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, 2000 Commission file number 0-20008 VTEL Corporation A Delaware Corporation IRS Employer ID No. 74-2415696 108 Wild Basin Road Austin, Texas 78746 (512) 437-2700 The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and has been subject to such filing requirements for the past 90 days. At March 3, 2000 the registrant had outstanding 24,591,289 shares of its Common Stock, $0.01 par value.
<TABLE> <CAPTION> VTEL CORPORATION CONSOLIDATED BALANCE SHEET (Amounts in thousands, except per share data) - -------------------------------------------------------------------------------- January 31, July 31, 2000 1999 (Unaudited) <S> <C> <C> ASSETS Current assets: Cash and equivalents $ 9,122 $ 7,805 Short-term investments 1,403 4,308 Accounts receivable, net of allowance for doubtful accounts of 1,778 and 1,223 at January 31, 2000 and July 31,1999 28,144 38,291 Inventories 14,119 15,553 Prepaid expenses and other current assets 2,170 2,320 ----------------- ------------------ Total current assets 54,958 68,277 Property and equipment, net 27,012 29,704 Intangible assets, net 15,305 15,841 Capitalized software 10,020 7,351 Other assets 2,478 2,918 ----------------- ------------------ $ 109,773 $ 124,091 ================= ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 13,987 $ 18,375 Borrowings under revolving line of credit 12,500 - Accrued compensation and benefits 3,891 4,916 Other accrued liabilities 3,380 3,555 Notes payable, current portion 1,638 2,234 Deferred revenue 10,907 11,062 ----------------- ------------------ Total current liabilities 46,303 40,142 Long-term liabilities: Borrowings under revolving line of credit - 11,200 Notes payable 250 554 Other long-term obligations 4,107 4,176 ----------------- ------------------ Total long-term liabilities 4,357 15,930 ----------------- ------------------ Commitments and contingencies - - Stockholders' equity: Preferred stock, $.01 par value; 10,000,000 authorized; none issued or outstanding Common stock, $.01 par value; 40,000,000 authorized; 24,414,000 and 24,423,000 issued at January 31, 2000 and July 31, 1999 244 244 Additional paid-in capital 260,225 260,057 Accumulated deficit (200,979) (191,665) Unearned compensation (252) (385) Stock subscriptions receivable (138) (150) Accumulated other comprehensive income [loss] 13 (82) ----------------- ------------------ Total stockholders' equity 59,113 68,019 ----------------- ------------------ $ 109,773 $ 124,091 ================= ================== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 2
<TABLE> <CAPTION> VTEL CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (Amounts in thousands, except per share data) - -------------------------------------------------------------------------------- For the For the Three Months Ended Six Months Ended January 31, January 31, 2000 1999 2000 1999 <S> <C> <C> <C> <C> Revenues: Products $26,133 $26,386 $50,508 $52,274 Services and other 11,129 11,369 21,820 22,421 --------------- -------------- --------------- ---------------- 37,262 37,755 72,328 74,695 --------------- -------------- --------------- ---------------- Cost of sales: Products 15,203 14,483 29,721 27,763 Services and other 7,833 7,485 15,258 14,833 --------------- -------------- --------------- ---------------- 23,036 21,968 44,979 42,596 --------------- -------------- --------------- ---------------- Gross margin 14,226 15,787 27,349 32,099 --------------- -------------- --------------- ---------------- Operating expense: Selling, general and administrative 13,562 15,916 27,587 34,419 Research and development 3,915 4,638 7,682 9,874 Amortization of intangible assets 378 259 742 511 Restructuring expense - 2,915 - 2,915 --------------- -------------- --------------- ---------------- Total operating expenses 17,855 23,728 36,011 47,719 --------------- -------------- --------------- ---------------- Loss from operations (3,629) (7,941) (8,662) (15,620) --------------- -------------- --------------- ---------------- Other income (expense): Interest income 130 248 209 536 Interest expense and other (471) (251) (861) (299) --------------- -------------- --------------- ---------------- (341) (3) (652) 237 --------------- -------------- --------------- ---------------- Net loss before provision for income taxes (3,970) (7,944) (9,314) (15,383) Provision for income taxes - - - - --------------- -------------- --------------- ---------------- Net loss $ (3,970) $ (7,944) $ (9,314) $ (15,383) =============== ============== =============== ================ Basic and diluted loss per share: $ (0.16) $ (0.35) $ (0.38) $ (0.67) =============== ============== =============== ================ Weighted average shares outstanding: Basic and diluted 24,395 22,987 24,346 23,036 =============== ============== =============== ================ </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 3
<TABLE> <CAPTION> VTEL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Amounts in thousands) - -------------------------------------------------------------------------------- For the Six Months Ended January 31, 2000 1999 Cash flows from operating activities: <S> <C> <C> Net loss $ (9,314) $ (15,383) Adjustments to reconcile net loss to net cash used in operations: Depreciation and amortization 5,998 5,833 Provision for doubtful accounts 571 164 Amortization of unearned compensation 133 120 Gain on sale of fixed assets (41) (40) Foreign currency translation loss 124 19 Decrease in accounts receivable 9,576 5,423 (Increase) decrease in inventories 1,434 (1,948) Increase (decrease) in prepaid expenses and other current assets 150 (199) Decrease in accounts payable (4,386) (6,000) Increase (decrease) in accrued expenses (1,141) 679 Increase (decrease) in deferred revenues (122) 375 --------------- --------------- Net cash (used in) provided by operating activities 2,982 (10,973) --------------- --------------- Cash flows from investing activities: Net short-term investment activity 2,905 (1,000) Net purchase of property and equipment (1,781) (7,912) Issuance of note receivable (97) - Increase in capitalized software (3,147) (2,993) Increase in other assets (36) (973) --------------- --------------- Net cash used in investing activities (2,156) (12,878) --------------- --------------- Cash flows from financing activities: Borrowings under line of credit 1,300 15,000 Payments on notes payable (960) (367) Issuance of notes payable - 3,688 Net proceeds from issuance of stock 157 257 Purchase of treasury stock - (2,265) Sale of treasury stock 23 402 --------------- --------------- Net cash provided by financing activities 520 16,715 --------------- --------------- Effect of translation exchange rates on cash (29) (13) --------------- --------------- Net increase (decrease) in cash and equivalents 1,317 (7,149) Cash and equivalents at beginning of period 7,805 15,191 --------------- --------------- Cash and equivalents at end of period $ 9,122 $ 8,042 =============== =============== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 4
VTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data unless otherwise noted) - -------------------------------------------------------------------------------- Note 1 - General and Basis of Financial Statements The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and accordingly, do not include all information and footnotes required under generally accepted accounting principles for complete financial statements. In the opinion of management, these interim financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation of the financial position of the Company as of January 31, 2000 and July 31, 1999, the results of the Company's operations for the three and six month period ended January 31, 2000 and 1999 and cash flows for the six month period ended January 31, 2000 and 1999. The results for interim periods are not necessarily indicative of results for a full fiscal year. Note 2 - Inventories Inventories consist of the following (amounts in thousands): January 31, July 31, 2000 1999 Raw materials $ 8,047 $ 8,595 Work in process 1,021 1,504 Finished goods 4,258 4,637 Finished goods held for evaluation and rental and loan agreements 793 817 --------- -------- $ 14,119 $ 15,553 ========= ======== Finished goods held for evaluation consist of completed digital visual communications systems used for demonstration and evaluation purposes. Note 3 - Net Income (Loss) Per Share The Company reports earnings per share under SFAS No. 128, "Earnings Per Share." Under SFAS No. 128, basic earnings per share is based on the weighted effect of all common shares issued and outstanding, and is calculated by dividing net income available to common stockholders by the weighted average shares of common stock outstanding during the period. Diluted earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive shares outstanding. 5
VTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data unless otherwise noted) - -------------------------------------------------------------------------------- The calculation of the number of weighted average shares outstanding for basic and dilutive earnings (loss) per share for each of the periods presented is as follows (amounts in thousands): <TABLE> <CAPTION> For the For the Three Months Ended Six Months Ended January 31 January 31, 2000 1999 2000 1999 <S> <C> <C> <C> <C> Weighted average shares Outstanding - basic 24,395 22,987 24,346 23,036 ------ ------ ------ ------ Effect of dilutive securities: Stock options - - - - ------ ------ ------ ------ Dilutive potential common shares - - - - ------ ------ ------ ------ Weighted average shares Outstanding - diluted 24,395 22,987 24,346 23,036 ====== ====== ====== ====== Antidilutive securities 4,663 4,512 4,761 4,351 ====== ====== ====== ====== </TABLE> Note 4 - Restructuring Charge In November 1998, the Company adopted a restructuring plan which resulted in the reduction of 100 employees (approximately 14%) of the Company. While terminations were effective immediately for most employees upon announcement in November 1998, all employees terminated in the restructuring had left the Company during the third fiscal quarter. The Company also made the decision to reduce operating costs by exiting other activities and reducing the related overhead costs. These activities include the closure or consolidation of certain field sales offices, its Sunnyvale, California spare parts depot and technical assistance center. As a result of the restructuring, the Company recorded a restructuring charge of $2.9 million during the second fiscal quarter of 1999. All restructuring efforts had been completed by the end of the 1999 fiscal year. Note 5 - Comprehensive Loss The Company's comprehensive loss is comprised of net income, foreign currency translation adjustments and unrealized gains and losses on marketable securities held as available-for-sale investments. Comprehensive loss for the three and six months ended January 31, 2000 was $4.0 million and $9.3 million, respectively, and comprehensive loss for the three and six months ended January 31, was $7.9 million and $15.4 million, respectively, including the impact of other accumulated comprehensive loss. 6
VTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data unless otherwise noted) - -------------------------------------------------------------------------------- Note 6 - Line of Credit Amounts outstanding under the credit agreement are secured by substantially all of the Company's assets. The Company has issued a letter of credit totaling $1.2 million under the line of credit as a lease deposit on one of its facilities. At January 31, 2000, the Company had drawn $12.5 million under the credit line. The line of credit agreement is subject to loan covenants that require the maintenance of certain financial ratios. As the Company was not in compliance with several of the Financial Covenants, a loan modification and forbearance agreement was completed between the company and its lenders in December 1999. This agreement provided for a revised facility amount of $15.2 million, a maturity date of March 15, 2000 and provided for the lenders to forbear through February 15, 2000. As of March 10, 2000, the Company had repaid all amounts drawn on the line. The Company expects to obtain an alternative line of credit in the near term. 7
VTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data unless otherwise noted) - -------------------------------------------------------------------------------- Note 7-Segment Information In 1999, the Company adopted SFAS 131 "Disclosure about Segments of an Enterprise and Related Information". The Company manages its business primarily on a products and services basis. The Company's reportable segments are Products and Services/Other. The Products segment provides multi-media visual communication (commonly referred to as video teleconferencing) products to customers primarily through a network of resellers, and to a lesser extent directly to end-users. The Services/Other segment provides custom integrated systems, installations and product support services to customers. The accounting policies of the segments are the same as those of the Company. The Company evaluates the performance of its segments and allocates resources to them based on revenue and operating income; however, there is a charge to allocate certain corporate operating expenses to the segments. The prior year's segment information has been restated to present the Company's reportable segments. The table below presents segment information about revenue from unaffiliated customers, depreciation and operating income for the three and six month periods ended January 31, 2000 and 1999: <TABLE> <CAPTION> Services/ Corporate/ Products Other Other Total ------------- ------------- -------------- -------------- <S> <C> <C> <C> <C> For the three-month period ending January 31, 2000 Revenues from unaffiliated customers $ 26,133 $ 11,129 $ - $ 37,262 Depreciation and amortization 135 291 2,801 3,227 Operating income (loss) 10,930 3,296 (17,855) (3,629) For the three-month period ending January 31, 1999 Revenues from unaffiliated customers $ 26,386 $ 11,369 $ - $ 37,755 Depreciation and amortization 45 347 2,684 3,076 Operating income (loss) 11,903 3,884 (23,728) (7,941) For the six-month period ending January 31, 2000 Revenues from unaffiliated customers $ 50,508 $ 21,820 $ - $ 72,328 Depreciation and amortization 169 601 5,228 5,998 Operating income (loss) 20,787 6,562 (36,011) (8,662) For the six-month period ending January 31, 1999 Revenues from unaffiliated customers $ 52,274 $ 22,421 $ - $ 74,695 Depreciation and amortization 92 694 5,047 5,833 Operating income (loss) 24,511 7,588 (47,719) (15,620) </TABLE> 8
VTEL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data unless otherwise noted) - -------------------------------------------------------------------------------- Note 8 - Subsequent Events On March 3, 2000 VTEL settled a lawsuit pending in the 126th Judicial District Court in Travis County, Texas which VTEL had previously initiated against five former employees who left the Company in September 1996 to form Via Video Communications, Inc. ("Via Video"). Via Video was subsequently acquired by Polycom, Inc. Pursuant to the settlement agreement, the former employees of VTEL have paid $2.5 million in cash and have delivered to VTEL 300,800 shares of common stock of Polycom, Inc., having a market value $39,104,000 as of March 3, 2000, in settlement of the claims asserted by VTEL. The parties have agreed to dismissal of all claims and counterclaims and third party claims in the lawsuit, ending the litigation. Separately, VTEL voluntarily dismissed Polycom, Inc. and Via Video from the case without consideration. On March 3, 2000, VTEL granted non-exclusive licenses to Polycom, Inc.("Polycom") to use three of its patented technologies, and Polycom has agreed to a one time payment to VTEL of $8.3 million as a fully paid up royalty in exchange for such license. In turn and without any payments by VTEL, Polycom also has granted VTEL a non-exclusive sublicense to its rights under its license agreement with Brown University pertaining to its single camera tracking technology. Through this technology exchange, the parties will have access to specified distinctive technologies of the other for use in their product offerings. 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following review of VTEL's financial position as of January 31, 2000 and 1999 and for the three months and six months ended January 31, 2000 and 1999 should be read in conjunction with our 1999 Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 5, 1999. Results of Operations The following table provides the percentage of revenues represented by certain items in VTEL's Condensed Consolidated Statement of Operations: <TABLE> <CAPTION> For the Three For the Six Months Ended Months Ended January 31, January 31, 2000 1999 2000 1999 <S> <C> <C> <C> <C> Revenues 100% 100% 100% 100% Gross margin 38 42 38 43 Selling, general and administrative 36 42 38 46 Research and development 11 12 11 13 Restructuring expense 0 8 0 4 Total operating expenses 48 63 50 64 Net income (loss) (11) (21) (13) (21) </TABLE> Three and Six Months Ended January 31, 2000 and 1999 Revenues. Revenue for the quarters ended January 31, 2000 decreased by $0.5 million, or 1%, to $37.3 million from $37.8 million for the quarter ended January 31, 1999. Revenues for the six months ended January 31, 2000 decreased to $72.3 million from $74.7 million for the six months ended January 31, 1999, a decrease of $2.4 million or 3%. The decline over the comparable six month periods ended January 31, 2000 and 1999 can be attributed to a delay in the purchase decision of our customers as a result of the introduction of VTEL's new product line, Galaxy(TM), which was introduced near the end of the first fiscal quarter of 2000. Unit sales of our core products Galaxy(TM) and ESA(TM) (Enterprise Series Architecture, our prior generation flagship product line) increased 6% and 9% for the three and six months ended January 31, 2000 as compared to the same periods in fiscal 1999. The declining revenue levels over these same periods reflect the shift in product mix to units with lower average sales prices. Our market analysis indicates that the demand for high end video conferencing solutions is focused on relatively narrow market sectors such as education and state and federal government, while the corporate video conferencing market has migrated toward appliance type products. We continue to excel in the primary and secondary education and government sectors where we are perceived to be gaining market share. We believe that the desk top videoconferencing solution currently addressed by appliance type products by our competitors will ultimately be replaced with Internet solutions using videoconferencing software. This will be accomplished with the proliferation of 10
high speed, broad band internet protocol (IP) networks that are currently being deployed within the United States and abroad. We expect to continue our focus on bringing videoconferencing solutions to our targeted markets while we develop videoconferencing solutions for the Internet. Total sales of the combined product lines of Galaxy(TM) and ESA(TM) during the quarter ended January 31, 2000 were similar to total sales of the ESA product line in previous quarters. We expect the transition to the Galaxy(TM) product line to continue for several quarters due to the size of the install base of the ESA product line and the desire by our customers to install additional endpoints that are familiar . Approximately 75% of our product sales are from existing customers. A new, more innovative user interface software (Vtouch(TM)) and the additional functionality of H.323 IP (Internet Protocol) networking capability distinguish the Galaxy product line. For the three and six month periods ended January 31, 2000 and 1999, service revenue as a percent of total revenues was 30%. Less than 10% of service revenue relates to installation of our products and the balance of service revenue relates to maintenance contracts on videoconferencing units previously sold. Service and other revenue declined by $0.2 million and $0.6 million in the three and six months ended January 31, 2000 compared to the three and six months ended January 31, 1999. This decline reflects, in part, the decline in product sales over the past year. International sales represented approximately 25% and 22% respectively, of product revenues for the three months and six months ended January 31, 2000 compared to 28% and 22% respectively, for the three months and six months ended January 31, 1999. These revenue percentages represent export sales from our domestic operations, as well as sales from our foreign subsidiaries that are installed in foreign locations. VTEL primarily sells its products through resellers. For the three months and six months ended January 31, 2000 reseller sales were 81% and 78% of product sales, respectively. For the three months and six months ended January 31, 1999 reseller sales were 82% and 83% respectively. All other sales of our products are made directly to the end user customer. One of VTEL's initiatives is to grow revenues from non-U.S. markets. Non-U.S. operations are subject to certain risks inherent in conducting business abroad including price and currency exchange fluctuations and restrictive government actions. We believe our foreign currency exposure to be relatively low as foreign sales are predominantly settled in U.S. dollars. We use currency-hedging programs that utilize foreign currency forward contracts on a limited basis and review the credit worthiness of our customers to mitigate foreign currency exchange and credit risk. There can be no assurance that our foreign currency-hedging program will effectively hedge foreign currency exchange risk. While we strive for revenue growth, there can be no assurance that revenue growth or profitability can be achieved. Most recently VTEL has experienced neither revenue growth or profitability. Consistent with many companies in the technology industry, our business model is characterized by a very high degree of operating leverage. Our expense levels are based, in part, on our expectations as to future revenue levels, which are difficult to predict partly due to VTEL's strategy of distributing its products primarily through resellers. Because expense levels are based on our expectations as to future revenues, our expense base is relatively fixed in the short term. If revenue levels are below expectations, operating results may be materially and adversely affected and net income is likely to be disproportionately adversely affected. In addition, our quarterly and annual results may fluctuate as a result of many factors, including price reductions, delays in the introduction of new products, 11
delays in purchase decisions due to new product announcements by VTEL or its competitors, cancellations or delays of orders, interruptions or delays in supplies of key components, changes in reseller base, customer base, business or product mix and seasonal patterns and other shifts of capital spending by customers. There can be no assurance that we will be able to increase or even maintain our current level of revenues on a quarterly or annual basis in the future. Gross margin. Gross margin as a percentage of total revenues was 38% for the three and six months ended January 31, 2000, a decrease from the gross margin as a percentage for revenues of 42% and 43%, for the three and six months ended January 31, 1999. The decrease in gross margin percentage for the three and six month periods ended January 31, 2000 was the result of a shift by our customers towards the purchase of lower margin products. Additionally, product margins were affected unfavorably by inventory write-downs taken on non-core product lines in the three and six months ended January 31, 2000 that were $0.7 million greater than the comparable periods. We believe the shift to smaller group systems will reflect continued transition to visual communications systems that function within an IP network environment. As such, we anticipate that lower gross margins will be offset by stronger unit sales once IP networks proliferate. We expect gross margin pressures due to price competitiveness in the industry, shifts in the product sales mix and anticipated offerings of new products, which may carry a lower gross margin. We expect that overall price competitiveness in the industry will continue to become more intense as users of visual communication systems attempt to balance performance, functionality and cost. Our gross margin is subject to fluctuation based on pricing, production costs and sales mix. 12
Selling, general and administrative. Selling, general and administrative expenses decreased by $2.4 million, or 15%, to $13.6 million for the quarter ended January 31, 2000 from $15.9 million for the quarter ended January 31, 1999. Selling, general and administrative expenses decreased by $6.8 million, or 20%, to $27.6 million for the six months ended January 31, 2000 from $34.4 million for the six months ended January 31, 1999. Selling, general and administrative expenses as a percentage of revenues were 36% and 42% for the three months ended January 31, 2000 and 1999, respectively, and were 38% and 46% for the six months ended January 31, 2000 and 1999, respectively. The overall decline reflects the higher expense levels present during the three and six months ended January 31, 1999, prior to the restructuring efforts. As a result of the restructuring activities, selling, general and administrative expenses were reduced which is reflected in a comparison of the periods ended January 31, 2000 and 1999. However, VTEL believes that it must continue to reduce our selling, general and administrative expenses as a percent of revenues in order to become profitable. Research and development. Research and development expenses decreased by $0.7 million, or 16%, to $3.9 million for the quarter ended January 31, 2000 from $4.6 million for the quarter ended January 31, 1999. Research and development expenses decreased by $2.2 million, or 22%, to $7.7 million for the six months ended January 31, 2000 from $9.9 million for the six months ended January 31, 1999. Research and development expenses as a percentage of revenues were 11% and 12% for the three months ended January 31, 2000 and 1999, respectively, and were 11% and 13%, respectively, for the six months ended January 31, 2000 and 1999. Capitalized software development costs totaled $1.4 million and $1.8 million for the three months ended January 31, 2000 and 1999 respectively, and $3.1 and 3.0 million for the six months ended January 31, 2000 and 1999 respectively. Overall research and development expenditures (including capitalized costs) decreased during the three and six months ended January 31, 2000 in comparison with the three and six months ended January 31, 1999. This reduction reflects in part the completion of the development of our new product line, Galaxy(TM), but it also reflects planned reductions in research and development spending in order to maintain a spending level that is consistent with our cash flow expectations. The effort to reduce spending levels was initiated as part of the restructuring activities that took place in the second quarter of fiscal 1999. New products are generally characterized by increased functionality and better picture quality at lower bandwidths and often at reduced prices. The introduction of products, by either VTEL or its competitors, embodying new technology and the emergence of new industry standards may render existing products obsolete and unmarketable. Our ability to successfully develop and introduce on a timely basis new and enhanced products that embody new technology, anticipate and incorporate evolving industry standards and achieve levels of functionality and prices acceptable to the market will be a significant factor in VTEL's ability to grow and to remain competitive. Although the percentage of revenues invested in research and development may vary from period to period, VTEL is committed to investing in its research and development programs. 13
Net loss. VTEL generated a net loss of $4.0 million, or $0.16 per share, during the quarter ended January 31, 2000 compared to net loss of $7.9 million or $0.35 per share, during the quarter ended January 31, 1999. VTEL generated a net loss of $9.3 million, or $0.38 per share during the six months ended January 31, 2000 compared to net loss of $15.4 million, or $0.67 per share during the six months ended January 31, 1999. The decreased losses for the three and six month periods ended January 31, 2000 reflect in part the restructuring plan adopted during the quarter ended January 31, 1999 which included a restructuring charge of $2.9 million (see "Restructuring Activities"). The restructuring activities reduced operating expenses to a level more consistent with expected revenue levels. The higher losses for the three and six months ended January 31, 1999 reflect the higher expense levels prior to the restructuring activities. Although we continue to sustain losses in fiscal 2000, a large portion of the total loss is made up of VTEL's continued investment in our Internet businesses. That investment is a key element in our strategy to provide the foundation for future growth and additional value for our shareholders. There can be no assurance that we will generate net income at lower revenue levels. Current operational planning for the interim has been to incur losses to the extent we maintained positive cash flow. If revenues decline by more than we expect or if the product mix shifts to lower margin products then we could incur further substantial losses in the future and may have to consider additional restructuring measures in future quarters which may have a material adverse affect on VTEL's financial position and results of operations. Restructuring Activities In November 1998, the VTEL adopted a restructuring plan which resulted in the reduction of 100 employees (approximately 14%). While terminations were effective immediately for most employees upon announcement in November 1998, all employees terminated in the restructuring had left VTEL during the third fiscal quarter. We also made the decision to reduce operating costs by exiting other activities and reducing the related overhead costs. These activities include the closure or consolidation of certain field sales offices and our Sunnyvale, California spare parts depot and technical assistance center. As a result of the restructuring, we recorded a restructuring charge of $2.9 million during the second fiscal quarter of 1999. All restructuring efforts had been completed by the end of the 1999 fiscal year. Introduction of New Product Lines and Services VTEL continually strives to introduce the latest technology in digital visual communications. During the three months ended October 31, 1999, we introduced our new product line of Galaxy(TM) visual communication systems. The enhanced software included in the Galaxy(TM) line can accommodate and support customer migration to Internet Protocol networks easily because these endpoints can operate on either type network and move from one network architecture to another on a call by call basis through simple software commands. For many customers that previously purchased VTEL products, the migration to Internet Protocol network functionally can be accomplished through software upgrades to existing products. On January 24, 2000, we announced the formation of Onscreen24(TM), a business unit established by VTEL to focus exclusively on delivering high-impact, visual communications products and services for the World Wide Web. Onscreen24's strategy is to leverage new products, partnerships and acquisitions with existing VTEL assets - technical innovations, software and customer base - 14
that will enable Web-based service providers and portals to deploy media-rich solutions for high-impact communication experiences. Initially focused on business-to-business commerce, Onscreen24 will visually enable communications applications and platforms, making them more unique and enjoyable for the user and thereby more productive and profitable for businesses engaging in E-commerce. Through this strategy, Onscreen24 expects to introduce Video Commerce(R) to Internet customers. Onscreen24's initial objective will focus on market penetration and acceptance of its products in two key areas - Internet infrastructure providers and early adopters of media-rich solutions, specifically online advertising, E-learning and customer relationship management. Quarterly Revenue Cycle Historically, a significant percentage of our sales occur in the last few weeks of the quarter. By compressing most of our shipments into a short period of time at the end of each quarter, we will incur overtime costs, sharply increase our inventory levels in anticipation of this demand and deplete or exhaust our backlog of customer orders. Our sales cycle is difficult to predict and manage. It is possible that management's estimates of product demand will be inaccurate and as a result we could experience a rise in inventory levels and a decline in expected revenue levels in any given quarter. Management's estimates of future product revenue are derived from our analysis of market conditions and reports from our sales force of customer leads and prospective interest. Backlog of customer product orders cannot be relied upon to forecast future revenue levels. Because of the short cycle time between customer order and shipment, it is also possible that unanticipated delays from our vendors can disrupt shipments and adversely affect the results in a given quarter. This is especially an issue due to our reliance on a limited number of highly specialized suppliers. The above factors represent uncertainties that can have a material adverse effect on our financial position and results of operations. Liquidity and Capital Resources At January 31, 2000, VTEL had working capital of $8.7 million, including $10.5 million in cash, cash equivalents and short-term investments. 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. Cash used in operating activities was $11.0 million for the six months ended January 31, 1999 and primarily resulted from the net operating loss, an increase in inventories and the decrease in accounts payable. This was partially offset by the decrease in accounts receivable. Net cash used in investing activities during the six months ended January 31, 2000 was $2.2 million and primarily resulted from an increase in net property and equipment and an increase in capitalized software development costs. Net cash used in investing activities during the six months ended January 31, 1999 was $12.9 million and primarily resulted from increases in net property and equipment and an increase in capitalized software. 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, and was partially offset by payments on notes payable. Cash flows provided by financing activities during the six months ended January 31, 1999 were $16.7 million and related primarily to $15.0 million drawn on our revolving line of credit. 15
VTEL has a $20.0 million revolving line of credit with a banking syndicate. We have issued a letter of credit totaling $1.2 million under our revolving line of credit as a lease deposit on one of our facilities. At January 31, 2000 we have drawn $12.5 million under the syndicated line of credit. The line of credit is subject to loan covenants that require the maintenance of certain financial ratios. At January 31, 2000, we were not in compliance with several of the financial covenants. In December 1999, a loan modification and forbearance agreement was completed between VTEL and its lenders. This agreement provided for a revised facility amount of $15.2 million, a maturity date of March 15, 2000 and provided for the lender to forbear through February 15, 2000. As of March 10, 2000, we had repaid all amounts drawn on the line. We expect to obtain an alternative line of credit in the near term. VTEL's principal sources of liquidity at January 31, 2000 consisted of $10.5 million of cash, cash equivalents and short-term investments and the ability to generate cash from operations. In addition, VTEL may be able to monazite certain assets that have significant potential value or secure additional equity infusions in the private marketplace. On March 3, 2000 VTEL announced certain Subsequent Events as noted below that allowed VTEL to realize an immediate increase in cash of $10.8 million and an increase in marketable securities valued at $39.1 million. Subsequent Events On March 3, 2000 VTEL settled a lawsuit pending in the 126th Judicial District Court in Travis County, Texas which VTEL had previously initiated against five former employees who left the VTEL in September 1996 to form Via Video Communications, Inc. ("Via Video"). Via Video was subsequently acquired by Polycom, Inc. Pursuant to the settlement agreement, the former employees of VTEL have paid $2.5 million in cash and have delivered to VTEL 300,800 shares of common stock of Polycom, Inc., having a market value $39,104,000 as of March 3, 2000, in settlement of the claims asserted by VTEL. The parties have agreed to dismissal of all claims and counterclaims and third party claims in the lawsuit, ending the litigation. Separately, VTEL voluntarily dismissed Polycom, Inc. and Via Video from the case without consideration. On March 3, 2000, VTEL granted non-exclusive licenses to Polycom, Inc.("Polycom") to use three of its patented technologies, and Polycom has agreed to a one time payment to VTEL of $8.3 million as a fully paid up royalty in exchange for such license. In turn and without any payments by VTEL, Polycom also has granted VTEL a non-exclusive sublicense to its rights under its license agreement with Brown University pertaining to its single camera tracking technology. Through this technology exchange, the parties will have access to specified distinctive technologies of the other for use in their product offerings. 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. 16
VTEL's future results of operations and financial condition could be impacted by the following factors, among others: trends in the videoconferencing market, introduction of new products by competitors, increased competition due to the entrance of other companies into the videoconferencing market, especially more established companies with greater resources than ours, delay in the introduction of higher performance products, market acceptance of new products we introduce, price competition, interruption of the supply of low-cost products from third-party manufacturers, changes in general economic conditions in any of the countries in which we do business, adverse legal disputes and delays in purchases relating to federal government procurement. In addition, notwithstanding the internal control procedures instituted by VTEL, there can be no guarantee that accounting errors will not occur. Due to the factors noted above and elsewhere in Management's Discussion and Analysis of Financial Condition and Results of Operations, VTEL's past earnings and stock price has been, and future earnings and stock price potentially may be, subject to significant volatility, particularly on a quarterly basis. Past financial performance should not be considered a reliable indicator of future performance and investors are cautioned in using historical trends to anticipate results or trends in future periods. Any shortfall in revenue or earnings from the levels anticipated by securities analysts could have an immediate and significant effect on the trading price of our common stock in any given period. Also, we participate in a highly dynamic industry, which often contributes to the volatility of our common stock price. Cautionary Statement Regarding Risks and Uncertainties That May Affect Future Results Certain portions of this report contain forward-looking statements about the business, financial condition and prospects of VTEL. Our actual results could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, without limitation, changes in demand for our products and services, changes in competition, economic conditions, interest rates fluctuations, changes in the capital markets, changes in tax and other laws and governmental rules and regulations applicable to our business, and other risks indicated in our filings with the Securities and Exchange Commission. These risks and uncertainties are beyond the ability of our control, and in many cases, we cannot predict all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this report, the words "believes," "estimates," "plans," "expects," "anticipates" and similar expressions as they relate to VTEL or its management are intended to identify forward-looking statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk We believe our foreign currency exposure to be relatively low as foreign sales are predominantly in U.S. dollars. We use currency hedging programs that utilize foreign currency forward contracts on a limited basis and review the credit worthiness of our customers to mitigate foreign currency exchange and credit risk. For additional Quantitative and Qualitative Disclosures about Market Risk reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report on Form 10-K for the year ended July 31, 1999. 17
PART II -- OTHER INFORMATION Item 1. Legal Proceedings VTEL is the defendant or plaintiff in various actions that arose in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse affect on our financial condition or results of operations. On March 6, 2000 VTEL filed a Current Report on Form 8K reporting the termination of a pending legal proceeding. Reference is made to such report and to Note 7 - Subsequent Events in the unaudited financial statements contained herein, for information relating to the disposition of the pending claim. Item 2. None Item 3. Defaults Upon Senior Securities At January 31, 2000 VTEL was not in compliance with certain covenants as stipulated in the line of credit agreement in place with our lenders and therefore was in technical default. As of March 13, 2000, advances drawn on the line of credit had been repaid. Reference is made to Note 6 - Line of Credit of the unaudited financial statements contained herein, for additional information related to the technical default. Item 4. Submission of Matters to a Vote of Security Holders On December 16, 1999, an annual meeting of the stockholders was held whereby shareholders voted on the following proposals: 1. Proposal for the election of 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 Broker Non-votes F.H. (Dick) Moeller 20,376,228 522,134 - Stephen L. Von Rump 20,379,086 519,276 - Gordon H. Matthews 20,379,444 518,918 - T. Gary Trimm 20,379,244 519,118 - Richard Snyder 20,379,444 518,918 - Kathleen A. Cote 20,379,183 519,179 - James H. Wells 20,379,329 519,033 - 18
2. Proposal to approve an amendment to the Company's Employee Stock Purchase Plan ("ESPP") to increase the number of shares of the Company's Common Stock issuable under the ESPP upon the exercise of stock options granted pursuant to the ESPP from 950,000 shares to 1,450,000 shares. Details of this plan are incorporated by reference to the Company's proxy statement of December 16, 1999. The stockholders voted to approve the proposal by the following vote: For Against Abstain Broker Non-votes 18,950,085 1,106,570 189,647 - 3. Proposal to approve an amendment of the Company's 1992 Director Stock Option Plan (the "Director Plan") to increase the number of shares of the Company's Common Stock issuable under the Director Plan upon the exercise of stock options granted pursuant to the Director Plan from 150,000 to 250,000 shares and to modify the formula pursuant to which options are granted thereunder. Details of this plan are incorporated by reference to the Company's proxy statement of December 16, 1999. The stockholders voted to approve the proposal by the following vote: For Against Abstain Broker Non-votes 18,521,967 1,526,975 189,647 - 4. Proposal to ratify the Board of Directors' appointment of PricewaterhouseCoopers LLP, independent accountants, as the Company's independent auditors for the year ending July 31, 2000. The stockholders voted to approve the proposal by the following vote: For Against Abstain Broker Non-votes 20,603,376 203,336 91,650 - Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (A) Exhibits: 10.1 Change-in Control Agreements with members of senior management of the Company: (a) Brian C. Sullivan; (b) Stephen Cox; and (c) Stephen Von Rump. (B) Reports on Form 8-K: Incorporated by reference to two Forms 8-K filed on March 6, 2000 * * * 19
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 15, 2000 By: /s/ Mark E. Lang --------------------------------- Mark E. Lang Vice President-Finance (Chief Financial Officer and Principal Accounting Officer)