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, 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 June 5, 2001 the registrant had outstanding 24,801,227 shares of its Common
Stock, $0.01 par value.
VTEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------------
April 30, July 31,
2001 2000
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 6,635 $ 6,868
Short-term investments 15,552 39,742
Accounts receivable, net of allowance for doubtful
accounts of $907 and $888 at
April 30, 2001 and July 31, 2000 13,356 23,368
Inventories 13,552 14,733
Prepaid expenses and other current assets
1,139 1,803
----------------- ------------------
Total current assets 50,234 86,514
Property and equipment, net 11,307 19,275
Intangible assets, net 10,930 11,994
Capitalized software 3,366 4,728
Other assets 677 1,022
----------------- ------------------
$ 76,514 $ 123,533
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,972 $ 14,957
Accrued compensation and benefits 3,055 4,773
Other accrued liabilities 1,590 3,981
Notes payable, current portion - 610
Deferred revenue 8,576 11,886
----------------- ------------------
Total current liabilities 22,193 36,207
Long-term liabilities 3,286 4,665
Stockholders' equity:
Preferred stock, $.01 par value; 10,000
authorized; none issued or outstanding - -
Common stock, $.01 par value; 40,000 authorized;
24,911 and 24,847 issued at
April 30, 2001 and July 31, 2000 249 248
Additional paid-in capital 261,697 261,712
Accumulated deficit (214,046) (189,368)
Unearned compensation - (4)
Accumulated other comprehensive income 3,135 10,073
----------------- ------------------
Total stockholders' equity 51,035 82,661
----------------- ------------------
$ 76,514 $ 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 Nine Months Ended
April 30, April 30,
2001 2000 2001 2000
(Unaudited) (Unaudited)
Revenues:
Products $ 11,164 $ 21,010 $ 36,808 $ 71,518
Services and other 7,565 10,430 28,172 32,250
--------------- -------------- --------------- ----------------
18,729 31,440 64,980 103,768
--------------- -------------- --------------- ----------------
Cost of sales:
Products 7,115 13,138 24,091 42,859
Services and other 6,376 7,933 21,954 23,190
--------------- -------------- --------------- ----------------
13,491 21,071 46,045 66,049
--------------- -------------- --------------- ----------------
Gross margin 5,238 10,369 18,935 37,719
--------------- -------------- --------------- ----------------
Operating expense:
Selling, general and administrative 8,312 14,086 33,198 41,673
Research and development 2,512 4,392 11,505 12,074
Amortization of intangible assets 406 336 1,063 1,078
Write-off of leasehold improvements 1,147 - 1,147 -
Restructuring charge - - 1,708 -
--------------- -------------- --------------- ----------------
Total operating expenses 12,377 18,814 48,621 54,825
--------------- -------------- --------------- ----------------
Loss from operations (7,139) (8,445) (29,686) (17,106)
--------------- -------------- --------------- ----------------
Other income (expense):
Non-recurring events - 44,501 - 44,501
Gain on sale of investment 3,670 - 4,886 -
Interest income 231 424 1,064 633
Interest expense and other (1,646) (469) (1,246) (1,331)
--------------- -------------- --------------- ----------------
2,255 44,456 4,704 43,803
--------------- -------------- --------------- ----------------
(Loss) income before income taxes (4,884) 36,011 (24,982) 26,697
Benefit (provision) for income taxes 304 (870) 304 (870)
--------------- -------------- --------------- ----------------
Net (loss) income $ (4,580) $ 35,141 $ (24,678) $ 25,827
=============== ============== =============== ================
Basic income (loss) per share: $ (0.18) $ 1.43 $ (0.99) $ 1.06
=============== ============== =============== ================
Diluted income (loss) per share: $ (0.18) $ 1.36 $ (0.99) $ 1.03
=============== ============== =============== ================
Weighted average shares outstanding:
Basic 24,890 24,620 24,862 24,436
=============== ============== =============== ================
Diluted 24,890 25,765 24,862 24,955
=============== ============== =============== ================
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
Nine Months Ended
April 30,
2001 2000
(Unaudited)
Cash flows from operating activities:
Net (loss) income $ (24,678) $ 25,827
Adjustments to reconcile net (loss) income
to net cash used in or provided by operations:
Depreciation and amortization 8,725 9,478
Provision for doubtful accounts 401 1,046
Amortization of unearned compensation 4 147
Loss on sale of fixed assets 2,715 166
Foreign currency translation loss 42 188
Decrease in accounts receivable 9,611 11,262
Decrease in inventories 1,181 1,065
Decrease in prepaid expenses and other current assets 664 1
Decrease in accounts payable (5,985) (5,004)
(Decrease) increase in accrued expenses (4,265) 476
(Decrease) increase in deferred revenue (4,172) 1,149
--------------- ---------------
Net cash (used in) provided by operating activities (15,757) 45,801
--------------- ---------------
Cash flows from investing activities:
Net short-term investment activity 17,229 (32,196)
Net purchase of property and equipment (1,177) (3,596)
(Issuance) collection of note receivable (20) 87
Increase in capitalized software - (4,170)
Increase in other assets 168 36
--------------- ---------------
Net cash provided by (used in) investing activities 16,200 (39,839)
--------------- ---------------
Cash flows from financing activities:
Payments under line of credit - (11,200)
Payments on notes payable (1,360) (1,363)
Proceeds from notes payable 544 265
Net proceeds from issuance of stock 159 2,028
--------------- ---------------
Net cash used in financing activities (657) (10,270)
--------------- ---------------
Effect of translation exchange rates on cash (19) (42)
--------------- ---------------
Decrease in cash and equivalents (233) (4,350)
Cash and equivalents at beginning of period 6,868 7,805
--------------- ---------------
Cash and equivalents at end of period $ 6,635 $ 3,455
=============== ===============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (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 April 30, 2001 and July 31, 2000, the results of
operations for the three and nine month periods ended April 30, 2001 and 2000
and cash flows for the nine month periods ended April 30, 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:
April 30, July 31,
2001 2000
Raw materials $ 9,165 $ 8,394
Work in process 939 669
Finished goods 2,997 4,480
Finished goods held for evaluation,
rental, loan agreements, etc. 451 1,190
-------------- ---------------
$ 13,552 $ 14,733
============== ===============
Finished goods held for evaluation consist of completed digital visual
communications systems used for demonstration and evaluation purposes.
Note 3 - Comprehensive Income/(Loss)
In accordance with the disclosure requirements of SFAS No. 130, "Reporting
Comprehensive Income", the Company's other comprehensive income/(loss) is
comprised of net loss, foreign currency translation adjustments and unrealized
gains and losses on short-term investments held as available-for-sale
securities. Comprehensive loss for the three and nine months ended April 30,
2001 was $10.9 million and $31.6 million, respectively, and comprehensive income
for the three and nine months ended April 30, 2000 was $35.2 million and $26.0
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 designs and manufactures 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 designs and installs custom integrated visual communications
systems primarily in meeting spaces of large corporations, and provides a wide
5
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in
thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
variety of support services to customers, including equipment from numerous
vendors. The Internet ventures include ArticuLearn(TM), an e-learning portal
provider for commercial and educational businesses that delivers learning
content in a Web environment, and OnScreen24(TM), which developed and marketed
visual communication tools for the Internet. OnScreen24's operations were folded
back into the core businesses as of January 31, 2001.
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 as they are
currently defined under management's revised business strategy.
The table below presents segment information about revenue from
unaffiliated customers, depreciation and amortization, and operating income
(loss) for the three and nine month periods ended April 30, 2001 and 2000:
Internet
Products Solutions Ventures Total
------------ -------------- ------------ ---------------
For the three-month period ending April
30, 2001
Revenues from unaffiliated customers $ 10,100 $ 8,557 $ 72 $ 18,729
Depreciation and amortization 1,083 1,272 46 2,401
Operating loss (580) (5,677) (882) (7,139)
For the three-month period ending April
30, 2000
Revenues from unaffiliated customers $ 20,784 $ 10,656 $ - $ 31,440
-
Depreciation and amortization 1,278 2,149 53 3,480
Operating loss (5,496) (434) (2,515) (8,445)
For the nine-month period ending April
30, 2001
Revenues from unaffiliated customers $ 35,736 $ 29,142 $ 102 $ 64,980
Depreciation and amortization 3,487 5,110 128 8,725
Operating loss (13,298) (9,027) (7,361) (29,686)
For the nine-month period ending April
30, 2000
Revenues from unaffiliated customers $ 70,742 $ 33,026 $ - $ 103,768
Depreciation and amortization 3,771 5,562 145 9,478
Operating income (loss) (12,417) 980 (5,669) (17,106)
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
final effect of implementing SAB 101 on its financial position or its results of
operations. Management does not anticipate SAB 101 to have a material impact on
the financial statements of the Company.
6
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in
thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
Note 6 - Derivative Instruments and Hedging Activities
On August 31, 2000 the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. The standard requires the recognition of all derivatives as either
assets or liabilities on the Consolidated Balance Sheet with changes in fair
value recorded in the Consolidated Statement of Operations.
The accounting for changes in fair value of a derivative depends upon
whether it has been designated in a hedging relationship and, further, on the
type of hedging relationship pursuant to SFAS No. 133. Changes in the fair value
of derivatives not designated in a hedging relationship are recognized each
period in earnings. Hedging relationships are established pursuant to the
Company's risk management policies, and are initially and regularly evaluated to
determine whether they are expected to be, and have been, highly effective
hedges. If a derivative ceases to be a highly effective hedge, hedge accounting
is discontinued prospectively, and future changes in the fair value of the
derivative is recognized in earnings each period. For derivatives designated as
hedges of the variability of cash flows related to a recognized asset or
liability (cash flow hedges), the effective portion of the change in fair value
of the derivatives is reported in other comprehensive income and reclassified
into earnings in the period in which the hedged items affect earnings. Gains or
losses deferred in accumulated other comprehensive income associated with
terminated derivatives remain in accumulated other comprehensive income until
the hedged items affect earnings. Forecasted transactions designated as the
hedged items in cash flow hedges are regularly evaluated to assess that they
continue to be probable of occurring, and if the forecasted transactions are no
longer probable of occurring, any gain or loss deferred in accumulated other
comprehensive income is recognized in earnings currently.
During the nine months ended April 30, 2001, the Company utilized forward
currency exchange contracts to reduce the exposure to fluctuations in foreign
currency exchange rates related to the European Euro and the Australian Dollar.
These contracts are recorded at fair value in the Consolidated Balance Sheet
with changes reflected in the Consolidated Statement of Operations. The Company
also utilized derivatives designated as cash flow hedges to ensure a minimum
level of cashflows as related to its investment in the Polycom stock. The amount
of ineffectiveness with respect to these cash flow hedges was not material.
These hedges were recorded at fair value on the Consolidated Balance Sheet,
which included a $237 reduction in other comprehensive income, and will be
reclassified into earnings during the fourth fiscal quarter of 2001 and the
first quarter of fiscal year 2002.
Note 7 - Restructuring Charge
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
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 its Austin, Texas headquarters, as well as in 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
7
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in
thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
January 31, 2001. During the three months ended October 31, 2000, the Company
recorded a restructuring charge of $1,708. No additional restructuring charge
was incurred during the three months ended April 30, 2001.
Note 8 - Stock Buy-Back
On April 3, 2001 the Company announced a Board approved plan to repurchase
up to two million shares of the Company's stock. The repurchase will be based on
share price and availability. No stock was repurchased as of April 30, 2001.
Note 9 - Business Dispositions
Management believes the greatest growth and profit opportunities in the
visual communications industry lie in improving industry wide multi-vendor
platform interoperability and in the integration and management of video
conferencing networks, all of which are core competencies of the Solutions
business unit. Therefore, on May 30, 2001 VTEL announced its intent to sell the
Products business unit within 90 days. Subject to execution of the sale
agreement and shareholder approval, the Products unit will become a private
company and will continue to develop and to deliver superior videoconferencing
products for the education and government marketplace.
In preparation of the physical separation of the core business units, the
Products business unit maintains the VTEL name and the Solutions business unit
becomes Forgent Corporation, also subject to shareholder approval. Forgent's
mission is to enable its customers to significantly lower total costs of
ownership, through greater productivity, higher reliability, and increased
scalability. In order to be platform-neutral, legacy tolerant, and open-systems
oriented, Forgent's portfolio of offerings consists of (1) global services,
including maintenance, technical support, network consulting, migration
planning, system design, project management, installation, interoperability
testing, and training; (2) multi-vendor products provided by the Multi-Vendor
Products Program(TM), which includes the best-in-class visual communications
technology from partners such as Accord Networks, PictureTel, Polycom, Inc.,
RADVision and VTEL; and (3) network management software (Visual Network
Platform), which is currently under development and will provide industry-wide
interoperability and compatibility standards for both traditional (H.320) and
Internet protocol (H.323) networks, as well as drive the migration of video over
IP networks.
Despite increasing momentum, ArticuLearn was unable to secure external
funding for its operations. This disappointment was due to the weakening
environment for start-up businesses and the related tightening of the venture
capital marketplace. In order to reduce the cash investment required by the
Company and to solely focus on Forgent's mission, VTEL has started in the fourth
fiscal quarter of 2001 the process of liquidating this subsidiary. All
ArticuLearn employees will be terminated, effective June 30, 2001.
8
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, 2001 and
July 31, 2000 and for the three months and nine months ended April 30, 2001 and
2000 should be read in conjunction with the Company's 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 Nine
Months Ended Months Ended
April 30, April 30,
2001 2000 2001 2000
Revenues 100% 100% 100% 100%
Gross margin 28 33 29 36
Selling, general and administrative 44 45 51 40
Research and development 13 14 18 12
Restructuring charge 0 0 3 0
Total operating expenses 66 60 75 53
Net (loss) income (24) 112 (38) 25
Three and Nine Months Ended April 30, 2001 and 2000
Revenues. Revenues for the three months ended April 30, 2001 were $18.7
million, a decrease of $12.7 million, or 40%, from $31.4 million reported for
the three months ended April 30, 2000. Revenues for the nine months ended April
30, 2001 were $65.0 million, a decrease of $38.8 million from $103.8 million for
the nine months ended April 30, 2000. The decrease in overall revenue is due
primarily to a decline in sales of the videoconferencing systems.
In order to strategically position each business unit and to provide focus
on reestablishing growth and profitability from its core visual communications
business, the Company announced in November 2000 a split of its operations into
a Products business unit and a Solutions business unit. Since that announcement,
management has determined that the greatest growth and profit opportunities in
the video conferencing industry lie in improving industry wide multi-vendor
platform interoperability and in the integration and management of video
conferencing networks, all of which are core competencies of the Solutions
business unit. Therefore, on May 30, 2001 VTEL announced its intent to sell the
Products business unit within 90 days. Subject to execution of the sale
agreement and shareholder approval, the Products unit will become a private
company and will continue to develop and to deliver superior videoconferencing
products for the education and government marketplace.
During the three months ended April 30, 2001, the Products unit's goal
remained focused on revitalizing its commitment to customers and emphasizing the
IP H.323 technology. 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
9
customers at no charge, improves videoconferencing productivity through feature
enhancements, new interfaces for international users, and increased system
stability.
International sales represented approximately 12% and 22% respectively of
product revenues for the three months and nine months ended April 30, 2001,
compared to 17% and 19% respectively, for the three months and nine months ended
April 30, 2000. These revenue percentages represent export sales from the
Company's domestic operations as well as sales from its foreign subsidiaries.
The change in the international sales is due largely to the reduction of VTEL's
European offices. Since the demand for videoconferencing systems in Europe does
not provide VTEL with sufficient near-term growth opportunities, the European
offices were consolidated into primarily customer service and support
operations. The Product business unit's international presence is focused in
China, where the Company operates a wholly owned foreign enterprise and
maintains a manufacturing facility. VTEL's Galaxy products are the best-selling
videoconferencing systems in China and for the nine months ended April 30, 2001,
revenues from the China operations exceeded $1.6 million.
VTEL's Products business unit sells its products primarily through
resellers. For the three months and nine months ended April 30, 2001 reseller
sales were 86% and 82% of product sales, respectively. For the three months and
nine months ended April 30, 2000 reseller sales were 79% and 74% respectively.
All other revenues are generated through direct customer sales. The Company's
success at solidifying its key reseller partnerships during the three months
ended April 30, 2001 is evident by the increase in reseller sales as a
percentage of product sales for the three and nine month periods ended April 30,
2001 as compared to the same periods during prior fiscal year.
For the three months ended April 30, 2001 and 2000, service and other
revenues as a percent of total revenues were 40% and 33%, respectively. For the
nine months ended April 30, 2001 and 2000, service and other revenues as a
percent of total revenues were 43% and 31%, respectively. Service and other
revenues declined by $2.9 million and $4.1 million in the three and nine months
ended April 30, 2001, compared to the three and nine months ended April 30,
2000. Service revenues represent the combined revenues from VTEL's Solutions
business unit, which provides network consulting, installation, training, and
maintenance services as well as custom videoconferencing integration solutions
and multi-vendor products. With the exception of a decline in the revenue from
sales of integrated systems during the three months ended April 30, 2001, total
service revenue has remained relatively stable over the past seven quarters. The
decline in revenue from sales of integrated systems during the third fiscal
quarter was due primarily to the downturn in the economy, which caused customers
to defer capital purchases. As the economy improves, management expects to see a
rebound in such sales during the fourth fiscal quarter.
Since the Company believes the greatest growth and profit opportunities in
the visual communications industry lie with the core competencies of its
Solutions business, management is seeking shareholder approval to rename this
unit from VTEL Solutions to Forgent, to clearly communicate that Forgent has
separated from the Company's former videoconferencing equipment manufacturing
business. To empower its customers through visual communications, Forgent's
portfolio of offerings consists of (1) global services, including maintenance,
technical support, network consulting, migration planning, system design,
project management, installation, interoperability testing, and training; (2)
multi-vendor products provided by the Multi-Vendor Products Program (MVP), which
includes the best-in-class visual communications technology from partners such
as Accord Networks, PictureTel, Polycom, Inc., RADVision and VTEL; and (3)
network management software (Visual Network Platform), which is currently under
development and will provide industry-wide interoperability and compatibility
standards for both traditional (H.320) and Internet protocol (H.323) networks,
as well as drive the migration of video over IP networks. The Company's MVP
Program allows its customers to "test drive" multiple brand-name visual
10
communication technology before they buy the product. No other company has this
offering. As the MVP Program continues to grow and generate new non-VTEL service
contracts, management expects to see an increase in revenue.
Gross margin. Gross margin as a percentage of total revenues was 28% and
29% for the three and nine months ended April 30, 2001, respectively, a decrease
from the gross margin as a percentage of total revenues of 33% and 36% for the
three and nine months ended April 30, 2000, respectively.
Product margins were 36% of product revenue for the three months ended
April 30, 2001 and 37% for the three months ended April 30, 2000. Product
margins were 35% of product revenue for the nine months ended April 30, 2001 and
40% for the nine months ended April 30, 2000. As users of visual communication
systems demand higher performing products at lower cost, overall price
competitiveness in the industry remains intense. As a result, the Products
business has significantly reduced its discounting practices in favor of
obtaining more profitable sales and has taken several measures to recover our
gross margins, including performing its manufacturing process more efficiently
to reduce its costs of sales.
Service margins were 15% and 22% of service revenue for the three and nine
months ended April 30, 2001. Service margins were 24% and 28% of service revenue
for the three and nine months ended April 30, 2000. Service margins represent
the combined margins from installation and maintenance services as well as sales
from custom integration solutions and multi-vendor products. The decline in
service margins for the three and nine months ended April 30, 2001 as compared
to the related periods in prior year is due primarily to the reduction in
product revenue over the same periods, non-recurring compensation costs incurred
during the second fiscal quarter, and the reduction in revenue from sales of
integrated systems during the third fiscal quarter. Since the Solutions business
incurs relatively fixed costs of sales, service margins are directly tied to
revenue. As the MVP program expands and generates new non-VTEL service
contracts, management expects to see improved margins from its service contracts
due to economies of scale. Additionally, the Solutions business has taken
measures to reduce its costs, including obtaining MVP products directly from the
Company's partners, improving asset management and renegotiating subcoverage
contracts.
Selling, general and administrative. Selling, general and administrative
expenses decreased by $5.8 million, or 41%, to $8.3 million for the quarter
ended April 30, 2001 from $14.1 million for the quarter ended April 30, 2000.
Selling, general and administrative expenses decreased by $8.5 million, or 20%,
to $33.2 million for the nine months ended April 30, 2001 from $41.7 million for
the nine months ended April 30, 2000. Selling, general and administrative
expenses as a percentage of revenues were 44% and 45% for the three months ended
April 30, 2001 and 2000, respectively, and were 51% and 40% for the nine months
ended April 30, 2001 and 2000, respectively.
The quarter ended April 30, 2001 is the fifth consecutive quarter in which
VTEL has achieved a reduction in selling, general and administrative (SG&A)
expenses. During the six months ended January 31, 2001 VTEL completed certain
workforce and office space reductions as part of the restructuring activities
initiated during the first quarter this fiscal year (see "Restructuring Charge"
below). During the three months ended April 30, 2001, the Company sold its
equity interest in a real estate lease in Sunnyvale, California for $500,000.
Additionally, VTEL is no longer obligated for the related monthly rent payments
which represent a permanent annual reduction in operating expenses of $2 million
and a total reduction of $14 million over the remaining seven year life of the
lease. The lease buyout included a one-time non-cash charge of $1.1 million for
the leasehold improvements to the Sunnyvale facility.
11
During the three months ended April 30, 2001 management continued its
aggressive efforts to identify efficiencies and further reduce costs. As a
result of these additional efforts and the full realization of our restructuring
activities, VTEL achieved a 24% decrease in SG&A expenses during the three
months ended April 30, 2001 as compared to the three months ended January 31,
2001 and a 40% decrease as compared to the three months ended October 31, 2000.
Management is committed to continue decreasing SG&A expenses. Any expense not
directly supporting the generation of revenue for Forgent remains under close
scrutiny in order to prevent unnecessary costs.
Research and development. Research and development (R&D) expenses decreased
by $1.9 million, or 43%, to $2.5 million for the quarter ended April 30, 2001
from $4.4 million for the quarter ended April 30, 2000. Research and development
expenses decreased by $0.6 million, or 5%, to $11.5 million for the nine months
ended April 30, 2001 from $12.1 million for the nine months ended April 30,
2000. Research and development expenses as a percentage of revenues were 14% for
the three months ended April 30, 2001 and 2000, and were 18% and 12%,
respectively, for the nine months ended April 30, 2001 and 2000. Capitalized
software development costs totaled $1.0 million and $4.2 million for the three
and nine months ended April 30, 2000 respectively. No software development costs
were capitalized for the three and nine months ended April 30, 2001.
Research and development expenses for the nine months ended April 30, 2001
were less than the related expenses for the nine months ended April 30, 2000 due
primarily to two factors. The OnScreen24 operation historically incurred
significant R&D expenses. Due to the weakening of environment for start-up
businesses and related tightening of the venture capital marketplace, VTEL
absorbed its OnScreen24 operations back into the operations of its core business
during the second fiscal quarter of 2001, thus reducing R&D expenses for the
nine months ended April 30, 2001. This reduction is offset by the R&D expenses
incurred by the third component of Forgent's portfolio, the Visual Network
Platform (VNP) software. Currently the videoconferencing industry is
disconnected yet requires systems to interoperate. The VNP software will remove
the complexity, reduce the cost, improve the quality of service, and expand the
usability of visual communications, while enabling customers to leverage their
legacy technology. In addition to the in-house technological expertise, Forgent
is selecting strategic partnerships in order to define itself as a network
centric company, versus the traditional end-point centric company. Products with
the VNP software are currently being tested and management expects to offer its
first VNP product by the end of the calendar year.
VTEL's research and development strategy relies on the Company's ability to
develop and introduce new and enhanced products and solutions for enterprise
networks successfully. Leveraging on its expertise of visual communications
technology, VTEL is anticipating and incorporating the industry's evolving
standards into its 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 its
technology leadership position, management is reviewing all research and
development expenses in order to ensure they are in line with the Company's
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 the Company's
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.
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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 were
terminated or subleased to other tenants. These workforce reductions and
consolidations of office space reduced costs and focused resources on efforts to
support the new business charter. Management anticipates continued cost savings
as a result of the restructuring activities.
Other Income (Expense). Other income decreased by $42.2 million to $2.3
million for the quarter ended April 30, 2001 from income of $44.5 million for
the quarter ended April 30, 2000. Other income decreased by $39.1 million to
$4.7 million for the nine months ended April 30, 2001 from income of $43.8
million for the nine months ended April 30, 2000. The decrease is primarily
attributable to non-core business activities, which occurred last fiscal year.
During the three months ended April 30, 2000, VTEL reached a litigation
settlement agreement and a non-exclusive licensing agreement (see "Non-Recurring
Events" below). As a result of these agreements, VTEL received $10.8 million in
cash and shares that were sold during the quarter ended April 30, 2000 for $34.2
million. Related legal fees of $0.5 million were netted against this other
income.
Non-Recurring Events. On March 3, 2000 VTEL settled a lawsuit pending in
the 126th Judicial District Court in Travis County, Texas in which VTEL had
previously initiated against five former employees, who left 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 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. These shares were sold during the three months ended April 30, 2000 for
$34.2 million. The parties agreed to dismiss all claims, counterclaims, and
third party claims in the lawsuit, thus 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 of $8.3 million to VTEL as a fully paid up royalty in exchange for such
license. In turn and without any payments by VTEL, Polycom also granted VTEL a
non-exclusive sublicense to its rights under a license agreement with Brown
University pertaining to its single camera tracking technology. Through this
technology exchange, the parties have access to specified distinctive
technologies of the other for use in their product offerings.
Net Income (Loss). VTEL generated a net loss of $4.6 million, or $0.18 per
share, during the quarter ended April 30, 2001 compared to net income of $35.1
million, or $1.36 per fully diluted share, during the quarter ended April 30,
2000. VTEL generated a net loss of $24.7 million, or $0.99 per share, during the
nine months ended April 30, 2001 compared to net income of $25.8 million, or
$1.03 per fully diluted share, during the nine months ended April 30, 2000. The
decline in revenue and gross margins incurred during the nine months ended April
30, 2001, as well as the restructuring charge during fiscal 2001 and the
non-recurring events during fiscal 2000 contributed to the change in net income
(loss).
During fiscal year 2000, VTEL established two subsidiaries, OnScreen24 and
ArticuLearn, to leverage its expertise in visual communications and to pursue
business strategies related to the Internet. Due to the weakening of the
environment for start-up businesses and related tightening of the venture
capital marketplace, VTEL absorbed its OnScreen24 operations back into the
operations of its core businesses during the second fiscal quarter of 2001. In
order to derive additional value from its investment in this subsidiary, the
Company also is pursuing licensing partners for the intellectual property
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created by OnScreen24 and is deploying its engineers to assist in the
development of the Company's next generation network management platform.
Despite increasing momentum, ArticuLearn was unable to secure external funding
for its operations. In order to reduce the cash investment required by the
Company and to solely focus on Forgent's mission, VTEL has started in the fourth
fiscal quarter to liquidate this subsidiary. During the nine months ended April
30, 2001, the two subsidiaries incurred a combined net loss of $7.4 million.
In pursuing the primary objective of increasing shareholder value,
management believes the business strategies currently being implemented better
leverage VTEL's key strengths and better position the organization for future
growth and profitability. However, there can be no assurance that the Company
will generate net income. If revenues and margins continue to decline, VTEL
could incur further losses and may need to consider additional restructuring
measures in future quarters that could have a material adverse affect on the
Company's financial position and results of operations.
Introduction of New Product and Services
VTEL continually strives to introduce the latest technology in visual
communications. Last fiscal year, the Company introduced its 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. VTEL is committed to continually
developing enhancements for the Galaxy line. Additionally, the Company is
building a new network management platform and released 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,
providing the Company's customers the ability to utilize these management tools
via the Internet, thus expanding their access. Although this current technology
supports all VTEL products, Forgent 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 April 30, 2001, VTEL had working capital of $28.0 million, including
$22.2 million in cash, cash equivalents and short-term investments. Cash used in
operating activities was $15.8 million for the nine months ended April 30, 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
$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. The OnScreen24 and ArticuLearn operations
historically required much funding from VTEL. The liquidation of both these
subsidiaries, as well as the pending divestiture of the Products business unit
and the completion of the Company's ___ restructuring efforts, will improve the
cash requirements from operations. Therefore, management believes the Company is
in the position to stabilize its cash balance during the fourth fiscal quarter
of 2001.
Net cash provided by investing activities during the nine months ended
April 30, 2001 was $16.2 million and primarily resulted from the partial sales
of a short-term investment. 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 VTEL was able to convert the shares and
14
cash received from the non-recurring events into other short-term investments.
For fiscal year 2001 management established a $3.0 million annual capital budget
to support operations. As of April 30, 2001 VTEL has spent less than its
nine-month budget and anticipates completing the year with over $0.7 million
less spent than its annual budget.
Cash flows used in financing activities during the nine months ended April
30, 2001 were $0.7 million and primarily resulted from payments on notes
payable. Cash flows used in financing activities during the nine months ended
April 30, 2000 were $10.3 million as VTEL paid off $11.2 million advanced by its
lenders under a line of credit. Since the third quarter of fiscal year 2000 when
the Company repaid the outstanding balance on its line of credit, no new lines
of credit have been opened. VTEL settled its remaining notes payable on February
5, 2001 and as of April 30, 2001 the Company no longer has any debt. Based on
the current strong cash position, management does not anticipate acquiring any
additional lines of credit this fiscal year.
VTEL's principal sources of liquidity at April 30, 2001 consisted of $22.2
million of cash, cash equivalents and short-term investments. Included in this
amount was the $3.6 million investment in Polycom. During the quarter ended
April 30, 2001, the Company sold 70,000 shares of Accord. The Accord shares
converted to Polycom common stock shares as a result of Polycom's acquisition of
Accord. The Company also sold 187,299 shares of Polycom during the three months
ended April 30, 2001. The combined sales resulted in a $3.7 million realized
gain. The remaining 153,250 shares were marked to market and $3.3 million of
unrealized gain was recorded as part of comprehensive income.
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 the
Company's financial condition or results of operations.
General
The markets for VTEL's products and services 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
management attempts to identify and respond to these changes as soon as
possible, prediction of and reaction to such events will be an ongoing challenge
and may result in revenue shortfalls during certain periods of time.
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 VTEL's; delay in the
introduction of higher performance products; market acceptance of new products
the Company introduces; 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 VTEL does 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 have been, and future earnings and stock price
potentially may be, subject to significant volatility, particularly on a
15
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, VTEL participates in a highly dynamic industry,
which often contributes to the volatility of its 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, VTEL 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
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 VTEL's business and
other risks indicated in VTEL's filings with the Securities and Exchange
Commission. These risks and uncertainties are beyond the Company's control, and
in many cases, management 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 VTEL's investment portfolio
primarily consists of money market funds and other marketable securities
including commercial paper and government securities, management believes the
interest rate risk is minimal due to the short-term nature of these investments.
Additionally, management believes the foreign currency exposure to be relatively
low since most of VTEL's foreign sales are predominantly in U.S. dollars.
Management reviews the credit worthiness of VTEL's customers to mitigate the
foreign currency exchange risk and credit risk and may utilize foreign currency
forward contracts to hedge its risks. By carefully monitoring its foreign
currency exchange exposures, VTEL ensures the overall effectiveness of its
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 the Company's
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.
16
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
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:
None
* * *
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
June 15, 2001 By: /s/ Dick N. Snyder
-----------------------
Dick N. Snyder
Chief Executive Officer
By: /s/ Jay C. Peterson
-----------------------
Jay C. Peterson
Chief Financial Officer
17