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 January 31, 2001
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 March 6, 2001 the registrant had outstanding 24,879,379 shares of its Common
Stock, $0.01 par value.
VTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
January 31, July 31,
2001 2000
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 9,819 $ 6,868
Short-term investments 24,868 39,742
Accounts receivable, net of allowance for doubtful
accounts of $1,207 and $888 at
January 31, 2001 and July 31, 2000 12,610 23,368
Inventories 13,778 14,733
Prepaid expenses and other current assets 1,245 1,803
---------- ----------
Total current assets 62,320 86,514
Property and equipment, net 15,215 19,275
Intangible assets, net 11,337 11,994
Capitalized software 3,816 4,728
Other assets 709 1,022
---------- ----------
$ 93,397 $ 123,533
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,809 $ 14,957
Accrued compensation and benefits 4,083 4,773
Other accrued liabilities 2,906 3,981
Notes payable, current portion - 610
Deferred revenue 10,141 11,886
---------- ----------
Total current liabilities 27,939 36,207
Long-term liabilities 3,541 4,665
Stockholders' equity:
Preferred stock, $.01 par value; 10,000
authorized; none issued or outstanding - -
Common stock, $.01 par value; 40,000 authorized;
24,879 and 24,847 issued at
January 31, 2001 and July 31, 2000 249 248
Additional paid-in capital 261,675 261,712
Accumulated deficit (209,464) (189,368)
Unearned compensation - (4)
Accumulated other comprehensive income 9,457 10,073
---------- ----------
Total stockholders' equity 61,917 82,661
---------- ----------
$ 93,397 $ 123,533
========== ==========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
2
VTEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------------
For the For the
Three Months Ended Six Months Ended
January 31, January 31,
2001 2000 2001 2000
(Unaudited) (Unaudited)
Revenues:
Products $ 11,559 $ 26,133 $ 25,644 $ 50,508
Services and other 10,163 11,129 20,608 21,820
--------------- -------------- --------------- ----------------
21,722 37,262 46,252 72,328
--------------- -------------- --------------- ----------------
Cost of sales:
Products 7,475 15,203 16,977 29,721
Services and other 7,792 7,833 15,577 15,258
--------------- -------------- --------------- ----------------
15,267 23,036 32,554 44,979
--------------- -------------- --------------- ----------------
Gross margin 6,455 14,226 13,698 27,349
--------------- -------------- --------------- ----------------
Operating expense:
Selling, general and administrative 11,043 13,562 24,887 27,587
Research and development 3,314 3,915 8,993 7,682
Amortization of intangible assets 328 378 657 742
Restructuring expense - - 1,708 -
--------------- -------------- --------------- ----------------
Total operating expenses 14,685 17,855 36,245 36,011
--------------- -------------- --------------- ----------------
Loss from operations (8,230) (3,629) (22,547) (8,662)
--------------- -------------- --------------- ----------------
Other income (expense):
Gain on investment 1,216 - 1,216 -
Interest income 324 130 833 209
Interest expense and other 383 (471) 402 (861)
--------------- -------------- --------------- ----------------
1,923 (341) 2,451 (652)
--------------- -------------- --------------- ----------------
Net loss before income taxes (6,307) (3,970) (20,096) (9,314)
Income taxes - - - -
--------------- -------------- --------------- ----------------
Net loss $ (6,307) $ (3,970) $ (20,096) $ (9,314)
=============== ============== =============== ================
Basic and diluted loss per share: $ (0.25) $ (0.16) $ (0.81) $ (0.38)
=============== ============== =============== ================
Weighted average shares outstanding:
Basic and diluted 24,862 24,395 24,848 24,346
=============== ============== =============== ================
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
VTEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
- --------------------------------------------------------------------------------
For the
Six Months Ended
January 31,
2001 2000
(Unaudited)
Cash flows from operating activities:
Net loss $ (20,096) $ (9,314)
Adjustments to reconcile net loss
to net cash used in or provided by operations:
Depreciation and amortization 6,324 5,998
Provision for doubtful accounts 613 571
Amortization of unearned compensation 4 133
Gain loss on sale of fixed assets (56) (41)
Foreign currency translation (gain) loss (152) 124
Decrease in accounts receivable 10,145 9,576
Decrease in inventories 955 1,434
Decrease in prepaid expenses and other current assets 558 150
Decrease in accounts payable (4,148) (4,386)
Decrease in accrued expenses (2,300) (1,141)
Decrease in deferred revenues (2,377) (122)
--------------- ---------------
Net cash (used in) provided by operating activities (10,530) 2,982
--------------- ---------------
Cash flows from investing activities:
Net short-term investment activity 14,357 2,905
Net purchase of property and equipment (604) (1,781)
Issuance of note receivable (57) (97)
Increase in capitalized software - (3,147)
Decrease (increase) in other assets 58 (36)
--------------- ---------------
Net cash provided by (used in) investing activities 13,754 (2,156)
--------------- ---------------
Cash flows from financing activities:
Borrowings under line of credit - 1,300
Payments on notes payable (720) (960)
Net proceeds from notes payable 257 -
Net proceeds from issuance of stock 137 157
Sale of treasury stock - 23
--------------- ---------------
Net cash (used in) provided by financing activities (326) 520
--------------- ---------------
Effect of translation exchange rates on cash 53 (29)
--------------- ---------------
Net increase in cash and equivalents 2,951 1,317
Cash and equivalents at beginning of period 6,868 7,805
--------------- ---------------
Cash and equivalents at end of period $ 9,819 $ 9,122
=============== ===============
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, unless otherwise noted)
- --------------------------------------------------------------------------------
Note 1 - General and Basis of Financial Statements
The accompanying unaudited 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 principles 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 January 31, 2001 and July 31, 2000, the results of
operations for the three and six month periods ended January 31, 2001 and 2000
and cash flows for the six month periods ended January 31, 2001 and 2000. The
results for interim periods are not necessarily indicative of results for a full
fiscal year.
Note 2 - Inventories
Inventories consist of the following:
January 31, July 31,
2001 2000
Raw materials $ 9,211 $ 8,394
Work in process 894 669
Finished goods 2,773 4,480
Finished goods held for evaluation
and rental and loan agreements 900 1,190
--------------- ---------------
$ 13,778 $ 14,733
=============== ===============
Finished goods held for evaluation consist of completed digital visual
communications systems used for demonstration and evaluation purposes.
Note 3 - Comprehensive Gain/(Loss)
In accordance with the disclosure requirements of SFAS No. 130,
"Reporting Comprehensive Income", the Company's comprehensive gain/(loss) is
comprised of net loss, foreign currency translation adjustments and unrealized
gains and losses on marketable securities held as available-for-sale
investments. Comprehensive loss for the three and six months ended January 31,
2001 was $7.7 million and $20.7 million, respectively, and comprehensive loss
for the three and six months ended January 31, 2000 was $4.0 million and $9.3
million, respectively.
Note 4 - Segment Information
The Company manages its business primarily along the lines of three
reportable segments: Products, Solutions 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 Solutions segment
provides custom integrated systems, and a wide variety of support services to
customers supporting a wide multi-vendor portfolio. The Internet Ventures
5
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
include ArticuLearn, which is an e-learning portal provider for commercial and
educational businesses who delivers learning content in a Web environment, and
Onscreen24 which develops and markets visual communication tools for the
Internet.
The Company evaluates the performance as well as the financial results of its
segments. Included in the segment operating income (loss) is an allocation of
certain corporate operating expenses. 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 amortization, operating income (loss) and total
assets for the three and six month periods ended January 31, 2001 and 2000:
Internet Unallocated
Products Solutions Ventures Items Total
------------ -------------- ------------ --------------- ---------------
For the three-month period ending
January 31, 2001
Revenues from unaffiliated customers $ 11,552 $ 10,140 $ 30 $ - $ 21,722
Depreciation and amortization 1,614 1,241 166 - 3,021
Operating income (loss) (6,559) 661 (2,194) (138) (8,230)
For the three-month period ending
January 31, 2000
Revenues from unaffiliated customers $ 26,133 $ 11,129 $ - $ - $ 37,262
Depreciation and amortization 2,293 1,085 - - 3,378
Operating income (loss) (3,998) 625 (256) - (3,629)
For the six-month period ending January
31, 2001
Revenues from unaffiliated customers $ 25,638 $ 20,584 $ 30 $ - $ 46,252
Depreciation and amortization 3,448 2,519 357 - 6,324
Operating income (loss) (15,791) 919 (6,481) (1,194) (22,547)
For the six-month period ending January
31, 2000
Revenues from unaffiliated customers $ 50,508 $ 21,820 $ - $ - $ 72,328
Depreciation and amortization 3,985 1,969 44 - 5,998
Operating income (loss) (7,299) 1,069 (2,432) - (8,662)
Note 5 - Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements,"
which provides guidance on revenue recognition issues. VTEL is required to
implement SAB 101 beginning on May 1, 2001. The Company has not determined the
effect of implementing SAB 101 on its financial position or its results of
operations. However, the Company believes its revenue recognition policies are
consistent with SAB 101 and therefore the adoption of this pronouncement will
not materially affect its financial statements.
Note 6 - Restructuring Activities
On August 23, 2000, VTEL announced a new business charter and the
restructuring of its organization. The new business charter is intended to
execute a change in business strategy that leverages VTEL's solutions and
systems integration capabilities in order to become the industry leader in
6
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
providing visual communication solutions over broadband enterprise networks. The
restructuring involved the involuntary termination of approximately 200
employees globally, or 34% of the Company's workforce and the consolidation of
leased office space in Austin, Texas, Sunnyvale, California and other remote
facilities. These workforce reductions and consolidations of office space
reduced costs and focused resources on efforts to support the new business
charter. The Company completed all terminations by January 31, 2001. During the
three months ended October 31, 2000, the Company recorded a restructuring charge
of $1,708. No restructuring charge was incurred for the three months ended
January 31, 2001.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following review of VTEL's financial position as of January 31,
2001 and July 31, 2000 and for the three months and six months ended January 31,
2001 and 2000 should be read in conjunction with our 2000 Annual Report on Form
10-K filed with the Securities and Exchange Commission on October 30, 2000.
Results of Operations
The following table provides the percentage of revenues represented by
certain items in VTEL's Consolidated Statements of Operations:
For the Three For the Six
Months Ended Months Ended
January 31, January 31,
2001 2000 2001 2000
Revenues 100% 100% 100% 100%
Gross margin 30 38 30 38
Selling, general and administrative 51 36 54 38
Research and development 15 11 19 11
Restructuring expense 0 0 4 0
Total operating expenses 68 48 78 50
Net loss (29) (11) (43) (13)
Three and Six Months Ended January 31, 2001 and 2000
Revenues. Revenues for the three months ended January 31, 2001 were
$21.7 million, a decrease of $15.5 million, or 42%, from $37.3 million reported
for the three months ended January 31, 2000. Revenues for the six months ended
January 31, 2001 were $46.3 million, a decrease of $26.1 million from $72.3
million for the six months ended January 31, 2000. The decrease in overall
revenue is due primarily to a decline in sales of the videoconferencing systems.
Service revenues have remained relatively constant over comparable periods.
Early in the second quarter, after considerable research and consulting
with experts within the visual communications industry as well as discussions
with our customers, resellers and strategic partners, the Company announced an
enhanced business strategy that created two separate business units for its core
visual communications operations. In November 2000, the Company announced a
split of that core business into a Products business unit (Products) and a
Solutions business unit (Solutions). We believe the separation strategically
positions Products to continue to enhance its ability to design, develop,
manufacture, market and sell the industry's best multimedia-rich PC-based
videoconferencing systems, while Solutions expands its specialized capabilities
to deliver common network management over hybrid networks, including Internet
Protocol (IP) and ISDN. With independent management teams dedicated to each core
business, the Company is focused on reestablishing growth and profitability from
its core business.
During the three months ended January 31, 2001, the Products business
unit accomplished several important goals and successfully renewed its
commitment to provide the industry's best PC-based collaborative
videoconferencing systems. Although our videoconferencing systems' average sales
8
price is down from prior year due to a shift in the product mix, our second
fiscal quarter achieved a 9% ASP increase over the first fiscal quarter. This
ASP was the highest ASP level the Company has achieved in the past four
quarters. On February 27, 2001, VTEL released the software upgrade, Version
2.02, for our flagship Galaxy(TM) product line, a fourth-generation PC-based
system. The upgrade, which is available to all new and current customers at no
charge, improves videoconferencing productivity through feature enhancements,
new interfaces for international users, and increased system stability. In
addition to revitalizing its commitment to customers, the Products business
unit's emphasis on IP H.323 technology is gaining ground. For the three months
ended January 31, 2001, 20% of the videoconferencing units sold were equipped to
run on H.323 technology. As customers increase their adoption of the H.323
standard for videoconferencing, we anticipate an increase in revenues from the
sale of products equipped with this capability.
International sales represented approximately 16% and 22% respectively
of product revenues for the three months and six months ended January 31, 2001,
compared to 25% and 22% respectively, for the three months and six months ended
January 31, 2000. These revenue percentages represent export sales from our
domestic operations as well as sales from our foreign subsidiaries. Our recent
market analysis, as well as information from industry sources, indicates that
demand for videoconferencing systems in Europe is highest for non-PC-based
videoconferencing systems, which we have determined does not provide VTEL with
sufficient near-term growth opportunities in the region. Therefore, we have
dramatically reduced the number of European offices and consolidated operations
there into primarily customer service and support operations. This change was an
important strategy in pursuing the Products business unit's objective to be
profitable. Although we will continue to support our European customers and
active sales channels through a dedicated sales team in the United States, the
Company is focusing its available resources to enhance the features and
functionality of Galaxy products as well as to develop new higher margin
products. VTEL's primary operations abroad are located in China, where the
company has operated a wholly owned foreign enterprise since May 2000. VTEL also
maintains a manufacturing facility in China, where the Company's Galaxy products
are the best-selling videoconferencing systems. For the six months ended January
31, 2001, revenues from our China operations exceeded $1.2 million.
VTEL sells its products primarily through resellers. For the three
months and six months ended January 31, 2001 reseller sales were 84% and 82% of
product sales, respectively. For the three months and six months ended January
31, 2000 reseller sales were 81% and 78% respectively. All other revenues are
generated through direct customer sales. During the second fiscal quarter, the
Products business unit solidified its key reseller partnerships, especially with
those in the education sector where VTEL commands a market share that exceeds
70%.
For the three months ended January 31, 2001 and 2000, service and other
revenues as a percent of total revenues were 47% and 30%, respectively. For the
six months ended January 31, 2001 and 2000, service and other revenues as a
percent of total revenues were 45% and 30%, respectively. Service and other
revenues declined slightly by $1.0 million and $1.2 million in the three and six
months ended January 31, 2001, compared to the three and six months ended
January 31, 2000. Service revenues represent the combined revenues from VTEL's
Solutions business unit, which provides installation, training, and maintenance
services as well as custom videoconferencing integration solutions.
During the last fiscal quarter, the Solutions business unit created the
Multi-Vendor Partners Program(TM) (MVP), which allows VTEL to market and
distribute various vendor products through its Solutions business. During the
three months ended January 31, 2001, the Company completed its cross-training
9
and documentation of its MVP products and services and prepared its direct sales
force and support staff for joint MVP sales and marketing programs.
Additionally, the Solutions business unit expanded its interoperability
facilities to develop prototypes for multi-vendor network management platforms.
The program's success and the validation from our customers are evident through
contractual wins from multiple Fortune 500 companies and 20% of our service
revenues this quarter being generated from non-VTEL products and services.
Through the MVP, the Solutions business unit is focusing on areas where we can
provide value-added services to ensure that VTEL is the primary source of
integrated solutions for visual communications over IP and hybrid networks.
Gross margin. Gross margin as a percentage of total revenues was 30%
for the three and six months ended January 31, 2001, a decrease from the gross
margin as a percentage of total revenues of 38% for the three and six months
ended January 31, 2000.
Product margins were 35% of product revenue for the three months ended
January 31, 2001 and 42% for the three months ended January 31, 2000. Product
margins were 34% of product revenue for the six months ended January 31, 2001
and 41% for the six months ended January 31, 2000. As users of visual
communication systems demand higher performing products at lower cost, our
product mix has shifted. We expect the overall price competitiveness in the
industry will remain intense and, therefore, have taken several measures to
recover our gross margins. The Products business has significantly reduced its
discounting practices in favor of obtaining more profitable sales. Additionally,
the Products unit is performing our manufacturing process more efficiently to
reduce our cost of products sold. During the three months ended January 31, 2001
the Company improved its inventory management, reducing inventory levels by
nearly $3 million from the prior quarter-end. The Company plans to continue
focusing on measures to perfect its manufacturing process and to further reduce
inventory levels to amounts that more closely match forecasted sales volume.
Service margins were 23% and 24% of service revenue for the three and
six months ended January 31, 2001. Service margins were 30% of service revenue
for the three and six months ended January 31, 2000. Service margins represent
the combined margins from installation and maintenance services as well as sales
from custom integration solutions. The decline in service margins for the three
and six months ended January 31, 2001 as compared to the related periods in
prior year is due primarily to the reduction in product revenue over the same
periods and to non-recurring compensation costs incurred during this fiscal
quarter. As the MVP program expands, we expect to see improved margins from our
service contracts due to economies of scale and relatively fixed costs of sales.
Additionally, the Solutions business is obtaining its MVP products directly from
its partners, which will further improve margins from our integration business.
Selling, general and administrative. Selling, general and
administrative expenses decreased by $2.5 million, or 19%, to $11.0 million for
the quarter ended January 31, 2001 from $13.6 million for the quarter ended
January 31, 2000. Selling, general and administrative expenses decreased by $2.7
million, or 10%, to $24.9 million for the six months ended January 31, 2001 from
$27.6 million for the six months ended January 31, 2000. Selling, general and
administrative expenses as a percentage of revenues were 51% and 36% for the
three months ended January 31, 2001 and 2000, respectively, and were 54% and 38%
for the six months ended January 31, 2001 and 2000, respectively.
Although selling, general and administrative (SG&A) expenses as a
percentage of revenues have increased due to the reduction in total revenues,
the total SG&A expenses have decreased over comparable periods. As part of our
aggressive efforts to find efficiencies and further reduce costs , the Company
10
reduced its sales force by over half and closed some regional sales offices.
Other workforce and office space reductions occurred during the six months ended
January 31, 2001 as part of the restructuring activities initiated last fiscal
quarter (see Restructuring Charge below). During the three months ended January
31, 2001 our efforts have resulted in cost savings of nearly $7.0 million in
operating expenses over the three-month period ended October 31, 2000. Despite
the significant decreases in operating costs the Company has already achieved,
the full effect of our cost-reduction measures will not be realized until the
third fiscal quarter, when we anticipate reducing operating expense by an
additional 15%. Once completed, these cost-reductions will continue to impact
future periods positively.
Research and development. Research and development expenses decreased
by $0.6 million, or 15%, to $3.3 million for the quarter ended January 31, 2001
from $3.9 million for the quarter ended January 31, 2000. Research and
development expenses increased by $1.3 million, or 17%, to $9.0 million for the
six months ended January 31, 2001 from $7.7 million for the six months ended
January 31, 2000. Research and development expenses as a percentage of revenues
were 15% and 11% for the three months ended January 31, 2001 and 2000,
respectively, and were 19% and 11%, respectively, for the six months ended
January 31, 2001 and 2000. Capitalized software development costs totaled $1.4
million and $3.1 million for the three and six months ended January 31, 2000
respectively. No software development costs were capitalized for the three and
six months ended January 31, 2001.
Research and development expenses for the six months ended January 31,
2000 were less than the related expenses for the six months ended January 31,
2001 due to the $3.1 million of software development costs that were capitalized
during the last fiscal year. Since the projects currently under development have
not reached technological feasibility, all research and development expenditures
in fiscal year 2001 have been expensed when incurred. Although $1.4 million of
software development costs were capitalized for the three months ended January
31, 2000, research and development expenses decreased for the three months ended
January 31, 2001 due to the diminution of the Onscreen24(TM) operations, which
historically incurred significant research and development costs.
VTEL's research and development strategy relies on our ability to
develop and introduce new and enhanced products and solutions for enterprise
networks successfully. Leveraging on our expertise of visual communications
technology, we are anticipating and incorporating the industry's evolving
standards into our products and solutions as well as maximizing their level of
performance in order to remain competitive. Although VTEL is committed to
investing in its research and development activities in order to maintain our
technology leadership position, we are managing all research and development
expenses to be in line with our anticipated future revenue levels.
Restructuring Charge. On August 23, 2000, VTEL announced a new business
charter and the restructuring of its organization and recorded a $1.7 million
charge during the quarter ended October 31, 2000. The restructuring charge was
less than the estimated range of $6 to $8 million provided in our fiscal 2000
Annual Report. This difference was due to the unanticipated delay in the
reduction of some of the workforce, unexpected success in subletting certain
facilities, and non-recurring costs totaling $2.2 million that have been
classified as either product costs or selling, general and administrative.
The restructuring involved the involuntary termination of
approximately 200 employees globally, or 34% of the Company's workforce, and the
consolidation of leased office space in Austin, Texas and Sunnyvale, California.
The consolidation of the office space resulted in a 120,000 square feet
reduction, or 40% of the office space occupied. The Company's affected leases
will be terminated or subleased to other tenants. These workforce reductions and
consolidations of office space reduced costs and focused resources
11
on efforts to support the new business charter. As a result of the terminations
and office space reduction, the Company anticipates saving approximately $4.0
million in personnel costs and approximately $1.0 million in occupancy expense
per quarter, starting in the third quarter of fiscal 2001.
Other Income (Expense). Other income increased by $2.3 million to $1.9
million for the quarter ended January 31, 2001 from expenses of $0.3 million for
the quarter ended January 31, 2000. Other income increased by $3.1 million to
$2.5 million for the six months ended January 31, 2001 from expenses of $0.7
million for the six months ended January 31, 2000. The increases are primarily
attributable to two non-core business activities. During the three months ended
January 31, 2001, the Company partially sold its investment in common stock of
Accord Networks Ltd. (Accord), a networking equipment manufacturer, which netted
a $1.2 million gain. Additionally, during the three and six months ended January
31, 2001, VTEL managed significantly more cash and short-term investments than
the comparable periods ended January 31, 2000. As a result, interest income
increased by 149% and 299% for the three and six months ended January 31, 2001,
respectively.
Net loss. VTEL generated a net loss of $6.3 million, or $0.25 per
share, during the quarter ended January 31, 2001 compared to net loss of $4.0
million, or $0.16 per share, during the quarter ended January 31, 2000. VTEL
generated a net loss of $20.1 million, or $0.81 per share, during the six months
ended January 31, 2001 compared to net loss of $9.3 million, or $0.38 per share,
during the six months ended January 31, 2000. The decline in revenue and gross
margins resulted in higher net losses incurred during the three and six months
ended January 31, 2001. The restructuring activities related to our enhanced
business strategy also contributed to the net losses for the six months ended
January 31, 2001.
During fiscal year 2000, VTEL established two subsidiaries to leverage
our expertise in visual communications and to pursue business strategies related
to the Internet. Onscreen24 develops and markets visual communication tools for
the Internet such as video mail and streaming technologies. ArticuLearn(TM)
develops e-learning infrastructure to support the delivery of web-based training
and the user identification and transaction capabilities needed to deliver this
service effectively. During the three and six months ended January 31, 2001, the
Internet companies contributed $2.2 million and $6.5 million to our net losses,
respectively. Due to the weakening of environment for start-up businesses and
related tightening of the venture capital marketplace, VTEL during the second
fiscal quarter absorbed its Onscreen24 operations back into the operations of
its core business. In order to derive additional value from our investment in
this subsidiary, we also are pursuing licensing partners for the intellectual
property created by Onscreen24 and deploying its engineers to assist in the
development of the Company's next generation network management platform.
ArticuLearn, VTEL's second Internet subsidiary, has increased its momentum and
made significant progress in delivering e-learning portal solutions to various
customers. During the second fiscal quarter, ArticuLearn filed for three patents
and has several others in progress. During the third fiscal quarter, ArticuLearn
will aggressively focus on growing revenues as well as securing external funding
to ramp its business operations and help reduce the cash investment required by
VTEL.
In pursuing the primary objective of increasing shareholder value, we
believe the business strategies currently being initiated better leverage VTEL's
key strengths and better position the organization for future growth and
profitability. However, there can be no assurance that we will generate net
income, or that our continued investment in ArticuLearn will prove successful.
If revenues and margins continue to decline, we could incur further losses and
may need to consider additional restructuring measures in future quarters that
could have a material adverse affect on VTEL's financial position and results of
operations.
12
Introduction of New Product and Services
VTEL continually strives to introduce the latest technology in visual
communications. Last fiscal year, we introduced our leading videoconferencing
product line, the Galaxy visual communication systems, which provides
state-of-the-art audio and video with high-resolution slide capture and send
graphics. The software within the Galaxy systems is H.323 capable for
videoconferencing over IP networks and/or H.320 capable for videoconferencing
over traditional circuit switched networks. We are committed to continually
developing enhancements for the Galaxy line and we recently released Version
2.02 to all VTEL Galaxy customers. This development advances customer
productivity by improving stability, offering international user interfaces and
providing easier future upgrades. Additionally, the Company is building a new
network management platform and will release SmartVideoNet Manager(TM) (SVNM)
Version 3.0 in the third fiscal quarter. SVNM allows administrators of
videoconferencing systems to effectively manage their video networks from remote
locations. Version 3.0 makes SVNM a Web-based application, thus providing our
customers the ability to utilize these management tools via the Internet, thus
expanding their access. Although this current technology supports all VTEL
products, the Solutions business is investigating the development of new
platforms that can accommodate all of the products within the MVP portfolio, as
well as many other components of the enterprise network.
Liquidity and Capital Resources
On January 31, 2001, VTEL had working capital of $34.4 million,
including $34.7 million in cash, cash equivalents and short-term investments.
Cash used in operating activities was $10.5 million for the six months ended
January 31, 2001 and primarily resulted from the net loss incurred, which was
partially offset by the decrease in accounts receivable. Cash provided by
operating activities was $3.0 million for the six months ended January 31, 2000
and primarily resulted from a decrease in accounts receivable and inventory,
which was partially offset by the net operating loss incurred and a decrease in
accounts payable. During the three months ended January 31, 2001, the Company
continued to fervently collect its outstanding receivables. At the end of the
quarter, this aggressive effort resulted in a days sales outstanding (DSO) of 52
days, which is the Company's third consecutive quarterly decline as well as the
lowest level the Company had achieved in the past five years.
Net cash provided by investing activities during the six months ended
January 31, 2001 was $13.8 million and primarily resulted from the partial sale
of a short-term investment. Net cash used in investing activities during the six
months ended January 31, 2000 was $2.2 million and primarily resulted from
increases in net property and equipment and capitalized software. In order to
support the Company's operations and its facilities under the new business
strategy, we have established a $3.0 million capital budget for fiscal 2001.
During the three months ended January 31, 2001, we were able to improve our
operations and meet our goals while utilizing $0.2 million less in capital
expenditures than were budgeted for the quarter.
Cash flows used in financing activities during the six months ended
January 31, 2001 were $0.3 million and primarily resulted from payments on notes
payable. Cash flows provided by financing activities during the six months ended
January 31, 2000 were $0.5 million and resulted from $1.3 million being drawn on
our revolving line of credit, which was partially offset by payments on notes
payable. In the third quarter of fiscal year 2000, the Company repaid the
outstanding balance on its line of credit. No new lines of credit were opened
during the six months ended January 31, 2001, in which we paid off one note
payable and we settled our remaining notes payable on February 5, 2001. Based on
our current strong cash position, we do not anticipate acquiring any additional
lines of credit this fiscal year.
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VTEL's principal sources of liquidity at January 31, 2001 consisted of
$34.7 million of cash, cash equivalents and short-term investments. Included in
this amount was our $10.2 million investment in Accord. During the quarter ended
January 31, 2001, the Company sold 120,000 shares of its total 1.3 million
shares of Accord, realizing a $1.2 million gain, which concluded with a $9.5
million unrealized gain recorded as part of our comprehensive income. Since our
restructuring efforts have been essentially completed and paid for as of January
31, 2001, we expect our cash decline to decrease in the next fiscal quarter and
to continue to improve our cash flow from operations during the fourth quarter
of this fiscal year.
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.
Due to the factors noted above and elsewhere in the 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 that
reflect the Company's current expectations regarding future results of
operations, economic performance, financial condition and achievements. Whenever
possible, we attempted to identify these forward-looking statements with the
words "believes," "estimates," "plans," "expects," "anticipates" and other
similar expressions. These statements reflect management's current plans and
14
expectations that rely on a number of assumptions and estimates that are subject
to risks and uncertainties including, but not limited to rapid changes in
technology, unexpected changes in customer order patterns or order mix, the
intensity of competition, economic conditions, the cost and availability of
certain key components, pricing pressures, interest rates fluctuations, changes
in the capital markets, litigation involving intellectual property, changes in
tax and other laws and governmental rules applicable to our business and other
risks indicated in our filings with the Securities and Exchange Commission.
These risks and uncertainties are beyond our control, and in many cases, we
cannot predict all of the risks and uncertainties that could cause actual
results to differ materially from those indicated by the forward-looking
statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's primary market risk exposure relates to interest rate risk and
foreign currency exchange fluctuations. Since our investment portfolio primarily
consists of money market funds and other marketable securities including
commercial paper and government securities, we believe the interest rate risk is
minimal due to the short-term nature of these investments. Additionally, we
believe our foreign currency exposure to be relatively low since most of our
foreign sales are predominantly in U.S. dollars. We review the credit worthiness
of our customers to mitigate the foreign currency exchange risk and credit risk
and we may utilize foreign currency forward contracts to hedge our risks on firm
commitments. By carefully monitoring our foreign currency exchange exposures, we
ensure the overall effectiveness of our foreign currency hedge positions. 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, 2000.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
VTEL is the defendant or plaintiff in various actions that arose in the
normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on our
financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
15
Item 4. Submission of Matters to a Vote of Security Holders
On December 14, 2000, an annual meeting of the stockholders was held in
King of Prussia, Pennsylvania, whereby the shareholders voted on the following
proposals:
1. Proposal to elect seven directors to hold office until the next annual
meeting of stockholders or until their respective successors are duly
elected and qualified. The stockholders voted to approve the proposal
by the following vote:
Nominee For Withheld
Richard N. Snyder 20,334,277 1,070,181
Stephen L. Von Rump 19,999,232 1,405,226
F.H. (Dick) Moeller 20,298,696 1,105,762
Gordon H. Matthews 20,374,175 1,030,283
T. Gary Trimm 20,314,233 1,090,225
Kathleen A. Cote 20,379,040 1,025,418
James H. Wells 20,384,772 1,019,686
2. Proposal to ratify the Board of Director's appointment of Ernst & Young
LLP, independent accountants, as the Company's independent auditors for
the year ending July 31, 2001. The stockholders voted to approve the
proposal by the following vote:
For Against Abstain
21,170,424 186,231 47,803
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(B) Reports on Form 8-K:
None
* * *
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VTEL CORPORATION
March 19, 2001 By: /s/ Stephen L. Von Rump
-------------------------------
Stephen L. Von Rump
Chief Executive Officer
By: /s/ Jay C. Peterson
-------------------------------
Jay C. Peterson
Interim Chief Financial Officer
(Principal Accounting Officer)
17