combined company, taking into consideration that a trend or change in
the historical results of the combined entity was caused by many events related
to each individual company operating independently as competitors. The
financial information presented on a historical restated basis is not
indicative of the financial condition and results of operations that may have
been achieved in the past or will be achieved in the future had the companies
operated as a single entity for the periods presented. The following discussion
of the consolidated operations and financial condition of the Company should be
read in conjunction with the Company's consolidated financial statements and
related notes thereto included elsewhere herein.
In May 1996, the Company changed its fiscal year end from December 31
to July 31. The accompanying financial information includes the results of
operations and cash flows for the seven month transition period ended July 31,
1996 with comparative presentation of the unaudited results for the seven
months ended July 31, 1995. Results of operations for the seven month periods
ended July 31, 1996 and 1995 are not necessarily indicative of the operating
results which would be expected for a full year.
RESULT OF OPERATIONS
The following table sets forth for the fiscal periods indicated the
percentage of revenues represented by certain items in the Company's
consolidated statement of operations:
FOR THE FOR THE SEVEN FOR THE
YEARS ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, JULY 31, JULY 31,
1994 1995 1995 1996 1997
(UNAUDITED)
Revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin 39.2 35.0 40.8 37.1 39.1
Selling, general and administrative 31.0 32.7 32.0 40.1 34.2
Research and development 11.2 11.1 12.1 16.8 12.8
Total operating expenses 42.2 44.4 45.0 58.0 62.9
Other income, net 0.2 0.4 0.2 1.8 0.6
Net loss from continuing operations (2.8) (9.1) (4.4) (19.1) (23.2)
Net income (loss) 0.1% (28.2)% (3.9)% (19.1)% (27.3)%
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND JULY 31, 1997 AND THE SEVEN
MONTHS ENDED JULY 31, 1995 AND 1996.
Revenues
Consolidated revenues increased from $169.2 million in fiscal 1994 to
$191.1 million in fiscal 1995, an increase of 13%. Consolidated revenues
slightly decreased from $191.1 million in fiscal 1995 to $191.0 million in
fiscal 1997. Consolidated revenues decreased from $98.1 million for the seven
months ended July 31, 1995 to $97.0 million for the seven months ended July 31,
1996, a decrease of 1%.
18
19
The Company has generally experienced a trend of growth in
consolidated digital visual communication product revenues due to increased
unit shipments of as a result of product enhancements, market acceptance of the
Company's digital visual communication products, price reductions, and
increased sales and marketing focus by the Company. However, total
consolidated product revenues declined from the year ended December 31, 1995 to
the year ended July 31, 1997 and from the seven months ended July 31, 1995 to
the seven months ended July 31, 1996 as a result of a trend of decreasing
digital visual communication product revenues by the Company's wholly-owned
subsidiary, CLI, due to product transition issues and distraction of the
attention of CLI's management due to an attempt to diversify in the broadcast
products division that ultimately was sold in June 1996.
The Company has experienced a trend of revenue growth in consolidated
service revenues as a result of an increase in service and systems integration
revenues generated from the assets acquired in the ICS Transaction in November
1995 (see Note 3 to the Consolidated Financial Statements) and an increase in
the installed base of digital visual communication products resulting in a
larger revenue base for services.
The following table summarizes the Company's group digital visual
communication and multipoint control unit sales activity:
FOR THE
FOR THE FOR THE SEVEN YEAR
YEARS ENDED MONTHS ENDED ENDED
DECEMBER 31, JULY 31, JULY 31,
1994 1995 1995 1996 1997
(Unaudited)
Large-group digital visual
communication systems 3,456 3,607 1,903 1,654 3,595
Small-group digital visual
communication systems 201 334 201 69 690
MCU II(TM) - second-generation 269 223 113 81 213
----- ----- ----- ----- -----
Multipoint control units Total units 3,926 4,164 2,217 1,804 4,498
===== ===== ===== ===== =====
International sales as a percentage of total consolidated product
revenues were 18%, 23% and 26% for the years ended December 31, 1994 and 1995
and July 31, 1997 and were 22% and 21% for the seven months ended July 31, 1995
and 1996. The increase in international revenues as a percentage of total
consolidated product revenues is the result of increased penetration into
foreign markets such as Europe, China, the Far East and Latin America.
The Company believes its foreign currency exposure to be relatively
low in that foreign sales are predominantly in U.S. dollars. The Company does
not engage in any currency hedging programs that utilize foreign currency
contracts, options or other derivative instruments to hedge the Company's
foreign currency risk.
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 primarily through resellers.
Because expense levels are based on the Company's expectations as to future
revenues, the Company's expense base is relatively fixed in the short term. If
revenue levels are below expectations, operating results may be materially and
adversely affected and net income is likely to be disproportionately adversely
affected. In addition, the Company's quarterly and annual results may fluctuate
as a result of many factors, including price reductions, delays in the
introduction of new products, delays
19
20
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.
The integration of operations following the Merger will require the
dedication of management resources which will temporarily detract from
attention to the day-to-day business of the combined company. The focus of
management resources on merger-related issues could have an adverse effect on
revenues. 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 margins were 39%, 35% and 39% for the years ended December 31,
1994 and 1995 and July 31, 1997 and were 41% and 37% for the seven months ended
July 31, 1995 and 1996.
The Company's gross margin trend indicates relatively consistent gross
margins with the exception of a significant decline which occurred during the
year ended December 31, 1995 as a result of an $11.0 million charge taken in
November 1995 by the Company's subsidiary, CLI, to reduce the carrying amount
of certain assets, primarily inventory and capitalized software related to a
restructuring of its digital videoconferencing products division. Gross margins
also declined from the seven months ended July 31, 1995 to the seven months
ended July 31, 1996 as service and integration revenues became a larger
proportion of total revenues during the seven months ended July 31, 1996 due to
incremental revenues generated by the Company's systems integration and service
operations which were acquired in November 1995. The Company's systems
integration and service operations carry a lower gross margin percentage than
its product revenues such that the Company's overall gross margin is lower.
Although the systems integration and service revenues related to assets
acquired in connection with the ICS Transaction generally carry a lower gross
margin, the systems integration and service activities also generally carry
lower operating expenses than the Company's other revenue sources.
During the periods presented, the Company's gross margin trend has
been affected by changes in the Company's sales mix to higher margin products
with more features and lower per unit manufacturing costs realized by the
distribution of relatively fixed manufacturing overhead costs over a greater
number of units shipped, offset by the impact of lower average selling prices
and a higher proportion of service and systems integration revenues which
generally carry a lower gross margin than the Company's digital visual
communication products.
The Company expects 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 digital visual communication
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.
20
21
Selling, general and administrative
Selling, general and administrative expenses of $65.4 million in
fiscal 1997 increased by 5% from $62.5 million in fiscal 1995, which increased
by 19% from $52.5 million in fiscal 1994. Selling, general and administrative
expenses were 31%, 33% and 34% of revenues for the years ended December 31,
1994 and 1995 and July 31, 1997. The trend of selling, general and
administrative expenses as a percentage of revenues indicates a growth in
selling, general and administrative expenses with small or no increases in
revenues. However, the overall increase in selling, general and administrative
expenses as a percentage of revenues during the periods presented is the net
effect of opposite trends experienced by VTEL, on a stand-alone basis prior to
the Merger, and its wholly-owned subsidiary, CLI. While VTEL, on a stand-alone
basis, experienced increases in revenues at a rate that was faster than the
growth in selling, general and administrative expenses, its wholly-owned
subsidiary, CLI, experienced declines in revenues without a proportionate
decline in selling, general and administrative expenses. The net effect of the
two entities is a trend of increasing selling, general and administrative
expenses as a percentage of revenues. The Company expects that the Merger will
result in economies of scale that can be realized by the combined companies in
sales, marketing and administration such that these expenses will decline as a
percentage of revenues.
Selling, general and administrative expenses increased from $31.4
million for the seven months ended July 31, 1995 to $38.8 million for the seven
months ended July 31, 1996, an increase of 24%. Selling, general and
administrative expenses were 32% and 40% of revenues for the seven months ended
July 31, 1995 and 1996. Selling, general and administrative expenses increased
from the seven months ended July 31, 1995 to the seven months ended July 31,
1996 due to the incremental selling, general and administrative expenses
associated with the systems integration and service operations acquired in
connection with the ICS Transaction in November 1995 and a $1.7 million charge
taken by the Company's wholly-owned subsidiary, CLI, during the seven months
ended July 31, 1996 to restructure its videoconferencing business. The charges
related primarily to severance and related costs associated with headcount
reductions.
Research and development expense
Research and development expenses of $24.5 million in fiscal 1997
increased by 15% from $21.3 million in fiscal 1995, which increased by 12% from
$19.0 million in 1994. Research and development expenses were 11%, 11% and 13%
of revenues for the years ended December 31, 1994 and 1995 and July 31, 1997.
Research and development expenses increased due to increased research and
development investments made by the Company to develop new products. The
Company began to increase research and development activities in 1993 to
produce new products, including a platform for its personal desktop system, a
small group system and its second generation multipoint control unit. The trend
of research and development expenses as a percentage of revenues is the net
result of a decline in research and development expenses as a percentage of
revenues experienced by VTEL, on a stand-alone basis, due to an increase in
revenues at a faster rate than the increase in research and development
expenses, offset by an increase in research and development expenses as a
percentage of revenues experienced by the Company's wholly-owned subsidiary,
CLI, due to a trend of declining revenues without a related decline in research
and development expenses as a result of CLI focusing on the development of its
next generation product platform.
21
22
Research and development expenses increased from $11.9 million for the
seven months ended July 31, 1995 to $16.3 million for the seven months ended
July 31, 1996, an increase of 37%. Research and development expenses were 12%
and 17% of revenues for the seven months ended July 31, 1995 and 1996. Research
and development expenses increased from the seven months ended July 31, 1995 to
the seven months ended July 31, 1996 as a result of the Company's efforts to
develop its Leadership Conferencing(TM) and Team Conferencing(TM) systems which
were introduced at the end of calendar 1995 and the beginning of calendar 1996,
respectively. Research and development expenses also increased as a result of
the reassignment of Company research and development personnel who had been
involved with the Intel joint development projects in 1995 to the Company's
other projects (see Note 9 to the Company's Consolidated Financial Statements).
Additionally, research and development expenses increased as a result of the
Company's wholly-owned subsidiary, CLI, shifting its development efforts from
software development to hardware development during the seven months ended July
31, 1996, which resulted in less capitalization of development costs related to
software development.
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and frequent product
introductions. New products are generally characterized by increased
functionality and better picture quality at lower bandwidths and at reduced
prices. The introduction of products, by either the Company or its competitors,
embodying new technology and the emergence of new industry standards may render
existing products obsolete and unmarketable. The Company's ability to
successfully develop and introduce on a timely basis new and enhanced products
that embody new technology, anticipate and incorporate evolving industry
standards and achieve levels of functionality and prices acceptable to the
market will be a significant factor in the Company's ability to grow and to
remain competitive. 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.
Interest income and expense
Interest income was $1.1 million, $1.8 million and $2.7 million for
the years ended December 31, 1994 and 1995 and July 31, 1997 and was $0.7
million and $1.9 million for the seven months ended July 31, 1995 and 1996.
Changes in interest income are based on interest rates earned on invested cash
and cash balances available for investment. Interest income increased during
the year ended December 31, 1995 in comparison with the year ended December 31,
1994 and increased during the seven months ended July 31, 1996 in comparison
with the seven months ended July 31, 1995 due to an increase in the Company's
cash and investment balances resulting from the completion of a secondary
offering in October 1995 which generated net proceeds of approximately $57.0
million. Interest income increased during the year ended July 31, 1997 compared
with the previous periods presented due to an increase in the Company's cash
and investment balances resulting from the completion of a private placement of
preferred stock by the Company's wholly-owned subsidiary, CLI, in October 1996
which generated net proceeds of approximately $7.0 million.
Interest expense was $0.8 million, $1.1 million and $1.6 million for
the years ended December 31, 1994 and 1995 and July 31, 1997 and was $0.7
million and $0.4 million for the seven months ended July 31, 1995 and 1996.
Interest expense relates only to the Company's wholly-owned subsidiary, CLI,
which relied on lines of credit to fund working capital and capital investment
requirements. Interest expense was increased from the year ended December 31,
1994 to the years ended December 31, 1995 and July 31, 1997 as a result of
higher average borrowings at higher interest rates during the year ended
December 31, 1995. The Company incurred less interest expense during the seven
months ended July 31, 1996 in comparison with the seven months ended July 31,
1995 as a result of a decrease in average borrowings during the seven months
ended July 31, 1996.
22
23
Income taxes
The Company has experienced substantial changes in ownership as
defined by the Internal Revenue Code. These changes result in annual
limitations of the amount of net operating loss carryforward generated prior to
each change which can be utilized to offset future taxable income. As a result
of the ownership change at CLI at the date of the Merger, a portion of CLI's
net operating loss carryforward generated prior to the Merger will never be
available to offset future taxable income due to the effect of the annual
limitation and the expiration of the related net operating losses. Therefore,
the unavailable portion of the net operating loss carryforward is not
considered in determining the deferred tax asset at July 31, 1997.
At July 31, 1997, the Company had total domestic net operating loss
carryforwards of $68.2 million ($24.1 million and $44.1 million for VTEL and
CLI, respectively). The portions of these carryforwards available for
utilization during fiscal 1998 (in consideration of the annual limitations of
$4.6 million and $2.6 million for VTEL and CLI, respectively) are $14.4
million.
Due to the uncertainty surrounding the timing of realizing the
benefits of its favorable tax attributes in future tax returns, the Company has
placed a valuation allowance against its otherwise recognizable net deferred
tax asset. Accordingly, no deferred taxes have been recorded for the years
ended December 31, 1994 and 1995, for the seven months ended July 31, 1996 and
for the year ended July 31, 1997.
Discontinued operations
In November 1995, the Company's wholly-owned subsidiary, CLI, adopted
a plan to discontinue operations of its broadcast products division and focus
its efforts and resources in developing and marketing videoconferencing
products. CLI subsequently developed a restructuring plan for its
videoconferencing products division which resulted in adjustments that were
recorded during the year ended December 31, 1995 related to the carrying
amounts of certain assets, primarily inventories, capitalized software
development costs and accounts receivable. During the seven months ended July
31, 1996, CLI also reduced its workforce and identified a number of offices
that would be closed. Severance and other expenses totaling approximately $1.7
million associated with these actions are reflected in the result of operations
for the seven months ended July 31, 1996.
In June 1996, CLI completed the sale of certain assets of its
broadcast products division. During the year ended July 31, 1997, CLI revised
the amount of loss associated with disposing of the broadcast products division
and recorded an additional charge of $7.8 million, primarily due to additional
at-risk receivables that were subsequently identified (see Note 6 to the
Consolidated Financial Statements).
Net income (loss)
The Company generated net losses from continuing operations of $4.8
million, $17.3 and $44.3 million for the years ended December 31, 1994 and 1995
and July 31, 1997 and $4.3 million and $18.5 million for the seven months ended
July 31, 1995 and 1996. The trend of increasing net losses during the years
ended December 31, 1994 and 1995 is the net effect of a trend of periodic net
income generated by VTEL, on a stand-alone basis, during these periods, offset
by a trend of significant increasing losses incurred by the Company's
wholly-owned subsidiary. The increases in net income generated by VTEL, on a
stand-alone basis, during these periods was due to improved gross margins and
growth in revenues at a higher rate than growth in operating expenses. The
Company's wholly-owned subsidiary, CLI, experienced increasing net losses
during these periods due to a trend of declining revenues without a
proportionate decline in operating expenses and due to charges taken for
settlement of litigation during the year ended December 31, 1995.
23
24
The increase in net losses incurred from the seven months ended July
31, 1995 to the seven months ended July 31, 1996 is the result of independent
charges taken by both VTEL and its wholly-owned subsidiary, CLI, related to
restructuring activities and the effect of CLI's decision to discontinue
operations relating to its broadcast products division in November 1995.
The loss incurred during the year ended July 31, 1997 is primarily the
result of merger and other expenses of $29.4 million, consisting of transaction
expenses of $5.7 million and restructuring and other expenses of $23.7 million,
recorded during the year ended July 31, 1997.
Transaction expenses include legal, accounting, investment banking and
printing fees. Restructuring and other expenses include amounts related to the
consolidation of facilities; severance costs relating to workforce reductions;
impairment charges related to certain intangibles, property and equipment,
receivables and inventories; and provision for the discharge of contingent
liabilities.
Other factors affecting results of operations
The integration of operations following the Merger will require the
dedication of management resources which will temporarily detract from
attention to the day-to-day business of the combined company. The difficulties
of integration may be increased by the necessity of integrating personnel with
disparate business backgrounds and combining two different corporate cultures.
Following the Merger, the Company is attempting to reduce expenses by the
consolidation of facilities, employees, marketing programs and other expenses.
Subsequent to such reductions, the Company intends to reinvest much of these
cost savings in programs aligned with its current strategic initiatives. There
can be no assurance that the Company will be able to reduce expenses in this
fashion, that there will not be high costs associated with such activities,
that such reductions will not result in a decrease in revenues or that there
will not be other material adverse effects of such activities. Additionally,
there can be no assurance that the Company will not incur additional charges in
subsequent quarters to reflect costs associated with the Merger. Such effects
could materially reduce the earnings of the combined company during the
transition period. There can be no assurance that the effort at product
transition or that the integration of the product lines of the two companies
will not have material adverse effects on results of operations. 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 segment, introduction of new products by competitors,
increased competition due to the entrance of other companies into the
videoconferencing market segment - 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.
There can be no assurance that the present and potential customers of
the Company will continue their current buying patterns without regard to the
Merger, and any significant delay or reduction in orders could have an adverse
effect on the near-term business and results of operations of the combined
company.
24
25
Generally, the shares issued by the Company to consummate the Merger
are freely tradable, subject to certain resale restrictions for affiliates
pursuant to Rules 144 or 145 under the Securities Act. An aggregate of
approximately 1.1 million of the shares issued in the Merger are beneficially
owned by affiliates of CLI and therefore, subject to resale restrictions.
However, the Company provided certain registration rights to the holders of
such shares. The sale of a significant number of the foregoing shares could
cause substantial fluctuations in the price of the Company's Common Stock over
short time periods.
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 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
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.
Further, this Annual Report on Form 10-K contains forward-looking
statements, within the meaning of the Private Securities Litigation Reform Act
of 1995, that relate to future results or events and are based on the Company's
current expectations. There are many factors that affect the Company's business
and results of operations, all of which involve risks and uncertainties that
could cause actual results to differ materially from those reflected in those
forward- looking statements, including the risks discussed above and elsewhere
herein.
Share repurchase program
During the seven months ended July 31, 1996, the Company adopted a
share repurchase program pursuant to which the Company repurchased shares of
its Common Stock in the open market. During fiscal 1997, the Company purchased
455,200 shares of its Common Stock for approximately $3.7 million. All of the
repurchased shares were reissued during fiscal 1997 to fulfill requirements for
the Company's Common Stock. In February 1997, the Company terminated the stock
repurchase program.
Liquidity and capital resources
At July 31, 1997, the Company had working capital of $39.5 million,
including $25.1 million in cash, cash equivalents and short-term investments.
Cash provided by operating activities was $2.9 million and $8.8 million for the
years ended December 31, 1994 and 1995. Cash used in operating activities was
$15.2 million for the year ended July 31, 1997. Cash used by operating
activities was $1.0 million and $11.1 million for the seven months ended July
31, 1995 and 1996. Changes in cash from operating activities are primarily the
result of the net losses or income generated by the Company and changes in
working capital, primarily increases and decreases in accounts receivable,
inventories and accounts payable.
Cash used in investing activities was $17.8 million and $77.9 million
for the years ended December 31, 1994 and 1995. The increase in cash used in
investing activities is the result of increased capital expenditures for
property and equipment used to support the growth in the Company's operations,
primarily sales and marketing and product development efforts, and the
investment of the cash proceeds from the Company's secondary offering in
November 1995 which netted approximately $57.0 million less the cash used of
approximately $10.7 million to purchase the systems integration and service
operations in connection with the ICS Transaction. Cash provided by investing
activities was $23.3 million for the year ended July 31, 1997 primarily due to
the utilization of investments to finance the Company's operations during the
period, which included large cash requirements associated with the Merger.
25
26
Cash used in investing activities was $16.4 million for the seven
months ended July 31, 1995 compared with cash provided by investing activities
of $1.2 million for the seven months ended July 31, 1996. Cash used in
investing activities was primarily the result of capital expenditures. Capital
expenditures were $11.0 million and $11.1 million for the seven months ended
July 31, 1995 and 1996. Cash provided by investing activities during the seven
months ended July 31, 1996 included the proceeds from the sale of assets
related to discontinued operations of the Company's wholly- owned subsidiary,
CLI.
Cash provided by financing activities was $6.0 million and $69.2
million for the years ended December 31, 1994 and 1995. Cash provided by
financing activities increased during the year ended December 31, 1995 in
comparison with the year ended December 31, 1994 due to financing activities
during the year ended December 31, 1995 related to the sale of the Company's
Common Stock which netted approximately $57.0 million. Cash used in financing
activities was $5.1 million for the year ended July 31, 1997 primarily as a
result of the purchase of treasury stock by the Company and the repayment of
debt by the Company's wholly-owned subsidiary, CLI, offset by the sale of
preferred stock by CLI during the year ended July 31, 1997.
Cash provided by financing was $4.9 million for the seven months ended
July 31, 1995 compared to cash used in financing activities of $3.9 million for
the seven months ended July 31, 1996. Cash provided by financing activities
during the seven months ended July 31, 1995 was related to the sale of stock by
the Company's wholly-owned subsidiary, CLI, which netted approximately $4.9
million. Cash used in financing activities during the seven months ended July
31, 1996 was related to the reduction in borrowings of approximately $4.4
million from cash generated from the sale of the broadcast products division in
June 1996 by CLI.
The Company has a $10.0 million 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 July
31, 1997 consist of $25.1 million of cash, cash equivalents and short-term
investments and amounts available under the Company's revolving line of credit.
Recent pronouncements
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting and Disclosure of Stock-Based
Compensation." SFAS No. 123 introduces a fair-value based method of accounting
for stock-based compensation. It encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options and other
equity instruments to employees based on their estimated fair market value on
the date of grant. The Company has opted to continue to apply the existing
accounting rules contained in Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees." As such, SFAS No. 123 did not have
any effect on the Company's financial position or results of operations.
Effective January 1, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." In accordance with SFAS No. 121, the Company periodically
evaluates its long-lived assets and intangible assets to determine if an
impairment has occurred. The adoption of SFAS No. 121 did not have any effect
on the Company's consolidated financial position or result of operations.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share." The new standard, which is effective for
financial statements issued for periods ending after December 15, 1997,
establishes standards for computing and presenting earnings per share ("EPS")
and upon adoption requires restatement of all prior period EPS data presented.
The Company will implement this standard for the year ended July 31, 1998. The
implementation of the standard will result in the presentation of a basic EPS
calculation in the consolidated financial statements as well as a diluted EPS
calculation. Under SFAS No. 128, basic and diluted EPS are not expected to
differ materially from the amounts currently reported.
* * *
26
27
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants 28
Independent Auditors' Report 29
Financial Statements:
Consolidated Balance Sheet as of July 31, 1996 and 1997 30
Consolidated Statement of Operations for the years ended
December 31, 1994 and 1995, the seven months ended
July 31, 1995 (unaudited) and 1996, and the year ended July 31, 1997 31
Consolidated Statement of Changes in Stockholders' Equity for the
years ended December 31, 1994 and 1995, the seven months ended
July 31, 1996 and the year ended July 31, 1997 32
Consolidated Statement of Cash Flows for the years ended
December 31, 1994 and 1995, the seven months ended
July 31, 1995 (unaudited) and 1996, and the year ended July 31, 1997 33
Notes to Consolidated Financial Statements 34
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts 54
Schedules other than those listed above have been omitted since they are either
not required, not applicable or the information is otherwise included
27
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of VTEL Corporation
In our opinion, based upon our audits and the report of other
auditors, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of VTEL
Corporation and its subsidiaries at July 31, 1996 and 1997, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1995, for the seven months ended July 31, 1996, and for the
year ended July 31, 1997 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Compression Labs, Incorporated, which statements reflect revenues of
$114,958,000 and $112,979,000 for the years ended December 31, 1994 and 1995,
respectively. Those statements were audited by other auditors whose report
thereon has been furnished to us, and our opinion expressed herein, insofar as
it related to the amounts included for Compression Labs, Incorporated, is based
solely on the report of the other auditors. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Austin, Texas
September 24, 1997
28
29
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
of Compression Labs, Incorporated
We have audited the consolidated statements of operations, changes in
stockholders' equity and of cash flows of Compression Labs, Incorporated and
subsidiaries for each of the years in the two-year period ended December 31,
1995 (not presented herein). In connection with our audits of the
aforementioned consolidated financial statements, we have also audited the
financial statement schedule. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements of Compression
Labs, Incorporated referred to above present fairly, in all material respects,
the results of their operations and their cash flows for each of the years in
the two-year period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth herein.
KPMG Peat Marwick LLP
San Jose, California
March 13, 1996
29
30
VTEL CORPORATION
CONSOLIDATED BALANCE SHEET
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
JULY 31,
1996 1997
ASSETS
Current assets:
Cash and equivalents $ 1,973 $ 4,757
Short-term investments 48,307 20,299
Accounts receivable, net of allowance for doubtful
accounts of $7,875 and $10,722 at July 31, 1996 and 1997 47,958 43,707
Inventories 29,308 22,244
Prepaid expenses and other current assets 2,399 2,891
--------- ---------
Total current assets 129,945 93,898
Property and equipment, net 25,792 21,660
Intangible assets, net 13,730 12,768
Capitalized software, net 3,561 --
Other assets 2,064 2,809
--------- ---------
Total assets $ 175,092 $ 131,135
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 10,656 $ --
Accounts payable 20,694 25,699
Accrued merger and other expenses -- 9,704
Accrued compensation and benefits 4,203 4,552
Other accrued liabilities 6,588 3,070
Deferred revenue 9,150 11,345
Research and development advance 906 --
Accrued expenses, discontinued operations 657 --
--------- ---------
Total current liabilities 52,854 54,370
--------- ---------
Commitments and contingencies (Note 11) -- --
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 authorized;
none issued or outstanding -- --
Common stock, $.01 par value; 40,000,000 authorized;
21,498,000, and 22,873,000 issued and outstanding
at July 31, 1996 and 1997 215 229
Additional paid-in capital 245,585 254,880
Accumulated deficit (123,713) (178,234)
Cumulative translation adjustment 151 5
Unearned compensation -- (115)
--------- ---------
Total stockholders' equity 122,238 76,765
--------- ---------
$ 175,092 $ 131,135
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
30
31
VTEL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
FOR THE YEARS FOR THE SEVEN FOR THE YEAR
ENDED MONTHS ENDED ENDED
DECEMBER 31, JULY 31, JULY 31,
1994 1995 1995 1996 1997
(UNAUDITED)
REVENUES:
Products $ 159,350 $ 169,455 $ 89,207 $ 74,098 $ 150,791
Services and other 9,839 21,619 8,872 22,864 40,232
--------- --------- --------- --------- ---------
169,189 191,074 98,079 96,962 191,023
--------- --------- --------- --------- ---------
COST OF SALES:
Products 94,583 109,653 52,523 44,390 87,231
Services and other 8,226 14,578 5,585 16,592 29,090
--------- --------- --------- --------- ---------
102,809 124,231 58,108 60,982 116,321
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Gross margin 66,380 66,843 39,971 35,980 74,702
--------- --------- --------- --------- ---------
Selling, general and administrative 52,502 62,511 31,397 38,842 65,399
Research and development 19,004 21,283 11,878 16,274 24,460
Merger and other -- 897 897 553 29,397
Amortization of intangible assets -- 80 -- 560 960
--------- --------- --------- --------- ---------
Total operating expenses 71,506 84,771 44,172 56,229 120,216
--------- --------- --------- --------- ---------
Loss from operations (5,126) (17,928) (4,201) (20,249) (45,514)
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 1,051 1,802 699 1,901 2,736
Interest expense (804) (1,142) (655) (424) (1,582)
Other 103 54 164 265 77
--------- --------- --------- --------- ---------
350 714 208 1,742 1,231
--------- --------- --------- --------- ---------
Net loss from continuing operations
before provision for income taxes (4,776) (17,214) (3,993) (18,507) (44,283)
Benefit (provision) for income taxes (40) (87) (342) -- 12
--------- --------- --------- --------- ---------
Net loss from continuing operations (4,816) (17,301) (4,335) (18,507) (44,271)
--------- --------- --------- --------- ---------
DISCONTINUED OPERATIONS:
Net income (loss) from operations 4,985 (1,941) 524 -- (7,783)
Loss on disposal -- (34,601) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) from discontinued operations 4,985 (36,542) 524 -- (7,783)
--------- --------- --------- --------- ---------
Net income (loss) $ 169 $ (53,843) $ (3,811) $ (18,507) $ (52,054)
========= ========= ========= ========= =========
COMPUTATION OF NET INCOME (LOSS) PER SHARE:
Net loss from continuing operations $ (4,816) $ (17,301) $ (4,335) $ (18,507) $ (44,271)
Deemed preferred stock dividend related to
conversion discount -- -- -- -- (2,527)
--------- --------- --------- --------- ---------
Adjusted net loss from continuing operations (4,816) (17,301) (4,335) (18,507) (46,798)
Net income (loss) from discontinued operations 4,985 (36,542) 524 -- (7,783)
--------- --------- --------- --------- ---------
Net income (loss) applicable to common stock $ 169 $ (53,843) $ (3,811) $ (18,507) $ (54,581)
========= ========= ========= ========= =========
Net loss per share from continuing operations $ (0.27) $ (0.90) $ (0.24) $ (0.87) $ (2.10)
Net income (loss) per share from
discontinued operations 0.28 (1.91) 0.03 -- (0.35)
========= ========= ========= ========= =========
Net income (loss) per share $ 0.01 $ (2.81) $ (0.21) $ (0.87) $ (2.45)
========= ========= ========= ========= =========
Weighted average shares outstanding 17,518 19,131 17,821 21,393 22,255
========= ========= ========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
31
32
VTEL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
COMMON STOCK
---------------------- TOTAL
NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT OTHER EQUITY
--------- --------- --------- --------- --------- -------------
BALANCE AT DECEMBER 31, 1993 16,301 $ 163 $ 169,076 $ (51,532) $ (112) $ 117,595
Proceeds from sale of stock 68 1 1,972 -- -- 1,973
Proceeds from stock issued
under employee plans 360 4 3,659 -- -- 3,663
Exercise of stock warrants 30 -- 528 -- -- 528
Amortization of unearned
compensation -- -- -- -- 23 23
Foreign currency translation
adjustment -- -- -- -- 234 234
Net income -- -- -- 169 -- 169
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1994 16,759 168 175,235 (51,363) 145 124,185
Proceeds from sale of stock 3,312 33 61,927 -- -- 61,960
Proceeds from stock issued
under employee plans 546 5 3,220 -- -- 3,225
Exercise of stock warrants 15 -- 249 -- -- 249
Stock issued for acquired
assets (Note 3) 260 3 3,721 -- -- 3,724
Amortization of unearned
compensation -- -- -- -- 21 21
Foreign currency translation
adjustment -- -- -- -- (9) (9)
Net loss -- -- -- (53,843) -- (53,843)
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1995 20,892 209 244,352 (105,206) 157 139,512
Proceeds from stock issued
under employee plans 178 2 1,237 -- -- 1,239
Proceeds from exercise
of stock warrants 428 4 (4) -- -- --
Foreign currency translation
adjustment -- -- -- -- (6) (6)
Net loss -- -- -- (18,507) -- (18,507)
--------- --------- --------- --------- --------- ---------
BALANCE AT JULY 31, 1996 21,498 215 245,585 (123,713) 151 122,238
Proceeds from sale of stock 1,258 13 7,703 -- -- 7,716
Proceeds from stock issued
under employee plans 572 1 2,503 -- -- 2,504
Purchase and issuance of
treasury stock (455) -- (1,275) (2,467) -- (3,742)
Unearned compensation -- -- 364 -- (364) --
Amortization of unearned
compensation -- -- -- -- 249 249
Foreign currency translation
adjustment -- -- -- -- (146) (146)
Net loss -- -- -- (52,054) -- (52,054)
========= ========= ========= ========= ========= =========
BALANCE AT JULY 31, 1997 22,873 $ 229 $ 254,880 $(178,234) $ (110) $ 76,765
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
32
33
VTEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
FOR THE YEARS FOR THE SEVEN FOR THE YEAR
ENDED MONTHS ENDED ENDED
DECEMBER 31, JULY 31, JULY 31,
1994 1995 1995 1996 1997
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 169 $ (53,843) $ (3,811) $ (18,507) $ (52,054)
Adjustments to reconcile net income (loss)
to net cash from operations:
Depreciation and amortization 13,038 20,898 7,858 8,294 12,667
Provision for doubtful accounts 80 40 8 18 4,145
Amortization of unearned compensation 23 21 11 -- 249
Amortization of deferred gain (107) (100) (57) (56) --
Foreign currency translation gain (loss) 48 40 (83) (216) (3)
(Increase) decrease in accounts receivable (9,518) (4,007) (15,651) 10,324 106
(Increase) decrease in inventories (1,868) 9,647 (725) (7,367) 7,064
(Increase) decrease in prepaid expenses
and other current assets 1,992 2,107 (76) 2,522 (492)
Increase (decrease) in accounts payable (4,570) 7,430 263 (11,216) 5,005
Increase (decrease) in accrued expenses 1,808 16,156 3,973 (14,562) 6,535
(Decrease) in research and
development advance (1,649) (190) (190) -- (5)
Increase (decrease) in deferred revenues 4,809 (912) (1,098) (1,378) 2,195
Increase (decrease) in accrued expenses,
discontinued operations (1,400) 11,503 8,614 21,016 (657)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities 2,855 8,790 (964) (11,128) (15,245)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (111,679) (707,280) (65,148) (241,994) (391,628)
Sales and maturities of short-term investments 113,989 664,545 68,327 253,671 419,636
Purchases of property and equipment (14,510) (16,759) (11,027) (11,139) (18,781)
Sales of property and equipment 701 1,775 1,054 1,307 11,208
Cash paid for acquired assets (Note 3) -- (10,684) -- -- --
(Increase) decrease in capitalized software (6,702) (9,371) (2,958) (681) 3,561
(Increase) decrease in other assets 357 (103) (6,662) 69 (745)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities (17,844) (77,877) (16,414) 1,233 23,251
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock 5,264 65,434 6,255 1,014 8,044
Purchase of treasury stock -- -- -- -- (3,742)
Proceeds from the sale of treasury stock -- -- -- -- 1,275
Principal payments under capital lease obligations (374) (844) (436) (549) --
(Payments) borrowings under line of credit
agreements 1,110 2,993 (2,801) (2,766) --
Collateralized borrowings (payments) -- 1,597 1,850 (1,589) --
Repayment of short-term debt -- -- -- -- (10,656)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities 6,000 69,180 4,868 (3,890) (5,079)
--------- --------- --------- --------- ---------
Effect of translation exchange rates on cash 186 (49) 125 210 (143)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and equivalents (8,803) 44 (12,385) (13,575) 2,784
Cash and equivalents at beginning of period 24,307 15,504 15,504 15,548 1,973
--------- --------- --------- --------- ---------
Cash and equivalents at end of period $ 15,504 $ 15,548 $ 3,119 $ 1,973 $ 4,757
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 31 $ 74 $ 27 $ -- $ --
========= ========= ========= ========= =========
Interest paid $ 804 $ 1,142 $ 655 $ 424 $ 1,582
========= ========= ========= ========= =========
Stock issued for acquired assets (Note 3) $ -- $ 3,724 $ -- $ -- $ --
========= ========= ========= ========= =========
Stock issued in lieu of repayment of research
and development advance $ -- $ -- $ -- $ -- $ 901
========= ========= ========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
33
34
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
1. THE COMPANY
VTEL Corporation ("VTEL" or the "Company") designs, manufactures,
markets, services and supports integrated, multi-media digital visual
communication systems which operate over private and switched digital
communication networks. VTEL distributes its systems to a domestic and
international marketplace through a reseller network and directly to end- user
customers.
On May 23, 1997, shareholders of VTEL and Compression Labs,
Incorporated, a Delaware corporation ("CLI"), approved the merger (the
"Merger") of VTEL-Sub, Inc., a Delaware corporation and direct wholly-owned
subsidiary of VTEL ("Merger Sub"), with and into CLI, pursuant to an Agreement
and Plan of Merger and Reorganization (the "Merger Agreement"), with CLI
becoming a direct wholly-owned subsidiary of VTEL. As a result of the Merger,
(a) the outstanding shares of CLI's common stock were converted into the right
to receive 0.46 shares of common stock of VTEL for each share of CLI common
stock converted (or cash in lieu of fractional shares otherwise deliverable in
respect thereof), and (b) the outstanding shares of CLI Series C Preferred
Stock were converted into the right to receive 3.15 shares of VTEL common stock
for each share of CLI preferred stock converted (or cash in lieu of fractional
shares otherwise deliverable in respect thereof). The CLI shares were exchanged
for a total of 8,424,741 shares of VTEL common stock.
The acquisition was accounted for as a pooling of interests and
accordingly, the consolidated financial statements have been restated for all
periods to include the accounts of CLI. Revenues, net income (loss) from
continuing operations and net income (loss) of the separate companies for the
periods preceding the acquisition were as follows:
VTEL CLI TOTAL
YEAR ENDED DECEMBER 31, 1994
Revenues $ 54,231 $114,958 $169,189
Net income (loss) from continuing operations 62 (4,878) (4,816)
Net income 62 107 169
YEAR ENDED DECEMBER 31, 1995
Revenues $ 78,095 $112,979 $191,074
Net income (loss) from continuing operations 3,739 (21,040) (17,301)
Net income (loss) 3,739 (57,582) (53,843)
SEVEN MONTHS ENDED JULY 31, 1996
Revenues $ 50,109 $ 46,853 $ 96,962
Net loss from continuing operations (9,899) (8,608) (18,507)
Net loss (9,899) (8,608) (18,507)
YEAR ENDED JULY 31, 1997 *
Revenues $124,438 $ 66,585 $191,023
Net loss from continuing operations (28,841) (15,430) (44,271)
Net loss (29,905) (22,149) (52,054)
* Information for CLI is through the date of the Merger, May 23, 1997.
34
35
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
In connection with the Merger, the Company recorded merger and other
expenses of $29,397 during the year ended July 31, 1997 as follows:
TRANSACTION EXPENSES:
Investment banking fees $ 2,391
Legal and accounting fees 1,600
Other 1,663
--------
5,654
--------
RESTRUCTURING AND OTHER:
Asset impairments 12,469
Reserve for contingent liabilities 5,271
Severance and termination benefits 3,457
Other 2,546
--------
23,743
--------
Total $ 29,397
========
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and include the accounts of
VTEL's wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. Preparation of the consolidated
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. The more
significant estimates made by management include the provision for doubtful
accounts receivable, inventory write-downs for potentially excess or obsolete
inventory, warranty reserves, the valuation allowance for the gross deferred
tax asset, and the amortization period for intangible assets. Actual amounts
could differ from the estimates made. Management periodically evaluates
estimates used in the preparation of the financial statements for continued
reasonableness. Appropriate adjustments, if any, to the estimates used are made
prospectively based upon such periodic evaluation.
In May 1996, VTEL changed its fiscal year end from December 31 to July
31. The accompanying consolidated financial statements include the results of
operations and cash flows for the seven-month transition period ended July 31,
1996 with comparative presentation of the unaudited results for the seven
months ended July 31, 1995.
Revenue Recognition
Product revenues, recorded net of discounts, are recognized at the
time a product is shipped or services are performed and the Company has no
significant further obligations to the customer. Customer prepayments are
deferred until product shipment has occurred or services have been rendered and
there are no significant further obligations to the customer. Service revenues
are recognized at the time the services are rendered and the Company has no
significant further obligations to the customer.
35
36
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Warranty Costs
The Company generally warrants its products against hardware defects
for one year from the date of installation but not to exceed fifteen months
from date of shipment. A warranty is provided for software defects for ninety
days from the date of installation. The Company provides currently for the
estimated costs which may be incurred in the future under the warranty program.
Software Development Costs
Costs incurred in connection with the development of software products
are accounted for in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased or Otherwise Marketed." Costs incurred prior to the establishment
of technological feasibility are charged to research and development expense.
Amortization of capitalized software begins upon initial product shipment.
Software development costs are amortized (a) over the estimated life of the
related product (generally thirty-six months), using the straight-line method
or (b) based on the ratio of current revenues from the related products to
total estimated revenues for such products, whichever is greater.
The Company's wholly-owned subsidiary, CLI, capitalized internal
software development costs of $6,645, $9,276 and $1,622 for the years ended
December 31, 1994 and 1995 and July 31, 1997, respectively, and $2,957 and $563
for the seven months ended July 31, 1995 and 1996. Amortization of such costs
was $5,120, $17,411 and $1,827 for the years ended December 31, 1994 and 1995
and July 31, 1997, respectively, and $1,996 and $947 for the seven months ended
July 31, 1995 and 1996, respectively. In connection with the Merger, the
Company recorded an impairment charge of $3,218 related to capitalized software
development costs.
Cash and Equivalents
Cash and equivalents include cash and certificates of deposit with
original maturities of three months or less at the date of acquisition.
Short-term Investments
Short-term investments are carried at market value, which approximates
cost, at the balance sheet date. Short- term investments consist of funds
primarily invested in mortgage-backed securities guaranteed by the U.S.
government, government securities and commercial paper. Investment securities
generally have maturities of less than one year.
The Company accounts for investment securities under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No.
115 requires investment securities to be classified as held-to-maturity,
trading or available-for-sale based on the characteristics of the securities
and the activity in the investment portfolio. At July 31, 1996 and 1997, all
investment securities are classified as available-for-sale. No unrealized gains
or losses have been recorded as a separate component of equity for the current
period or prior year as market values approximate cost due to the short-term
nature of the investments.
Inventories
Inventories are stated at the lower of cost (determined under the
first-in, first-out method) or market. Cost includes the acquisition of
purchased components, parts and sub-assemblies, labor and overhead.
36
37
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Property and Equipment
Property and equipment is recorded at cost. Internal support equipment
consists of certain demonstration and development systems manufactured by the
Company and is recorded at manufactured cost. Depreciation and amortization are
provided using the straight-line method over the estimated economic lives of
the assets, ranging from two to ten years, or over the lease term of the
respective assets, as applicable. Repair and maintenance costs are expensed as
incurred.
Intangible Assets
During the year ended December 31, 1995, VTEL acquired certain assets
and a service and support infrastructure related to an operating group of
another company (see Note 3). The estimated value of the intangible assets is
being amortized over a period of 15 years, which is the period over which the
Company expects to be able to continue to effectively utilize the service and
support infrastructure to support its resellers in the offering of broader
services to users of digital visual communication equipment. In accordance with
Accounting Principles Board Opinion ("APB") No. 17, "Intangible Assets," the
Company periodically evaluates the amortization period associated with the
acquired intangible assets based upon anticipated periods of future benefit,
including factors such as loss of employees with key or unique knowledge, the
Company's ability to continue to successfully utilize the specialized
integration and process knowledge to provide integration and support services,
and other relevant factors which could require revision of the estimate of the
amortization period. Appropriate adjustments, if any, to the amortization
period will be made prospectively based upon such periodic evaluation.
Research and Development Advance
Research and development advance represents a cash advance received by
VTEL under a development and license agreement (see Note 9) for the
reimbursement of research and development costs incurred by VTEL in performing
work specified in the agreement. The amounts used to reimburse costs incurred
under the agreement were recognized as reductions of research and development
expenses.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are
measured using the local currency as the functional currency. Accordingly,
assets and liabilities of the subsidiaries are translated at current rates of
exchange at the balance sheet date. The resultant gains or losses from
translation are included in a separate component of stockholders' equity.
Income and expense from the subsidiaries are translated using monthly average
exchange rates.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes," which requires the liability method of accounting for income
taxes. Under the liability method, deferred taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
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 using the treasury stock method.
37
38
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Net loss applicable to common stock for the year ended July 31, 1997
is computed by increasing the net loss from continuing operations by $2,527
which represents a deemed dividend related to the 20% conversion discount on
the Series C Preferred Stock measured at the date of original issuance.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share." The new standard, which is effective for
financial statements issued for periods ending after December 15, 1997,
establishes standards for computing and presenting earnings per share ("EPS")
and upon adoption requires restatement of all prior period EPS data presented.
The Company will implement this standard in fiscal 1998. The implementation of
the standard will result in the presentation of a basic EPS calculation in the
financial statements as well as a diluted EPS calculation. Under SFAS No. 128,
basic and diluted earnings per share is not expected to differ materially from
the amounts currently reported.
Concentration of Credit Risk
The Company sells its products to various companies across several
industries, including third-party resellers. The Company performs ongoing
credit evaluations of its customers and maintains reserves for potential credit
losses. The Company requires advanced payments or secures transactions when
deemed necessary.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, including
cash and equivalents, short-term investments and short-term trade receivables
and payables, approximates fair value. The carrying amount of short-term
investments approximates fair value because of the short maturity and nature of
these instruments. The Company places its cash in investment quality financial
instruments and limits the amount invested in any one institution or in any
type of instrument. The Company has not experienced any significant losses on
its investments.
Long-lived Assets
The Company evaluates its long-lived assets and intangibles based on
guidance provided by SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used for long-lived assets and certain identifiable intangibles to be disposed
of.
Employee Stock Plans
The Company determines the fair value of grants of stock, stock
options and other equity instruments issued to employees in accordance with
SFAS No. 123, "Accounting and Disclosure of Stock-Based Compensation." SFAS No.
123 encourages, but does not require, companies to recognize compensation
expense for grants of stock, stock options, and other equity instruments to
employees based on their estimated fair market value on the date of grant. The
Company has opted to continue to apply the existing accounting rules contained
in APB No. 25, "Accounting for Stock Issued to Employees." As such, SFAS No.
123 has had no effect on the Company's financial position or results of
operations.
The Company records unearned compensation related to stock options
that are issued at exercise prices which are below the fair market value of the
underlying stock on the measurement date. Such unearned compensation is
amortized ratably over the vesting period of the related stock options.
38
39
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
3. PURCHASE TRANSACTION
In November 1995, VTEL purchased certain assets and a service and
support infrastructure related to the Integrated Communications Systems Group
of another company (the "ICS Transaction"). The transaction resulted in VTEL
acquiring certain tangible assets primarily consisting of inventories, prepaid
expenses and fixed assets and assuming certain deferred revenues related to
extended warranty service contracts. The acquired service and support
infrastructure includes a trained workforce possessing specialized systems
integration and process knowledge. The transaction will allow VTEL to enhance
its ability to support its resellers' abilities to offer systems integration,
installation and end-user support to the ultimate purchaser of its products,
thereby allowing the resellers to more effectively provide an essential part of
the services that are integral to the purchase of the Company's products.
VTEL completed the ICS Transaction with the payment of $10,684 in
cash, which includes $142 of transaction expenses, and the issuance of 260,000
shares of VTEL's unregistered common stock with an estimated market value at
the time of the transaction of $3,723. The transaction was accounted for under
the purchase method pursuant to which VTEL determined that approximately
$14,400 of the purchase price related to intangible assets which are primarily
represented by the service and support infrastructure. Amortization of the
intangible asset was $80, $560 and $960 for the year ended December 31, 1995,
the seven months ended July 31, 1996 and the year ended July 31, 1997,
respectively.
4. INVENTORIES
Inventories consist of the following:
JULY 31,
1996 1997
Raw materials $ 13,808 $ 9,493
Work-in-process 2,781 4,143
Finished goods 10,678 7,490
Finished goods held for
evaluation and rental
and loan agreements 2,041 1,118
-------- --------
$ 29,308 $ 22,244
======== ========
Finished goods held for evaluation and under rental and loan
agreements consists of completed multi-media communication systems used for
demonstration and evaluation purposes, which are generally sold during the next
year.
39
40
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
5. PROPERTY AND EQUIPMENT
Property and equipment is composed of the following:
JULY 31,
1996 1997
Furniture, machinery and equipment $ 39,496 $ 28,803
Internal support equipment 12,880 22,743
Leasehold improvements 2,369 2,872
-------- --------
54,745 54,418
Less accumulated depreciation (28,953) (32,758)
-------- --------
$ 25,792 $ 21,660
======== ========
Depreciation and amortization expense relating to property and
equipment was approximately $13,038, $20,818, $8,379 and $12,991 for the years
ended December 31, 1994 and 1995, the seven months ended July 31, 1996, and the
year ended July 31, 1997, respectively.
6. DISCONTINUED OPERATIONS
During November 1995, CLI adopted a strategic plan to discontinue
operations of its broadcast products division. This division generally
manufactured and sold broadcast video products to commercial end-users. The
results for the division have been accounted for as discontinued operations in
accordance with APB No. 30, "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," and the accompanying
consolidated financial statements have been presented to reflect the
discontinuation of the division.
On June 27, 1996, CLI completed the sale of certain assets of its
broadcast products division to another company in exchange for $12,500 in cash
(subject to post-closing adjustments) and the assumption of $2,000 in
liabilities. The purchaser assumed past warranty obligations associated with
the product family covered by the sale. With the exception of the accounts
receivable, CLI disposed of the remaining assets of the division to a separate
buyer. During the year ended July 31, 1997, the Company recorded a provision
for probable losses to fully reserve the remaining accounts receivable of the
discontinued operations that were considered to be uncollectible. Such
provision is reflected in the accompanying consolidated statement of operations
in the net loss from discontinued operations. Net assets related to
discontinued operations consist of net accounts receivable of $8,698 and nil at
July 31, 1996 and 1997, respectively.
Revenues from the discontinued division were approximately $42,029 and
$36,974 for the years ended December 31, 1994 and 1995, respectively. Revenues
from the discontinued division were $11,201 for the seven months ended July 31,
1996 and nil for the year ended July 31, 1997.
7. SHORT-TERM AND LONG-TERM DEBT
On November 28, 1994, VTEL executed a credit agreement with a
financial institution which established a $10,000 revolving line of credit.
Under the line of credit, VTEL may borrow up to $10,000 based on eligible
accounts receivable. The line of credit provides a minimum borrowing base of
$5,000. The credit agreement also provides that the Company may request the
issuance of letters of credit up to a maximum of $4,000 and foreign exchange
contracts subject to certain limitations.
40
41
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Any amounts outstanding under the credit agreement will bear interest
at the prime rate and will be payable on the maturity date of December 13, 1998
unless VTEL converts the revolving advances to a three-year term loan, which
will bear interest at the prime rate and will be payable in equal monthly
installments.
Any amounts outstanding under the credit agreement will be secured by
VTEL's inventory and accounts receivable. The credit agreement requires VTEL
to maintain certain financial ratios and other covenants. At July 31, 1997,
VTEL had no amounts outstanding under the credit line.
At July 31, 1996, the Company, through its wholly-owned subsidiary,
CLI, also had a $15,000 revolving line of credit with a bank with an interest
rate equal to the highest London Interbank Offered Rate ("LIBOR") plus 4.8%
(10.9% at July 31,1996). This line of credit expired on June 30, 1997 and was
repaid in full in July 1997.
8. STOCKHOLDERS' EQUITY
General
In October 1995, VTEL completed a secondary offering of its common
stock which consisted of the sale of 3,000,000 shares of VTEL's common stock
generating net proceeds to VTEL of approximately $57,000.
In June 1995, Intel purchased 51,898 shares of VTEL's common stock for
approximately $396 pursuant to an agreement, since terminated, which enabled
Intel to maintain its percentage ownership interest in VTEL. In October 1995,
Intel delivered notice of its intent to exercise its warrant to purchase
1,199,124 shares of VTEL's common stock at an exercise price of $11.50 per
share under an agreement which modified the provisions of the common stock and
Warrant Purchase Agreement (the "Stock Agreement") between VTEL and Intel.
Pursuant to the modified agreement, Intel agreed to sell to VTEL concurrently
with the exercise of the warrant, and VTEL agreed to purchase from Intel,
771,464 shares of VTEL's common stock at a price of $17.875, the closing price
of VTEL's Common Stock on the day immediately preceding the date in which Intel
delivered notice of its intent to exercise the warrant. During the seven months
ended July 31, 1996, VTEL completed the warrant exercise and related stock
redemption transaction such that Intel increased its ownership of VTEL's common
stock by 427,660 shares. The modified agreement also resulted in Intel agreeing
to terminate certain of its rights specified in the Investor Rights Agreement
between the Company and Intel. VTEL registered the shares acquired by Intel as
provided under the Stock Agreement. In May 1997, VTEL issued 155,040 shares of
Common Stock, at the fair market value, to Intel in lieu of repayment of the
remaining $901 advance under the Development Agreement (see Note 9 to the
Consolidated Financial Statements) that was unused at that time.
In November 1995, VTEL issued 260,769 shares of its unregistered
common stock in connection with the ICS Transaction (see Note 3).
Share Repurchase Program
During the seven months ended July 31, 1996, VTEL adopted a share
repurchase program pursuant to which VTEL repurchased shares of its common
stock in the open market. The repurchased shares will be issued from time to
time to fulfill requirements for VTEL's common stock under its employee stock
plans. Subsequent to July 31, 1996, VTEL repurchased 455,200 shares of its
common stock for approximately $3,700. In February 1997, VTEL terminated the
stock repurchase program. VTEL applied the cost method of accounting for its
treasury stock.
CLI Redeemable Convertible Preferred Stock
On October 25, 1996, CLI completed a private placement of 350,000
shares of Class C Preferred Stock and stock warrants for the purchase of
375,000 shares of CLI common stock for approximately $7,000, before certain
issuance costs, pursuant to a purchase agreement with an institutional
investor. The preferred stock was exchanged
41
42
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
for 1,102,500 shares of VTEL common stock and both the number and exercise
price of the warrants were converted into warrants for the purchase of VTEL
common stock based on the exchange ratio of 0.46 in connection with the Merger.
The converted warrants, totaling 172,500 VTEL shares, have an exercise price of
$12.39 and expire in October 2001.
Stock and Stock Option Plans
VTEL has three stock option plans, the 1989 Stock Option Plan (the
"1989 Plan"), the 1996 Stock Option Plan (the "1996 Plan") and the 1992
Director Stock Option Plan (the "1992 Plan"). The 1989 Plan and the 1996 Plan
both provide for the issuance of non-qualified and incentive stock options to
key employees, directors and consultants of the Company. Stock options are
generally granted at the estimated fair market value at the time of grant, and
the options vest ratably over 48 months and are generally exercisable for a
period of ten years beginning with date of grant. The 1992 Plan provides for
the issuance of stock options to nonemployee directors at the estimated fair
market value at the time of grant. Such options vest ratably over 36 months and
are exercisable for a period of ten years beginning with the date of the grant.
CLI had employee and director stock option plans prior to the merger
with VTEL. On May 23, 1997, all options outstanding under these plans converted
into options for common stock of VTEL. Both the number of shares subject to
option and the per share exercise price under each option were adjusted by the
exchange ratio of 0.46.
The Company applies APB No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost is
recognized for its stock option plans unless options are issued at exercise
prices which are below the market price on the measurement date. Had
compensation cost for the Company's stock option plans been determined based on
the fair market value at the grant dates for awards under those plans
consistent with the method provided by SFAS No. 123, the Company's net loss and
net loss per share would have been reflected by the following pro forma amounts
for the year ended December 31, 1995, the seven months ended July 31, 1996 and
the year ended July 31, 1997:
FOR THE YEAR FOR THE SEVEN FOR THE YEAR
ENDED MONTHS ENDED ENDED
DECEMBER 31, JULY 31, JULY 31,
1995 1996 1997
Net income (loss) As reported $ (53,843) $ (18,507) $ (52,054)
Pro forma $ (55,748) $ (20,638) $ (55,276)
Primary net loss per share As reported $ (2.81) $ (.87) $ (2.45)
Pro forma $ (2.91) $ (.96) $ (2.60)
42
43
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants during the year ended December 31,
1995, the seven months ended July 31, 1996 and the year ended July 31, 1997:
FOR THE YEAR FOR THE SEVEN FOR THE YEAR
ENDED DECEMBER MONTHS ENDED ENDED
31, JULY 31, JULY 31,
1995 1996 1997
Dividend yield - - -
Expected volatility 84.21% 84.83% 92.31%
Risk-free rate of return 5.43% 6.56% 5.90%
Expected life 4.94 years 4.94 years 5.12 years
The following table summarizes activity under all Plans for the years
ended December 31, 1994 and 1995, the seven months ended July 31, 1996 and the
year ended July 31, 1997. This information includes stock options relating to
CLI's stock option plans; both the number of shares and the per share exercise
price have been adjusted by the exchange ratio of 0.46.
1994 1995 1996 1997
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE (000'S) PRICE
Outstanding at the
beginning of the year 1,506 $3.41 1,638 $ 3.97 1,879 $ 8.80 2,187 $ 9.40
Converted from CLI - - - - - - 1,798 17.43
Granted 361 5.61 701 17.37 449 10.99 2,098 6.44
Exercised (151) 1.68 (371) 3.66 (77) 3.13 (324) 3.14
Canceled (78) 5.17 (89) 8.88 (64) 10.39 (2,111) 14.58
----- ----- ----- ------ ----- ------ ----- -------
Outstanding at the
end of the year 1,638 $3.97 1,879 $ 8.80 2,187 $ 9.40 3,648 $ 9.42
===== ===== ===== ====== ===== ====== ===== =======
Options exercisable at
year end 1,620 $3.92 1,851 $ 8.74 2,165 $ 9.40 3,402 $ 9.20
===== ===== ===== ====== ===== ====== ===== =======
Weighted average
fair value of
options granted
during the year $ - $12.07 $ 7.77 $ 3.42
===== ====== ====== =======
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES JULY 31, 1997 CONTRACTUAL EXERCISE PRICE JULY 31, 1997 EXERCISE PRICE
LIFE
$ 0.300 - $ 9.000 2,528,250 8.28 years $ 5.52 2,485,896 $ 5.50
9.239 - 17.391 655,638 7.14 13.24 475,544 13.49
17.663 - 20.563 149,827 6.79 19.28 132,674 19.34
20.652 - 24.457 177,561 3.54 23.99 174,822 24.03
25.815 - 42.663 137,196 5.10 33.37 133,458 33.52
----------------- --------- ---- ------ --------- ------
$ 0.300 - $42.663 3,648,472 7.66 years $ 9.42 3,402,394 $ 9.20
================= ========= ==== ====== ========= ======
43
44
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Employee Stock Purchase Plan
On April 29, 1993, VTEL adopted an Employee Stock Purchase Plan
("Employee Plan") which enables all employees to acquire VTEL stock under the
plan. The Employee Plan authorizes the issuance of up to 450,000 shares of
VTEL's Common Stock. The Employee Plan allows participants to purchase shares
of the Company's Common Stock at a price equal to the lesser of (a) 85% of the
fair market value of the Common Stock on the date of the grant of the option or
(b) 85% of the fair market value of the Common Stock at the time of exercise.
Shares of Common Stock issued under the Employee Plan totaled 88,740, 66,087,
37,121 and 105,549, respectively, for the years ended December 31, 1994 and
1995, the seven months ended July 31, 1996 and the year ended July 31, 1997.
The fair value of the employees' purchase rights was estimated using
the Black-Scholes model with the following assumptions for the year ended
December 31, 1995, the seven months ended July 31, 1996 and the year ended July
31, 1997:
FOR THE FOR THE SEVEN FOR THE
YEAR ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, 1995 JULY 31, 1996 JULY 31, 1997
SECTION 16 SECTION 16 SECTION 16
OFFICERS OTHERS OFFICERS OTHERS OFFICERS OTHERS
Dividend yield - - - - - -
Expected volatility 95.78% 90.29% 95.78% 90.29% 82.89% 79.83%
Risk-free rate of return 5.18% 5.12% 5.18% 5.12% 5.31% 5.23%
Expected life (in years) .50 .25 .50 .25 .50 .25
Weighted-average fair value of
purchase rights granted $3.13 $2.30 $3.13 $2.30 $2.54 $2.11
9. DEVELOPMENT AND LICENSE AGREEMENT
On October 22, 1993, VTEL entered into a Development and License
Agreement (the "Development Agreement") with Intel Corporation ("Intel"),
pursuant to which the companies agreed to engage in a series of development
efforts with respect to video compression software as well as other video
technology such as processes and designs. The agreement contains certain
provisions for licensing agreements and royalties between the two companies for
the use of the technology developed under the agreement.
The initial term of the Development Agreement has renewed until
December 31, 1997 and will continue to automatically renew thereafter for
successive terms of one year unless written notice is given by either party six
months prior to the expiration of the initial term or any successor term.
VTEL was advanced $3,000 under the agreement to be used for the
initial reimbursements of research and development costs incurred by VTEL in
performing the work specified in the Development Agreement. The Company is
required to periodically report the amount of costs incurred which have been
reimbursed from the advance. VTEL records reductions of the advance as the
specified work is performed and reimbursable costs are incurred. However,
reimbursements are actually approved for release to VTEL as specified projects
or milestones are completed. In May 1997, VTEL issued 155,040 shares of Common
Stock, at the fair market value, to Intel in lieu of repayment of the remaining
$901 advance that was unused at that time.
44
45
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
During the years ended December 31, 1994 and 1995 and July 31, 1997,
the Company reduced gross research and development expenses by approximately
$1,649, $190 and $5, respectively, for reimbursable research and development
costs under the terms of the Development Agreement. No reductions of research
and development expenses were recorded during the seven months ended July 31,
1996 as a result of the Development Agreement. As of July 31, 1997, the Company
had no research and development activities in process or planned related to the
Development Agreement.
10. FEDERAL INCOME TAXES
Under the provisions of SFAS No. 109, the components of the net
deferred tax amount are as follows:
JULY 31, JULY 31,
1996 1997
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 33,062 $ 23,198
Research and development credit carryforwards 3,127 3,376
Minimum tax credit carryforwards 110 110
Inventory and warranty provisions 2,983 3,562
Compensation accruals 346 1,932
Depreciation 5,012 2,698
Deferred revenue 1,465 703
Accrued expenses 4,655 2,385
Capitalized research and development expenses 1,414 -
Accounts receivable 3,753 3,996
Other 1,651 281
-------- --------
Gross deferred tax asset 57,578 42,241
-------- --------
DEFERRED TAX LIABILITIES:
Capitalized software (1,256) -
Long-term contract revenue (800) -
-------- --------
Gross deferred tax liability (2,056) -
-------- --------
Valuation allowance (55,522) (42,241)
-------- --------
Net deferred tax asset $ - $ -
======== ========
The Company's net operating loss and research and development credit
carryforwards expire in varying amounts from 1999 through 2012. Research and
development tax credit carryforwards expire in varying amounts from 2002
through 2012. Minimum tax credit carryforwards do not expire and carry forward
indefinitely. Net operating losses related to the Company's foreign subsidiary
(totaling $8,066) are available to offset future foreign taxable income.
45
46
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
The Company has experienced substantial changes in ownership as
defined by the Internal Revenue Code. These changes result in annual
limitations of the amount of net operating loss carryforward generated prior to
each change which can be utilized to offset future taxable income. As a result
of the ownership change at CLI at the date of the Merger, a portion of CLI's
net operating loss carryforward generated prior to the Merger will never be
available to offset future taxable income due to the effect of the annual
limitation and the expiration of the related net operating losses. Therefore,
the unavailable portion of the net operating loss carryforward is not
considered in determining the deferred tax asset at July 31, 1997.
At July 31, 1997, the Company had total domestic net operating loss
carryforwards of $68,230 ($24,099 and $44,131 for VTEL and CLI, respectively).
The portions of these carryforwards available for utilization during fiscal
1998 (in consideration of the annual limitations of $4,636 and $2,570 for VTEL
and CLI, respectively) are $14,429.
Due to the uncertainty surrounding the timing of realizing the
benefits of its favorable tax attributes in future tax returns, the Company has
placed a valuation allowance against its otherwise recognizable net deferred
tax asset. Accordingly, no deferred taxes have been recorded for the years
ended December 31, 1994 and 1995, for the seven months ended July 31, 1996 and
for the year ended July 31, 1997.
The tax provisions reflected in the accompanying consolidated
financial statements is due primarily to federal alternative minimum taxes and
state income taxes.
11. COMMITMENTS AND CONTINGENCIES
Lease Commitments
VTEL leases furniture and equipment, manufacturing facilities and
office space under noncancelable leases which expire at various dates through
2004. Certain leases obligate VTEL to pay property taxes, maintenance and
repair costs.
Future minimum lease payments under all operating leases as of July 31, 1997
were as follows:
FISCAL YEAR ENDING:
1998 $ 5,314
1999 4,860
2000 2,641
2001 1,815
2002 1,169
thereafter 2,625
--------
$ 18,424
========
Total rent expense under all operating leases for the years ended
December 31, 1994 and 1995, for the seven months ended July 31, 1996, and for
the year ended July 31, 1997 was $5,452, $6,188, $4,713, and $4,601,
respectively.
Contingencies
CLI is currently engaged in several legal proceedings relating to
matters arising prior to the Merger. There can be no assurance that CLI's legal
proceedings can be resolved favorably to CLI or VTEL. Such legal proceedings,
if continued for an extended period of time, could have an adverse effect upon
CLI's working capital and management's ability to concentrate on its business.
The Company has recorded an estimate of the costs to
46
47
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
defend and discharge the claims. Such amount is included in the charges
recorded as contingent liabilities (see Note 1 to the Consolidated Financial
Statements). In the opinion of management, such reserves should be sufficient
to discharge the liabilities, if any. However, an unfavorable outcome in any
one or several such legal proceedings could have a material adverse effect on
CLI and hence, VTEL.
In a complaint filed on December 20, 1993 in the United States
District Court in Dallas, Texas, Datapoint Corporation ("Datapoint") alleged
that CLI had infringed two United States patents owned by Datapoint relating to
video conferencing networks. The complaint seeks a judgment of infringement,
monetary damages, injunctive relief and attorneys' fees. CLI responded to the
complaint by denying the material allegations of the complaint and asserting
affirmative defenses. Discovery has commenced in the case. On September 27,
1995, CLI filed a motion to construe the scope of the patent claims at issue in
the litigation so as to elucidate whether Datapoint could assert that CLI is
infringing the patents in suit or whether Datapoint's patents are invalid in
light of the prior art. In April 1996, a Special Master submitted a report
which did not recommend that the Court adopt CLI's position set forth in the
motion. The Court in September 1996 adopted the report of the Special Master
that the claims of the patents in suit be construed in a manner favorable to
the plaintiff. The case has been set for trial in the fall of 1997. CLI is
vigorously defending the claims.
In June 1997, Keytech, S.A. ("Keytech") filed suit against CLI in the
United States District Court in Tampa, Florida. Keytech was a distributor of
satellite encoder and decoder products manufactured by a division of CLI which
CLI sold in June 1996. Keytech has asserted that the equipment sold was
defective and did not conform to contract specifications and express and
implied warranties. Keytech has asserted damages in excess of $20 million based
on its allegations of breach of contract, breach of warranties and fraud. CLI
has filed an answer denying liability and has asserted cross-claims against
Keytech for amounts due and unpaid for equipment sold by CLI to Keytech.
12. GEOGRAPHIC INFORMATION
The Company operates in one industry. Transfers between geographic
areas are recorded at cost plus a markup. Information about the Company's
operations in different geographic areas is as follows:
FOR THE YEAR ENDED
JULY 31, 1997
UNITED STATES EUROPE AND ELIMINATIONS CONSOLIDATED
OTHER
Sales to unaffiliated customers $ 180,811 $ 10,212 $ - $ 191,023
Transfer between geographic areas 12,612 - (12,612) -
--------- -------- --------- ----------
Total sales $ 193,423 $ 10,212 $ (12,612) $ 191,023
========= ======== ========= ==========
Net loss from continuing operations $ (40,942) $ (3,144) $ (185) $ (44,271)
========= ======== ========= ==========
Net loss $ (48,725) $ (3,144) $ (185) $ (52,054)
========= ======== ========= ==========
Identifiable assets $ 139,051 $ 8,008 $ (15,924) $ 131,135
========= ======== ========= ==========
47
48
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
FOR THE SEVEN MONTHS ENDED
JULY 31, 1996
UNITED STATES EUROPE AND ELIMINATIONS CONSOLIDATED
OTHER
Sales to unaffiliated customers $ 93,728 $ 3,234 $ - $ 96,962
Transfer between geographic areas 2,383 - (2,383) -
--------- -------- -------- ---------
Total sales $ 96,111 $ 3,234 $ (2,383) $ 96,962
========= ======== ======== =========
Net loss $ (16,721) $ (1,834) $ 48 $ (18,507)
========= ======== ======== =========
Identifiable assets $ 179,799 $ 3,131 $ (7,838) $ 175,092
========= ======== ======== =========
FOR THE YEAR ENDED
DECEMBER 31, 1995
UNITED STATES EUROPE AND ELIMINATIONS CONSOLIDATED
OTHER
Sales to unaffiliated customers $ 184,471 $ 6,603 $ - $ 191,074
Transfer between geographic areas 3,475 - (3,475) -
--------- ------- -------- ---------
Total sales $ 187,946 $ 6,603 $ (3,475) $ 191,074
========= ======= ======== =========
Net loss from continuing operations $ (16,912) $ (520) $ 131 $ (17,301)
========= ======= ======== =========
Net loss $ (53,454) $ (520) $ 131 $ (53,843)
========= ======= ======== =========
Identifiable assets $ 219,616 $ 3,445 $ - $ 223,061
========= ======= ======== =========
FOR THE YEAR ENDED
DECEMBER 31, 1994
UNITED STATES EUROPE AND ELIMINATIONS CONSOLIDATED
OTHER
Sales to unaffiliated customers $ 165,459 $ 3,730 $ - $ 169,189
Transfer between geographic areas 3,683 - (3,683) -
--------- -------- -------- ---------
Total sales $ 169,142 $ 3,730 $ (3,683) $ 169,189
========= ======== ======== =========
Net loss from continuing operations $ (2,767) $ (1,537) $ (472) $ (4,776)
========= ======== ======== =========
Net income (loss) $ 2,178 $ (1,537) $ (472) $ 169
========= ======== ======== =========
Identifiable assets $ 174,929 $ 3,157 $ - $ 178,086
========= ======== ======== =========
* * *
48
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the captions
"Election of Directors" will be filed with the Company's Definitive Proxy
Statement pursuant to Regulation 14A on or before November 28, 1997.
ITEM 11. EXECUTIVE COMPENSATION
In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the caption
"Executive Compensation" will be filed with the Company's Definitive Proxy
Statement pursuant to Regulation 14A on or before November 28, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the caption
"Security Ownership of Certain Beneficial Owners and Management" will be filed
with the Company's Definitive Proxy Statement pursuant to Regulation 14A on or
before November 28, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
(a)(1) The financial statements filed as part of this Report at Item 8 are listed in the Index to Financial Statements
and Financial Statement Schedules on page 27 of this Report.
(a)(2) The financial statement schedule filed as part of this Report at Item 8 is listed in the Index to Financial
Statements and Financial Statement Schedules on page 27 of this Report.
(a)(3) The following exhibits are filed with this Annual Report on Form 10-K:
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
2.1 - Agreement and Plan of Merger and Reorganization dated as of January 6, 1997 by and among
VTEL, VTEL-Sub, Inc. and CLI (incorporated by reference to the Exhibit 99.1 of VTEL's Report
on Form 8-K dated January 6, 1997).
49
50
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
3.1 - Amendment to Fourth Amended and Restated Certificate of Incorporation, as filed on May 27,
1997 with the Secretary of State of Delaware.
3.2 - Bylaws of the Company as adopted by the Board of Directors of the Company effective as of
June 11, 1989 (incorporated by reference to Exhibit 3.3 to the Company's Registration
Statement on Form S-1, File No. 33-45876, as amended).
3.3 - Amendment to Bylaws of the Company as adopted by the Board of Directors of the Company
effective as of April 28, 1992 (incorporated by reference to Exhibit 19.1 to the Company's
Quarterly Report on Form 10-Q for the three months ended March 31, 1992).
3.4 - Amendment to the Bylaws of the Company as adopted by the Board of Directors of the Company
effective as of July 10, 1996 (incorporated by reference to Exhibit 4.5 to the Company's
Current Report on Form 8-K dated July 10, 1996).
4.1 - Specimen Certificate for the Common Stock (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-1, File No. 33-45876, as amended).
4.2 - Rights Agreement dated as of July 10, 1996 between VTEL Corporation and First National Bank
of Boston, which includes the form of Certificate of Designations for Designating Series A
Preferred Stock, $.01 par value, the form of Rights Certificate, and the Summary of Rights to
Purchase Series A Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated July 10, 1996).
10.1 - License Agreement, dated as of November 7, 1990, between Universite de Sherbrooke, as
Licenser, and the Company, as Licensee (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1, File No. 33-45876, as amended).
10.2 - VideoTelecom Corp. 1989 Stock Option Plan, as amended (incorporated by reference to Exhibit
4.1 to the Company's Registration on Form S-8, File No. 33-51822).
10.3 - Form of VideoTelecom Corp. Nonqualified Stock Option Agreement (incorporated by reference to
Exhibit 10.16 to the Company's Registration Statement on Form S-1, File No. 33-45876, as
amended).
10.4 - Form of VideoTelecom Corp. Incentive Stock Option Agreement (incorporated by reference to
Exhibit 10.17 to the Company's Registration Statement on Form S-1, File No. 33-45876, as
amended).
50
51
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
10.5 - Distributor Agreement dated January 8, 1990, between US WEST Communications Services, Inc.
and the Company (incorporated by reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1, File No. 33-45876, as amended).
10.6 - Purchase Agreement effective October 1, 1990, between GTE Service Corporation and the
Company, as amended July 1, 1991 (incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as amended).
10.7 - Distribution Agreement, made and entered into November 1, 1991, by and between Microsoft
Corporation and the Company (incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as amended).
10.8 - Lease agreement, executed on November 18, 1992, by and between NationsBank of Texas, N.A., as
Lessor, and the Company, as Lessee (incorporated by reference to Exhibit 10.23 to the
Company's 1993 Annual Report on Form 10-K).
10.9 - VideoTelecom Corp. 1992 Director Stock Option Plan (incorporated by reference to Exhibit 4.1
to the Company's Registration on Form S-8, File No. 33-51822).
10.10 - VideoTelecom Corp. Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1 to
the Company's Registration on Form S-8, File No. 33-51822).
10.11 - Loan and Security Agreement, dated November 28, 1994, between Silicon Valley Bank, as
Creditor, and the Company, as Borrower (incorporated by reference to Exhibit 10.16 to the
Company's 1994 Annual Report on Form 10-K).
10.12 - Lease agreement, executed by Waterford HP, Ltd. on June 14, 1994, as Landlord, and the
Company, as Tenant, together with First Amendment of Lease Agreement between Waterford HP,
Ltd., as Landlord, and the Company, as Tenant, dated November 2, 1994, Second Amendment of
Lease Agreement between Waterford HP, Ltd., as Landlord, and the Company, as Tenant, dated
February 1, 1995, and Net Profits Agreement, executed between Waterford HP, Ltd. on June 14,
1994 and the Company (incorporated by reference to Exhibit 10.17 to the Company's 1994 Annual
Report on Form 10-K).
51
52
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
10.13 - Subscription Agreement dated June 14, 1995 by and between VTEL Corporation, Accord Video
Telecommunications, Ltd., Nizanim Fund (1993) Ltd., the "Star Entities", Manakin Investments
BV, Messrs. Gideon Rosenfeld and Sigi Gavish, and Eduardo Shoval (incorporated by reference
to Exhibit 10.19 to the Company's 1995 Annual Report on Form 10-K. The schedules referred to
in the agreement have been omitted but will be furnished to the Securities and Exchange
Commission upon request).
10.14 - Amendment to the VideoTelecom Corp. 1989 Stock Option Plan and the 1992 Director Stock Option
Plan (the terms of which are incorporated by reference to the Company's 1996 Definitive Proxy
Statement).
10.15 - The VTEL Corporation 1996 Stock Option Plan (the terms of which are incorporated by
reference to the Company's 1995 Definitive Proxy Statement).
10.16 - Amendment to the VTEL Corporation 1996 Stock Option Plan (the terms of which are incorporated
by reference to the Company's Joint Proxy Statement filed on April 24, 1997).
10.17 - Compression Labs, Incorporated 1980 Stock Option Plan - the ISO Plan (incorporated by
reference to the Annual Report on Form 10-K of Compression Labs, Inc. for the year ended
December 31, 1994).
10.18 - Revised forms of Incentive Stock Option and Early Exercise Stock Purchase Agreement used in
connection with the issuance and exercise of options under the ISO Plan (incorporated by
reference to the Registration on Form S-8 of Compression Labs, Inc. filed on June 6, 1997).
10.19 - Lease Agreement, dated March 31, 1992, between MLH Income Realty Partnership III, Lessor and
Compression Labs, Incorporated, Lessee (incorporate by reference to the Annual Report on
Form 10-K of Compression Labs, Incorporated for the year ended December 31, 1992).
10.20 - First Amendment to Lease, dated December 14, 1994, between MLH Income Realty Partnership
III, Lessor, and Compression Labs, Incorporated, Lessee (incorporated by reference to the
Annual Report on Form 10-K of Compression Labs, Inc. for the year ended December 31, 1994).
10.21 - Consulting and separation agreement between Compression Labs, Incorporated and John E. Tyson
dated February 16, 1996 (incorporated by reference to the Annual Report on Form 10-K of
Compression Labs, Inc. for the year ended December 31, 1995).
21.1 - List of Subsidiaries
23.1 - Consent of Price Waterhouse LLP.
52
53
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
23.2 - Consent of KPMG Peat Marwick LLP.
27.1 - Financial Data Schedule (filed electronically only)
- ---------------
(b) Reports on Form 8-K:
DATE FILED ITEM REPORTED
June 5, 1997 Consummation of Merger and Acquisition of CLI
July 14, 1997 Combined Results of Operations for the first full month
after completion of the Merger
(c) See subitem 14(a)(3) above.
(d) See subitem 14(a)(2) above.
53
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ Rodney S. Bond
------------------------------------
Rodney S. Bond
CHIEF FINANCIAL OFFICER,
VICE PRESIDENT-FINANCE, TREASURER
AND SECRETARY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ F.H. (Dick) Moeller Chief Executive Officer October 29, 1997
- ----------------------------------- Chairman of the Board and ----------------
F.H. (Dick) Moeller Director (Principal Executive
Officer)
/s/ Jerry S. Benson, Jr. President and Chief Operating Officer, October 29, 1997
- ----------------------------------- Director ----------------
Jerry S. Benson, Jr.
/s/ Rodney S. Bond Chief Financial Officer, October 29, 1997
- ----------------------------------- Vice President- Finance, ----------------
Rodney S. Bond Treasurer and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Arthur G. Anderson Director October 29, 1997
- ----------------------------------- ----------------
Arthur G. Anderson
/s/ John V. Jaggers Director October 29, 1997
- ----------------------------------- ----------------
John V. Jaggers
/s/ Eric L. Jones Director October 29, 1997
- ----------------------------------- ----------------
Eric L. Jones
/s/ Max Hopper Director October 29, 1997
- ----------------------------------- ----------------
Max Hopper
/s/ Gordon Matthews Director October 29, 1997
- ----------------------------------- ----------------
Gordon Matthews
/s/ T. Gary Trimm Director October 29, 1997
- ----------------------------------- ----------------
T. Gary Trimm
54
55
VTEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
PROVISION FOR WRITE-OFF OF
BALANCE AT DOUBTFUL UNCOLLECTIBLE BALANCE AT
BEGINNING ACCOUNTS ACCOUNTS END OF
OF YEAR RECEIVABLE RECEIVABLE YEAR
(IN THOUSANDS)
Accounts receivable -
allowances for
doubtful accounts
Year ended December 31, 1994 $ 1,563 $ 921 $ (347) $ 2,137
Year ended December 31, 1995 2,137 11,389 (3,313) 10,213
Seven months ended July 31, 1996 10,213 (132) (2,206) 7,875
Year ended July 31, 1997 7,875 6,086 (3,239) 10,722
55
56
INDEX TO EXHIBITS
-----------------
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
2.1 - Agreement and Plan of Merger and Reorganization dated as of
January 6, 1997 by and among VTEL, VTEL-Sub, Inc. and CLI
(incorporated by reference to the Exhibit 99.1 of VTEL's Report
on Form 8-K dated January 6, 1997).
3.1 - Amendment to Fourth Amended and Restated Certificate of
Incorporation, as filed on May 27, 1997 with the Secretary of
State of Delaware.
3.2 - Bylaws of the Company as adopted by the Board of Directors of the
Company effective as of June 11, 1989 (incorporated by reference
to Exhibit 3.3 to the Company's Registration Statement on Form
S-1, File No. 33-45876, as amended).
3.3 - Amendment to Bylaws of the Company as adopted by the Board of
Directors of the Company effective as of April 28, 1992
(incorporated by reference to Exhibit 19.1 to the Company's
Quarterly Report on Form 10-Q for the three months ended March
31, 1992).
3.4 - Amendment to the Bylaws of the Company as adopted by the Board of
Directors of the Company effective as of July 10, 1996
(incorporated by reference to Exhibit 4.5 to the Company's
Current Report on Form 8-K dated July 10, 1996).
4.1 - Specimen Certificate for the Common Stock (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-1, File No. 33-45876, as amended).
4.2 - Rights Agreement dated as of July 10, 1996 between VTEL
Corporation and First National Bank of Boston, which includes the
form of Certificate of Designations for Designating Series A
Preferred Stock, $.01 par value, the form of Rights Certificate,
and the Summary of Rights to Purchase Series A Preferred Stock
(incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated July 10, 1996).
10.1 - License Agreement, dated as of November 7, 1990, between
Universite de Sherbrooke, as Licenser, and the Company, as
Licensee (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1, File No. 33-45876,
as amended).
10.2 - VideoTelecom Corp. 1989 Stock Option Plan, as amended
(incorporated by reference to Exhibit 4.1 to the Company's
Registration on Form S-8, File No. 33-51822).
10.3 - Form of VideoTelecom Corp. Nonqualified Stock Option Agreement
(incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).
10.4 - Form of VideoTelecom Corp. Incentive Stock Option Agreement
(incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).
57
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
10.5 - Distributor Agreement dated January 8, 1990, between US WEST
Communications Services, Inc. and the Company (incorporated by
reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1, File No. 33-45876, as amended).
10.6 - Purchase Agreement effective October 1, 1990, between GTE Service
Corporation and the Company, as amended July 1, 1991
(incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).
10.7 - Distribution Agreement, made and entered into November 1, 1991,
by and between Microsoft Corporation and the Company
(incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).
10.8 - Lease agreement, executed on November 18, 1992, by and between
NationsBank of Texas, N.A., as Lessor, and the Company, as Lessee
(incorporated by reference to Exhibit 10.23 to the Company's 1993
Annual Report on Form 10-K).
10.9 - VideoTelecom Corp. 1992 Director Stock Option Plan (incorporated
by reference to Exhibit 4.1 to the Company's Registration on Form
S-8, File No. 33-51822).
10.10 - VideoTelecom Corp. Employee Stock Purchase Plan (incorporated by
reference to Exhibit 4.1 to the Company's Registration on Form
S-8, File No. 33-51822).
10.11 - Loan and Security Agreement, dated November 28, 1994, between
Silicon Valley Bank, as Creditor, and the Company, as Borrower
(incorporated by reference to Exhibit 10.16 to the Company's 1994
Annual Report on Form 10-K).
10.12 - Lease agreement, executed by Waterford HP, Ltd. on June 14, 1994,
as Landlord, and the Company, as Tenant, together with First
Amendment of Lease Agreement between Waterford HP, Ltd., as
Landlord, and the Company, as Tenant, dated November 2, 1994,
Second Amendment of Lease Agreement between Waterford HP, Ltd.,
as Landlord, and the Company, as Tenant, dated February 1, 1995,
and Net Profits Agreement, executed between Waterford HP, Ltd. on
June 14, 1994 and the Company (incorporated by reference to
Exhibit 10.17 to the Company's 1994 Annual Report on Form 10-K).
58
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
10.13 - Subscription Agreement dated June 14, 1995 by and between VTEL
Corporation, Accord Video Telecommunications, Ltd., Nizanim Fund
(1993) Ltd., the "Star Entities", Manakin Investments BV, Messrs.
Gideon Rosenfeld and Sigi Gavish, and Eduardo Shoval
(incorporated by reference to Exhibit 10.19 to the Company's 1995
Annual Report on Form 10-K. The schedules referred to in the
agreement have been omitted but will be furnished to the
Securities and Exchange Commission upon request).
10.14 - Amendment to the VideoTelecom Corp. 1989 Stock Option Plan and
the 1992 Director Stock Option Plan (the terms of which are
incorporated by reference to the Company's 1996 Definitive Proxy
Statement).
10.15 - The VTEL Corporation 1996 Stock Option Plan (the terms of which
are incorporated by reference to the Company's 1995 Definitive
Proxy Statement).
10.16 - Amendment to the VTEL Corporation 1996 Stock Option Plan (the
terms of which are incorporated by reference to the Company's
Joint Proxy Statement filed on April 24, 1997).
10.17 - Compression Labs, Incorporated 1980 Stock Option Plan - the ISO
Plan (incorporated by reference to the Annual Report on Form 10-K
of Compression Labs, Inc. for the year ended December 31, 1994).
10.18 - Revised forms of Incentive Stock Option and Early Exercise Stock
Purchase Agreement used in connection with the issuance and
exercise of options under the ISO Plan (incorporated by reference
to the Registration on Form S-8 of Compression Labs, Inc. filed
on June 6, 1997).
10.19 - Lease Agreement, dated March 31, 1992, between MLH Income Realty
Partnership III, Lessor and Compression Labs, Incorporated,
Lessee (incorporate by reference to the Annual Report on Form
10-K of Compression Labs, Incorporated for the year ended
December 31, 1992).
10.20 - First Amendment to Lease, dated December 14, 1994, between MLH
Income Realty Partnership III, Lessor, and Compression Labs,
Incorporated, Lessee (incorporated by reference to the Annual
Report on Form 10-K of Compression Labs, Inc. for the year ended
December 31, 1994).
10.21 - Consulting and separation agreement between Compression Labs,
Incorporated and John E. Tyson dated February 16, 1996
(incorporated by reference to the Annual Report on Form 10-K of
Compression Labs, Inc. for the year ended December 31, 1995).
21.1 - List of Subsidiaries
23.1 - Consent of Price Waterhouse LLP.
59
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
23.2 - Consent of KPMG Peat Marwick LLP.
27.1 - Financial Data Schedule (filed electronically only)
- ---------------
(b) Reports on Form 8-K:
1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
----------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "VTEL CORPORATION", FILED IN THIS OFFICE ON THE TWENTY-THIRD DAY
OF MAY, A.D. 1997, AT 4:01 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
EDWARD J. FREEL
-----------------------------------
Edward J. Freel, Secretary of State
[SEAL]
AUTHENTICATION: 8480711
DATE: 05-27-97
2
CERTIFICATE OF AMENDMENT
OF
FOURTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
VTEL CORPORATION
VTEL Corporation, a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify:
FIRST: The Board of Directors of the Corporation duly adopted resolutions
setting forth the following amendment ("Amendment") to the Fourth Amended and
Restated Certificate of Incorporation of the Corporation (the "Certificate"),
declaring the Amendment to be advisable and calling for the submission of the
proposed Amendment to the stockholders of the Corporation for consideration
thereof.
SECOND: The Amendment was adopted by the stockholders of the Corporation
at a special meeting of stockholders called and held upon notice in accordance
with Section 222 of the General Corporation Law of the State of Delaware.
THIRD: The Certificate is amended by deleting the whole of Article Fourth
thereof and replacing in lieu and instead of such Article Fourth a new Article
Fourth reading in its entirety as follows:
"FOURTH: The Corporation shall have the authority to issue two (2)
classes of shares to be designated, respectively, "Preferred Stock" and
"Common Stock." All of said shares shall be One Cent ($.01) par value each.
The total number of shares of capital stock which the Corporation shall
have the authority to issue is Fifty Million (50,000,000), which shall
consist of Forty Million (40,000,000) shares of Common Stock and Ten
Million (10,000,000) shares of Preferred Stock."
FOURTH: The Amended was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, this Corporation has caused this certificate to be
signed by its President and Secretary, this 23rd day of May, 1997.
VTEL CORPORATION
By: /s/ F. H. MOELLER
---------------------------------------
F. H. (Dick) Moeller, Chief Executive
Officer
ATTEST: /s/ RODNEY S. BOND
-----------------------------------
Rodney S. Bond, Secretary
1
VTEL Corporation
List of Subsidiaries
Exhibit 21.1
Subsidiary Location of Incorporation
Compression Labs, Incorporated Delaware
VTEL-ICS, Incorporated Delaware
VTEL Australia Ltd. Pty. Australia
CLI Belgium Belgium
CLI Europe Ltd. United Kingdom
VTEL Europe Ltd. United Kingdom
1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-65464, 33-65472 and 33-65478) of VTEL
Corporation of our report dated September 24, 1997 appearing on page 28 in this
Annual Report on Form 10-K.
PRICE WATERHOUSE LLP
Austin, Texas
November 5, 1997
1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statements on
Form S-8 (No. 33-65464, 33-65472, and 33-65478) of VTEL Corporation of our
report dated March 13, 1996, relating to the consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
two-year period ended December 31, 1995, which report appears in the July 31,
1997, annual report on Form 10-K of VTEL Corporation.
/s/ KPMG PEAT MARWICK LLP
San Jose, California
November 5, 1997
5
12-MOS
JUL-31-1997
AUG-1-1996
JUL-31-1997
4,757,000
20,299,000
54,429,000
(10,722,000)
22,244,000
93,898,000
54,418,000
(32,758,000)
131,135,000
54,370,000
0
0
0
255,109,000
(178,344,000)
131,135,000
191,023,000
191,023,000
(116,321,000)
(120,216,000)
2,813,000
0
(1,582,000)
(44,283,000)
12,000
(44,271,000)
(7,783,000)
0
0
(52,054,000)
(2.45)
(2.45)
