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, 1998 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 1, 1998 the registrant had outstanding 23,167,114 shares of its Common Stock, $0.01 par value.
<TABLE> <CAPTION> PART I - FINANCIAL INFORMATION Item 1. Financial Statements VTEL Corporation CONDENSED CONSOLIDATED BALANCE SHEET (Dollars in thousands, except share and per share amounts) <S> <C> <C> April 30, 1998 July 31, (Unaudited) 1997 --------------- -------------- ASSETS Current assets: Cash and equivalents $ 8,447 $ 4,757 Short-term investments 14,287 20,299 Accounts receivable, net of allowance for doubtful accounts of $10,462 and $10,722 at April 30, 1998 and July 31, 1997 40,624 43,707 Inventories 15,676 22,244 Prepaid expenses and other current assets 2,430 2,891 --------------- -------------- Total current assets 81,464 93,898 Property and equipment, net 25,392 21,660 Intangible assets, net 12,048 12,768 Other assets 3,003 2,809 --------------- -------------- $121,907 $ 131,135 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 18,158 $ 25,699 Accrued merger and other expenses 3,471 9,704 Accrued compensation and benefits 4,141 4,552 Other accrued liabilities 3,939 3,070 Deferred revenue 12,889 11,345 --------------- -------------- Total current liabilities 42,598 54,370 --------------- -------------- Stockholders'equity: Preferred stock, $.01 par value; 10,000,000 authorized; none issued or outstanding -- -- Common stock, $.0l par value; 40,000,000 authorized; 23,160,000 and 22,873,000 issued and outstanding at April 30, 1998 and July 31, 1997 230 229 Additional paid-in capital 256,044 254,880 Accumulated deficit (176,867) (178,234) Cumulative translation adjustment (32) 5 Unearned compensation (66) (115) --------------- --------------- Total stockholders' equity 79,309 76,765 --------------- --------------- $121,907 $131,135 =============== =============== The accompanying notes are an integral part of these condensed consoloidated financial statements. </TABLE> 2
<TABLE> <CAPTION> VTEL Corporation CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (Amounts in thousands, except per share amounts) <S> <C> <C> <C> <C> For the For the Nine Months Ended Nine Months Ended April 30, April 30, --------------------------------- ----------------------------------- 1998 1997 1998 1997 -------------- ------------- -------------- --------------- Revenues: Products $ 32,887 $ 35,197 $ 99,290 $ 114,876 Services and other 12,113 8,903 32,691 30,100 -------------- ------------- -------------- --------------- 45,000 44,100 131,981 144,976 -------------- ------------- -------------- --------------- Cost of sales: Products 15,969 19,121 49,176 64,997 Services and other 7,944 6,319 21,316 21,825 23,913 25,440 70,492 86,922 Gross margin 21,087 18,660 61,489 58,154 -------------- ------------- -------------- --------------- Selling, general and 16,525 16,319 46,231 49,913 administrative Research and development 4,786 6,339 14,755 18,515 Amortization of intangible assets 240 240 720 720 -------------- ------------- -------------- --------------- Total operating expenses 21,551 22,898 61,706 69,148 -------------- ------------- -------------- --------------- Loss from operations (464) (4,238) (217) (10,994) -------------- ------------- -------------- --------------- Other income (expense): Interest income 247 561 716 1,762 Interest expense and other 1,217 (163) 906 (1,236) -------------- ------------- -------------- --------------- 1,464 398 1,622 526 -------------- ------------- -------------- --------------- Income (loss) from continuing operations before benefit (provision) for income taxes 1,000 (3,840) 1,405 (10,468) Benefit (provision) for income (20) -- (37) 12 taxes -------------- ------------- -------------- --------------- Income (loss) from continuing 980 (3,840) 1,368 (10,456) operations Loss from discontinued -- -- -- (6,698) operations -------------- ------------- -------------- --------------- Net income (loss) $980 (3,840) 1,368 (17,154) ============== ============= ============== =============== Basic income (loss) per share: Continuing operations $0.04 $(0.18) 0.06 $(0.48) Discontinued operations -- -- -- (0.31) -------------- ------------- -------------- --------------- Net income (loss) per share $0.04 $(0.18) 0.06 $(0.79) ============== ============= ============== =============== Diluted income (loss) per share: Continuing operations $0.04 $(0.18) $0.06 $(0.48) Discontinued operations -- -- -- (0.31) -------------- ------------- -------------- --------------- Net income (loss) per share $0.04 $(0.18) $0.06 $(0.79) ============== ============= ============== =============== Weighted average shares outstanding: Basic 23,130 21,757 23,013 21,856 ============== ============= ============== =============== Diluted 23,400 21,757 23,477 21,856 ============== ============= ============== =============== The accompanying notes are an integral part of these condensed consoloidated financial statements. </TABLE> 3
<TABLE> <CAPTION> VTEL CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Dollars in thousands) <S> <C> <C> For the Nine Months Ended April 30, 1998 1997 --------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ 1,368 $ (17,154) Adjustments to reconcile net income (loss) to net cash from operations: Depreciation and amortization 6,601 11,727 Provision for doubtful accounts 44 80 Amortization of unearned compensation 49 111 Foreign currency translation (gain) loss 87 (32) Decrease in accounts receivable 3,039 5,637 Decrease in inventories 6,568 3,367 (Increase) decrease in prepaid expenses and 461 (1,425) other current assets Increase (decrease) in accounts payable (7,539) 287 Decrease in accrued expenses (5,779) (1,313) Increase in deferred revenues 1,544 1,744 Decrease in accrued expenses, discontinued - (657) --------------- -------------- operations Net cash provided by operating 6,443 2,372 --------------- -------------- activities Cash flows from investing activities: Net short-term investment activity 6,012 10,577 Net purchase of property and equipment (9,617) (10,085) Increase in other assets (191) (1,567) --------------- -------------- Net cash used in investing (3,796) (1,075) --------------- -------------- activities Cash flows from financing activities: Repayments under line of credit agreements - (5,145) Net proceeds from issuance of stock 1,165 7,841 Purchase of treasury stock - (3,742) Sale of treasury stock - 1,640 --------------- -------------- Net cash provided by financing activities 1,165 594 --------------- -------------- Effect of translation exchange rates on cash (122) (156) --------------- -------------- Net increase in cash and equivalents 3,690 1,735 Cash and equivalents at beginning of period 4,757 1,973 --------------- -------------- Cash and equivalents at end of period $ 8,447 $ 3,708 =============== ============== The accompanying notes are an integral part of these condensed consoloidated financial statements. </TABLE> 4
VTEL Corporation NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) VTEL Corporation ("VTEL" or the "Company") designs, manufactures, markets and supports multi-media digital visual communication systems. The Company's systems integrate traditional video and audio conferencing with additional functions, including the sharing of PC software applications and the transmission of high-resolution images and facsimiles. Through the use of the Company's multi-media digital visual communication systems, users are able to replicate more closely the impact and effectiveness of face-to-face meetings, education and training classes and certain medical consultations. The Company's systems are built upon a system platform which is based on industry-standard, PC-compatible open hardware and software architecture. By leveraging this open architecture design, the Company is able to integrate into the videoconference PC-compatible hardware and software applications which allow users to customize the systems to meet their unique needs. The PC-architecture also provides a natural pathway to connect the Company's digital visual communication systems onto local area networks (LANs) and wide area networks (WANs) thereby leveraging the rapidly expanding network infrastructures being deployed in organizations throughout the world. Also complementing this open architecture is the Company's compliance with emerging industry standards. The Company's open architecture and compliance with data and telecommunications standards permit the incorporation of new functions through software upgrades, thereby extending the useful life of the user's investment. The Company primarily distributes its systems to a domestic and international marketplace through third party resellers. The Company's headquarters and production facilities are in Austin, Texas. 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 only normal, recurring adjustments, necessary for a fair presentation of the financial position of the Company as of April 30, 1998 and the results of the Company's operations and its cash flows for the three month period and nine month period ended April 30, 1998. The results for interim periods are not necessarily indicative of results for a full fiscal year. On May 23, 1997, shareholders of VTEL and Compression Labs, Incorporated, a Delaware corporation ("CLI"), approved the merger (the "Merger") of VTEL-Sub, Inc., a Delaware corporation and direct wholly-owned subsidiary of VTEL ("Merger Sub"), with and into CLI, pursuant to an Agreement and Plan of 5
Merger and Reorganization (the "Merger Agreement"), with CLI becoming a direct wholly-owned subsidiary of VTEL. As a result of the Merger, (a) the outstanding shares of CLI's common stock were converted into the right to receive 0.46 shares of common stock of VTEL for each share of CLI common stock converted (or cash in lieu of fractional shares otherwise deliverable in respect thereof), and (b) the outstanding shares of CLI Series C Preferred Stock were converted into the right to receive 3.15 shares of VTEL common stock for each share of CLI preferred stock converted (or cash in lieu of fractional shares otherwise deliverable in respect thereof). The CLI shares were exchanged for a total of 8,424,741 shares of VTEL common stock. The acquisition was accounted for as a pooling of interests and accordingly, the consolidated financial statements have been restated for all periods to include the accounts of CLI. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements (including the notes thereto) contained in the Company's 1997 Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 12, 1997. Note 2 - Inventories Inventories consist of the following: April 30, July 31, 1998 1997 (Unaudited) (Dollars in thousands) Raw materials $ 7,551 $ 9,493 Work in process 558 4,143 Finished goods 6,766 7,490 Finished goods held for evaluation - and rental and loan agreements 801_ 1,118 ---------- _ ---------- $ 15,676 $ 22,244 ========== ========== Finished goods held for evaluation consists of completed digital visual communication systems used for demonstration and evaluation purposes, which are generally sold during the next 12 months. Note 3 - Net Income (Loss) Per Share 6
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." The new standard, which is effective for financial statements issued for periods ending after December 31, 1997, establishes standards for computing and presenting earnings per share (EPS) and requires restatement of all prior period EPS data presented upon adoption. The Company has implemented this standard in the second quarter of fiscal 1998. The implementation of SFAS No. 128 results in the presentation of a basic EPS presented in the consolidated financial statements as well as a diluted EPS for the periods presented. Basic EPS is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income (loss) by the weighted average number of common shares and common share equivalents (if dilutive) outstanding for the period. Stock options and warrants are the only dilutive potential shares that the Company has outstanding for all periods presented. All prior years' EPS data in this report have been recalculated to reflect the provisions of SFAS No. 128. At April 30, 1998, options and warrants to acquire 2.0 million shares of common stock were not included in the computations of diluted earnings per share because the effect of including the options and warrants would have been anti-dilutive. At April 30, 1997, options and warrants to acquire 4.1 million shares of common stock were not included in the computations of diluted earnings per share because the effect of including the options and warrants would have been anti-dilutive. Note 4 - Year 2000 Evaluation The Company has considered the impact of the year 2000 on its business systems and processes and has determined that the year 2000 will not have a material adverse affect on its financial position and results of operations. Note 5 - Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB), issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. As such, the Company will adopt SFAS No. 130 for its fiscal year ended July 31, 1998. 7
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which the Company adopted in the first quarter of 1998. The statement established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Under SFAS No. 131, operating segments are to be determined consistent with the way that management organizes and evaluates financial information internally for making operating decisions and assessing performance. The adoption of this new accounting standard is not expected to have a material impact on the Company's consolidated balance sheet or statement of operations. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations On May 23, 1997, shareholders of VTEL and Compression Labs, Incorporated, a Delaware corporation ("CLI"), approved the merger (the "Merger") of VTEL-Sub, Inc., a Delaware corporation and direct wholly-owned subsidiary of VTEL ("Merger Sub"), with and into CLI, pursuant to an Agreement and Plan of Merger and Reorganization (the "Merger Agreement"), with CLI becoming a direct wholly-owned subsidiary of VTEL. As a result of the Merger, (a) the outstanding shares of CLI's common stock were converted into the right to receive 0.46 shares of common stock of VTEL for each share of CLI common stock converted (or cash in lieu of fractional shares otherwise deliverable in respect thereof), and (b) the outstanding shares of CLI Series C Preferred Stock were converted into the right to receive 3.15 shares of VTEL common stock for each share of CLI preferred stock converted (or cash in lieu of fractional shares otherwise deliverable in respect thereof). The CLI shares were exchanged for a total of 8,424,741 shares of VTEL common stock. The acquisition was accounted for as a pooling of interests and accordingly, the consolidated financial statements have been restated for all periods to include the accounts of CLI. The restatement of the consolidated financial information combines the financial information of VTEL and CLI giving retroactive effect to the Merger as if the two companies had operated as a single company for the three and nine months ended April 30, 1998. However, the two companies operated independently prior to the Merger, and the historical changes and trends in the financial condition and results of operations of these two companies resulted from independent activities. Nonetheless, the following management's discussion and analysis of financial condition and results of operations attempts to relate the activities which resulted in the changes in financial condition and results of operations of the combined company, taking into consideration that a trend or change in the historical results of the combined entity was caused by many events related to each individual company operating independently as competitors. The financial information presented on a historical restated basis is not indicative of the financial condition and results of operations that may have been achieved in the past or will be achieved in the future had the companies operated historically as a single entity. 8
The following review of the Company's financial position and results of operations for the three and nine month periods ended April 30, 1998 and 1997 should be read in conjunction with the Company's 1997 Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 12, 1997. Results of Operations The following table sets forth for the fiscal periods indicated the percentage of revenues represented by certain items in the Company's Condensed Consolidated Statement of Operations: <TABLE> <CAPTION> For the three For the nine months ended months ended April 30, April 30, 1998 1997 1998 1997 <S> <C> <C> <C> <C> Revenues 100% 100% 100% 100% Gross margin 47 42 47 40 Selling, general and administrative 37 37 35 34 Research and development 11 14 11 13 Total operating expenses 48 52 47 48 Other income, net 3 1 1 - Net income (loss) from continuing operations 2 (9) 1 (7) Loss from discontinued operations - - - (5) Net income (loss) 2% (9)% 1% (12)% </TABLE> Three and Nine Months Ended April 30, 1998 and 1997 Revenues. Revenues for the quarter ended April 30, 1998 increased to $45.0 million from $44.1 million in the quarter ended April 30, 1997, an increase of $0.9 million or 2%. Revenues for the nine months ended April 30, 1998 decreased to $132.0 million from $145.0 million for the nine months ended April 30, 1997, a decrease of $13.0 million or 9%. The decrease in revenues for the nine month period ended April 30, 1998 is the result of a decrease in the total number of unit sales of the Company's systems primarily led by a decline in the sale of the products of the Company's wholly-owned subsidiary, CLI, in the early part of the nine month period ended April 30, 1998 as a result of the transition by the combined Company to the sale of the Company's Enterprise System Architecture(TM) (ESA)-based products. The increase in revenues during the three months ended April 30, 1998 in comparison with the three months ended April 30, 1997 is the combination of a decline product revenues as described above and an increase in revenues generated from Services and Other. The increase in revenues from Services and Other where driven by an increase in revenues from the Company's Integration Services Group. 9
The following table summarizes the Company's group system unit sales activity: <TABLE> <CAPTION> For nine months For the three months ended ended July 31, October 31, January 31, April 30, April 30, 1997 1997 1998 1998 1998 <S> <C> <C> <C> <C> <C> Large group digital visual communication systems 699 751 583 899 2,233 Small group digital visual communication systems 175 75 140 237 452 Multipoint control units 43 16 42 33 91 ---- ---- ---- ----- ----- Total systems 917 842 765 1,169 2,776 ==== ==== ==== ===== ===== </TABLE> International sales contributed approximately 32% and 24%, respectively, of product revenues for the three and nine months ended April 30, 1998 as compared to 31% and 25% of product revenues for the three and nine months ended April 30, 1997. While the Company strives for consistent revenue growth, there can be no assurance that consistent revenue growth or profitability can be achieved. The Company's business model is characterized by a very high degree of operating leverage. The Company's expense levels are based, in part, on its expectations as to future revenue levels, which are difficult to predict partly due to the Company's strategy of distributing its products through resellers. Because expense levels are based on the Company's expectations of future revenues, the Company's 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, the Company's quarterly and annual results may fluctuate as a result of many factors, including price reductions, delays in the introduction of new products, delays in purchase decisions due to new product announcements by the Company 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 the Company will be able to increase or even maintain its current level of revenues on a quarterly or annual basis in the future. Due to all of the foregoing factors, it is possible that in one or more future quarters the Company's operating results will be below the expectations of public securities market analysts. In such event, the price of the Company's Common Stock would likely be materially adversely affected. 10
Gross margin. Gross margin as a percentage of total revenues was 47% for the three and nine months ended April 30, 1998, an increase from the gross margin as a percentage for revenues of 42% and 40%, respectively, for the three and nine months ended April 30, 1997. During the three months and nine months ended April 30, 1998, the products that were previously developed by the Company's wholly-owned subsidiary, CLI, represented a smaller proportion of total product revenues due to the transition of the Company's combined product offering to the Company's ESA-based products. The products of the Company's wholly-owned subsidiary, CLI, generally have a lower gross margin than the ESA-based products. During the three and nine months ended April 30, 1997, the Company's restated combined revenues consisted of a higher proportion of revenues from CLI, which resulted in a lower gross margin on a combined basis. The higher proportion of products revenues from the ESA platform products resulted in a higher blended gross margin for the three and nine months ended April 30, 1998. Although the Company expects gross margins to remain consistent during fiscal 1998, it continues to 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. The Company expects that overall price competitiveness in the industry will continue to become more intense as users of videoconferencing systems attempt to balance performance, functionality and cost. The Company's gross margin is subject to fluctuation based on pricing, production costs and sales mix. Selling, general and administrative. Selling, general and administrative expenses increased by $0.2 million, or 1%, from $16.3 million for the quarter ended April 30, 1997 to $16.5 million for the quarter ended April 30, 1998. Selling, general and administrative expenses decreased by $3.7 million, or 7%, from $49.9 million for the nine months ended April 30, 1997 to $46.2 million for the nine months ended April 30, 1998. Selling, general and administrative expenses as a percentage of revenues were 37% and 37% for the three months ended April 30, 1997 and 1998, respectively, and were 34% and 35% for the nine months ended April 30, 1997 and 1998, respectively. Selling, general and administrative expenses as a percentage of revenues remained consistent between each of the corresponding three and nine month periods ended April 30, 1998 and April 30, 1997 due to the Company investing consistently in selling, general and administrative activities on consistent revenues for each of the quarters ending April 30, 1997 and 1998. However, the composition of the selling, general and administrative expenses changed despite the consistency in amount. During the quarter ended April 30, 1998, the Company reduced selling, general and administrative expenses by creating efficiencies and eliminating duplicate costs by combining the operations of VTEL and its wholly-owned subsidiary, CLI, subsequent to the merger of the two companies. The reduction of selling, general and administrative costs as a result of these actions were then invested in the Company's branding and advertising initiatives which are expected to increase future revenues. As such, the Company has been able to continue to invest in programs designed to increase future revenues without increasing overall selling, general and administrative expenses. Revenues may be affected during the transition period in which the Company is implementing the branding campaign such that the expected increase in revenues from the new marketing strategy may not coincide with potential changes in revenues due to the decline in marketing spending under the Company's former marketing strategy. The result could be a decline in revenues during the transition period. 11
Research and development. Research and development expenses decreased by $1.5 million, or 24%, from $6.3 million for the quarter ended April 30, 1997 to $4.8 million for the quarter ended April 30, 1998. Research and development expenses decreased by $3.7 million, or 20%, from $18.5 million for the nine months ended April 30, 1997 to $14.8 million for the nine months ended April 30, 1998. Research and development expenses as a percentage of revenues were 11% and 14% for the three months ended April 30, 1998 and 1997, respectively, and were 13% and 11%, respectively, for the nine months ended April 30, 1998 and 1997. The decrease in the amount of research and development expenses is due to the combination of VTEL and its wholly-owned subsidiary, CLI, subsequent to the Merger such that the Company is focusing its research and development activities on a single product platform, the ESA platform. The Company was able to reduce total research and development expenses by limiting its development efforts to the development of its family of products on a single product platform while still investing a higher amount in research and development activities related to its ESA platform. The Company has redirected a portion of the research and development expenses related to the products developed by its wholly-owned subsidiary, CLI, to the ESA platform thereby leveraging the development activities of both companies. Although the percentage of revenues invested by the Company in research and development may vary from period to period, the Company is committed to investing in its research and development programs. Future research and development expenses are expected to increase as revenues increase. These expenditures will be largely devoted to improving the Company's system user interface and the development of the next generation product platform. Other income, net. Other income, net increased by $1.1 million, or 275%, from a net income of $0.4 million for the quarter ended April 30, 1997 to income of $1.5 million for the quarter ended April 30, 1998. Other income, net increased by $1.1 million, or 220%, from $0.5 million for the nine months ended April 30, 1997 to $1.6 million for the nine months ended April 30, 1998. The increase in Other income, net during the three and nine months ended April 30, 1998 compared with the three and nine months ended April 30, 1997 is attributable to income generated from a planned non-recurring real estate transaction which eliminated duplicate corporate headquarter facilities. Net income (loss). The Company generated net income of $0.98 million, or $0.04 per share, during the quarter ended April 30, 1998 compared to a net loss of $3.8 million, or $0.18 per share, during the quarter ended April 30, 1997. The Company generated net income of $1.4 million, or $0.06 per share, during the nine months ended April 30, 1998 compared to a net loss of $17.2 million, or $0.79 per share, during the nine months ended April 30, 1997. During the quarter ended April 30, 1997, the Company's wholly-owned subsidiary, CLI, incurred a net loss on a stand-alone basis of $4.2 million, and VTEL generated net income on a stand-alone basis of $0.4 million, which resulted in a restated combined net loss of $3.8 million. During the nine months ended April 30, 1997, the Company's wholly-owned subsidiary, CLI, incurred a net loss on a stand-alone basis of $19.4 million, including a $6.7 million loss from discontinued operations, and VTEL generated net income on a stand-alone basis of $2.2 million, which resulted in a combined net loss of $17.2 million. Subsequent to the Merger, VTEL's management reduced the operating expenses of the combined company by eliminating duplicate operating costs and leveraging the research and development and selling, general and administrative expenses of the two 12
companies such that these expenses were focused on a single company development platform and sales and marketing strategy. The result was a reduction in the combined costs incurred by the two companies, which were investing amounts in implementing two corporate strategies when the companies operated as competitors, and an increase in the amount of funds available to invest in a single company plan. Additionally, the Company has been able to improve gross margins by transitioning the combined Company to the sale of the Company's higher gross margin ESA-based products. Improvement in the Company's financial performance during the remainder of fiscal year 1998 will depend on the Company's ability to increase revenues through growth in the Company's distribution channels, to introduce its new products which should generate revenue growth, and control the growth of operating expenses. There can be no assurances that the Company will be successful in achieving these objectives. Liquidity and Capital Resources At April 30, 1998, the Company had working capital of $38.9 million, including $22.7 million in cash, cash equivalents and short-term investments. Cash provided by operating activities was $6.4 million for the nine months ended April 30, 1998 and primarily results from decreases in inventories and accounts receivable and an increase in deferred revenues, offset by a decrease in accounts payable and accrued liabilities. The reduction in accounts payable and accrued liabilities includes amounts for Merger and other expenses which were accrued at July 31, 1997. Cash provided by operating activities was $2.4 million for the nine months ended April 30, 1997, primarily due to a net loss of $17.2 million coupled with an increase in prepaid expenses and other current assets and a decrease in accrued expenses offset by a decrease in accounts receivable and inventories and an increase in deferred revenues. Net cash used in investing activities during the nine months ended April 30, 1998 was $3.8 million and primarily resulted from in increase in net property and equipment of $9.6 million offset by cash generated from the reduction of short-term investments of $6.0 million. Cash used in investing activities during the nine months ended April 30, 1997 was $1.1 million and primarily resulted from cash generated by a reduction of short-term investments of $10.6 million offset by an increase in net property and equipment of $10.1 million. Cash flows provided by financing activities during the nine months ended April 30, 1998 were $1.2 million and related to sales of stock under the Company's employee stock plans. Cash flows provided by financing activities during the nine months ended April 30, 1997 were $0.6 million and related primarily to the sale of approximately $7.0 million of preferred stock by the Company's wholly-owned subsidiary, CLI, the sale of stock under employee stock purchase plans totaling approximately $0.8 million, the repayment of borrowings made by the Company's wholly-owned subsidiary, CLI, totaling approximately $5.1 million, the purchase of treasury stock totaling $3.7 million, and the sale of treasury stock totaling $1.6 million. At April 30, 1998, the Company had a $25.0 million revolving line of credit with a banking syndicate. The Company has issued a letter of credit totaling $1.2 million under its revolving line of credit as a lease deposit on one of its facilities. No amounts have been drawn under the syndicated line of credit. 13
The Company's principal sources of liquidity at April 30, 1998 consist of $22.7 million of cash, cash equivalents and short-term investments in addition to amounts available under the Company's revolving line of credit. The Company believes that existing cash and cash equivalent balances, short-term investments, cash generated from sales of products and services and its revolving lines of credit will be sufficient to meet the Company's cash and capital requirements for at least the next 12 months. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB), issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. As such, the Company will adopt SFAS No. 130 for its fiscal year ended July 31, 1998. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which the Company adopted in the first quarter of 1998. The statement established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Under SFAS No. 131, operating segments are to be determined consistent with the way that management organizes and evaluates financial information internally for making operating decisions and assessing performance. The adoption of this new accounting standard is not expected to have a material impact on the Company's consolidated balance sheet or statement of operations. General The markets for the Company's 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 the Company 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. 14
The Company'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 those of the Company, delay in the introduction of higher performance products, market acceptance of new products introduced by the Company, 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 the Company does business, adverse legal disputes and delays in purchases relating to federal government procurement. Due to the factors noted above and elsewhere in Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company's past earnings and stock price has been, and future earnings and stock price potentially may be, subject to significant volatility, particularly on a quarterly basis. Past financial performance should not be considered a reliable indicator of future performance and investors are cautioned in using historical trends to anticipate results or trends in future periods. Any shortfall in revenue or earnings from the levels anticipated by securities analysts could have an immediate and significant affect on the trading price of the Company's Common Stock in any given period. Also, the Company participates in a highly dynamic industry which often contributes to the volatility of the Company's Common Stock price. Cautionary Statement Regarding Risks and Uncertainties That May Affect Future Results Certain portions of this report contain forward-looking statements about the business, financial condition and prospects of the Company. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, without limitation, changes in demand for the Company's products and services, changes in competition, economic conditions, interest rates fluctuations, changes in the capital markets, changes in tax and other laws and governmental rules and regulations applicable to the Company's business, and other risks indicated in the Company's filing with the Securities and Exchange Commission. These risks and uncertainties are beyond the ability of the Company to control, and in many cases, the Company cannot predict all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this report, the words "believes," "estimates," "plans," "expects," "anticipates" and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. PART II -- OTHER INFORMATION Item 1. Legal Proceedings CLI is currently engaged in several legal proceedings relating to matters arising prior to the Merger. There can be no assurance that CLI's legal proceedings can be resolved favorably to CLI or VTEL. Such legal proceedings, if continued for an extended period of time, could have an adverse effect upon 15
CLI's working capital and management's ability to concentrate on its business. The Company had recorded an estimate of the costs to defend and discharge the claims prior to the quarter ended April 30, 1998 and such contingent liabilities are reflected as accrued expenses at April 30, 1998. In the opinion of management, such reserves should be sufficient to discharge the liabilities, if any. However, an unexpected outcome in any one or several such legal proceedings could have a material adverse effect on CLI and hence, VTEL. In a complaint filed on December 20, 1993 in the United States District Court in Dallas, Texas, Datapoint Corporation ("Datapoint") alleged that CLI had infringed two United States patents owned by Datapoint relating to video conferencing networks. The complaint seeks a judgment of infringement, monetary damages, injunctive relief and attorneys' fees. CLI responded to the complaint by denying the material allegations of the complaint and asserting affirmative defenses. Discovery has commenced in the case. Datapoint filed a similar case against PictureTel Corporation (PictureTel) as well as other companies. The case against PictureTel has been completed whereby a jury ruled against Datapoint. Datapoint is appealing the court decision. The Datapoint suit against CLI will likely be stayed while the appeal relating to the PictureTel suit is pending and the suit against CLI may ultimately be dismissed based upon the outcome of the PictureTel case. In June 1997, Keytech, S.A. ("Keytech") filed suit against CLI in the United States District Court in Tampa, Florida. Keytech was a distributor of satellite encoder and decoder products manufactured by a division of CLI which CLI sold in June 1996. Keytech has asserted that the equipment sold was defective and did not conform to contract specifications and express and implied warranties. Keytech has asserted damages in excess of $20 million based on its allegations of breach of contract, breach of warranties and fraud. CLI has filed an answer denying liability and has asserted cross-claims against Keytech for amounts due and unpaid for equipment sold by CLI to Keytech. 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: Exhibit Number Document description 10.1 Lease Agreement, dated January 30, 1998, between 2800 Industrial, Inc., Lessor and VTEL Corpora- tion, Lessee 10.2 First Amendment, dated March 11, 1998, to Lease Agreement, dated January 30, 1998, between 2800 Industrial, Inc., Lessor and VTEL Corporation, Lessee (b) Reports on Form 8-K: None * * * 16
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 11, 1998 By: /s/Rodney S. Bond ----------------------------------- Rodney S. Bond Vice President-Finance (Chief Financial Officer and Principal Accounting Officer)