SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1999
Commission file number 0-20008
VTEL CORPORATION
A DELAWARE CORPORATION IRS EMPLOYER ID NO. 74-2415696
108 WILD BASIN ROAD
AUSTIN, TEXAS 78746
(512) 437-2700
The registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and
has been subject to such filing requirements for the past 90 days.
At December 10, 1999 the registrant had 24,533,668 outstanding shares of its
Common Stock, $0.01 par value.
1
VTEL CORPORATION
CONSOLIDATED BALANCE SHEET
(Amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
OCTOBER 31, JULY 31,
1999 1999
(unaudited)
ASSETS
Current assets:
Cash and equivalents $ 11,276 $ 7,805
Short-term investments 1,370 4,308
Accounts receivable, net of allowance for doubtful
accounts of $1,470 and $1,223 at
October 31, 1999 and July 31, 1999 29,536 38,291
Inventories 16,000 15,553
Prepaid expenses and other current assets 2,185 2,320
--------------- --------------
Total current assets 60,367 68,277
Property and equipment, net 28,534 29,704
Intangible assets, net 15,657 15,841
Capitalized software, net 9,033 7,351
Other assets 2,474 2,918
--------------- --------------
$ 116,065 $ 124,091
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,492 $ 18,375
Borrowings under revolving line of credit 14,000 -
Accrued compensation and benefits 3,681 4,916
Other accrued liabilities 3,825 3,555
Notes payable, current portion 2,093 2,234
Deferred revenue 10,668 11,062
--------------- --------------
Total current liabilities 48,759 40,142
Long-term liabilities:
Borrowings under revolving line of credit - 11,200
Notes payable 250 554
Other long-term obligations 4,191 4,176
--------------- --------------
Total long-term liabilities 4,441 15,930
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000
authorized; none issued or outstanding
Common stock, $.01 par value; 40,000,000 authorized;
24,533,000 and 24,423,000 issued and outstanding at
October 31, 1999 and July 31, 1999 245 244
Additional paid-in capital 260,179 260,057
Accumulated deficit (197,009) (191,665)
Unearned compensation (310) (385)
Stock subscriptions receivable (150) (150)
Accumulated other comprehensive loss (90) (82)
--------------- --------------
Total stockholders' equity 62,865 68,019
=============== ==============
$ 116,065 $ 124,091
=============== ==============
The accompanying Notes are an integral part of these condensed Consolidated
Financial Statements.
2
VTEL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------------
FOR THE
THREE MONTHS ENDED
OCTOBER 31,
1999 1998
REVENUES:
Products $ 24,375 $ 25,888
Services and other 10,691 11,052
---------------- ---------------
Total revenues 35,066 36,940
---------------- ---------------
COST OF SALES:
Products 14,518 13,280
Services and other 7,424 7,348
---------------- ---------------
Total cost of sales 21,942 20,628
---------------- ---------------
Gross margin 13,124 16,312
---------------- ---------------
OPERATING EXPENSES:
Selling, general and administrative 14,025 18,503
Research and development 3,768 5,236
Amortization of intangible assets 364 252
---------------- ---------------
Total operating expenses 18,157 23,991
---------------- ---------------
Loss from operations (5,033) (7,679)
---------------- ---------------
OTHER INCOME (EXPENSE):
Interest income 80 288
Interest expense and other (391) (48)
---------------- ---------------
(311) 240
---------------- ---------------
Net loss before provision
for income taxes (5,344) (7,439)
Provision for income taxes - -
Net loss from continuing operations $ (5,344) $ (7,439)
================ ===============
Net loss per share-basic and diluted $ (0.22) $ (0.32)
================ ===============
Weighted average shares outstanding:
Basic and diluted 24,298 23,085
================ ===============
The accompanying Notes are an integral part of these condensed Consolidated
Financial Statements.
3
VTEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
- -------------------------------------------------------------------------------------------------------------------
FOR THE
THREE MONTHS
ENDED OCTOBER 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,344) $ (7,439)
Adjustments to reconcile net loss
to net cash provided by (used in) operations:
Depreciation and amortization 2,620 2,757
Provision for doubtful accounts and returns 259 33
Amortization of unearned compensation 75 39
Foreign currency translation gain 2 33
Gain on sale of fixed assets 42 -
Decrease in accounts receivable 8,496 1,831
Decrease in inventories (447) (3,726)
(Increase) decrease in prepaid expenses and other
current assets 135 (1,006)
Decrease in accounts payable (3,883) (3,340)
Increase (decrease) in accrued expenses (912) 495
Decrease in deferred revenues (374) (346)
--------------- ---------------
Net cash provided by (used in) operating activities 581 (10,735)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net short-term investment activity 2,938 (110)
Net purchases of property and equipment (914) (3,473)
Collection of note receivable 12 -
Increase in capitalized software (1,702) (1,241)
Decrease in other assets 92 170
--------------- ---------------
Net cash provided by (used in) investing activities 426 (4,654)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock 111 21
Purchase of treasury stock - (2,265)
Proceeds from the sale of treasury stock 12 178
Borrowings under line of credit agreements 2,800 7,500
Payments on notes payable (453) -
--------------- ---------------
Net cash provided by financing activities 2,470 5,434
--------------- ---------------
Effect of translation exchange rates on cash (6) 127
--------------- ---------------
Net increase (decrease) in cash and equivalents 3,471 (9,828)
Cash and equivalents at beginning of period 7,805 15,191
--------------- ---------------
Cash and equivalents at end of period $ 11,276 $ 5,363
=============== ===============
The accompanying Notes are an integral part of these condensed Consolidated
Financial Statements.
4
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Note 1 - General and Basis of Financial Statements
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and accordingly, do not include all
information and footnotes required under generally accepted accounting
principles for complete financial statements. In the opinion of management,
these interim financial statements contain all adjustments, consisting of
normal, recurring adjustments, necessary for a fair presentation of the
financial position of the Company as of October 31, 1999 and July 31, 1999, the
results of the Company's operations for the three month periods ended October
31, 1999 and 1998 and cash flows for the three month periods ended October 31,
1999 and 1998. The results for interim periods are not necessarily indicative of
results for a full fiscal year.
Note 2 - Inventories
Inventories consist of the following:
OCTOBER 31, JULY 31,
1999 1999
Raw materials $ 8,926 $ 8,358
Work-in-process 1,570 1,504
Finished goods 3,894 4,134
Finished goods held for
evaluation and rental agreements 1,610 1,557
-------- --------
$ 16,000 $ 15,553
======== ========
Finished goods held for evaluation and under rental agreements consist
of completed visual communication systems used for demonstration and evaluation
purposes, which are generally sold during the next year.
Note 3- Net Income (Loss) Per Share
The Company reports earnings per share under SFAS No. 128, "Earnings
Per Share." Under SFAS No. 128, basic earnings per share is based on the
weighted effect of all common shares issued and outstanding, and is calculated
by dividing net income available to common stockholders by the weighted average
shares of common stock outstanding during the period. Diluted earnings per share
is calculated by dividing net income available to common stockholders by the
weighted average number of common shares used in the basic earnings per share
calculation plus the number of common shares that would be issued assuming
conversion of all potentially dilutive shares outstanding
5
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
The calculation of the number of weighted-average shares outstanding for basic
and dilutive earnings (loss) per share for each of the periods presented is as
follows:
FOR THE THREE MONTHS
ENDED
OCTOBER 31,
1999 1998
Weighted average shares
outstanding - basic 24,298 23,085
------- -------
Effect of dilutive securities:
Stock options - -
Warrants to purchase common stock - -
------- -------
Dilutive potential common shares - -
------- -------
Weighted average shares
outstanding - diluted 24,298 23,085
======= =======
Anti-dilutive securities 4,173 3,985
======= =======
Note 4 - Comprehensive Income
The Company's comprehensive income is comprised of net income, foreign
currency translation adjustments and unrealized gains and losses on marketable
securities held as available-for-sale investments. Comprehensive loss of $5.4
million and $7.6 million for the three-month periods ended October 31, 1999 and
1998, respectively, was not materially different from reported net loss.
Note 5 - Line of Credit
Amounts outstanding under the credit agreement are secured by
substantially all of the Company's assets. The Company has issued a letter of
credit totaling $1.2 million under the line of credit as a lease deposit on one
of its facilities. At October 31, 1999, the Company had drawn $14.0 million
under the credit line. The line of credit agreement is subject to loan covenants
that require the maintenance of certain financial ratios. As of December 15,
1999 the Company was not in compliance with several of the financial covenants
and as a result advances under the line are callable and additional advances
under the line of credit are not available. The Company is in the process of
renegotiating the line of credit and curing the default or obtaining an
alternative line of credit.
6
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Note 6-Segment Information
In 1999, the company adopted SFAS 131. The Company manages its business
primarily on a products and services basis. The Company's reportable segments
are Products and Services/Other. The Products segment provides multi-media
visual communication (commonly referred to as videoteleconferencing) products to
customers primarily through a network of resellers, and to a lesser extent
directly to end-users. The Services/Other segment provides custom integrated
systems, installations and product support services to customers. The accounting
policies of the segments are the same as those of the Company.
The Company evaluates the performance of its segments and allocates
resources to them based on revenue and operating income; however, there is a
charge to allocate corporate operating expenses to the segments. The prior
year's segment information has been restated to present the Company's reportable
segments.
The table below presents segment information about revenue from
unaffiliated customers, depreciation and operating income for the three-month
periods ended October 31, 1999 and October 31, 1998:
SERVICES/ CORPORATE
PRODUCTS OTHER OTHER TOTAL
------------- ------------- -------------- --------------
FOR THE THREE-MONTH PERIOD ENDING
OCTOBER 31, 1999
Revenues from unaffiliated customers $ 24,375 $ 10,691 $ - $ 35,066
Depreciation and amortization 34 305 2,281 2,620
Operating income (loss) 9,857 3,267 (18,468) (5,344)
FOR THE THREE-MONTH PERIOD ENDING
OCTOBER 31, 1998
Revenues from unaffiliated customers $ 25,888 $ 11,052 $ - $ 36,940
Depreciation and amortization 47 347 2,363 2,757
Operating income (loss) 12,608 3,704 (23,751) (7,439)
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Result of Operations
The following table sets forth for the fiscal periods indicated the percentage
of revenues represented by certain items in VTEL's consolidated statement of
operations:
FOR THE THREE MONTHS ENDED
OCTOBER 31,
1999 1998
Revenues 100% 100%
Gross margin 37 44
Selling, general and administrative 40 50
Research and development 11 14
Total operating expenses 52 65
Other income, net (1) 1
Net income (loss) (15)% (20)%
Revenues
Consolidated revenues decreased to $35.1 million for the three-month
period ending October 31, 1999 from $36.9 million for the three-month period
ending October 31, 1999. The primary reason for the decrease in revenues was due
to the disruption caused by the introduction of VTEL's new product line,
Galaxy(TM). The initial shipments of Galaxy(TM) began late during the three
month period ended October 31, 1999. Significant backlog for the new Galaxy(TM)
systems and upgrades to existing Enterprise Series Architecture (ESA(TM))
systems to the new Galaxy(TM) features remained in backlog at quarter end.
During the quarter ended October 31, 1999, we introduced our latest
line of videoconferencing systems that address both large and small
videoconferencing solutions. The Galaxy(TM) product line is distinguished by a
new more intuitive user interface software (Vtouch(TM)) that offers the
additional functionality of H.323 (Internet Protocol) networking capability (see
new products below).
For the three-month periods ended October 31, 1999 and 1998, service
revenue as a percent of total revenues was 30%. Approximately 50% of service
revenue relates to installation of our products and the balance relates to
maintenance contracts on videoconferencing units sold. The $0.4 million decline
in service revenue in the three months ended October 31, 1999 compared to the
three months ended October 31, 1999 reflects, in part, the decline in unit sales
over the past year.
International sales as a percentage of total consolidated product
revenues were 21% and 18% for the three-month periods ended October 31, 1999 and
1998, respectively. These revenue percentages represent export sales from our
domestic operations, as well as sales from our foreign subsidiaries. The
increased international sales during the 1999 period were the result of
increased orders delivered to customers in Europe.
VTEL primarily sells its products through resellers. For the
three-month periods ended October 31, 1999 and 1998 reseller sales were 76% and
84% of product sales, respectively. This decline indicates that a larger
proportion of sales was made directly to our customers during the three months
ended October 31, 1999. The additional direct sales during the 1999 period were
the result of increased international activity that is often more direct in
nature.
One of VTEL's initiatives is to grow revenues from non-U.S. markets.
Non-U.S. operations are subject to certain risks inherent in conducting business
abroad including price and currency exchange fluctuations and restrictive
government actions. We believe our foreign currency exposure to be relatively
8
low as foreign sales are predominantly in U.S. dollars. We use currency-hedging
programs that utilize foreign currency forward contracts on a limited basis and
review the credit worthiness of our customers to mitigate foreign currency
exchange and credit risk. There can be no assurance that our foreign
currency-hedging program will effectively hedge foreign currency exchange risk.
While we strive 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, our business model is
characterized by a very high degree of operating leverage. Our expense levels
are based, in part, on our expectations as to future revenue levels, which are
difficult to predict partly due to VTEL's strategy of distributing its products
primarily through resellers. Because expense levels are based on our
expectations as to future revenues, our expense base is relatively fixed in the
short term. If revenue levels are below expectations, operating results may be
materially and adversely affected and net income is likely to be
disproportionately adversely affected. In addition, our quarterly and annual
results may fluctuate as a result of many factors, including price reductions,
delays in the introduction of new products, delays in purchase decisions due to
new product announcements by VTEL 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 we
will be able to increase or even maintain our current level of revenues on a
quarterly or annual basis in the future.
Gross Margin
Overall, gross margins were 37% and 44% for the three-month periods
ended October 31, 1999 and 1998, respectively. Product margins were 40% and 49%
for the three-month periods ended October 31, 1999 and 1998, respectively. The
lower gross margin percentage for the period ended October 31, 1999 was
primarily due to a product mix change to smaller group systems that carry lower
gross margins than the large group systems. Margins associated with our service
operations were 31% and 34% for the three- month periods ended October 31, 1999
and 1998, respectively. The reduced margins over the comparative periods are the
result of an expense base that anticipated higher revenues than were achieved.
We believe the shift to smaller group systems reflects a transition to
visual communications systems that function within an IP network environment. As
such, we anticipate that lower gross margins will be offset by stronger unit
sales once IP networks proliferate. We expect gross margin pressures due to
price competitiveness in the industry, shifts in the product sales mix and
anticipated offerings of new products, which may carry a lower gross margin. We
expect that overall price competitiveness in the industry will continue to
become more intense as users of visual communication systems attempt to balance
performance, functionality and cost. Our gross margin is subject to fluctuation
based on pricing, production costs and sales mix.
Selling, general and administrative
Selling, general and administrative expenses of $14.0 million in the
fiscal quarter ended October 31, 1999 decreased by 24.2% from $18.1 million in
the fiscal quarter ended October 31, 1998. Selling, general and administrative
expenses were 40% and 50% of revenues for the three-month periods ended October
31, 1999 and 1998, respectively. This decline reflects the higher expense levels
present during the three months ended October 31, 1998, prior to the
restructuring efforts, which reduced the overall expense levels of VTEL.
Research and development expense
Research and development expenses of $3.8 million for the three-month
period ended October 31, 1999 decreased by 28% from $5.2 million in the
three-month period ended October 31, 1998. Research and development expenses
were 10.8% and 14.2% of revenues for the quarters ended October 31, 1999 and
1998, respectively. Research and development expense is net of software
9
development costs of $1.7 million and $1.2 million that were capitalized during
three months ended October 31, 1999 and 1998, respectively. The decrease in
research and development expenditures during the 1999 period reflects the
restructuring efforts that were completed during the fiscal year ended July 31,
1999. The restructuring efforts were aimed at a more efficient use of our
resources while continuing to develop new and innovative technologies.
The market for VTEL'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 often at reduced prices. The
introduction of products, by either VTEL or its competitors, embodying new
technology and the emergence of new industry standards may render existing
products obsolete and unmarketable. Our 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 VTEL's ability to grow and to remain competitive. Although
the percentage of revenues invested in research and development may vary from
period to period, VTEL is committed to investing in its research and development
programs.
Interest income and expense
Interest income was $.08 million and $.29 million for the three-month periods
ended October 31, 1999 and 1998, respectively. Changes in interest income are
based on interest rates earned on invested cash and cash balances available for
investment. The decrease in interest income during the three-month period ended
October 31, 1999 and the three months in fiscal 2000 ended October 31, 1999.
Introduction of New Product Lines
The Company continually strives to introduce the latest technology in
digital visual communications. During the three months ended October 31, 1999,
the Company introduced its new product line of Galaxy(TM) visual communication
systems. The enhanced software included in the Galaxy(TM) line can accommodate
and support customer migration to Internet Protocol networks easily because
these endpoints can operate on either type network and move from one network
architecture to another on a call by call basis through simple software
commands. For many customers that previously purchased VTEL products, the
migration to Internet Protocol network functionally can be accomplished through
software upgrades to existing products.
10
Quarterly Revenue Cycle
Historically, a significant percentage of the Company's sales occur in
the last few weeks of the quarter. By compressing most of its shipments into a
short period of time at the end of each quarter, the Company will incur overtime
costs, sharply increase its inventory levels in anticipation of this demand and
deplete or exhaust its backlog of customer orders. The Company's sales cycle is
difficult to predict and manage. It is possible that management's estimates of
product demand will be inaccurate and as a result the Company could experience a
rise in inventory levels and a decline in expected revenue levels in any given
quarter. Management's estimates of future product revenue are derived from its
analysis of market conditions and reports from its sales force of customer leads
and prospective interest. Backlog of customer product orders cannot be relied
upon to forecast future revenue levels. Because of the short cycle time between
customer order and shipment, it is also possible that unanticipated delays from
the Company's vendors can disrupt shipments and adversely affect the results in
a given quarter. This is especially an issue due to the Company's reliance on a
limited number of highly specialized suppliers. The above factors represent
uncertainties that can have a material adverse effect on the Company's financial
position and results of operations if not managed properly.
Impact of Year 2000
Many computer systems may experience problems handling dates beyond the
year 1999. Therefore, some computer hardware and software will need to be
modified prior to the Year 2000 in order to remain functional. Prior to April
1999, we believed that our products were Year 2000 compliant with minor
exceptions due to the incorporation of third party software such as Microsoft
Windows(TM), which is Year 2000 compliant with minor exceptions. In April 1999,
Microsoft announced that upgrades would be made available that will make
Microsoft Windows(TM) Year 2000 compliant. The ability to make Windows(TM)
compliant favorably affects VTEL customers who are using older video
conferencing systems that run on Windows 95, 98 and NT (TM) software. We believe
that all our products being shipped today are Year 2000 compliant. Additionally,
previous shipments of our current products can be made Year 2000 compliant
through software patches or upgrades. While we are not currently aware of any
other Year 2000 compliance issues with our products, no assurances can be made
that problems will not arise such as customer problems with other software
programs, operating systems or hardware that disrupt their use of their
products. There can be no assurances that such disruption would not negatively
impact costs and revenues in future years.
The Enterprise Resource Planning System was acquired in 1998. The
vendor of our Enterprise Resource Planning System has assured us that the system
is Year 2000 compliant. On August 1, 1999, the system began processing
transactions in our fiscal year 2000. We began assessing Year 2000 issues and
Year 2000 testing of other management information systems during fiscal 1998.
We presently believe that with modifications to existing software and
conversions to new software, the Year 2000 issue can be mitigated. It is not
anticipated that there will be a significant increase in costs as much of the
Year 2000 activities will be a continuation of the on-going process to improve
all of our systems. We have estimated the total costs of Year 2000 compliance
and related contingency planning to be $200,000. We have not accrued any amounts
related to the expected costs as we intend to expense Year 2000 costs as they
are incurred. Through the implementation of our Year 2000 compliant Enterprise
Resource Planning Software and review of all computer hardware on our premises
we are optimistic about our ability to continue to be able to conduct business
on January 1, 2000. However, other factors that are beyond our control could
potentially have a material effect on future financial results. Specific factors
that might cause a material impact include, but are not limited to, electrical
power outages that would disrupt operations, failure by third parties to timely
convert their systems, and similar uncertainties. In addition, Year 2000 issues
may impact our customer's ability to purchase products and therefore materially
impact our future revenue stream. To the extent these potential revenue
reductions cannot be anticipated and/or we cannot reduce operating expenses
correspondingly, then we may experience severe unfavorable financial impact to
our net income. We have asked our employees to be available during the
transition period into 2000 as an additional measure to address any unexpected
Year 2000 issues.
11
Liquidity and capital resources
At October 31, 1999, we had working capital of $11.6 million, including
$12.6 million in cash, cash equivalents and short-term investments. Cash
provided by operating activities was $.6 million for the three months ended
October 31, 1999. Changes in cash from operating activities are primarily the
result of increases and decreases in accounts receivable, inventories and
accounts payable. Specifically, during the three months ended October 31, 1999,
cash collections of receivables were significant with an overall decrease of
$8.5 million in our accounts receivable balance. Cash used by operating
activities was $10.7 million for the three months ended October 31, 1998 and
primarily resulted from the net operating loss incurred.
Cash provided by investing activities of $.4 million for the three
months ended October 31, 1999 was primarily due to net sales of short-term
investments of $2.9 million. These sales were offset by investments in software
development costs that were capitalized and net investments in fixed assets.
Cash used by investing activities was $4.7 million for the three months ended
October 31, 1998 and primarily resulted from an increase in net property and
equipment of $3.5 million and an increase in capitalized software development
costs of $1.2 million.
Cash provided by financing activities was $2.4 million for the three
months ended October 31, 1999 and was primarily related to borrowings under the
Company's line of credit agreements. Cash provided by financing activities of
$5.4 million for the three months ended October 31, 1998 relate to borrowing
under our line of credit and was offset by the purchase of treasury stock.
VTEL has a $20.0 million revolving line of credit with a banking syndicate. We
have issued a letter of credit totaling $1.2 million under our revolving line of
credit as a lease deposit on one of our facilities. At October 31, 1999 we have
drawn $14.0 million under the syndicated line of credit. The line of credit is
subject to loan covenants that require the maintenance of certain financial
ratios. As of December 15, 1999, VTEL was not in compliance with several
financial covenants and as a result advances under the line of credit are
callable and additional advances under the line of credit are not available. We
are in the process of renegotiating the line of credit and curing the default or
obtaining an alternative line of credit.
VTEL's principal sources of liquidity at October 31, 1999 consist of
$12.6 million of cash, cash equivalents and short-term investments and the
ability to generate cash from operations. In addition, VTEL may be able to
liquidate certain investments that have significantly increased in value or
secure additional equity infusions in the private marketplace. However, VTEL
would suffer a material adverse effect on our liquidity if we were unable to
complete any of these alternative transactions and advances under the line of
credit were called for payment.
Legal Matters
VTEL is the defendant or plaintiff in various actions that arose in the
normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on our
financial condition or results of operations.
General
The markets for our products are characterized by a highly competitive
and rapidly changing environment in which operating results are subject to the
effects of frequent product introductions, manufacturing technology innovations
and rapid fluctuations in product demand. While we attempt to identify and
respond to these changes as soon as possible, prediction of and reaction to such
events will be an ongoing challenge and may result in revenue shortfalls during
certain periods of time.
VTEL's future results of operations and financial condition could be
impacted by the following factors, among others: trends in the videoconferencing
market, introduction of new products by competitors, increased competition due
to the entrance of other companies into the videoconferencing market, especially
more established companies with greater resources than ours, delay in the
introduction of higher performance products, market acceptance of new products
we introduce, price competition, interruption of the supply of low-cost products
from third-party manufacturers, changes in general economic conditions in any of
the countries in which we do business, adverse legal disputes and delays in
purchases relating to federal government procurement. In addition,
notwithstanding the internal control procedures instituted by VTEL, there can be
no guarantee that accounting errors will not occur.
12
Due to the factors noted above and elsewhere in Management's Discussion
and Analysis of Financial Condition and Results of Operations, the Company's
past earnings and stock price has been, and future earnings and stock price
potentially may be, subject to significant volatility, particularly on a
quarterly basis. Past financial performance should not be considered a reliable
indicator of future performance and investors are cautioned in using historical
trends to anticipate results or trends in future periods. Any shortfall in
revenue or earnings from the levels anticipated by securities analysts could
have an immediate and significant effect on the trading price of the Company's
common stock in any given period. Also, the Company participates in a highly
dynamic industry, which often contributes to the volatility of the Company's
common stock price.
Cautionary Statement Regarding Risks and Uncertainties That May Affect Future
Results
Certain portions of this report contain forward-looking statements
about the business, financial condition and prospects of the Company. The actual
results of the Company could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties including,
without limitation, changes in demand for the Company's products and services,
changes in competition, economic conditions, impact of Year 2000 related issues,
interest rates fluctuations, changes in the capital markets, changes in tax and
other laws and governmental rules and regulations applicable to the Company's
business, and other risks indicated in the Company's filings with the Securities
and Exchange Commission. These risks and uncertainties are beyond the ability of
the Company to control, and in many cases, the Company cannot predict all of the
risks and uncertainties that could cause its actual results to differ materially
from those indicated by the forward-looking statements. When used in this
report, the words "believes," "estimates," "plans," "expects," "anticipates" and
similar expressions as they relate to the Company or its management are intended
to identify forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe our foreign currency exposure to be relatively low as
foreign sales are predominantly in U.S. dollars. We use currency hedging
programs that utilize foreign currency forward contracts on a limited basis and
review the credit worthiness of our customers to mitigate foreign currency
exchange and credit risk. For additional Quantitative and Qualitative
Disclosures about Market Risk reference is made to Part II, Item 7A,
Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report
on Form 10-K for the year ended July 31, 1999.
13
PART II -- OTHER INFORMATION
ITEM 1. LEGAL MATTERS
VTEL is the defendant or plaintiff in various actions that arose in the
normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on our
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
* * *
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VTEL CORPORATION
December 15, 1999 By: /s/ Rodney S. Bond
---------------------------------
Rodney S. Bond
Vice President-Finance
(Chief Financial Officer
and Principal Accounting Officer)
15
5
0000884144
VTEL Corporation
1
U.S. Dollars
3-MOS
JUL-31-2000
AUG-01-1999
OCT-31-1999
1
11,276,000
1,370,000
31,006,000
(1,470,000)
16,000,000
60,367,000
58,586,000
(30,052,000)
116,065,000
48,759,000
0
0
0
260,424,000
(197,559,000)
116,065,000
35,066,000
35,066,000
(21,942,000)
(18,157,000)
11,000
0
(322,000)
(5,344,000)
0
(5,344,000)
0
0
0
(5,344,000)
(.22)
(.22)
