SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2000
Commission file number 0-20008
VTEL Corporation
A Delaware Corporation IRS Employer ID No. 74-2415696
108 Wild Basin Road
Austin, Texas 78746
(512) 437-2700
The registrant has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and
has been subject to such filing requirements for the past 90 days.
At June 2, 2000 the registrant had outstanding 24,954,499 shares of its Common
Stock, $0.01 par value.
VTEL CORPORATION
CONSOLIDATED BALANCE SHEET
(Amounts in thousands, except per share data)
- -------------------------------------------------------------------------------------------------
April 30, July 31,
2000 1999
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 3,455 $ 7,805
Short-term investments 36,504 4,308
Accounts receivable, net of allowance for doubtful
accounts of $2,108 and $1,318 at
April 30, 2000 and July 31, 1999 25,983 38,291
Inventories 14,488 15,553
Prepaid expenses and other current assets 2,319 2,320
--------- ---------
Total current assets 82,749 68,277
Property and equipment, net 26,317 29,704
Intangible assets, net 14,554 15,841
Capitalized software 10,465 7,351
Other assets 1,600 2,168
--------- ---------
$ 135,685 $ 123,341
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,371 $ 18,375
Borrowings under revolving line of credit - -
Accrued merger and other expenses - -
Accrued compensation and benefits 4,332 4,916
Other accrued liabilities 4,607 3,555
Notes payable, current portion 1,306 2,234
Deferred revenue 11,982 11,062
--------- ---------
Total current liabilities 35,598 40,142
Long-term liabilities:
Borrowings under revolving line of credit - 11,200
Notes payable 250 554
Other long-term obligations 4,487 4,176
--------- ---------
Total long-term liabilities 4,737 15,930
--------- ---------
Commitments and contingencies - -
Stockholders' equity:
Common stock, $.01 par value; 40,000,000 authorized;
24,940,000 and 24,423,000 issued at April 30, 2000
and July 31, 1999 249 244
Additional paid-in capital 261,551 260,057
Accumulated deficit (165,838) (191,665)
Unearned compensation (70) (385)
Stock subscriptions receivable (606) (900)
Accumulated other comprehensive income (loss) 64 (82)
--------- ---------
Total stockholders' equity 95,350 67,269
--------- ---------
$ 135,685 $ 123,341
========= =========
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 For the
Three Months Ended Nine Months Ended
April 30, April 30,
(Unaudited)
2000 1999 2000 1999
Revenues:
Products $ 21,010 $ 25,133 $ 71,518 $ 77,407
Services and other 10,430 10,983 32,250 33,404
-------- -------- --------- ---------
31,440 36,116 103,768 110,811
-------- -------- --------- ---------
Cost of sales:
Products 13,138 12,037 42,859 39,800
Services and other 7,933 6,362 23,190 21,195
-------- -------- --------- ---------
21,071 18,399 66,049 60,995
-------- -------- --------- ---------
Gross margin 10,369 17,717 37,719 49,816
-------- -------- --------- ---------
Operating expenses:
Selling, general and administrative 14,086 13,254 41,673 47,673
Research and development 4,392 4,427 12,074 14,301
Amortization of intangible assets 336 379 1,078 890
Restructuring expense - 203 - 3,118
-------- -------- --------- ---------
Total operating expenses 18,814 18,263 54,825 65,982
-------- -------- --------- ---------
Loss from operations (8,445) (546) (17,106) (16,166)
-------- -------- --------- ---------
Other income (expense):
Interest income 424 165 633 701
Non-recurring events 44,501 - 44,501 -
Interest expense and other (469) (193) (1,331) (492)
-------- -------- --------- ---------
44,456 (28) 43,803 209
-------- -------- --------- ---------
Income (loss) before provision
for income taxes 36,011 (574) 26,697 (15,957)
Provision for income taxes (870) - (870) -
-------- -------- --------- ---------
Net income (loss) $ 35,141 $ (574) $ 25,827 $ (15,957)
======== ======== ========= =========
Basic income (loss) per share: $ 1.43 $ (0.02) $ 1.06 $ (0.69)
======== ======== ========= =========
Diluted income (loss) per share: $ 1.36 $ (0.02) $ 1.03 $ (0.69)
======== ======== ========= =========
Weighted average shares outstanding:
Basic 24,620 23,734 24,436 23,264
======== ======== ========= =========
Diluted 25,765 23,734 24,955 23,264
======== ======== ========= =========
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
Nine Months Ended
April 30,
(Unaudited)
2000 1999
Cash flows from operating activities:
Net income (loss) $ 25,827 $(15,957)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operations:
Depreciation and amortization 9,478 9,103
Provision for doubtful accounts 1,046 323
Amortization of unearned compensation 147 212
Loss (gain) on sale of fixed assets 166 (104)
Foreign currency translation loss 188 69
Decrease in accounts receivable 11,262 6,844
Decrease (increase) in inventories 1,065 (1,743)
Decrease (increase) in prepaid expenses
and other current assets 1 (14)
Decrease in accounts payable (5,004) (8,146)
Increase (decrease) in accrued expenses 476 (1,086)
Increase in deferred revenues 1,149 445
-------- --------
Net cash provided by (used in) operating activities 45,801 (10,054)
-------- --------
Cash flows from investing activities:
Net short-term investment activity (32,196) 6,512
Net purchase of property and equipment (3,596) (5,576)
Collection (issuance) of notes receivable 87 (947)
Increase in capitalized software (4,170) (4,677)
Acquisition - (231)
Decrease (increase) in other assets 36 (195)
-------- --------
Net cash used in investing activities (39,839) (5,114)
-------- --------
Cash flows from financing activities:
(Payments) borrowings under line of credit (11,200) 11,200
Payments on notes payable (1,363) (1,539)
Issuance of notes payable 265 -
Net proceeds from issuance of stock 2,028 (42)
Purchase of treasury stock - (2,265)
4
Sale of treasury stock
- 688
-------- --------
Net cash (used in) provided by financing activities (10,270) 8,044
-------- --------
Effect of translation exchange rates on cash (42) (255)
-------- --------
Decrease in cash and equivalents (4,350) (7,379)
Cash and equivalents at beginning of period 7,805 15,191
-------- --------
Cash and equivalents at end of period $ 3,455 $ 7,812
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
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 accounting principals generally
accepted in the United States for complete financial statements. In the opinion
of management, these interim financial statements contain all adjustments,
consisting of normal, recurring adjustments, necessary for a fair presentation
of the financial position of VTEL as of April 30, 2000 and July 31, 1999, the
results of our operations for the three and nine month periods ended April 30,
2000 and 1999 and cash flows for the nine month period ended April 30, 2000 and
1999. The results for interim periods are not necessarily indicative of results
for a full fiscal year.
Note 2 - Inventories
Inventories consist of the following (amounts in thousands):
April 30, July 31,
2000 1999
Raw materials $ 6,365 $ 8,595
Work in process 1,025 1,504
Finished goods 5,958 4,637
Finished goods held for evaluation
and rental and loan agreements 1,140 817
-------- --------
$ 14,488 $ 15,553
======== ========
Finished goods held for evaluation consist of completed digital visual
communications systems used for demonstration and evaluation purposes.
Note 3 - Net Income (Loss) Per Share
VTEL 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.
6
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 (amounts in thousands):
For the For the
Three Months Ended Nine Months Ended
April 30, April 30,
2000 1999 2000 1999
Weighted average shares
Outstanding - basic 24,620 23,734 24,436 23,264
Effect of dilutive securities:
Stock options 1,087 - 480 -
Stock warrants 58 - 39 -
------ ------ ------ ------
Dilutive potential common shares 1,145 - 519 -
------ ------ ------ ------
Weighted average shares 25,765 23,734 24,955 23,264
====== ====== ====== ======
Outstanding - diluted
Antidilutive securities 570 4,052 2,460 4,657
====== ====== ====== ======
Note 4 - Restructuring Charge
In November 1998, we adopted a restructuring plan which resulted in the
reduction of 138 employees during the nine months ended April 30, 1999. While
terminations were effective immediately for most employees upon announcement all
employees terminated in the restructuring had left by the end of the third
fiscal quarter of 1999. We also made the decision to reduce operating costs by
exiting other activities and reducing the related overhead costs. These
activities include the closure or consolidation of certain field sales offices,
and our Sunnyvale, California spare parts depot and technical assistance center.
As a result of the restructuring, we recorded a restructuring charge of $3.1
million during the nine months ended April 30, 1999. All restructuring efforts
had been completed by the end of the 1999 fiscal year.
Note 5 - Comprehensive Income (Loss)
Our comprehensive income (loss) is comprised of net income, foreign
currency translation adjustments and unrealized gains and losses on marketable
securities held as available-for-sale investments.
Comprehensive income for the three and nine months ended April 30, 2000
was $35.2 million and $26.0 million, respectively, and comprehensive loss for
the three and nine months ended April 30, was ($0.8) million and ($16.1)
million, respectively, including the impact of other accumulated comprehensive
loss.
7
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Note 6 - Line of Credit
On March 10, 2000, VTEL repaid all amounts drawn on the line of credit
that was in place with a banking syndicate. At April 30, 2000, we did not have a
line of credit in place. The letter of credit totaling $1.2 million that had
been issued under the line of credit as a lease deposit on one of our facilities
has now been collateralized with a certificate of deposit. We expect to obtain
an alternative line of credit in the near term.
Note 7 - Non-Recurring Events
On March 3, 2000 VTEL settled a lawsuit pending in the 126th Judicial
District Court in Travis County, Texas which VTEL had previously initiated
against five former employees who left the Company in September 1996 to form Via
Video Communications, Inc. ("Via Video"). Via Video was subsequently acquired by
Polycom, Inc. Pursuant to the settlement agreement, the former employees of VTEL
have paid $2.5 million in cash and have delivered to VTEL 300,800 shares of
common stock of Polycom, Inc. in settlement of the claims asserted by VTEL.
These shares were sold during the three months ended April 30, 2000 for $34.2
million. The parties have agreed to dismissal of all claims and counterclaims
and third party claims in the lawsuit, ending the litigation. Separately, VTEL
voluntarily dismissed Polycom, Inc. and Via Video from the case without
consideration.
On March 3, 2000, VTEL granted non-exclusive licenses to Polycom, Inc.
("Polycom") to use three of its patented technologies, and Polycom paid a one
time fee to VTEL of $8.3 million as a fully paid up royalty in exchange for such
license. In turn and without any payments by VTEL, Polycom also has granted VTEL
a non-exclusive sublicense to its rights under its license agreement with Brown
University pertaining to its single camera tracking technology. Through this
technology exchange, the parties will have access to specified distinctive
technologies of the other for use in their product offerings.
The cash and the value of the shares received from these non-recurring
events are reported net of legal fees totaling $0.5 million in the consolidated
statement of operations.
8
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Note 8 - Acquisition
On March 9, 1999, the Company completed the acquisition of substantially
all of the assets of Vosaic LLP, an Internet video software and technology
company for $3.2 million in cash, stock and warrants. The transaction has been
accounted for as a purchase of assets. The acquisition involved the issuance of
1,149,000 shares (equivalent to approximately 5% of the outstanding shares of
the Company's stock as of March 9, 1999).
Note 9 - Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition," which outlines the basic
criteria that must be met to recognize revenue and provide guidance for
presentation of revenue and for disclosure related to revenue recognition
policies in financial statements filed with the Securities and Exchange
Commission. As required by this SAB, we will adopt the Securities Exchange
Commission requirements beginning with our first quarter of fiscal 2001. We
are in the process of evaluating the impact of the SAB on our financial position
and results of operations.
Note 10 - Segment Information
In 1999, VTEL adopted SFAS 131, "Disclosure about Segments and an
Enterprise and Related Information". VTEL manages its business primarily on a
products, services and internet ventures basis. Our reportable segments are
Products, Services/Other and Internet Ventures. The Products segment provides
multi-media visual communication (commonly referred to as video
teleconferencing) 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 Internet Ventures are business units established to
focus on delivering visual communications products and services for the World
Wide Web. In addition to our operating segments, we incur various corporate
overhead related charges that are reflected separately in the table below. The
accounting policies of the segments are the same as those of VTEL.
The table below presents segment information about revenue from
unaffiliated customers, depreciation and net income (loss) for the three and
nine month periods ended April 30, 2000 and 1999:
Services/ Internet Corporate/
Products Other Ventures Other Total
---------- ----------- ----------- ------------ ----------
For the three-month period
ending April 30, 2000
Revenues from unaffiliated
customers $ 21,010 $ 10,430 $ - $ - $ 31,440
Depreciation and amortization 35 265 101 3,079 3,480
Net income (loss) 7,872 2,498 (2,504) 27,275 35,141
For the three-month period
ending April 30, 1999
Revenues from unaffiliated
customers $ 25,133 $ 10,983 $ - $ - $ 36,116
Depreciation and amortization 77 260 - 2,933 3,270
Net income (loss) 13,096 4,621 - (18,291) (574)
For the nine-month period
ending April 30, 2000
Revenues from unaffiliated
customers $ 71,518 $ 32,250 $ - $ - $ 103,768
Depreciation and
amortization 205 867 225 8,181 9,478
Net income (loss) 28,659 9,060 (6,394) (5,498) 25,827
For the nine-month period
ending April 30, 1999
Revenues from unaffiliated
customers $ 77,407 $ 33,404 $ - $ - $ 110,811
Depreciation and amortization 168 608 - 8,327 9,103
Net income (loss) 37,607 12,209 - (65,773) (15,957)
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following review of VTEL's financial position as of April 30, 2000
and 1999 and for the three months and nine months ended April 30, 2000 and 1999
should be read in conjunction with our 1999 Annual Report on Form 10-K filed
with the Securities and Exchange Commission on November 5, 1999.
Results of Operations
The following table provides the percentage of revenues represented by
certain items in VTEL's Condensed Consolidated Statement of Operations:
For the Three For the Nine
Months Ended Months Ended
April 30, April 30,
2000 1999 2000 1999
Revenues 100% 100% 100% 100%
Gross margin 33 49 36 45
Selling, general and administrative 45 37 40 43
Research and development 14 12 12 13
Restructuring expense 0 1 0 3
Total operating expenses 60 51 53 60
Net income (loss) 112 (2) 25 (15)
Three and Nine Months Ended April 30, 2000 and 1999
Revenues. Revenue for the quarter ended April 30, 2000 decreased by $
4.7 million, or 13%, to $31.4 million from $36.1 million for the quarter ended
April 30, 1999. Revenues for the nine months ended April 30, 2000 decreased to
$103.8 million from $110.8 million for the nine months ended April 30, 1999, a
decrease of $7.04 million, or 6%. The comparible three month decline is the
result of a reduction in industry demand for higher end video conferencing
products. The decline over the comparable nine month periods ended April 30,
2000 and 1999 can be attributed to a slower than anticipated conversion by our
customers to our new product line, Galaxy(TM), which was introduced near the end
of the first fiscal quarter of 2000. Despite the slow conversion, the pace of
Galaxy(TM) sales continues to grow quarter over quarter. In addition, the
videoconferencing industry continues to experience competition from low-end
appliance type products that has had the effect of driving average sales prices
downward. During the quarter ended April 30, 2000, VTEL further addressed the
lower-end competition with the introduction of the Galaxy(TM) MiniTower, a sub
$10,000 PC-based videoconferencing solution that utilizes H.323 Internet
Protocol (IP) Vtouch(TM) software (see Introduction of New Product Lines and
Services).
Unit sales of our core products Galaxy(TM) and ESA(TM) (Enterprise
Series Architecture, our prior generation flagship product line) increased 3%
and 27% for the three and nine months ended April 30, 2000 as compared to the
same periods in fiscal 1999. The declining revenue levels over these same
periods reflect the shift in product mix to units with lower average sales
prices. Our market analysis indicates that the demand for high end video
conferencing solutions is focused on relatively narrow market sectors such as
education and state and federal government, while the corporate video
conferencing market has migrated toward appliance type products. We continue to
excel in the primary and secondary education and government sectors where we are
10
perceived to be gaining market share. We believe that the desk top
videoconferencing solution currently addressed by appliance type products by our
competitors will ultimately be replaced with Internet solutions using
videoconferencing software. This will be accomplished with the proliferation of
high speed, broad band Internet Protocol (IP) networks that are currently being
deployed within the United States and abroad. We expect to continue our focus on
bringing videoconferencing solutions to our targeted markets while we develop
videoconferencing solutions for the Internet.
We expect the transition to the Galaxy(TM) product line to continue for
several quarters due to the size of the install base of the ESA(TM) product line
and the desire by our customers to install additional endpoints that are
familiar. Approximately 75% of our product sales are from existing customers. A
new, more innovative user interface software (Vtouch(TM)) and the additional
functionality of H.323 IP networking capability distinguish the Galaxy(TM)
product line.
For the three and nine month periods ended April 30, 2000, service
revenue, as a percent of total revenues was 33% and 31%, respectively. Less than
10% of service revenue relates to installation of our products and the balance
of service revenue relates to maintenance contracts on videoconferencing units
previously sold. Service and other revenue declined by $0.6 million and $1.2
million in the three and nine months ended April 30, 2000 compared to the three
and nine months ended April 30, 1999. This decline reflects, in part, the
decline in product sales over the past year.
International sales represented approximately 17% and 19% respectively,
of product revenues for the three months and nine months ended April 30, 2000
compared to 23% and 23% for both the three months and nine months ended April
30, 1999. These revenue percentages represent export sales from our domestic
operations, as well as sales from our foreign subsidiaries that are installed in
foreign locations.
VTEL primarily sells its products through resellers. For the three
months and nine months ended April 30, 2000 reseller sales were 79% and 74% of
product sales, respectively. For the three months and nine months ended April
30, 1999 reseller sales were 74% and 80% respectively. All other sales of our
products are made directly to the end user customer.
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
low as foreign sales are predominantly settled 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 revenue growth, there can be no assurance that
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.
11
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. Gross margin as a percentage of total revenues was 33%
and 36% for the three and nine months ended April 30, 2000, respectively, a
decrease from the gross margin as a percentage of revenues of 49% and 45%, for
the three and nine months ended April 30, 1999. The decrease in gross margin
percentage for the three and nine month periods ended April 30, 2000 was the
result of a shift by our customers towards the purchase of lower margin
products. Additionally, product margins were affected unfavorably by inventory
write-downs taken on non-core product lines in the three and nine months ended
April 30, 2000 that were $0.6 million per quarter greater than the comparable
periods.
We believe the shift to smaller group systems will reflect continued
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.
12
Selling, general and administrative. Selling, general and
administrative expenses increased by $0.8 million, or 6%, to $14.1 million for
the quarter ended April 30, 2000 from $13.2 million for the quarter ended April
30, 1999. Selling, general and administrative expenses decreased by $6.3
million, or 13%, to $41.7 million for the nine months ended April 30, 2000 from
$47.7 million for the nine months ended April 30, 1999. Selling, general and
administrative expenses as a percentage of revenues were 45% and 37% for the
three months ended April 30, 2000 and 1999, respectively, and were 40% and 43%
for the nine months ended April 30, 2000 and 1999, respectively. The overall
decline for the comparative nine month periods reflects the higher expense
levels present during the nine months ended April 30, 1999, prior to the
restructuring efforts. Selling, general and administrative expenses for the
three months ended April 30, 2000 were higher as compared to the three months
ended April 30, 1999 due to additional administrative expenses related to our
internet ventures. VTEL believes that it must continue to reduce our selling,
general and administrative expenses as a percent of revenues in order to become
profitable.
Research and development. Research and development expenses were
relatively stable at $4.4 million for the quarters ended April 30, 2000 and
1999. Research and development expenses decreased by $2.2 million, or 16%, to
$12.1 million for the nine months ended April 30, 2000 as compared to $14.3
million for the nine months ended April 30, 1999. Research and development
expenses as a percentage of revenues were 14% and 12% for the three months ended
April 30, 2000 and 1999, respectively, and were 12% and 13%, respectively, for
the nine months ended April 30, 2000 and 1999. Capitalized software development
costs totaled $1.0 million and $1.7 million for the three months ended April 30,
2000 and 1999 respectively, and $4.2 and $4.7 million for the nine months ended
April 30, 2000 and 1999 respectively.
Overall research and development expenditures (including capitalized
costs) decreased during the three and nine months ended April 30, 2000 in
comparison with the three and nine months ended April 30, 1999. This reduction
reflects in part the completion of the development of our new product line,
Galaxy(TM), but it also reflects planned reductions in research and development
spending in order to maintain a spending level that is consistent with our cash
flow expectations. The effort to reduce spending levels was initiated as part of
the restructuring activities that took place in fiscal 1999.
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.
13
Net income (loss). VTEL generated net income of $35.1 million, or $1.36
per fully diluted share, during the quarter ended April 30, 2000 compared to net
loss of $0.6 million or $.02 per share, during the quarter ended April 30, 1999.
VTEL generated net income of $25.8 million, or $1.03 per share during the nine
months ended April 30, 2000 compared to net loss of $16.0 million, or $.69 per
share during the nine months ended April 30, 1999. VTEL generated net income for
the three and nine month periods ended April 30, 2000 as a result of a
litigation settlement agreement and a non-exclusive licensing agreement that was
reached during the three months ended April 30, 2000 (see "Non-Recurring
Events"). VTEL received cash of $10.8 million and shares that were sold during
the quarter ended April 30, 2000 for $34.2 million. Legal fees of $0.5 million
were netted against reported non-recurring events.
We continued to sustain losses from operations in fiscal 2000. Losses
from operations are the result of declining revenue against costs that remain
relatively fixed as we have focused part of our resources on future business
development. Approximately $6.4 million of the total operating loss for the nine
months ended April 30, 2000 is made up of VTEL's continued investment in our
Internet businesses. That investment is a key element in our strategy to provide
the foundation for future growth and additional value for our shareholders. The
cash received as a result of the favorable non-recurring events gives us the
ability to continue to pursue these strategies.
There can be no assurance that we will generate net income at lower
revenue levels or that our Internet businesses will prove successful. Current
operational planning for the interim has been to incur operational losses to the
extent we maintained positive cash flow. If revenues decline by more than we
expect or if the product mix shifts to lower margin products then we could incur
further substantial losses in the future and may have to consider additional
restructuring measures in future quarters which may have a material adverse
affect on VTEL's financial position and results of operations.
Restructuring Activities
In November 1998, the VTEL adopted a restructuring plan which resulted
in the reduction of 138 employees during the nine months ended April 30, 1999.
While terminations were effective immediately for most employees upon
announcement, all employees terminated in the restructuring had left VTEL by the
end of the third fiscal quarter of 1999. We also made the decision to reduce
operating costs by exiting other activities and reducing the related overhead
costs. These activities include the closure or consolidation of certain field
sales offices and our Sunnyvale, California spare parts depot and technical
assistance center. As a result of the restructuring, we recorded a restructuring
charge of $3.1 million during the nine months ended April 30, 1999. All
restructuring efforts had been completed by the end of the 1999 fiscal year.
Non-Recurring Events
On March 3, 2000 VTEL settled a lawsuit pending in the 126th Judicial
District Court in Travis County, Texas which VTEL had previously initiated
against five former employees who left the VTEL in September 1996 to form Via
Video Communications, Inc. ("Via Video"). Via Video was subsequently acquired by
Polycom, Inc. Pursuant to the settlement agreement, the former employees of VTEL
have paid $2.5 million in cash and delivered to VTEL 300,800 shares of common
stock of Polycom, Inc. in settlement of the claims asserted by VTEL. When the
shares were received on March 3, 2000, the market value of the shares was $39.1
million. These shares were sold during the three months ended April 30, 2000 for
$34.2 million. The parties have agreed to dismissal of all claims and
counterclaims and third party claims in the lawsuit, ending the litigation.
Separately, VTEL voluntarily dismissed Polycom, Inc. and Via Video from the case
without consideration.
14
On March 3, 2000, VTEL granted non-exclusive licenses to Polycom,
Inc.("Polycom") to use three of its patented technologies, and Polycom paid a
one time fee to VTEL of $8.3 million as a fully paid up royalty in exchange for
such license. In turn and without any payments by VTEL, Polycom also has granted
VTEL a non-exclusive sublicense to its rights under its license agreement with
Brown University pertaining to its single camera tracking technology. Through
this technology exchange, the parties will have access to specified distinctive
technologies of the other for use in their product offerings.
Introduction of New Product Lines and Services
VTEL continually strives to introduce the latest technology in digital
visual communications. In October 1999, we introduced our 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 ISDN
(H.320) or IP (H.323) 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. During the three months ended April 30, 2000, we expanded
this product line with the introduction of the Galaxy(TM) MiniTower, a sub
$10,000 PC-based videoconferencing solution that utilizes H.323 Internet
Protocol (IP) Vtouch(TM) software. This product addresses the competition
experienced in the video conferencing industry from the low-end appliance-like
video conferencing products while offering high-end functionality and the
ability to upgrade further peripherals such as dual monitors and secondary
cameras.
On January 24, 2000, we announced the formation of Onscreen24(TM), a
business unit established by VTEL to focus exclusively on delivering
high-impact, visual communications products and services for the World Wide Web.
Onscreen24's strategy is to leverage new products, partnerships and acquisitions
with existing VTEL assets - technical innovations, software and customer base -
that will enable Web-based service providers and portals to deploy media-rich
solutions for high-impact communication experiences. Initially focused on
business-to-business commerce, Onscreen24(TM) will visually enable
communications applications and platforms, making them more unique and enjoyable
for the user and thereby more productive and profitable for businesses engaging
in E-commerce. Through this strategy, Onscreen24(TM) expects to introduce Video
Commerce(R), the abilities to conduct business through electronic visual
communications over the internet, to Internet customers. Onscreen24's initial
objective will focus on market penetration and acceptance of its products in two
key areas - Internet infrastructure providers and early adopters of media-rich
solutions, specifically online advertising, E-learning and customer relationship
management.
Quarterly Revenue Cycle
Historically, a significant percentage of our sales occur in the last
few weeks of the quarter. By compressing most of our shipments into a short
period of time at the end of each quarter, we will incur overtime costs, sharply
increase our inventory levels in anticipation of this demand and deplete or
exhaust our backlog of customer orders. Our 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 we 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 our analysis of market conditions and
reports from our 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 our vendors can disrupt
shipments and adversely affect the results in a given quarter. This is
15
especially an issue due to our reliance on a limited number of highly
specialized suppliers. The above factors represent uncertainties that can have a
material adverse effect on our financial position and results of operations.
Liquidity and Capital Resources
At April 30, 2000, VTEL had working capital of $47.2 million, including
$40.0 million in cash, cash equivalents and short-term investments. Cash
provided by operating activities was $45.8 million for the nine months ended
April 30, 2000 and primarily resulted from net income including cash received
from non-recurring events totaling $44.5 million and a decrease in accounts
receivable, which was partially offset by a decrease in accounts payable. Cash
used in operating activities was $10.1 million for the nine months ended April
30, 1999 and primarily resulted from the net operating loss, an increase in
inventories and a decrease in accounts payable. These uses were partially offset
by the decrease in accounts receivable.
Net cash used in investing activities during the nine months ended
April 30, 2000 was $39.8 million and primarily resulted from an increase in
short-term investments as we were able to convert the shares and cash received
from the non-recurring events into other short-term investments. We also
invested in net property and equipment and capitalized software development
costs. Net cash used in investing activities during the nine months ended April
30, 1999 was $5.1 million and primarily resulted from increases in net property
and equipment and an increase in capitalized software.
Cash used in financing activities during the nine months ended April
30, 2000 was $10.3 million as we paid off $11.2 million advanced by our lenders
under a line of credit. Cash provided by financing activities during the nine
months ended April 30, 1999 was $8.0 million and related primarily to $11.2
million drawn on our revolving line of credit.
As of March 10, 2000, the Company had repaid all amounts drawn on the
line of credit that was in place with a banking syndicate. At April 30, 2000, we
did not have a line of credit in place. The letter of credit totaling $1.2
million that had been issued under the line of credit as a lease deposit on one
of our facilities has now been collateralized with a certificate of deposit. The
Company expects to obtain an alternative line of credit in the near term.
VTEL's principal sources of liquidity at April 30, 2000 consisted of
$40.0 million of cash, cash equivalents and short-term investments and the
ability to generate cash from operations. In addition, VTEL may be able to
monatize certain long-term assets that have significant potential value or
secure additional equity infusions in the private marketplace.
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
16
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.
Due to the factors noted above and elsewhere in Management's Discussion
and Analysis of Financial Condition and Results of Operations, VTEL's past
earnings and stock price 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 our common
stock in any given period. Also, we participate in a highly dynamic industry,
which often contributes to the volatility of our common stock price.
Cautionary Statement Regarding Risks and Uncertainties That May Affect Future
Results
Certain portions of this report contain forward-looking statements
about the business, financial condition and prospects of VTEL. Our actual
results could differ materially from those indicated by the forward-looking
statements because of various risks and uncertainties including, without
limitation, changes in demand for our products and services, changes in
competition, economic conditions, interest rates fluctuations, changes in the
capital markets, changes in tax and other laws and governmental rules and
regulations applicable to our business, and other risks indicated in our filings
with the Securities and Exchange Commission. These risks and uncertainties are
beyond the ability of our control, and in many cases, we cannot predict all of
the risks and uncertainties that could cause its actual results to differ
materially from those indicated by the forward-looking statements. When used in
this report, the words "believes," "estimates," "plans," "expects,"
"anticipates" and similar expressions as they relate to VTEL or its management
are intended to identify forward-looking statements.
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.
17
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
VTEL is the defendant or plaintiff in various actions that arose in the
normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on our
financial condition or results of operations.
On March 6, 2000 VTEL filed a Current Report on Form 8K reporting the
termination of a pending legal proceeding. Reference is made to such report and
to Note 7 - Litigation Settlement in the unaudited financial statements
contained herein, for information relating to the disposition of the pending
claim.
Item 2.
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(B) Reports on Form 8-K:
The following are incorporated by reference to Forms 8-K filed
as follows
Form 8-K dated March 6, 2000 reporting the settlement
of the Via Video Communications, Inc litigation
referred to in Note 7.
Form 8-K dated March 6, 2000 reporting the license
agreement with Polycom, Inc. referred to in Note 7.
Form 8-K dated April 6, 2000 reporting the
resignation of PricewaterhouseCoopers LLP as the
Company's independent auditors.
Form 8-K dated April 27, 2000 reporting the
appointment Ernst & Young LLP as the Company's new
independent auditors for fiscal 2000.
* * *
18
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
April 14, 2000 By: /s/ Stephen L. Von Rump
---------------------------------
Stephen L. Von Rump
Chief Executive Officer
By: /s/ Jay C. Peterson
---------------------------------
Jay C. Peterson
Vice President-Finance
(Principal Accounting Officer)
5
0000884144
VTEL Corporation
1
U.S. Dollars
3-MOS
JUL-31-2000
FEB-01-2000
APR-30-2000
1
3,445,000
36,504,000
28,091,000
(2,108,000)
14,488,000
82,749,000
54,166,000
(27,849,000)
135,683,000
35,598,000
0
0
0
261,800,000
(166,450,000)
135,685,000
103,768,000
103,768,000
66,049,000
54,825,000
(43,170,000)
0
633,000
26,697,000
870,000
25,827,000
0
0
0
25,827,000
1.06
1.03
