Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1999
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
Securities registered pursuant to section 12 (b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the registrant (1) 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 (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filings pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. ( ).
The aggregate market value of 20,665,891 shares of the registrant's Common Stock
held by nonaffiliates on October 13, 1999 was approximately $68,466,096. For
purposes of this computation all officers, directors and 5% beneficial owners of
the registrant are deemed to be affiliates. Such determination should not be
deemed an admission that such officers, directors and beneficial owners are, in
fact, affiliates of the registrant.
At October 13, 1999 there were 24,456,573 shares of the registrant's Common
Stock, $.01 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders in
connection with the 1999 Annual Meeting are incorporated by reference into Part
III.
A list of all Exhibits to this Annual Report on Form 10-K is located at pages 50
through 54.
PART I.
ITEM 1. BUSINESS
GENERAL
VTEL Corporation (VTEL, we or our) designs, manufactures, markets and
supports visual communication systems. VTEL's product line is based on the
latest microprocessor technology, a unique integration of hardware and software
that provides features which are far beyond traditional video and audio
conferencing. The use of open PC architecture and standard Microsoft(R)
operating systems allows users to bring virtually any kind of data into a
meeting or training environment. These new visual communications systems allow
access and sharing of any information available on the World Wide Web, data that
resides on an organization's Local Area Network or Intranet, or local PC files
and software applications. The majority of our systems are built upon a system
platform that is based on industry-standard, PC-compatible open hardware and
software architecture. The PC-architecture also provides a natural pathway to
connect VTEL's visual communication systems to either Internet Protocol (IP)
networks or traditional telephone networks on a call by call basis through
simple software commands. Our network management software uses industry standard
protocols to allow large visual communications networks to be operated in the
same manner currently used in traditional data networks, thereby leveraging the
rapidly expanding network infrastructures being deployed in organizations
throughout the world. VTEL's streaming video software allows users to "webcast"
events live over an internal network or the Internet and store any multimedia
content for convenient, on-demand playback. We offer a wide range of global
professional services to assist customers in designing, installing, operating
and supporting organizational visual communications networks worldwide.
The cornerstone of VTEL's business strategy is to identify end-user
customer markets that can most benefit from the advanced functionality of our
multi-media visual communication systems and to focus a substantial portion of
its sales and marketing efforts on these targeted markets. Consistent with this
strategy, VTEL has targeted the manufacturing, education, government, health
care, and financial institution market segments and certain portions of the
general business market. VTEL primarily distributes its systems through
third-party resellers which include major telecommunications providers and
distributors such as Ameritech, Bell South, GTE, MCI, Norstan, PacBell, SBC,
Sprint, US West and other value-added resellers. We have built an extensive
marketing and sales organization to support our third-party resellers. This
organization provides marketing programs; field support personnel including
sales managers, system engineers, and business development managers; and
personnel with industry expertise to implement our targeted market strategy.
Since VTEL's inception, it has sold more than 30,000 visual communication
systems.
On May 23, 1997, shareholders of VTEL and Compression Labs,
Incorporated, a Delaware corporation ("CLI"), approved the merger of VTEL-Sub,
Inc., a Delaware corporation and direct wholly-owned subsidiary of VTEL (the
"Merger"), with and into CLI, pursuant to an Agreement and Plan of Merger and
Reorganization, with CLI becoming a direct wholly-owned subsidiary of VTEL. As a
result of the Merger all of the outstanding common and preferred 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.
On March 9, 1999, VTEL completed the acquisition of substantially all
of the assets of Vosaic LLP, an Internet video software and technology company
for $3.2 million in cash, stock and warrants. The transaction was accounted for
as a purchase of assets. The acquisition involved the issuance of 1,149,000
shares (equivalent to approximately 5% of the outstanding shares of VTEL's stock
as of March 9, 1999). VTEL acquired the core team, originally associated with
the University of Illinois, who pioneered the first multimedia Web Browser, and
has refined scalable video delivery technologies to stream and store video
information securely with high Quality of Service (QoS).
As part of VTEL's initiative to expand its international presence, we
consummated the acquisition of certain of the assets of the videoconferencing
division of one of our German resellers effective July 1, 1998. The
2
consideration paid by VTEL consisted of restricted stock, warrants, a note
payable, and the assumption of certain payables and other liabilities
for total consideration of approximately $1,871. In September 1998, VTEL compl-
eted the acquisition of one of its French resellers through the issuance of res-
tricted stock.
VTEL's executive offices are located at 108 Wild Basin Road, Austin,
Texas 78746, and its telephone number is (512) 437-2700.
INDUSTRY BACKGROUND
Visual communications systems enable users at remote locations to meet
and share information face-to-face. A wide range of business or professional
meetings, education and training classes, and technical or medical consultations
make use of this innovative technology to reduce operating costs, improve
customer services, reduce cycle times, and improve intra- or inter-company
communications. A videoconference entails the transmission of video, audio and
data signals between two or more locations over a network connection. Video,
audio and data conferencing involves a large amount of digital information. In
order to transmit this information over digital networks, the video, audio and
data signals must be digitized and compressed without substantially reducing the
information content. Improved compression algorithms reduce transmission costs
by allowing more information to be sent over lower capacity digital networks.
Improved quality and lower costs of videoconferencing systems and network
services have made videoconferencing applications more attractive to a broader
group of users worldwide. Also contributing to the wider use of
videoconferencing is the increased availability of switched digital telephone
service and the use of Internet Protocol networks, allowing a videoconference to
be initiated with nearly the ease of a normal telephone call.
The major change occurring in the industry today involves the evolutionary
migration of telecommunications networks from circuit-switched technology (like
traditional telephone lines) to packet-switched technology (Internet Protocol
networks). We are ideally positioned to take advantage of this change because
our underlying product technology is built upon an open PC architecture. In
October 1999, VTEL introduced its 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.
Videoconferencing systems are also becoming simpler to use. Current
videoconferencing systems can be configured as "set-top" appliances or
"roll-about" room systems that can be used without the need for trained
operators or special room requirements. In general, the videoconferencing market
can be grouped into four complementary categories: personal conferencing,
set-top conferencing, workgroup conferencing, and group conferencing. The
personal conferencing market is targeted at the individual. As such, solutions
are typically priced in the $1,000 to $7,000 range. The set-top conferencing
market is targeted at groups of two to three individuals. Systems in this market
range from $4,995 to $9,000. The workgroup conferencing market is targeted at
the project teams or executive offices that require collaborative data and
software interaction. Solutions in this market range from $9,995 to $15,000. The
group conferencing market is targeted at larger groups, typically eight or more
individuals. Application uses vary greatly from boardrooms to large classrooms.
These group systems are priced at $8,500 and above.
Another factor contributing to the growth of videoconferencing is the
continuing emergence of international industry standards designed to allow
interoperability of videoconferencing systems manufactured by different vendors.
The International Telecommunications Union ("ITU-T") sets international
standards used by the industry. VTEL has been a leader in promoting standards
across the industry and delivers standards-based products to its customers.
3
While technological advances and market receptivity have increased the use
of videoconferencing, traditional audio and video videoconferencing alone lacks
the functionality and effectiveness of face-to-face meetings in many
applications. We believe that, for certain applications, users are seeking
conferencing features, in addition to audio and video, that allow for the
exchange of information and interaction through a variety of media. For example,
engineers can communicate and solve problems more effectively by supplementing
the videoconference with shared media, such as graphics with annotations,
computer programs, document exchanges and whiteboards, which results in a better
replication of the impact and effectiveness of a face-to-face meeting. VTEL has
taken a leadership position in this form of high-value visual communication
technology due to its open PC platform and flexible architecture.
CORPORATE STRATEGY
VTEL's primary focus is on high-value visual communication systems
which provide high functionality tailored to the needs of our targeted markets.
This results in a range of offerings from desktop to boardroom applications. The
following are the components of VTEL's corporate strategy:
PRODUCT DIFFERENTIATION. VTEL's strategy is to differentiate its
products from the products marketed by its competitors. Key elements of this
strategy are as follows:
Open Architecture. VTEL's principal visual communication systems are
built upon a system platform which integrates video, audio and data compression
technologies in a PC-compatible open hardware and software architecture. This
open architecture allows VTEL to accelerate the development process through the
use of commonly available, low-cost hardware and software components and the
incorporation of third-party technological developments. VTEL's PC-based system
platforms are field-upgradable and easily accommodate software upgrades, thereby
extending the useful life of the customer's investment and providing us with
incremental revenues through these upgrade sales. In October 1999, we began
shipping our Galaxy(TM) line of visual communication systems. The new line is
distinguished by a new more intuitive user interface software (Vtouch TM) that
offers the additional functionality of H.323 (or Internet Protocol) networking
capability. Because VTEL's systems are PC-based, existing customers of our later
generation ESA(TM) line of visual communication systems will be able upgrade to
the latest features of the Galaxy(TM) line.
Centralized Management and Administration. Using the industry standard
Simple Network Management Protocol ("SNMP"), VTEL is able to centrally manage
and administer large, distributed visual communication networks. VTEL's
SmartVideoNet Manager product provides advanced functionality for management in
the videoconferencing industry. It leverages the industry standard SNMP for
statistics, controls, and alerts. These functions allow for centralized problem
determination and resolution, thereby eliminating the requirement for on-site
expert personnel to support the system. An additional benefit of SmartVideoNet
Manager is the ability to establish video calls from a centralized console with
no local user intervention. Using this, meeting participants simply arrive at
the conference room or classroom and the video call is already in session
waiting for their participation.
Consistent Operating Platform. An important characteristic of each
product in the family is the consistent use of standard Microsoft operating
systems (Windows 95(R), Windows 98(R), Windows NT(R)). This consistency combines
the PC-microprocessor architecture with a recognized software platform and
provides a familiar look and feel for the user throughout the product family
architecture. Windows operating systems support a wide variety of software and
hardware applications that can be integrated into a videoconference as
stand-alone features or as shared applications by visual communication users
through our collaboration capability.
Multi-media Functionality. VTEL's visual communication systems provide a
wide range of functions that utilize a variety of media and more closely
replicate the impact and effectiveness of face-to-face meetings. These
functions, referred to by VTEL as visual communications technology, combine
video and audio, document exchange,
4
shared whiteboard and computer application sharing. VTEL strives to make this
functionality easily accessible to the user. Our Pen Pal Graphics and
AppsView(TM) user interfaces were designed to make our group systems easier to
use and are fully integrated on VTEL Team Conferencing and Leadership
Conferencing systems. Galaxy's(TM) new Vtouch(TM) graphical user interface
builds upon the success of these earlier efforts to provide even easier system
operation. Both AppsView(TM) and Vtouch(TM) are customizable user interfaces
that run on a Microsoft Windows(R)operating system. They integrate all
application functions under a software defined interface which can be customized
by the user to meet specific needs.
Standards Compliance. VTEL believes the continued adoption and
implementation of industry standards for interoperability are critical to the
continued growth of the videoconferencing market. All of our visual
communication systems and multipoint products comply with the leading ITU-T
standards for videoconferencing. VTEL's platforms also comply with an extensive
array of additional communications and computer industry standards, both formal
and de facto (such as ISA, PCI, Intel x86, SNMP, and Microsoft Windows(R)),
involving video, audio, graphics, communications, computers, peripherals, and
network management. We have been an active participant on the relevant ITU-T
committees and intend to continue to promote both acceptance of the standards by
all vendors and formal compliance testing to assure interoperability.
Network Integration Capabilities. The PC-based open architecture design of
VTEL's products provides a natural pathway to connect our 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. We believe that not only will such networks
continue to expand globally, but the capability to centrally manage large
internationally dispersed networks will become a requirement for the successful
establishment of such networks. We believe that development of network
integration and network management capabilities will be an important success
factor to our strategy. The VTEL Network Assured Program was initiated with the
goal of ensuring interoperability between the various networking systems in the
marketplace and VTEL's videoconferencing equipment. This program offers the
customer, who must interface with the different major equipment vendors, the
peace-of-mind they are seeking as they integrate multivendor equipment on a
network. To facilitate an easy migration into the new realm of IP
communications, VTEL is collaborating with vendors of network services including
Cisco, GTE Network Services, IXC Communications and Ezenia! to enable seamless
integration between VTEL's H.323-based product line and their product line.
Service and Systems Integration Capabilities. VTEL's Global Services
division offers installation, integration and support services to customers of
its products. Most sales occur through resellers to the end users of our
products. This offering of services enhances VTEL's resellers' ability to sell
our visual communication systems and to generate additional revenues to VTEL
from the sales of such services. During fiscal 1999 Global Services expanded the
capabilities offered to our resellers by building application-specific systems
that address individual users' needs. This service excelled where resellers
expressed the need to deliver a system requirement that could be duplicated many
times within a market or region. Projects were typically priced in the range of
$100,000 to $300,000. The building of application-specific systems for a
reseller further differentiates VTEL and its hardware/software solutions. VTEL
intends to expand in this area in fiscal year 2000.
TARGETED MARKETS. The cornerstone of VTEL's business strategy is to
identify end-user customer markets that can most benefit from the advanced
functionality of our multi-media visual communication systems, and to focus a
substantial portion of our sales and marketing efforts on these targeted
markets. Consistent with this strategy, VTEL has targeted the manufacturing,
education, government, health care, and certain portions of the business market.
VTEL continues to focus on those markets in which it has the highest potential
for increasing its market share. We currently enjoy a leadership position in the
education market with installations at secondary and higher education systems
throughout the world.
5
DISTRIBUTION STRATEGY. VTEL believes that a well-executed distribution
channel is critical to marketing success. VTEL currently relies on third party
resellers to sell, install and support its visual communication systems in an
effort to leverage the sales forces of the resellers that are already providing
telecommunications and systems integration services to potential purchasers of
visual communication systems. All major resellers maintain demonstration
networks, with trained sales and support personnel.
Consistent with its focus on its targeted market segments, we work with
a number of VARs that specialize in specific applications, geographic areas and
markets such as education, health care, project management and government
procurement. Typically, VTEL's agreements with its resellers and VARs involve
non-exclusive arrangements which may be canceled by either party at will and
contain no minimum purchase requirements on the part of the resellers.
VTEL also sells products directly to certain end-user customers,
generally large global end user customers which have sophisticated global visual
communication networks and require much more involvement to support the sale,
installation and maintenance of the network. These sales are mostly completed
through VTEL's Global Service division.
PRODUCTS
We offer a complete line of interoperable multi-media visual
communication systems. VTEL differentiates its systems from competitive products
by a high level of advanced functionality, such as presentation graphics and
access to PC-based software and hardware peripherals. Because VTEL systems are
based on open PC-architecture, and most functionality is contained in software,
many system upgrades are accomplished via software, enabling customers to
protect their investment in our systems. VTEL systems may be configured with LAN
connections so that data and presentations may be created at an individual PC
workstation, stored on the LAN and retrieved by the visual communication system
for presentation or transfer to the remote location during a videoconference.
Videoconferences can range from simple point-to-point connections
between two locations of a single organization to connections between multiple
locations of multiple organizations in several countries. VTEL's primary visual
communication products are based upon one of three architectures, the
SmartStation Architecture (SSA) for personal and workgroup visual communication,
the Enterprise Series Architecture (ESA) for group conferencing, and the
TurboCast(TM) Architecture for Internet targeted visual communications
solutions.
ENTERPRISE SERIES ARCHITECTURE PLATFORM. VTEL's Enterprise Series
Architecture(TM) ("ESA") is the hardware and software platform for a family of
products designed to meet the needs of large and small groups. The ESA platform
is a PC-based, open architecture visual communication system configured around
an Intel Pentium(TM) PC chassis containing the ESA(TM) video-audio processing
boardset. The ESA(TM) system contains, in addition to the standard internal disk
drive and 3.5 inch floppy drive, a CD-ROM drive as well as an expansion chassis
which contains all the audio and video input/output ports. The ESA(TM) platform
utilizes the Microsoft Windows(R) operating system as its software platform and
incorporates either the AppsView(TM) software user interface and control system
or its newly released Galaxy(TM) Vtouch(TM) software user interface and control
system. Through AppsView(TM) or Vtouch(TM), the user controls all conference
functions with on-screen software icons which may be customized for each user or
application. The ESA platform contains open PC card slots for
application-specific peripherals.
The ESA(TM) platform supports industry standards for video, audio and
data compression and is interoperable with any other system supporting the H.320
standard using the AppsView(TM) software, and both H.320 and H.323 using the
Galaxy(TM) software . The platform operates over digital communication
bandwidths transmitting at data rates from 56 Kbps to T1 or E1 rates in
point-to-point and multipoint conferences. ESA connections can be made over
public dial-up digital networks or private digital dedicated facilities. During
fiscal 1999, ESA connectivity was expanded to include Internet Protocol networks
through a hardware addition. ESA systems may also be upgraded to H.323 (Internet
Protocol) with our new Galaxy(TM) software.
6
Configurations of the ESA(TM) platform with AppsView(TM) include VTEL's
Team Conferencing(TM) ("TC") and Leadership Conferencing(TM) ("LC") Systems.
These systems are single or dual monitor systems built on the ESA platform and
designed to provide mid-range products for users seeking high quality video and
audio and visual communication capability in a small to mid-sized group setting.
Data rates from 56 Kbps to 512 Kbps are provided on all systems and high speed
data rates up to T1 or E1 for the high end LC systems. The systems provide
higher performance PC-based functionality through the use of the Intel
Pentium(TM) microprocessor, inclusion of a CD-ROM drive, the Microsoft
Windows(TM) operating system and the AppsView(TM) user interface. Product
features include LAN connectivity, Internet access, both document and computer
conferencing, 30 frame per second video and capability of including software
applications designed for Microsoft Windows(TM) as part of the videoconference.
The TC systems have suggested list prices of $11,700 to $40,995 and LC5000
configurations vary in price from $54,995 to $59,495
Configurations of the ESA(TM) hardware platform with Galaxy(TM) include
several new Products: Galaxy Model 725, Galaxy Model 755, Galaxy Model 2500 and
Galaxy Model 5500. This new family of products provide the competitive price
performance characteristics required by customers across the wide range of group
system applications. The products provide state of the art video and audio with
high resolution slide capture and send graphics. The systems are H.323 capable
for videoconferencing over Internet Protocol Networks and/or H.320 capable for
videoconferencing over traditional circuit switched networks. Within this
product family there are solutions that support single or dual monitor
configurations, and data rates from 56kbps to 1920Kbps (T1/E1). All are
supported by the new Vtouch(TM) graphical user interface.
WG500. The WG500 is a series of workgroup visual communication systems
targeted at the project team or executive office where the ability to share and
interactively create a work product is required. As such, it is designed to
utilize industry leading collaborative multi-media tools such as Microsoft
NetMeeting(TM). Based on a high performance, multi-media PC platform, the WG500
fills the price-point and functionality gap between the personal desktop
conferencing market and the large group conferencing market. The WG500 has
suggested list prices of $9,995 to $14,995
SETTOP 250. The SETTOP 250 was the first business-class, set-top
videoconferencing system in the industry priced under $5,000. Combining
ease-of-use with high-quality features, the SETTOP 250 is the solution for
enterprise users who require entry-level group conferencing with
industry-standard voice and video. The SETTOP 250 includes an intuitive user
interface, an easy, color-coded installation process, and comes in both 128 Kbps
and 384 Kbps models.
SMARTSTATION. The SmartStation(TM) converts a Windows-based PC into a
videoconferencing system for personal use. Incorporating the performance of the
ESA(TM) products with its high-quality audio and video, the SmartStation(TM)
allows users to collaborate while still leveraging the power and versatility of
their desktop PC. In one easy-to-install package, SmartStation(TM) includes
VTEL's AppsView(TM) graphical conference control interface for consistent
operation across many of VTEL's visual communication solutions. SmartStation(TM)
supports data rates up to 384 Kbps for high-quality desktop conferencing and
supports the T.120 standard for data collaboration by integrating Microsoft
NetMeeting 2.0(TM).
SMARTVIDEONET MANAGER(TM). SmartVideoNet Manager(TM) software is a
tool designed to help customers simplify the administration of video networks
and reduce the operating costs. Based on the Windows NT platform and utilizing
the SNMP communications protocol, SmartVideoNet Manager(TM) leverages the
PC-based architecture of our systems to allow customers to use their existing
Intranet to provide continuous monitoring of their video network. SmartVideoNet
Manager(TM) allows administrators to remotely control, configure, diagnose and
troubleshoot VTEL systems, all from a PC console.
NETWORK EQUIPMENT. VTEL carries an extensive line of equipment to
optimize connectivity in a variety of network environments. In order to maximize
communication effectiveness, many customers choose to purchase multipoint
control units to link multiple users into a single meeting. The SmartLink
7
Multimedia Conference SERVER(TM) ("MCS") is the hub of a videoconferencing
meeting, allowing interactive communications with up to 48 participants. The
SmartLink MCS(TM) provides translation capabilities for a number of line rates
and video and audio algorithms to ensure maximum flexibility. Additionally, the
SmartLink MCS(TM) is manageable through SmartVideoNet Manager(TM). SmartLink
MCS(TM) configurations range in price from $19,480 to more than $150,000 for
advanced configurations.
TURBOCAST. The TurboCast(TM) software allows customers to capture,
store, distribute, and view media streams across the Internet and to be accessed
by clients using standard web browsers. The TurboCast solution consists of three
principal components: Studio, Reflector, and Viewer. The Studio and Reflectors
work together to capture and distribute live or stored multimedia content. The
TurboCast Viewer, implemented as a lightweight Java(R) applet, allows a media
stream to play directly within browsers such as Microsoft Internet Explorer(R)
and Netscape Navigator(R), without downloading additional software.
Since TurboCast(TM) can be used with any Java(R)-enabled browser,
broadcasts can be viewed on PC, Macintosh and Unix systems as well as some
Java(R)-based hand-held consumer devices. Current TurboCast products include:
TurboCast Studio which allows events to be captured for live broadcasts or
time-shifted replays using a standard video camera and PC or VTEL's Enterprise
Series videoconferencing systems.
PRODUCT DEVELOPMENT
VTEL's product development strategy is to design and develop core
systems capabilities and leverage the availability of hardware peripherals and
application software from third parties and to efficiently integrate such third
party resources into its systems. Additionally, with the acquisition of the
Internet streaming technology obtained with the purchase of Vosaic, we intend to
continue to introduce products that incorporate streaming technology. To the
extent that market needs cannot be met by available third party resources, we
may undertake the development of such resources. The following represent
development efforts that have been undertaken by VTEL:
SOFTWARE SYSTEM PLATFORM. The SmartStation(TM) Architecture and
ESA(TM) hardware platforms support our proprietary software architectures. The
characteristics of our products are developed and implemented primarily through
software, facilitating upgrades for users and the rapid incorporation of new
technologies. Upgrades are modular in nature, allowing additional licensed
program products to be added incrementally to the user's basic system. Our
software products are developed primarily in "C", a commonly-used, high-level
programming language, to provide future portability to other hardware platforms.
Development resources are being applied to the creation of new system software
and program products for increased functionality and flexibility of the
platform.
PERSONAL VISUAL COMMUNICATION SYSTEMS. Increased performance of
semiconductor processors specifically designed for video and image processing
allow for the cost-effective design and packaging of small group visual
communication systems and high functionality personal desktop systems that are
compatible with small and large group visual communication systems. We
introduced the SmartStation(TM) visual communication cardset which was developed
utilizing the capability of our visual communication software ported to a
suitable hardware platform. The principal hardware-related resource commitment
in the development process is the effort to find and test boardset candidates
for suitability for VTEL's software.
AUDIO COMPRESSION/ECHO CANCELLATION. Audio quality is an important
element in any video conference. At lower transmission rates, the amount of
bandwidth allocated to audio decreases, thereby requiring audio compression
algorithms to maintain acceptable audio quality. VTEL produces its own
proprietary, integrated echo canceller to improve audio quality. We offer audio
compression capability at allocated bandwidths of 8, 12, 32 and 74 Kbps through
audio subsystems.
VIDEO/IMAGE COMPRESSION. VTEL's continuing video compression
development activity is focused on the refinement of both H.320 and H.323
algorithms for higher resolution video capabilities and the integration of that
technology. Shortly following the merger with CLI in 1997, VTEL announced
8
StandardsPlus(TM) Video which provides improved video quality using industry
standards. Significant video quality improvements using industry technology
standards were achieved via a collaborative development effort between VTEL
engineers in Austin and Sunnyvale.
NETWORK MANAGERS. In the summer of 1997, VTEL introduced the industry's
first standards-based management and administration platform for distributed
visual communication networks. Using the SNMP standard, SmartVideoNet ManagerTM
allows VTEL customers to centrally control their visual communication network
for functions such as problem determination, problem resolution, call setup and
conference statistics. Using this management framework, conference support can
be provided centrally with no requirement for local user intervention, even for
networks with hundreds of visual communication system endpoints.
INTERNET TECHNOLOGIES. In 1999 VTEL launched several development
initiatives aimed at harnessing the emerging power of the Internet with its
associated technologies. The Internet will benefit VTEL on several fronts.
First, as a widely distributed and accessible "data network", the Internet
eventually will surpass in usage any data communication infrastructure based on
dedicated transmission media, initial bandwidth limitations notwithstanding. By
acquiring Vosaic, a University of Illinois-based Internet start-up, in 1999,
VTEL has begun to aggressively address the need to adapt its core
video-conferencing expertise to this new transmission medium.
Second, as an increasingly popular e-commerce infrastructure, the
Internet offers unprecedented access to new markets and customers without the
need to rely on intermediaries. By expanding its video-conferencing products
from hardware - software combination products into pure software solutions that
can run on any personal computer, VTEL can also harness the Internet as a
distribution and sales channel for its new generation of products without the
need for storing and shipping physical hardware. Sales, marketing, and
distribution of its products can all occur via the Internet.
VTEL's Internet products will be launched in several waves, all relying
on the same bandwidth optimizing technology and no-download viewing
capabilities. The first wave of products will be aimed at one-way streaming of
mostly archived, but in some cases also live visual content. A video-mail type
product will thus lead the way with the associated server and hosting
infrastructure. This product will be closely followed by a wave of visual
applications aimed at several specific OEM opportunities as well as the distance
learning market in general. The subsequent wave of products will expand the
interactive capabilities of the first thus broadening their market
applicability.
PRODUCT SUPPORT AND EXPANSION OF SUPPORT CAPABILITIES
Currently, end-user support and installation of our products are
provided by resellers and VARs, by Dictaphone in the United States, Fujitsu/Bell
Atlantic and ICL Sorbus (a wholly-owned subsidiary of Fujitsu/Bell Atlantic) in
most foreign markets as third-party service providers or directly by VTEL in
order to provide a comprehensive service offering for its worldwide customer
base. We train the service employees of Dictaphone, Fujitsu/Bell Atlantic and
ICL Sorbus and VTEL's resellers on diagnostics and service of its products.
Dictaphone, Fujitsu/Bell Atlantic and ICL Sorbus and the reseller service
network are supported by trained technicians at VTEL's Technical Assistance
Center. In order to meet all of its service commitments, we currently employ our
own field service engineers as well as maintain contracts with third party
Certified ISO technicians.
COMPETITION
The videoconferencing industry is highly competitive. VTEL believes
that the principal competitive factors in the industry are product architecture,
ease of use, video and audio quality, functionality, service and support, market
visibility, and price. We face competition from a number of companies that
market communications systems for videoconferencing. Currently in the United
States, PictureTel Corporation, Sony Corporation, Nippon Electric Corporation,
9
Polycom Corporation, and Tandberg ASA, among others, are marketing roll-about
group videoconferencing systems and multipoint control units. Internationally,
videoconferencing systems are available from, among others, British
Telecommunications plc., PictureTel Corporation, Sony Corporation, Nippon
Electric Corporation, Mitsubishi, Ltd., Fujitsu, Ltd., Panasonic Ltd., Polycom
Corporation, and Tandberg ASA.
Certain of our competitors have devoted significant resources to the
development and marketing of person-to-person visual communications products,
such as desktop videoconferencing systems, set-top systems, and software-based
internet/intranet visual communications systems, which may help to increase
awareness in the value of visual communications products while also resulting in
increased competition. Microsoft has introduced visual components to its
NetMeeting Release 2.0(TM) product. We intend to continue to focus on large-,
small-, and work-group visual communication systems, in addition to gateways and
other products, where we believe we can add significant value through software,
user interfaces, integrated environments, and applications designed to meet the
needs of its targeted markets. Additionally, we recognize that as streaming
technology proliferates over the Internet, there will be increased competition
directed toward our Internet products.
Our competitors and many of our potential competitors are more
established, benefit from greater market recognition, and have greater
financial, technological, production, and marketing resources than we do. It is
possible for these factors to have an adverse impact on our competitive
position.
MANUFACTURING
VTEL's manufacturing operations consist of integration and testing of
subsystems and assemblies. Our manufacturing strategy is to contract work to
established vendors, with VTEL fulfilling the quality and materials management
functions. Substantially all of the integrated circuits, subsystems and
assemblies used in our products are made to our specifications by third parties
under contract. We establish the relationship with the component vendors,
qualifies the vendors and arranges for shipment to VTEL or directly to the
vendor responsible for the next level of integration. Systems must pass several
levels of testing, including testing with current-release software, prior to
shipment. Our manufacturing quality system was initially certified in December
1994 as meeting the standards of ISO 9002 as set by the International Standards
Organization. VTEL has passed subsequent audits with only minimal corrective
action needed.
We rely on outside vendors for supplying substantially all of our
electronic components, subsystems and assemblies. Although we use standard parts
and components for our products that are generally available from multiple
vendors, certain components are currently available only from sole sources and
embody such parties' proprietary technology. We depend upon our suppliers to
deliver products that are free from defects, competitive in functionality and
price and consistent with our specifications and delivery schedules. The failure
of a supplier to provide such products could delay or interrupt our manufacture
and delivery of products and thereby adversely affect our business and operating
results. We endeavor to mitigate the potential adverse effect of supply
interruptions by carefully qualifying vendors on the basis of quality and
dependability and by maintaining adequate inventories of certain components.
However, there can be no assurance that such components will be readily
available when needed. Similarly, excessive rework costs associated with
defective components or process errors could adversely affect our business and
operating results. We do not have contracts with many of our suppliers ensuring
continued availability of key components.
VTEL attempts to forecast orders and to purchase certain long lead-time
components in advance of receipt of purchase orders from customers to enable us
to provide timely deliveries to customers when customer orders are received. In
addition, from time to time we enter into development arrangements with other
third parties to develop and incorporate new features and functions into our
products. As such, we are dependent upon these third parties to fulfill their
respective obligations under these development arrangements, and failure of
these third parties to do so could have a material adverse effect on our results
of operations.
10
PATENTS AND TRADEMARKS
VTEL has 24 patents issued by the United States Patent and Trademark
Office and 15 patent applications pending related to our technology.
There can be no assurance that the pending patents will be issued or
that issued patents can be defended successfully. However, we do not consider
patent protection crucial to our success. We believe that, due to the rapid
pace of technological change in the videoconferencing industry, legal protection
for our products are less significant than factors such as our use of an open
architecture, the success of our distribution strategy, the ongoing product
innovation and the knowledge, ability and experience of our employees.
VTEL has been issued two trademarks and two service marks by the United
States Patent and Trademark Office covering the "VTEL" mark and our logo as well
as trademarks and service marks issued by certain foreign countries and
entities. Applications for other trademarks are currently pending both in the
United States and abroad.
EMPLOYEES
At July 31, 1999, we employed 617 full-time employees as follows:
NUMBER OF
FUNCTION EMPLOYEES
Sales and marketing 224
Research and development 113
Service, support and
systems integration 143
Manufacturing 50
Finance and administration 87
=============
Total 617
=============
Our continued success will depend, in large part, on our ability to
attract and retain trained and qualified personnel who are in great demand
throughout the industry. None of our employees are represented by a labor union.
We believe that our employee relations are good.
VTEL's development, management of its growth and other activities de-
pend on the efforts of key management and technical employees. Competition for
such personnel is intense. We use incentives, including competitive compensation
and stock option plans, to attract and retain well-qualified employees. There
can be no assurance, however, that we will continue to attract and retain
personnel with the requisite capabilities and experience. The loss of one or
more of our key management or technical personnel also could have a material and
adverse affect. VTEL generally does not have employment agreements with its key
management personnel or technical employees. Our future success is also
dependent upon our ability to effectively attract, retain, train, motivate and
manage our employees. Failure to do so could have a material adverse effect on
our business and operating results.
EXECUTIVE OFFICERS
Our executive officers are as follows:
11
STEPHEN L. VON RUMP, age 41, was appointed President of VTEL in July
1999. He joined VTEL as Chief Marketing Officer in September 1998. Prior to
joining VTEL, Mr. Von Rump spent thirteen years at MCI Corporation most recently
as Vice President, Enterprise Services Marketing where he was responsible for
their data and Internet services strategy. As one of MCI's top data marketing
executives, he lead the transition of their enterprise business offerings from
legacy data services into the new era of virtual data and internet services.
Prior to MCI, Mr. Von Rump was a member of the technical staff at AT&T Bell
Laboratories. He holds a master's degree in electrical engineering, has authored
numerous technical and marketing publications and served as keynote speaker for
numerous professional conferences in the U.S. and abroad.
RODNEY S. BOND, age 55, joined VTEL in May 1990 as Chief Financial
Officer, Vice President - Finance and Assistant Secretary and Treasurer. He has
served as Secretary of VTEL since February 1993 and is now Assistant Treasurer
as of February 1999. From 1989 until he joined VTEL, he served as Managing
Director of Sherman Partners, a Dallas-based private investment and consulting
firm. From September 1985 to October 1988, Mr. Bond served as Chief Financial
Officer and Executive Vice President of Advanced Business Communications, Inc.,
a telecommunications equipment manufacturer.
DENNIS M. EGAN, age 48, joined VTEL in November 1995 as Vice President
- - Service. From January 1993 to November 1995, Mr. Egan served as Senior Vice
President of Peirce-Phelps, Inc. From June 1985 to January 1993, Mr. Egan was
Vice President and General Manager of the Integrated Communications Systems
Group of Peirce-Phelps. Mr. Egan's pre-1985 experience includes 13 years serving
in various sales and management positions with Peirce-Phelps.
DIANNE B. JOHNSON, age 40, was appointed Treasurer in February 1999. She
joined VTEL in July 1988 and has held a variety of management positions in
finance and operations. From December 1984 to July 1988, Ms. Johnson served in
the role of Accounting Manager with Capitol City Contractors.
STEVE F. KEILEN, age 40, was appointed Vice President, Chief Marketing
Officer in April 1999. He joined VTEL in July 1998 as Vice President and General
Manager of Enterprise Systems. Prior to joining VTEL, Mr. Keilen served as the
Director for Systems Marketing - North America at Compaq Computer Corporation
and was Director of Desktop Marketing and Product Management at Digital
Equipment Corporation prior to the merger of these two companies. He previously
held management positions at Digital Equipment Corporation and Hewlett-Packard
Company.
F.H. (DICK) MOELLER, age 54, joined VTEL in October 1989 and is
currently Chairman of the Board of Directors. From 1989 to September 1998, Mr.
Moeller has also served as President and/or Chief Executive Officer of VTEL.
From May 1982 to October 1989, Mr. Moeller served as the founder and President
of ProfitMaster Computer Systems, Inc., a computer software firm specializing in
real-time financial management systems for retail point-of-sale applications.
Prior to founding such firm, Mr. Moeller spent 12 years with Texas Instruments,
Inc. during which he held a variety of management positions, most recently
serving as Advanced Systems Manager of its Computer Systems Division. Effective
in July 1998, Mr. Moeller also began serving as General Partner of SSM Ventures,
a venture capital company.
LY-HUONG T. PHAM, age 41, joined VTEL in October 1997 as Chief
Technology Officer and Vice President of Research and Development. From May 1992
to October 1997, Ms. Pham served in numerous senior management positions at
Apple Computer, most recently serving as senior director, Operating Systems
Technologies. Prior to Apple, Ms. Pham spent 12 years at Wang Laboratories where
she held a variety of technical and senior management positions.
12
MICHAEL J. STEIGERWALD, age 40, joined VTEL in June 1998 as Vice
President and General Manager of the Professional Services strategic business
unit, based in King of Prussia, Pennsylvania. Mr. Steigerwald currently holds
the position Vice President Global Services. Prior to joining VTEL, Mr.
Steigerwald held the position of Vice President at Newbridge Networks, where he
lead the Global Service and Support organization responsible for their ViVID
Internetworking Products business unit. For thirteen years prior to his
experience with Newbridge Networks, Mr. Steigerwald held several services
management positions at Ungermann-Bass Networks, an early pioneer in the LAN
industry, with his last position being that of Vice President, Worldwide
Customer Care.
BOB R. SWEM, age 62, joined VTEL in September 1992 as Vice President -
Manufacturing. From June 1981 to July 1992, Mr. Swem held various positions with
the Austin Division of Tandem Computers, Inc., ranging from Manager of
Manufacturing to Director of Operations.
ITEM 2. PROPERTIES
VTEL's headquarters, product development, and sales and marketing
facility leases approximately 139,000 square feet in Austin, Texas under a lease
which expires in March 2013. During fiscal 1999, we reduced the workforce of
VTEL (see Restructuring Activities in Item 7.) and as a result were able to
sublet approximately 15,000 square feet during the later part of fiscal 1999 and
the first quarter of fiscal 2000. We believe that the remaining facilities are
adequate to meet our current requirements, and that suitable additional space
will be available, as needed, to accommodate further physical expansion of
corporate and development operations and for additional sales and marketing
offices. VTEL occupies approximately 60,000 square feet of a facility that is
situated in a light industrial area in Austin, Texas where our manufacturing,
training and spare parts depot are located. VTEL's manufacturing facilities and
equipment are currently utilized generally on a one-shift per day basis. Should
additional manufacturing capacity be needed during the next year, we believe
that it could provide the necessary manufacturing capacity through the addition
of work shifts or subcontractors and additional warehouse space.
VTEL leases 52,500 square feet in Sunnyvale, California under a lease
that expires in April 2008. We have a research and development group in our
Sunnyvale location. As a result of its restructuring activities, VTEL has sublet
approximately 5,200 square feet at its Sunnyvale location. VTEL's Professional
Services group occupies a facility of approximately 41,000 square feet in the
Philadelphia, Pennsylvania vicinity which is leased through June 2006.
ITEM 3. LEGAL PROCEEDINGS
VTEL is the defendant or plaintiff in various actions which 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.
Our wholly owned subsidiary, CLI, was previously involved in a legal
dispute with Philips Electronics North America Corporation ("Philips"). On May
25, 1999, we announced a compromise settlement agreement between Philips and
CLI. The settlement agreement, valued at less than $900,000, stipulates payment
by CLI in the form of cash and a future payment under a note, for $250,000 (see
Note 8 in the Consolidated Financial Statements), as well as warrants for VTEL
common stock. These amounts had previously been accrued as part of the reserve
for contingent liabilities related to the merger (see Note 1 in the Consolidated
Financial Statements). In addition, the settlement mutually releases each party
from all future claims, demands and causes of action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
13
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since April 7, 1992, VTEL's Common Stock has been traded in the
NASDAQ-National Market System under the symbol "VTEL". The following table sets
forth the range of high and low closing prices for each fiscal quarter of 1997,
1998 and 1999:
FISCAL YEAR FISCAL YEAR FISCAL YEAR
1997 1998 1999
HIGH LOW HIGH LOW HIGH LOW
1st Quarter $ 10.625 $ 6.625 $ 8.875 $ 5.438 $ 5.875 $ 2.875
2nd Quarter $ 11.000 $ 8.250 $ 8.438 $ 5.625 $ 4.750 $ 2.500
3rd Quarter $ 8.625 $ 4.875 $ 7.688 $ 5.250 $ 9.250 $ 2.000
4th Quarter $ 7.125 $ 5.500 $ 7.063 $ 4.750 $ 6.500 $ 4.000
VTEL has not paid cash dividends on its Common Stock and presently
intends to continue a policy of retaining earnings for reinvestment in its
business.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth consolidated financial data for VTEL as
of the dates and for the periods indicated. All such data reflects the Merger
with CLI on May 23, 1997, which was accounted for as a pooling of interests. The
consolidated operations data for the years ended July 31, 1997, 1998 and 1999
has been derived from the audited consolidated financial statements of VTEL
included elsewhere herein. The consolidated operations data for the year ended
December 31, 1995 and the seven months ended July 31, 1996 has been derived from
the audited consolidated financial statements of VTEL not included herein.
The consolidated balance sheet data as of July 31, 1998 and 1999 has
been derived from the audited consolidated financial statements of VTEL included
elsewhere herein. The consolidated balance sheet data as of December 31, 1995
and July 31, 1996 and 1997 have been derived from the audited consolidated
financial statements of VTEL not included herein.
The consolidated financial data as of July 31, 1995 and for the seven
months then ended have been derived from the unaudited consolidated financial
statements of VTEL not included herein. The unaudited consolidated financial
data include all adjustments, consisting of normal recurring adjustments, which
VTEL considers necessary for a fair presentation of its financial position as of
such dates and the results of operations and cash flows for such periods. The
selected financial data should be read in conjunction with the consolidated
financial statements of VTEL and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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 all periods presented.
However, the two companies operated independently prior to the merger that was
consummated in May 1997 and the historical changes and trends in the financial
condition and results of operations of these two companies resulted from
independent activities.
14
FOR THE
FOR THE YEAR SEVEN MONTHS FOR THE YEARS
ENDED ENDED ENDED
DEC 31, JULY 31, JULY 31,
1995 1995 1996 1997 1998 1999
------------ ------ ------ ------ ------ ------
UNAUDITED
In thousands, except per share amounts
STATEMENT OF OPERATIONS DATA:
Revenues $ 191,074 $98,079 $96,962 $ 191,023 $ 179,684 $ 151,602
Gross margin 66,843 39,971 35,980 74,702 84,957 67,238
Net income (loss) from continuing
operations (17,301) (4,335) (18,507) (44,271) 2,779 (15,565)
Net income (loss) (53,843) (3,811) (18,507) (52,054) 2,779 (15,565)
Net income (loss) per share from
continuing operations (0.90) (0.24) (0.87) (2.10) 0.12 (0.66)
Net income (loss) per share (2.81) (0.21) (0.87) (2.45) 0.12 (0.66)
BALANCE SHEET DATA:
Working capital $ 93,330 $76,023 $77,091 $ 39,528 $ 41,503 $ 28,135
Total assets 223,061 182,082 175,092 131,135 129,289 124,091
Long-term liabilities 985 1,278 - - 3,848 15,930
Stockholders' equity 139,512 126,739 122,238 76,765 81,258 68,019
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
On May 23, 1997, shareholders of VTEL and CLI approved 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 (the "Merger"). The restatement of the
consolidated financial information for the year ended July 31, 1997 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 entire year. The
following discussion of the consolidated operations and financial condition of
VTEL should be read in conjunction with our consolidated financial statements
and related notes thereto included elsewhere herein.
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 all periods presented.
However, the two companies operated independently prior to the Merger that was
consummated in May 1997 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 as a single entity for the periods presented. The following
discussion of the consolidated operations and financial condition of VTEL should
be read in conjunction with our consolidated financial statements and related
notes thereto included elsewhere herein.
RESULT OF OPERATIONS
The following table sets forth for the fiscal periods indicated the
percentage of revenues represented by certain items in VTEL's consolidated
statement of operations:
15
FOR THE YEARS ENDED
JULY 31,
1997 1998 1999
Revenues 100.0% 100.0% 100.0%
Gross margin 39.1 47.3 44.4
Selling, general and administrative 34.2 36.1 40.1
Research and development 12.8 11.1 11.8
Total operating expenses 62.9 46.8 54.7
Other income, net 0.6 1.1 0.1
Net income (loss) from continuing
operations (23.2) 1.5 (10.3)
Net income (loss) (27.3)% 1.5% (10.3)%
FOR THE YEARS ENDED JULY 31, 1997, 1998, AND 1999
Revenues
Consolidated revenues decreased from $191.0 million in fiscal 1997 to
$179.7 million in fiscal 1998 and to $151.6 million in fiscal 1999.
Revenues for the year ended July 31, 1998 decreased in comparison with
revenues for the year ended July 31, 1997 due to Merger transition issues.
During the year ended July 31, 1998, we combined the sales forces of VTEL and
CLI, migrated to a single product platform by eliminating the former CLI
platform, and combined the management and operations of the two companies into a
single organization. The primary reason for the decrease in revenues during
fiscal 1999 was the result of a decrease in unit sales of our large group visual
communications systems. The decline in revenues is also attributed to delays or
shifts in purchasing decisions of customers resulting from new product
announcements by VTEL and its competitors. We have determined that trends
presented by our customer base indicate shifts of capital spending. It appears
that customers may be delaying their purchase decision for large group systems
while they evaluate the impact of converting from videoconferencing systems
which currently run on digital (ISDN) type phone lines to systems which run on
Internet Protocol (IP) packet based networks. We anticipate that this trend will
reverse itself as we release products in fiscal 2000 that provide an IP network
solution.
We differentiate our operations between product and service. We feel
that our service capabilities set us apart from our competitors. Service
revenues have continued to increase over the last three fiscal years, and for
the years ended July 31, 1997, 1998, and 1999, services have represented 21%,
25% and 30%, respectively, of total revenues. Margins associated with our
service operations have continued to increase, for the years ended July 31,
1997, 1998 and 1999, gross margins for services increased to 28%, 36% and 37%,
respectively.
International sales as a percentage of total consolidated product
revenues were, 26%, 24% and 22% for the years ended July 31, 1997, 1998, and
1999. These revenue percentages represent export sales from our domestic
operations, as well as sales from our foreign subsidiaries. The general decline
in international sales over the three year period can be attributed to many
factors including the economic decline in the Far East and competition from
foreign producers of competing videoconferencing systems in Europe as well as
the Far East.
16
VTEL primarily sells its products through resellers. For the years
ended July 31, 1997, 1998 and 1999 reseller sales were 75%, 77% and 80% of
product sales, respectively.
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 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 (see also
"Market Risk" below).
While we strive for consistent revenue growth, there can be no
assurance that consistent revenue growth or profitability can be achieved.
Consistent with many companies in the technology industry, our business model is
characterized by a very high degree of operating leverage. Our expense levels
are based, in part, on our expectations as to future revenue levels, which are
difficult to predict partly due to VTEL's strategy of distributing its products
primarily through resellers. Because expense levels are based on our
expectations as to future revenues, our expense base is relatively fixed in the
short term. If revenue levels are below expectations, operating results may be
materially and adversely affected and net income is likely to be
disproportionately adversely affected. In addition, our quarterly and annual
results may fluctuate as a result of many factors, including price reductions,
delays in the introduction of new products, delays in purchase decisions due to
new product announcements by VTEL or its competitors, cancellations or delays of
orders, interruptions or delays in supplies of key components, changes in
reseller base, customer base, business or product mix and seasonal patterns and
other shifts of capital spending by customers. There can be no assurance that we
will be able to increase or even maintain our current level of revenues on a
quarterly or annual basis in the future.
Gross margin
Gross margins were 39%, 47% and 44% for the years ended July 31, 1997
,1998, and 1999 respectively.
During the year ended July 31, 1997 VTEL'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 product revenues from
the large group visual communications systems using the ESA platform resulted in
a higher blended gross margin for the year ended July 31, 1998 as compared to
the year ended July 31, 1998. The lower gross margin percentage for the year
ended July 31, 1999 was the result of the shift by our customers to the purchase
of lower margin product segments as well as lower average sales prices brought
on by competitive price pressure. Gross product margins were also adversely
affected by excess manufacturing capacity as unit sales were lower than
initially anticipated. As we continue to grow our Global Services division, the
associated service and systems integration revenues which generally carry a
lower gross margin than our product revenues, may contribute to overall
downward gross margin pressure.
While many customers continue to delay the purchase of higher cost
large group systems, some are shifting to the purchase of lower cost small group
systems in order to maintain their visual communications networks with only a
moderate continued investment during the perceived industry transition. We
believe this transition will be driven by the shift to visual communications
systems which function within an IP network environment. As such, we anticipate
that lower gross margins will be offset by stronger unit sales as 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.
17
Selling, general and administrative
Selling, general and administrative expenses of $60.9 million in fiscal
1999 decreased by 6% from $64.8 million in fiscal 1998, which decreased by 1%
from $65.4 million in fiscal 1997. Selling, general and administrative expenses
were 34%, 36% and 40% of revenues for the years ended July 31, 1997, 1998 and
1999.
Selling, general and administrative expenses as a percentage of revenue
increased from the year ended July 31, 1997 to the year ended July 31, 1998. The
proportionate increase was due to investments made during the year ended July
31, 1998 related to marketing and branding campaigns which were designed to
provide brand awareness for VTEL's products and to establish VTEL as an industry
leader in visual communications. Additionally, Merger transition issues related
to the combination of the sales forces of VTEL and CLI contributed to an
increase in selling, general and administrative expenses without a proportionate
increase in revenues.
Selling, general and administrative expenses as a percentage of revenue
increased from the year ended July 31, 1998 to the year ended July 31, 1999
despite a decline in total expenses. VTEL's expense levels were based, in part,
on expectations as to revenue levels. Because expense levels were based on our
expectations of future revenues, our expense base is relatively fixed in the
short term. For this reason, the selling, general and administrative expenses
were higher, as a percentage of revenues, for fiscal 1999 as compared to prior
periods.
Research and development expense
Research and development expenses of $18.0 million in fiscal 1999
decreased by 9.5% from $19.9 million in fiscal 1998, which decreased by 18.7%
from $24.5 million in 1997. Research and development expenses were 12.8%, 11.1%
and 11.8% of revenues for the years ended July 31, 1997, 1998, and 1999.
Merger-related expenses recorded during the year ended July 31, 1997 included a
$3.2 million charge for the write-off of capitalized research and development
cost incurred by CLI for products that were discontinued subsequent to the
Merger. Efficiencies were realized by combining the research and development
efforts of VTEL and CLI subsequent to the Merger and the Company migrated to a
single product platform by eliminating CLI's product platform. The research and
development capabilities of both companies were then focused on a single
platform such that Company could make a larger investment in its ESA(TM)
platform while reducing the overall research and development expenses of the
combined companies. Additionally, during the year ended July 31, 1998, we
capitalized $0.98 million of software development costs related to new product
developments resulting in a reduction in research and development expenses
recorded during the year.
The decrease in research and development expense from the year ended
July 31, 1998 to the year ended July 31, 1999 reflects the capitalization of
software development costs totaling $6.4 million. Research and development
projects being capitalized are related to the new user interface software
included with our next generation of video conferencing systems and software for
video conferencing solutions over IP networks. In October 1999, the user
interface software was released with our new Galaxy(TM) line of visual
communication systems. Software development costs are capitalized after a
product is determined to be technologically feasible and is in the process of
being developed for market. At the time of release, the capitalized software
will be amortized over the estimated economic life of the related projects.
During the year ended July 31, 1999, research and development expenses included
a charge for in-process research and development related to the acquired assets
of Vosaic (see "Acquisition" below). As part of the valuation associated with
Vosaic, we recorded a charge to research and development expense of $474,000.
The charge is based on our estimate of purchase price associated with research
and development on projects that were in-process at the time of acquisition. The
charge for research and development that was in-process relates to the next
generation video streaming product that was approximately 20% complete at the
date of acquisition.
The market for VTEL's products is characterized by rapidly changing
technology, evolving industry standards and frequent product introductions. New
products are generally characterized by increased functionality and better
picture quality at lower bandwidths and at reduced prices. The introduction of
18
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.
Merger and other expense
Merger and other expense decreased from $29.4 million in fiscal 1997 to
a $1.5 million credit to income in fiscal 1998 and a $0.2 million credit to
income in fiscal 1999. Merger and other expenses of $29.4 million recorded
during fiscal 1997 consisted of transaction expenses of $5.7 million and
restructuring and other expenses of $23.7 million. See Note 1 to the
Consolidated Financial Statements.
In connection with the Merger, we made the decision to discontinue the
CLI product-line and made the transition to a single product platform, VTEL's
Enterprise Series Architecture (ESA) platform. We also made the decision to
reduce duplicate operating functions, which resulted in a reduction in the
workforce of CLI. The merger transition plan also resulted in a charge in fiscal
1997 for the obsolescence of all the remaining CLI inventory related to the
discontinued products ($3.5 million) and the impairment of excess and
unproductive assets ($9.0 million). Asset impairment was determined by
estimating the lower of the asset's carrying amount or fair value less cost to
sell.
Management determined that, based on unanticipated favorable events
that occurred during fiscal 1998, including resolution of certain litigation and
other matters, a reversal of certain accruals totaling $2.6 million should be
recorded in fiscal 1998. Separately, a charge of $1.0 million was recorded to
reflect the final write-off and disposal costs of remaining discontinued CLI
inventory, which had previously been held for sale.
During the year ended July 31, 1999, the final significant contingent
liabilities, involving litigation in which CLI was a defendant, were either
settled or dismissed in court. Final Merger related payments totaling $1.3
million were paid during 1999. In addition, we recorded a note payable to
Philips Electronics North America Corporation for $0.3 million as part of terms
of that settlement agreement. Since no determinable contingent liabilities
remained in relation to the Merger, the final balance of accrued liabilities
totaling $0.2 million were returned as a credit to the Consolidated Statement of
Operations.
Restructuring Activities
In November 1998, management adopted a restructuring plan that is
intended to match the size and complexity of the organization with our planned
path. The plan included the involuntary reduction of 138 employees in 1999.
Terminations were generally made in all departments, including manufacturing,
sales, management and accounting, and were effective immediately for most
employees upon announcement. We also made the decision to reduce operating costs
by exiting other activities and reducing related overhead costs. These
activities included the closure of certain field sales offices and our
Sunnyvale, California spare parts depot.
As a result of the restructuring, we recorded a charge of $3.1 million
during the year ended July 31, 1999. As of July 31, 1999, substantially all of
the termination and severance benefits had been paid. The transition of the
spare parts depot in Sunnyvale was completed during 1999.
The following schedule summarizes the components and activities of the
restructuring plan:
BALANCE
RESTRUCTURING EXPENDITURES ACCRUED AT
CHARGE INCURRED JULY 31, 1999
Termination and severance
benefits $ 2,311 $ 2,293 $ 18
Facility closure and other
(primarily non-cancelable
lease obligations) 769 769 -
------- ------- ----
$ 3,080 $ 3,062 $ 18
======= ======= ====
19
Interest income and expense
Interest income was $2.7 million, $1.2 million and $.8 million for the
years ended July 31, 1997, 1998, and 1999, respectively. Changes in interest
income are based on interest rates earned on invested cash and cash balances
available for investment. The decrease in interest income during fiscal 1998 is
the result of the reduced cash balances due to Merger related expenditures
incurred and primarily is the result of reduced cash balances due to operating
losses during fiscal 1999.
Interest expense was $1.6 million, $0 and $0.9 million for the years
July 31, 1997, 1998 and 1999 respectively. Interest expense for the year ending
July 31, 1997 relates almost entirely to VTEL's wholly-owned subsidiary, CLI,
which relied on lines of credit to fund working capital and capital investment
requirements. No interest expense was incurred during fiscal 1998 as we repaid
all outstanding debt prior to July 31, 1997. Interest expense during fiscal 1999
relates to borrowings under our line of credit as well as interest paid on notes
payable.
Income taxes
We have experienced substantial changes in ownership as defined by the
Internal Revenue Code. These changes result in annual limitations of the amount
of net operating loss carryforward generated prior to each change which can be
utilized to offset future taxable income. As a result of the ownership change at
CLI at the date of the Merger, a portion of CLI's net operating loss
carryforward generated prior to the Merger will never be available to offset
future taxable income due to the effect of the annual limitation and the
expiration of the related net operating losses. Therefore, the unavailable
portion of the net operating loss carryforward is not considered in determining
the deferred tax asset at July 31, 1999.
At July 31, 1999, VTEL had total domestic net operating loss
carryforwards of $113,948 ($40,530 and $73,418 for VTEL and CLI, respectively).
The portions of these carryforwards available for utilization during fiscal 2000
(in consideration of the annual limitations) are $83,048. Additional net
operating losses created prior to the changes in control of $2,574 become
available in each subsequent year and accumulate if not used until such net
operating losses expire.
Due to the uncertainty surrounding the timing of realizing the benefits
of our favorable tax attributes in future tax returns, we have placed a full
valuation allowance against our net deferred tax asset. Accordingly, no deferred
tax benefit has been recorded for the years ended July 31, 1997, 1998 and 1999.
Discontinued operation
In November 1995, VTEL's wholly-owned subsidiary, CLI, adopted a plan
to discontinue operation of its broadcast products division and focus its
efforts and resources in developing and marketing videoconferencing products. In
June 1996, CLI completed the sale of certain assets of its broadcast products
division. During the year ended July 31, 1997, CLI revised the amount of loss
associated with disposing of the broadcast products division and recorded an
additional charge of $7.8 million, primarily due to additional at-risk
receivables that were subsequently identified (see Note 7 to the Consolidated
Financial Statements). No activity related to discontinued operation was
recorded in either fiscal 1998 or 1999.
20
Net income (loss)
VTEL generated a net loss from continuing operations of $44.3 million
for the year ended July 31, 1997. In fiscal 1998, we recorded net income from
continuing operations of $2.8 million. For the year ended July 31, 1999 we
generated a net loss of $15.6 million. The large net loss incurred for the year
ended July 31, 1997 was due substantially to charges of $29.4 million taken
related to the Merger (see Note 1 to the Consolidated Financial Statements). We
generated net income during fiscal 1998 as a result of a reduction of operating
expenses which was greater than the decline in revenues and several nonrecurring
events. Additionally, we generated income of approximately $1.3 million (net of
expenses) from a planned non-recurring real estate transaction which eliminated
duplicate corporate headquarter facilities. Due to the favorable resolution of
certain Merger-related issues during the year ended July 31, 1998, we were able
to record a net credit to income of approximately $1.5 million due to the
reversal of certain Merger and other accruals that were recorded as of July 31,
1997.
The loss generated during fiscal 1999 was the result of lower revenues
due to a decline in the demand for large group video conferencing systems. Since
expense levels are based to a large extent on revenue expectations we
experienced significant losses during the first and second quarters of the year
after which we were able to complete its restructuring (see "Restructuring
Activities") and align more closely its expense levels with projected revenue.
Other factors affecting results of operations
VTEL's future results of operations and financial condition could be
impacted by the following factors, among others: trends in the videoconferencing
market segment, introduction of new products by competitors, increased
competition due to the entrance of other companies into the videoconferencing
market segment especially more established companies with greater resources than
ours, delay in the introduction of higher performance products, market
acceptance of new products introduced by VTEL, price competition, interruption
of the supply of low-cost products from third-party manufacturers, changes in
general economic conditions in any of the countries in which we do business,
adverse legal disputes and delays in purchases relating to federal government
procurement.
Due to the factors noted above and elsewhere in Management's Discussion
and Analysis of Financial Condition and Results of Operations, our past earnings
and stock price have 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 VTEL's Common Stock in any given
period. Also, we participate in a highly dynamic industry which often
contributes to the volatility of VTEL's Common Stock price.
On October 1, 1999, VTEL filed Form 8-K in which we restated our
Consolidated Statement of Operations for the quarters ended October 31, 1998,
January 31, 1999 and April 30, 1999. The restatements are attributed to non-cash
adjustments made to certain depreciation and amortization accounts, inventory
accounts, and to the reversal of final acceptance revenues for certain Chinese
orders in which final cash payment has not yet been received. The unaudited
quarterly financial results are included in Note 15 of the accompanying
Consolidated Financial Statements.
21
Further, this Annual Report on Form 10-K contains forward-looking
statements, within the meaning of the Private Securities Litigation Reform Act
of 1995, that relate to future results or events and are based on our current
expectations. There are many factors that affect our business and results of
operations, all of which involve risks and uncertainties that could cause actual
results to differ materially from those reflected in those forward-looking
statements, including the risks discussed above and elsewhere herein.
Liquidity and capital resources
At July 31, 1999, we had working capital of $28.1 million, including
$12.1 million in cash, cash equivalents and short-term investments. Cash used by
operating activities was $15.2 million for the year ended July 31, 1997. Cash
provided by operating activities was $19.8 million for the year ended July 31,
1998. Cash used by operating activities was $10.7 million for the year ended
July 31, 1999. Changes in cash from operating activities are primarily the
result of the net losses or income generated and changes in working capital,
primarily increases and decreases in accounts receivable, inventories and
accounts payable.
Cash provided by investing activities was $23.3 million for the year
ended July 31, 1997 as compared to cash used in investing activities of $10.6
million for the year ended July 31, 1998. During fiscal 1997, cash provided by
investing activities was primarily due to the net sale of investments to finance
our operations during the period, which included large cash requirements
associated with the Merger. During fiscal 1998 cash used in investing activities
was primarily the result of expenditures related to leasehold improvements in
Austin and Sunnyvale, the implementation of its Enterprise Resource Planning
System, our transaction processing and financial accounting system, and
purchases of equipment. During fiscal 1999, we used $4.6 million in investing
activities that were spent primarily to complete the acquisition of property and
equipment and capitalize the costs associated with the research and development
of our next generation of visual communication products. These were partially
offset by the net sale and maturity of short-term investments.
Cash used by financing activities was $5.1 million for the year ended
July, 31 1997 as compared to cash provided by financing activities of $1.5
million for the year ended July 31, 1998 and cash provided by financing
activities of $8.0 million for the year ended July 31, 1999. Cash used in
financing activities during fiscal 1997 was primarily the result of the purchase
of treasury stock by VTEL and the repayment of debt by our wholly-owned
subsidiary, CLI, offset by the sale of preferred stock by CLI during the year
ended July 31, 1997. Cash provided by financing activities for the year ended
July 31, 1998 relates to the issuance of stock under VTEL's stock option and
stock purchase plans (see Note 10 to our Consolidated Financial Statements).
Cash provided by financing activities for the year ended July 31, 1999 relate to
borrowing under our line of credit and is offset by the purchase of treasury
stock and payments on notes payable.
During fiscal 1997, we purchased 455,200 shares of our Common Stock for
approximately $3.7 million. All of the repurchased shares were reissued during
fiscal 1997 to fulfill requirements for VTEL's Common Stock. In February 1997,
we terminated the stock repurchase program. During fiscal 1999 we initiated a
new stock repurchase program and repurchased 526,000 shares of our Common Stock
for $2.3 million. The repurchased shares have been used to fulfill requirements
for VTEL's stock including stock option exercises or stock issuances under
business combination transactions. No additional share repurchases are currently
planned, although we are authorized to repurchase up to 1,474,000 additional
shares.
VTEL has a $20.0 million revolving line of credit with a banking syndi-
cate. 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 July
31, 1999 we have drawn $11.2 million under the syndicated line of credit. The
line of credit is subject to loan covenants that require the maintenance of
certain financial ratios. In the event we are unable to maintain these ratios in
the future; additional advances under the line of credit may not be available.
VTEL's principal sources of liquidity at July 31, 1999 consist of $12.1
million of cash, cash equivalents and short-term investments, amounts available
under our revolving line of credit and the ability to generate cash from
operations.
22
Legal Matters
VTEL is the defendant or plaintiff in various actions which 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.
Our wholly owned subsidiary, CLI, was previously involved in a legal
dispute with Philips Electronics North America Corporation ("Philips"). On May
25, 1999, we announced a compromise settlement agreement between Philips and
CLI. The settlement agreement, valued at less than $900,000 stipulates payment
by CLI in the form of cash and a future payment under a note for $250,000 (see
Note 8 in the Consolidated Financial Statements), as well as warrants for VTEL
common stock. These amounts had previously been accrued as part of the reserve
for contingent liabilities related to the merger (See Note 1 in the Consolidated
Financial Statements). In addition, the settlement mutually releases each party
from all future claims, demands and causes of action.
Impact of Year 2000
Many computer systems may experience problems handling dates beyond the
year 1999. Therefore, some computer hardware and software will need to be
modified prior to the Year 2000 in order to remain functional. Prior to April
1999, we believed that our products were Year 2000 compliant with minor
exceptions due to the incorporation of third party software such as Microsoft
Windows(TM) which is Year 2000 compliant with minor exceptions. In April 1999,
Microsoft announced that upgrades would be made available that will make
Microsoft Windows(TM) Year 2000 compliant. The ability to make Windows(TM)
compliant favorably affects VTEL customers who are using older video
conferencing systems that run on Windows 95, 98 and NT(TM) software. We believe
that all our products being shipped are Year 2000 compliant. Additionally,
previous shipments of our current products can be made Year 2000 compliant
through software patches or upgrades. While we are not currently aware of any
other Year 2000 compliance issues with our products, no assurances can be made
that problems will not arise such as customer problems with other software
programs, operating systems or hardware that disrupt their use of their
products. There can be no assurances that such disruption would not negatively
impact costs and revenues in future years.
The Enterprise Resource Planning System was acquired in 1998. We have
been assured by the vendor of our Enterprise Resource Planning System that the
system is Year 2000 compliant. On August 1, 1999, the system began processing
transactions in our fiscal year 2000. We began assessing Year 2000 issues and
Year 2000 testing of other management information systems during fiscal 1998.
We presently believe that with modifications to existing software
and conversions to new software, the Year 2000 issue can be mitigated. It is not
anticipated that there will be a significant increase in costs as much of the
Year 2000 activities will be a continuation of the on-going process to improve
all of our systems. We have estimated the total costs of Year 2000 compliance
and related contingency planning to be $200,000. We have not accrued any amounts
related to the expected costs as we intend to expense Year 2000 costs as they
are incurred. We have plans to complete our internal risk assessment of Year
2000 issues and expect to complete our review of significant vendors and key
business partners by November 15, 1999. Through the implementation of our Year
2000 compliant Enterprise Resource Planning Software and review of all computer
hardware on our premises we are optimistic about our ability to continue to be
able to conduct business on January 1, 2000. However, other factors that are
beyond our control could potentially have a material effect on future financial
results. Specific factors that might cause a material impact include, but are
not limited to, electrical power outages that would disrupt operations, failure
by third parties to timely convert their systems, and similar uncertainties. In
addition, Year 2000 issues may impact our customer's ability to purchase
products and therefore materially impact our future revenue stream. To the
extent these potential revenue reductions cannot be anticipated and/or we cannot
reduce operating expenses correspondingly, then we may experience severe
unfavorable financial impact to our net income. We have asked our employees to
be available during the transition period into 2000 as an additional measure to
address any unexpected Year 2000 issues.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 requires the recognition
of all derivatives as either assets or liabilities in the statement of financial
position and the measurement of those instruments at fair value. We are required
to adopt this standard in the first quarter of fiscal 2001. We expect that the
adoption of SFAS No. 133 will not have a material impact on our financial
position or our results of operations.
23
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SoP) No. 98-5, "Reporting on the Costs of Start-up
Activities", which provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The SoP is effective for VTEL on
August 1, 1999. We estimate that the effect of adopting the SoP to be
approximately $0.1 million which will be recorded as a cumulative change in
accounting principle as reported in the results of operations during the first
quarter of fiscal 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We identify our principal market risks as foreign currency exchange
rate fluctuations and interest rate risk related to long-term debt obligations.
Foreign currency exchange rate fluctuations are mostly related to the settlement
of net intercompany receivables due from our foreign subsidiaries. The amount of
risk is mitigated by the practice of requiring where possible the repayment of
such receivables in U.S. currency. In the normal course of business, we employ
established policies and procedures to manage these risks. We use proceeds from
debt obligations to support general corporate purposes including capital
expenditures and working capital needs. Interest rate exposure is related to
borrowings under the $20 million revolving line of credit facility. Interest
rate exposure with regard to our investments is minor due to the short term
nature of our maturities.
Foreign Exchange Risk
Our objective in managing our exposure to foreign currency exchange
rate fluctuations is to reduce the impact of adverse fluctuations in earnings
and cash flows associated with foreign currency exchange rate changes.
Accordingly, we utilize forward contracts to hedge our foreign currency exposure
on firm commitments. The principal currencies hedged during fiscal year 1999
were the German mark, the Euro and Australian dollar. We monitor our foreign
currency exchange exposures to ensure the overall effectiveness of our foreign
currency hedge positions. However, there can be no assurance our foreign
currency hedging activities will offset the impact of substantial fluctuations
in currency exchange rates on our results of operations and financial position.
The following are summarized market risks of forward contracts at July 31, 1999
by foreign currencies in which we do business:
(Thousands except contract rates) Notional Average Unrealized
Settlement Contract Gain
Functional Currency Amount Rate (Loss)
- ------------------------------- ----------------- -------------- -------------
Euros $ 2,261 1.07 $ (19)
Australian Dollars 452 0.65 1
------- ---- -----
$ 2,713 $ (18)
======= =====
* * *
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants 26
Financial Statements:
Consolidated Balance Sheet as of July 31, 1998 and 1999 27
Consolidated Statement of Operations for the years ended
July 31, 1997, 1998 and 1999 28
Consolidated Statement of Changes in Stockholders' Equity for the
years ended July 31, 1997, 1998 and 1999 29
Consolidated Statement of Cash Flows the years ended July 31, 1997, 1998 and 1999 30
Notes to Consolidated Financial Statements 31
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts 56
Schedules other than those listed above have been omitted since they are
either not required, not applicable or the information is otherwise
included
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of VTEL Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of VTEL Corporation and its subsidiaries at July 31, 1998 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended July 31, 1999 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule listed in the accompanying index, presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and the
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits. We conducted our audits of
these consolidated financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Austin, Texas
September 24, 1999
26
VTEL CORPORATION
CONSOLIDATED BALANCE SHEET
(Amounts in thousands, except share and per share data)
- -----------------------------------------------------------------------------------------------------------
1998 1999
ASSETS
Current assets:
Cash and equivalents $ 15,191 $ 7,805
Short-term investments 14,484 4,308
Accounts receivable, net of allowance for doubtful
accounts of $9,447 and $1,223 at
July 31, 1998 and July 31, 1999 40,527 38,291
Inventories 12,951 15,553
Prepaid expenses and other current assets 2,533 2,320
-------- --------
Total current assets 85,686 68,277
Property and equipment, net 28,106 29,704
Intangible assets, net 11,812 15,841
Capitalized software 984 7,351
Other assets 2,701 2,918
-------- --------
$129,289 $124,091
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,600 $ 18,375
Accrued merger and other expenses 1,741 -
Accrued compensation and benefits 5,258 4,916
Other accrued liabilities 2,791 3,555
Notes payable, current portion 2,234
Deferred revenue 11,793 11,062
-------- --------
Total current liabilities 44,183 40,142
Long-term liabilities:
Borrowings under line of credit - 11,200
Notes payable - 554
Other long-term obligations 3,848 4,176
-------- --------
Total long-term liabilities 3,848 15,930
27
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- ------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 13) - -
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000
authorized; none issued or outstanding - -
Common stock, $.01 par value; 40,000,000 authorized;
23,227,000 and 24,423,000 issued at July 31, 1998
and July 31, 1999 232 244
Additional paid-in capital 256,594 260,057
Accumulated deficit (175,455) (191,665)
Unearned compensation (76) (385)
Stock subscriptions receivable - (150)
Accumulated other comprehensive loss (37) (82)
-------- --------
Total stockholders' equity 81,258 68,019
-------- --------
$129,289 $124,091
======== ========
The accompanying notes are an integral part
of these consolidated financial statements
28
VTEL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------------
FOR THE
YEARS ENDED JULY 31,
1997 1998 1999
REVENUES:
Products $ 150,791 $ 134,775 $ 105,520
Services and other 40,232 44,909 46,082
----------------- ---------------- ----------------
Total revenues 191,023 179,684 151,602
----------------- ---------------- ----------------
COST OF SALES:
Products 87,231 65,811 55,167
Services and other 29,090 28,916 29,197
----------------- ---------------- ----------------
Total cost of sales 116,321 94,727 84,364
----------------- ---------------- ----------------
Gross margin 74,702 84,957 67,238
----------------- ---------------- ----------------
OPERATING EXPENSES:
Selling, general and administrative 65,399 64,802 60,855
Research and development 24,460 19,892 17,951
Merger and other 29,397 (1,536) (235)
Amortization of intangible assets 960 960 1,271
Restructuring expense - - 3,080
----------------- ---------------- ----------------
Total operating expenses 120,216 84,118 82,922
----------------- ---------------- ----------------
Income (loss) from operations (45,514) 839 (15,684)
----------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Interest income 2,736 1,242 792
Interest expense and other (1,505) 735 (723)
----------------- ---------------- ----------------
1,231 1,977 69
----------------- ---------------- ----------------
Net income (loss) before provision
for income taxes (44,283) 2,816 (15,615)
Benefit (provision) for income taxes 12 (37) 50
----------------- ---------------- ----------------
Net income (loss) from continuing operations (44,271) 2,779 (15,565)
----------------- ---------------- ----------------
DISCONTINUED OPERATION:
Net loss from discontinued operation (7,783) - -
----------------- ---------------- ----------------
Net income (loss) $ (52,054) $ 2,779 $ (15,565)
================= ================ ================
COMPUTATION OF NET INCOME (LOSS) PER SHARE:
Net income (loss) from continuing operations $ (44,271) $ 2,779 $ (15,565)
Deemed preferred stock dividend related to
conversion discount (2,527) - -
----------------- ---------------- ----------------
Adjusted net income (loss) from continuing operations (46,798) 2,779 (15,565)
Net income (loss) from discontinued operation (7,783) - -
----------------- ---------------- ----------------
Net income (loss) applicable to common stock $ (54,581) $ 2,779 $ (15,565)
================= ================ ================
Basic and diluted income (loss) per common share:
Income (loss) from continuing operations $ (2.10) $ 0.12 $ (0.66)
Income (loss) from discontinued operation (0.35) - -
----------------- ---------------- ----------------
Net income (loss) per share $ (2.45) $ 0.12 $ (0.66)
================= ================ ================
Weighted average shares outstanding:
Basic 22,255 23,057 23,509
================= ================ ================
Diluted 22,255 23,458 23,509
================= ================ ================
The accompanying notes are an integral part
of these consolidated financial statements
29
VTEL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL ACCUMULATED TOTAL
---------------------------
NUMBER OF PAID-IN OTHER STOCKHOLDERS'
ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT OTHER INCOME (LOSS) EQUITY
------------- ------------- -------------- ------------- ------------- ------------ --------------
BALANCE AT JULY 31, 1996 21,498 $ 215 $ 245,585 $ (123,713) $ - $ 151 $ 122,238
Proceeds from sale of
stock 1,258 13 7,703 - - - 7,716
Proceeds from stock
issued under employee
plans 572 1 2,503 - - - 2,504
Purchase and issuance
of treasury stock (455) - (1,275) (2,467) - - (3,742)
Unearned compensation - - 364 - (364) -
Amortization of
unearned compensation - - - - 249 - 249
Net loss - - - (52,054) -
Foreign currency
translation adjustment - - - - - (146)
Comprehensive loss (52,200)
------------- ------------- -------------- ------------- ------------- ------------ --------------
BALANCE AT JULY 31, 1997 22,873 229 254,880 (178,234) (115) 5 76,765
Proceeds from stock
issued under employee
plans 344 3 1,473 - - - 1,476
Common stock issued
for acquisition 10 - 153 - - - 153
Unearned compensation - - 88 - (88) -
Amortization of
unearned compensation - - - - 127 - 127
Net income - - - 2,779 - -
Foreign currency
translation adjustment - - - - - (42)
Comprehensive income 2,737
------------- ------------- -------------- ------------- ------------- ------------ --------------
BALANCE AT JULY 31, 1998 23,227 232 256,594 (175,455) (76) (37) 81,258
Proceeds from stock
issued under
employee plans 47 1 103 - - - 104
Purchase of treasury
stock (526) - (2,265) - - - (2,265)
Issuance of treasury
stock under employee
plans 357 - 1,438 (645) - - 793
Treasury stock issued for
acquisition 169 - 826 - - - 826
Common stock issued for
acquisitions 1,149 11 2,596 - - - 2,607
Warrants issued in legal
settlement [Note 13] - - 52 - - - 52
Stock subscriptions
receivable - - 150 - (150) - -
Unearned compensation - - 563 - (563) - -
Amortization of unearned
compensation - - - - 254 - 254
Net loss - - - (15,565) - -
Foreign currency
translation adjustment - - - - - (45)
Comprehensive loss (15,610)
BALANCE AT JULY 31, 1999 24,423 $ 244 $ 260,057 $ (191,665) $ (535) $ (82) $ 68,019
============= ============= ============== ============= ============= ============ ==============
The accompanying notes are an
integral part
of these consolidated financial statements.
30
VTEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
- -------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED JULY 31,
1997 1998 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (52,054) $ 2,779 $ (15,565)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operations:
Depreciation and amortization 12,667 8,870 11,797
Provision for doubtful accounts and returns 4,145 (119) 436
Amortization of unearned compensation 249 127 254
Gain on sale of fixed assets - - (132)
Foreign currency translation gain (loss) (3) 112 88
Decrease in accounts receivable 106 3,299 2,206
(Increase) decrease in inventories 7,064 10,758 (1,294)
(Increase) decrease in prepaid expenses and other
current assets (492) 358 220
Increase (decrease) in accounts payable 5,005 (3,099) (5,539)
Increase (decrease) in accrued expenses 6,535 (5,505) (2,967)
(Decrease) in research and development advance (5) - -
Increase (decrease) in deferred revenues 2,195 2,172 (178)
Decrease in accrued expenses, discontinued operation (657) - -
Net cash provided by (used in) operating activities ------------- ------------- --------------
(15,245) 19,752 (10,674)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (391,628) (247,223) (150,828)
Sales and maturities of short-term investments 419,636 253,038 161,004
Purchases of property and equipment (18,781) (15,835) (8,778)
Sales of property and equipment 11,208 260 1,441
Cash paid for acquired assets (Note 3) - - (231)
Issuance of notes receivable - - (750)
(Increase) decrease in capitalized software 3,561 (984) (6,367)
(Increase) decrease in other assets (745) 104 (67)
Net cash provided by (used in) investing activities ------------- ------------- --------------
23,251 (10,640) (4,576)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock 8,044 1,476 104
Purchase of treasury stock (3,742) - (2,265)
Proceeds from the sale of treasury stock 1,275 - 793
Borrowings under line of credit agreements - - 11,200
Payments on notes payable - - (1,835)
Repayment of short-term debt (10,656) - -
Net cash provided by (used in) financing activities ------------- ------------- --------------
(5,079) 1,476 7,997
Effect of translation exchange rates on cash (143) (154) (133)
------------- ------------- ---------------
Net increase (decrease) in cash and equivalents 2,784 10,434 (7,386)
Cash and equivalents at beginning of period 1,973 4,757 15,191
------------- ------------- ---------------
Cash and equivalents at end of period $ 4,757 $ 15,191 $ 7,805
============= ============= ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,582 $ - $ 775
Non-cash transactions
Stock issued for acquired assets (Note 3) - 153 3,433
Notes payable issued for acquired asset - 837 4,373
Issuance of stock warrants and note in legal settlement (Note 13) - - 302
Issuance of restricted stock to employees (Note 10) - - 563
Stock issued in lieu of repayment of research and development
advance 901 - -
The accompanying notes are an integral part
of these consolidated financial statements
31
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
1. THE COMPANY
VTEL Corporation ("VTEL" or the "Company") designs, manufactures,
markets, services and supports integrated, multi-media visual communication
systems which operate over private and switched digital communication networks.
VTEL distributes its systems to a domestic and international marketplace through
a reseller network and directly to end-user customers.
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.
The acquisition was accounted for as a pooling of interests and
accordingly, the consolidated financial statements have been restated for the
period ended July 31, 1997 to include the accounts of CLI. Revenues, net income
(loss) from continuing operations and net income (loss) of the separate
companies for the 1997 period were as follows:
VTEL CLI TOTAL
----------- ------------- -------------
YEAR ENDED JULY 31, 1997 *
Revenues $124,438 $ 66,585 $191,023
Net loss from continuing operations ** 556 (44,827) (44,271)
Net loss (508) (51,546) (52,054)
* Information for CLI is through the date of the Merger, May 23, 1997.
** Includes loss of $29,397 related to the merger.
In connection with the Merger, the Company recorded merger and other
expenses of $29,397 during the year ended July 31, 1997 as follows:
TRANSACTION EXPENSES:
Investment banking fees $ 2,391
Legal and accounting fees 1,600
Other 1,663
----------
5,654
----------
RESTRUCTURING AND OTHER:
Asset impairments 12,469
Reserve for contingent liabilities 5,271
Severance and termination benefits 3,457
Other 2,546
----------
23,743
----------
Total $ 29,397
==========
In connection with the Merger in 1997, the Company made the decision to
discontinue the CLI product-line and made the transition to a single product
platform, VTEL's Enterprise Series Architecture (ESA) platform. The Company also
made the decision to reduce duplicate operating functions, which resulted in a
reduction in the workforce of CLI. These activities resulted in the obsolescence
of all of the remaining CLI inventory related to the discontinued products and
the impairment of excess and unproductive assets resulting from the merger
transition plan. Asset impairment was determined by estimating the lower of the
asset's carrying amount or fair value less cost to sell.
32
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
The restructuring activities related to the Merger involved the
involuntary termination of approximately 150 employees over the period from May
23, 1997 (the date of the Merger) to November 30, 1997.
The major components of the asset impairment recorded at July 31, 1997
are as follows:
Write-down of recorded value of discontinued CLI inventory
due to discontinuance of the CLI product line $ 3,500
Write-off of capitalized software development costs due to 3,200
discontinuance of the CLI product line
Write-off of purchased software deemed redundant as a 1,300
result of the Merger
Write-off of unproductive CLI assets (primarily furniture, 2,800
fixtures, equipment and leasehold improvements) due to
workforce reduction subsequent to the Merger
Reserve for uncollectible receivables related to sales of 1,669
products which were subsequently discontinued and no
longer supported
----------
Total $ 12,469
==========
Contingent liabilities of $5.2 million accrued at July 31, 1997 reflect
amounts accrued for the discharge of pending and threatened litigation against
the Company's wholly-owned subsidiary, CLI, and amounts accrued to discharge
known and probable vendor disputes related to CLI. These amounts include
management's estimate of the probably costs expected to be incurred to settle,
discharge or litigate the matters.
Other restructuring charges of $2.5 million include $1.6 million
related to the cancellation of purchase commitments that had no future economic
benefit to the discontinued CLI product-line and costs associated with the
closure of redundant facilities.
Changes to accrued merger and other and the reserve for asset
impairments during the year ended July 31, 1999 were as follows:
BALANCE AT PAID IN DISPOSALS REVERSED BALANCE AT
JULY 31, FISCAL IN FISCAL IN FISCAL JULY 31,
1998 1999 1999 1999 1999
ASSET IMPAIRMENTS $ 382 $ - $ 382 $ - $ -
============ =========== ============ ============ ============
ACCRUED MERGER AND
OTHER EXPENSES:
Reserve for
contingent liabilities $ 1,484 $ 1,249 $ - $ 235* $ -
Severance and
termination benefits 257 257 - - -
------------ ----------- ------------ ------------ ------------
$ 1,741 $ 1,506 $ - $ 235 $ -
============ =========== ============ ============ ============
* During the fiscal year ended July 31, 1999, the remaining litigation claims
involving CLI were either dismissed in court or settled with the plaintiff. The remaining
reserves for contingent liabilities were credited to income.
33
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and include the accounts of VTEL's
wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. Preparation of the consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The more significant
estimates made by management include the provision for doubtful accounts
receivable, inventory write-downs for potentially excess or obsolete inventory,
warranty reserves, the valuation allowance for the gross deferred tax asset,
contingency reserves, lives of fixed assets and the amortization period for
intangible assets. Actual amounts could differ from the estimates made.
Management periodically evaluates estimates used in the preparation of the
financial statements for continued reasonableness. Appropriate adjustments, if
any, to the estimates used are made prospectively based upon such periodic
evaluation.
Revenue Recognition
Product revenues, recorded net of discounts, are recognized at the time
a product is shipped or services are performed and the Company has no
significant further obligations to the customer. Customer prepayments are
deferred until product shipment has occurred or services have been rendered and
there are no significant further obligations to the customer. Service revenues
are recognized at the time the services are rendered and the Company has no
significant further obligations to the customer. Revenues for extended warranty
contracts are recorded over the contract period. The Company records an
allowance to reduce sales revenue by an amount which reflects management's
estimate of potential future sales returns, exchanges, customer stock rotations
or price protection discounts.
Warranty Costs
The Company generally warrants its products against hardware defects
for one year from the date of installation but not to exceed fifteen months from
date of shipment. A warranty is provided for software defects for ninety days
from the date of installation. The Company provides currently for the estimated
costs which may be incurred in the future under the warranty program.
Software Development Costs
Costs incurred in connection with the development of software products
are accounted for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed." Costs incurred prior to the establishment of
technological feasibility are charged to research and development expense.
Amortization of capitalized software begins upon initial product shipment.
34
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Software development costs are amortized (a) over the estimated life of the
related product (generally thirty months), using the straight-line method or (b)
based on the ratio of current revenues from the related products to total
estimated revenues for such products, whichever is greater.
The Company capitalized internal software development costs of $1,622,
$984 and $6,367 for the years ended July 31, 1997, 1998 and 1999, respectively.
Amortization of such costs was $1,827, $50 and zero for the years ended July 31,
1997, 1998 and 1999, respectively. In connection with the Merger, the Company
recorded an impairment charge of $3,218 related to capitalized software
development costs during the year ended July 31, 1997 due to the elimination of
the product line to which the capitalized software development costs related.
Cash and Equivalents
Cash and equivalents include cash and investments in liquid money
market accounts.
Short-term Investments
Short-term investments are carried at market value, which approximates
cost, at the balance sheet date. Short-term investments consist of funds
primarily invested in mortgage-backed securities guaranteed by the U.S.
government, government securities and commercial paper. Investment securities
generally have maturities of less than one year.
The Company accounts for investment securities under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
requires investment securities to be classified as held-to-maturity, trading or
available-for-sale based on the characteristics of the securities and the
activity in the investment portfolio. At July 31, 1998 and 1999, all investment
securities are classified as available-for-sale. No unrealized gains or losses
have been recorded as a separate component of equity for the current period or
prior year as market values approximate cost due to the short-term nature of the
investments.
Inventories
Inventories are stated at the lower of cost (weighted average cost
which approximates the first-in, first-out method) or market. Cost includes the
acquisition of purchased components, parts and sub-assemblies, labor and
overhead.
Property and Equipment
Property and equipment is recorded at cost. Internal support equipment
is video teleconferencing equipment used internally for purposes such as sales
and marketing demonstrations, Company meetings, testing, troubleshooting
customer problems, and engineering, and is recorded at manufactured cost.
Depreciation and amortization are provided using the straight-line method over
the estimated economic lives of the assets, ranging from two to ten years, or
over the lease term or life of the improvement of the respective assets, as
applicable. Repair and maintenance costs are expensed as incurred. The Company
periodically reviews the estimated economic lives of property and equipment and
will make adjustments according to the latest information available.
In accordance with Statement of Position ("SoP") 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for internal Use," the
Company capitalized $0.8 million of internal costs associated with the
implementation of the Oracle Enterprise Resource Planning Software System, the
Company's management resource planning, transaction processing and financial
accounting system, during the year ended July 31, 1998.
35
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Intangible Assets
Intangible assets include the goodwill that results from various
acquisitions of the Company (see Note 3) as well as other intangibles, including
acquired technology. Goodwill is associated with the acquisition of the
Company's Global Services unit, Vosaic and its subsidiaries in France and
Germany. Amortization periods for the intangibles associated with these
acquisitions range from 3 to 15 years. In accordance with Accounting Principles
Board Opinion ("APB") No. 17, "Intangible Assets," the Company periodically
evaluates the amortization period associated with the acquired intangible assets
based upon anticipated periods of future benefit. The Company evaluates factors
such as loss of employees with key or unique skills, the Company's ability to
continue to successfully utilize the specialized knowledge acquired and other
relevant factors which could require revision of the estimate of the
amortization period. Appropriate adjustments, if any, to the amortization period
will be made prospectively based upon such periodic evaluation. Accumulated
amortization of intangibles was $2,554 and $3,817 at July 31, 1998 and 1999.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are
measured using the local currency as the functional currency. Accordingly,
assets and liabilities of the subsidiaries are translated at current rates of
exchange at the balance sheet date. The resultant gains or losses from
translation are included in a separate component of stockholders' equity. Income
and expense from the subsidiaries are translated using monthly average exchange
rates.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes," which requires the liability method of accounting for income
taxes. Under the liability method, deferred taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
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. All historical
earnings per share data have been restated to conform to the current year
presentation.
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:
FOR THE YEARS ENDED
JULY 31,
1997 1998 1999
Weighted average shares
Outstanding - basic 22,255 23,057 23,509
------- ------- -------
Effect of Dilutive Securities:
Stock options - 400 -
Warrants to purchase common stock - 1 -
------- ------- -------
Dilutive potential common shares - 401 -
------- ------- -------
Weighted average shares
outstanding - diluted 22,255 23,458 23,509
======= ======= =======
Antidilutive securities 3,648 1,764 4,457
======= ======= =======
36
Net loss applicable to common stock for the year ended July 31, 1997 is
computed by increasing the net loss from continuing operations by $2,527 which
represents a deemed dividend related to the 20% conversion discount on Series C
Preferred Stock measured at the date of original issuance.
Concentration of Credit Risk
The Company sells its products to various companies across several
industries, including third-party resellers. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potential credit losses.
The Company requires advanced payments or secured transactions when deemed
necessary.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, including
cash and equivalents, short-term investments and short-term trade receivables,
payables, and debt, approximates fair value. The fair value of the Company's
foreign currency forward contracts is determined at July 31, 1998 and 1999 based
on quoted market rates. The carrying amount of short-term investments
approximates fair value because of the short maturity and nature of these
instruments. The Company places its cash in investment quality financial
instruments and limits the amount invested in any one institution or in any type
of instrument. The Company has not experienced any significant losses on its
investments.
Long-lived Assets
The Company evaluates its long-lived assets and intangibles based on
guidance provided by SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used for long-lived assets and certain identifiable intangibles to be disposed
of. The Company believes no impairment exists at July 31, 1999.
Employee Stock Plans
The Company determines the fair value of grants of stock, stock options
and other equity instruments issued to employees in accordance with SFAS No.
123, "Accounting and Disclosure of Stock-Based Compensation." SFAS No. 123
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options, and other equity instruments to employees
based on their estimated fair market value on the date of grant. The Company has
opted to continue to apply the existing accounting rules contained in APB No.
25, "Accounting for Stock Issued to Employees." As such, SFAS No. 123 has had no
effect on the Company's financial position or results of operations.
The Company records unearned compensation related to stock options that
are issued at exercise prices which are below the fair market value of the
underlying stock on the measurement date. Such unearned compensation is
amortized ratably over the vesting period of the related stock options.
Treasury Stock
The Company accounts for its treasury stock purchases and issuances
using the cost method.
37
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Comprehensive Income
During fiscal 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No.130 establishes standards for reporting
comprehensive income and its components. The Company's comprehensive income
(loss) is shown on the Company's Statement of Changes in Stockholders' Equity
and is comprised of net income (loss) and foreign currency translation
adjustments.
Segment Information
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in the fiscal year ended July 31, 1999.
SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
No. 131 also requires disclosures about products and services, geographic areas
and major customers. The adoption of SFAS No. 131 did not affect the Company's
results of operations or financial position, but did affect the disclosure of
segment information as and has been used for all years presented in these
financial statements (Note 14).
Recent Accounting Pronouncements
In June 1998, Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities.
SFAS No. 133 requires the recognition of all derivatives as either assets or
liabilities in the statement of financial position and the measurement of those
instruments at fair value. The Company is required to adopt this standard in the
first quarter of fiscal 2001. The Company expects that the adoption of SFAS No.
133 will not have a material impact on it financial position or its results of
operations.
In April 1998, American Institute of Certified Public Accountants issued
SoP No. 98-5, "Reporting on the Costs of Start-up Activities", which provides
guidance on the financial reporting of start-up costs and organization costs. It
requires costs of start-up activities and organization costs to be expensed as
incurred. The SoP is effective for the Company on August 1, 1999. The Company
estimates that the effect of adopting the SoP to be approximately $100 which
will be recorded as a cumulative change in accounting principle in the results
of operations during the first quarter of fiscal 2000.
3. ACQUISITIONS
The Company consummated the acquisition of certain of the assets of the
videoconferencing division of one of its German resellers effective July 1,
1998. The consideration paid by the Company consisted of restricted stock,
warrants, a note payable, and the assumption of certain payables and other
liabilities totaling approximately $1,871. During fiscal 1999, the Company
completed the acquisition of one of its French resellers primarily through the
issuance of restricted stock for approximately $826.
On March 9, 1999, the Company completed the acquisition of
substantially all of the assets of Vosaic LLP, an Internet video software and
technology company for $3.2 million in cash, stock and warrants. The transaction
has been accounted for as a purchase of assets. The acquisition involved the
issuance of 1,149,000 shares (equivalent to approximately 5% of the outstanding
38
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
shares of the Company's stock as of March 9, 1999). The common shares have been
registered with the Securities Exchange Commission as of May 14, 1999. Of these
shares, 200,000 are to be held in escrow and an additional, 350,000 warrants
remain unearned pending the completion of certain obligations by Vosaic LLP.
4. INVENTORIES
Inventories consist of the following:
JULY 31,
1998 1999
Raw materials $ 5,938 $ 8,595
Work-in-process 517 1,504
Finished goods 5,833 4,637
Finished goods held for
evaluation and rental agreements 663 817
------- -------
$12,951 $15,553
======= =======
Finished goods held for evaluation and under rental agreements consists
of completed visual communication systems used for demonstration and evaluation
purposes, which are generally sold during the next year.
5. PROPERTY AND EQUIPMENT
Property and equipment and related depreciable life is composed of the
following:
JULY 31,
1998 1999
Furniture, machinery and equipment, 2-10 years $ 30,045 $ 24,241
Internal support equipment, 2-4 years 12,513 9,043
Customer service assets, 4-8 years 15,263 15,520
Leasehold improvements, lease term or
life of the improvement 6,686 8,893
--------- ---------
64,507 57,697
Less accumulated depreciation (36,401) (27,993)
--------- ---------
$ 28,106 $ 29,704
========= =========
Depreciation and amortization expense relating to property and
equipment was approximately $12,991, $7,910 and $9,964 for the years ended July
31, 1997, 1998 and 1999, respectively.
39
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
6. RESTRUCTURING ACTIVITIES
In November 1998, management adopted a restructuring plan that was
intended to match the size and complexity of the organization with the planned
path of the Company. The plan included the involuntary reduction of 138
employees in fiscal 1999. Terminations were generally made in all departments,
including manufacturing, sales, management and accounting, and were effective
immediately for most employees upon announcement. The Company also made the
decision to reduce operating costs by exiting other activities and reducing
related overhead costs. These activities included the closure of certain field
sales offices and its Sunnyvale, California spare parts depot.
As a result of the restructuring, the Company recorded a charge of $3.1
million during the year ended July 31, 1999. As of July 31, 1999, substantially
all of the termination and severance benefits had been paid. The transition of
the spare parts depot in Sunnyvale was completed during 1999.
The following schedule summarizes the components and activities of the
restructuring plan:
BALANCE
RESTRUCTURING EXPENDITURES ACCRUED AT
EXPENSE INCURRED JULY 31, 1999
Termination and severance
benefits $ 2,311 $ 2,293 $ 18
Facility closure and other
(primarily non-cancelable lease
obligations) 769 769 -
-------- -------- ------
$ 3,080 $ 3,062 $ 18
======== ======== ======
7. DISCONTINUED OPERATION
On June 27, 1996, CLI completed the sale of certain assets of its
broadcast products division to another company in exchange for $12,500 in cash
and the assumption of $2,000 in liabilities. The purchaser assumed past warranty
obligations associated with the product family covered by the sale. With the
exception of the accounts receivable, CLI disposed of the remaining assets of
the division to a separate buyer. During the year ended July 31, 1997, the
Company recorded a provision for probable losses to fully reserve the remaining
accounts receivable of the discontinued operation that were considered to be
uncollectible. Such provision is reflected in the accompanying consolidated
statement of operations in the net loss from discontinued operations. No
revenues from discontinued operation were recorded during the years ended July
31, 1997, 1998 or 1999.
40
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
8. NOTES PAYABLE
Notes payable at July 31, 1999 consist of the following:
Notes payable to the vendor of the Company's
Enterprise Resource Planning System
in quarterly and annual installments
through May 2001, bearing interest at rates
ranging from 7.22% to 8.50% $ 2,538
Other 250
-----------
2,788
Less:
Current maturities (2,234)
-----------
Long-term notes payable $ 554
===========
The aggregate annual maturities of notes payable at July 31, 1999 are as
follows:
FISCAL YEAR ENDING:
2000 $ 2,234
2001 554
-----------
$ 2,788
===========
9. LINE OF CREDIT
On May 5, 1999, the Company executed a credit agreement with a banking
syndicate which established a $20,000 revolving line of credit. Under the line
of credit, the Company may borrow up to 80% of eligible accounts receivable. The
credit agreement also provides that the Company may request the issuance of
letters of credit up to a maximum of $10,000 and foreign exchange contracts up
to a maximum of $10,000. Each of the aforementioned provisions are subject to
certain limitations.
Any amounts outstanding under the credit agreement will bear interest
at the prime rate plus 0.5% (8.5 % at July 31, 1999) or, at the option of the
Company, LIBOR plus 3.25% (9.05% at July 31, 1999) The interest rates may
decline if the Company achieves consecutive profitable quarters. All such
advances and accrued interest under the credit agreement will be payable on the
maturity date of May 4, 2001. The Company pays an annual commitment fee of
0.375% on its unused line of credit.
41
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Any amounts outstanding under the credit agreement will be secured by
substantially all of the Company's assets. The credit agreement requires that
the Company maintain certain financial ratios and other covenants. The Company
has issued a letter of credit totaling $1,200 under the line of credit as a
lease deposit on one of its facilities. At July 31, 1999, the Company had drawn
$11,200 under the credit line.
10. STOCKHOLDERS' EQUITY
General
In May 1997, VTEL issued 155,040 shares of Common Stock, at the fair
market value, to Intel in lieu of repayment of the remaining $901 advance under
the Development Agreement (see Note 11) that was unused at that time.
On March 9, 1999, the Company completed the acquisition of
substantially all of the assets of Vosaic LLP, an Internet video software and
technology company which involved the issuance of 1,149,000. Of these shares,
200,000 are to be held in escrow and an additional 350,000 warrants remain
unearned pending the completion of certain obligations by Vosaic (see Note 3).
Share Repurchase Program
During fiscal 1997, the Company purchased 455,200 shares of its Common
Stock for approximately $3.7 million. All of the repurchased shares were
reissued during fiscal 1997 to fulfill requirements for the Company's Common
Stock. In February 1997, the Company terminated the stock repurchase program.
During fiscal 1999, the Company initiated a new stock repurchase
program and repurchased 526,000 shares of its Common Stock for $2.3 million. The
repurchased shares have been be used to fulfill requirements for the Company's
stock including stock option exercises or stock issuances under business
combination transactions. No additional share repurchases are currently planned,
although the Company is authorized to repurchase up to 1,474,000 additional
shares.
Stock Subscriptions Receivable
During fiscal 1999, the Company loaned certain employees of the Company
amounts to either purchase shares of the Company's stock on the open market,
exercise options or participate in the employee stock purchase program.
Receivables with recourse totaling $150 that are related to the exercise of
options and the participation of the employee stock purchase program have been
classified as a reduction of additional paid-in capital. Receivables with
recourse totaling $750 related to the purchase of shares on the open market have
been classified as other long-term assets.
CLI Redeemable Convertible Preferred Stock
On October 25, 1996, CLI completed a private placement of 350,000
shares of Class C Preferred Stock and stock warrants for the purchase of 375,000
shares of CLI Common Stock for approximately $7,000, before certain issuance
costs, pursuant to a purchase agreement with an institutional investor. The
preferred stock was exchanged for 1,102,500 shares of VTEL Common Stock and both
the number and exercise price of the warrants were converted into warrants for
the purchase of VTEL Common Stock based on the exchange ratio of 0.46 in
connection with the Merger. The converted warrants, totaling 172,500 VTEL
shares, have an exercise price of $12.39 and expire in October 2001.
Stock and Stock Option Plans
VTEL has three stock option plans, the 1989 Stock Option Plan (the
"1989 Plan"), the 1996 Stock Option Plan (the "1996 Plan") and the 1992 Director
Stock Option Plan (the "1992 Plan"). The 1989 Plan and the 1996 Plan both
provide for the issuance of non-qualified and incentive stock options to
employees and consultants of the Company. Stock options are generally granted at
42
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
the fair market value at the time of grant, and the options generally vest
ratably over 48 months and are generally exercisable for a period of ten years
beginning with date of grant. The 1992 Plan provides for the issuance of stock
options to nonemployee directors at the fair market value at the time of grant.
Effective June 1999, the 1989 Plan expired whereby the company can no longer
grant options under the Plan, however, options previously granted remain
outstanding. Such options vest ratably over 36 months and are exercisable for a
period of ten years beginning with the date of the grant.
CLI had employee and director stock option plans prior to the merger
with VTEL. On May 23, 1997, all options outstanding under these plans were
converted into options for Common Stock of VTEL. Both the number of shares
subject to option and the per share exercise price under each option were
adjusted by the exchange ratio of 0.46.
The Company applies APB No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost is
recognized for its stock option plans unless options are issued at exercise
prices which are below the market price on the measurement date. Had
compensation cost for the Company's stock option plans been determined based on
the fair market value at the grant dates for awards under those plans consistent
with the method provided by SFAS No. 123, the Company's net loss and net loss
per share would have been reflected by the following pro forma amounts for the
years ended July 31, 1997, 1998 and 1999:
FOR THE YEARS ENDED JULY 31,
1997 1998 1999
Net income (loss) As reported $ (52,054) $ 2,779 $ (15,565)
Pro forma $ (55,276) $(1,589) $ (20,023)
Basic and diluted net income (loss) per
common share As reported $ (2.45) $ 0.12 $ (0.66)
Pro forma $ (2.60) $ (0.07) $ (0.85)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants the years ended July 31, 1997, 1998 and 1999:
FOR THE YEARS ENDED JULY 31,
1997 1998 1999
Dividend yield - - -
Expected volatility 92.31% 63.12% 67.67%
Risk-free rate of return 5.90% 5.52% 6.14%
Expected life 5.12 years 5.65 years 6.26 years
43
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
The following table summarizes activity under all Plans for the years
ended July 31, 1997, 1998 and 1999. This information includes stock options
relating to CLI's stock option plans. Both the number of shares and the per
share exercise price have been adjusted by the exchange ratio of 0.46.
1997 1998 1999
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE
Outstanding at the
Beginning of the year 2,187 $ 9.40 3,648 $9.42 3,938 $8.65
Converted from CLI 1,798 17.43 - - - -
Granted 2,098 6.44 896 6.43 1,818 3.40
Exercised (324) 3.14 (186) 4.00 (134) 2.34
Canceled (2,111) 14.58 (420) 7.55 (1,074) 7.05
------ ----- ------
Outstanding at the
end of the year 3,648 $ 9.42 3,938 $8.65 4,548 $7.11
====== ===== ======
Options exercisable at
Year end 3,402 $ 9.20 3,710 $8.42 4,457 $7.04
====== ===== ======
Weighted average
fair value of
options granted
During the year $ 3.42 $4.12 $2.48
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF EXERCISE OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
PRICES JULY 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE JULY 31, 1999 EXERCISE PRICE
$ 0.30 - $ 2.94 860,353 8.47 years $ 2.43 860,353 $ 2.43
3.00 - 4.88 787,302 8.51 3.93 787,302 3.93
4.91 - 6.11 474,561 8.80 5.56 471,227 5.56
6.13 - 6.13 1,122,153 7.88 6.13 1,115,485 6.13
6.19 - 42.66 1,303,665 5.97 13.53 1,222,399 13.70
-------------------- ----------- ----------
$ 0.30 - $ 42.66 4,548,034 7.65 years $ 7.11 4,456,766 $ 7.04
==================== =========== ==========
Generally, options are exercisable immediately upon grant. However,
stock issued upon exercise of a stock option is subject to repurchase by the
Company at the exercise price until the option vesting period has elapsed. At
July 31, 1999, options to purchase 2,140,615 shares were vested. At July 31,
1999, 30,540 unvested options had been exercised.
Employee Stock Purchase Plan
On April 29, 1993, VTEL adopted an Employee Stock Purchase Plan
("Employee Plan") which enables all employees to acquire VTEL stock under the
plan. The Employee Plan authorizes the issuance of up to 950,000 shares of
VTEL's Common Stock. The Employee Plan allows participants to purchase shares of
the Company's Common Stock at a price equal to the lesser of (a) 85% of the fair
market value of the Common Stock on the date of the grant of the option or (b)
85% of the fair market value of the Common Stock at the time of exercise. Common
Stock issued under the Employee Plan totaled 105,549 shares, 158,073 shares and
203,118 shares respectively, for the years ended July 31, 1997, 1998 and 1999.
44
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
The fair value of the employees' purchase rights was estimated using
the Black-Scholes model with the following assumptions for the years ended July
31, 1997, 1998 and 1999:
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
JULY 31, 1997 JULY 31, 1998 JULY 31, 1999
SECTION 16 SECTION 16 SECTION 16
OFFICERS OTHERS OFFICERS OTHERS OFFICERS OTHERS
Dividend yield - - - - - -
Expected volatility 82.89% 79.83% 52.10% 51.68% 72.43% 71.00%
Risk-free rate of return 5.31% 5.23% 5.40% 5.34% 5.13% 4.99%
Expected life (in years) .50 .25 .50 .25 .50 .25
Weighted-average fair value
of Purchase rights granted $2.54 $2.11 $ 1.96 $ 1.66 $ 1.46 $ 1.12
Restricted Stock Plan
On December 17, 1998, the Company adopted a restricted stock plan (the
"1998 Plan"). The 1998 Plan authorizes the issuance of up to 1,000,000 shares of
VTEL's Common Stock.to be used to reward, incent and retain its employees.
Shares of restricted stock issued under the 1998 Plan were 80,000 for the year
ended July 31, 1999.
11. DEVELOPMENT AND LICENSE AGREEMENT
On October 22, 1993, VTEL entered into a Development and License
Agreement (the "Development Agreement") with Intel Corporation ("Intel"),
pursuant to which the companies agreed to engage in a series of development
efforts with respect to video compression software as well as other video
technology such as processes and designs. The agreement contains certain
provisions for licensing agreements and royalties between the two companies for
the use of the technology developed under the agreement.
The initial term of the Development Agreement has renewed until
December 31, 1999 and will continue to automatically renew thereafter for
successive terms of one year unless written notice is given by either party six
months prior to the expiration of the initial term or any successor term.
VTEL was advanced $3,000 under the agreement to be used for the initial
reimbursements of research and development costs incurred by VTEL in performing
the work specified in the Development Agreement. During the year ended July 31,
1997, the Company reduced gross research and development expenses by
approximately $5 for reimbursable research and development costs under the terms
of the Development Agreement. No reductions of research and development expenses
were recorded during the years ended July 31, 1998 and 1999 as a result of the
Development Agreement. In May 1997, VTEL issued 155,040 shares of Common Stock,
at the fair market value, to Intel in lieu of repayment of the remaining $901
advance that was unused at that time. As of July 31, 1999, the Company had no
research and development activities in process or planned related to the
Development Agreement.
45
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
12. FEDERAL INCOME TAXES
Under the provisions of SFAS No. 109, the components of the net deferred
tax amount are as follows:
JULY 31,
1998 1999
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 29,140 $ 38,742
Research and development credit carryforwards 3,458 4,379
Minimum tax credit carryforwards 110 110
Inventory and warranty provisions 1,246 1,921
Charitable contributions 22 40
Compensation accruals 635 306
Depreciation 630 -
Deferred revenue 1,796 713
Accrued expenses 841 -
Accounts receivable 3,163 292
Other 558 545
---------- ----------
Gross deferred tax asset 41,599 47,048
---------- ----------
DEFERRED TAX LIABILITIES:
Capitalized software (274) (220)
Depreciation - (453)
---------- ----------
Gross deferred tax liability (274) (673)
---------- ----------
Valuation allowance (41,325) (46,375)
---------- ----------
Net deferred tax asset $ - $ -
========== ==========
The Company's net operating loss carryforwards expire in varying
amounts from 1999 through 2019. Research and development tax credit
carryforwards expire in varying amounts from 1999 through 2019. Minimum tax
credit carryforwards do not expire and carry forward indefinitely. Net operating
losses related to the Company's foreign subsidiaries (totaling $ 7,222) are
available to offset future foreign taxable income.
The Company has experienced substantial changes in ownership as defined
by the Internal Revenue Code. These changes result in annual limitations of the
amount of net operating loss carryforward generated prior to each change which
can be utilized to offset future taxable income. As a result of the ownership
change at CLI at the date of the Merger, a portion of CLI's net operating loss
carryforward generated prior to the Merger will never be available to offset
future taxable income due to the effect of the annual limitation and the
expiration of the related net operating losses.
At July 31, 1999, the Company had total domestic net operating loss
carryforwards of $113,948 ($40,530 and $73,418 for VTEL and CLI, respectively).
The portions of these carryforwards available for utilization during fiscal 2000
(in consideration of the annual limitations) are $83,048. Additional net
operating losses created prior to the changes in control of $2,574 become
available in each subsequent year and accumulate if not used until such net
operating losses expire.
Due to the uncertainty surrounding the timing of realizing the bene-
its of its favorable tax attributes in future tax returns, the Company has
placed a valuation allowance against its net deferred tax asset. Accordingly, no
deferred tax benefits have been recorded for the years ended July 31, 1997,
1998, and 1999.
13. COMMITMENTS AND CONTINGENCIES
Lease Commitments
VTEL leases furniture and equipment, manufacturing facilities and
office space under noncancelable leases which expire at various dates through
2013. Certain leases obligate VTEL to pay property taxes, maintenance and repair
costs.
46
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Future minimum lease payments under all operating leases as of July 31, 1999
were as follows:
FISCAL YEAR ENDING:
2000 $ 7,289
2001 7,115
2002 6,647
2003 5,830
2004 5,435
Thereafter 32,380
-----------
$ 64,696
===========
Total rent expense under all operating leases for the years ended
July 31, 1997, 1998 and 1999 was $4,601, $4,301 and $4,520 respectively.
During the year ended July 31, 1998, the Company completed the planned
elimination of duplicate headquarter facilities by terminating the lease for the
former CLI headquarters. The landlord paid the Company a $1,800 termination fee
which is recorded (net of termination expenses) as Other Income in the
accompanying Statement of Operations.
In connection with the acquisition of certain of the assets of the
videoconferencing division of one of its German resellers, (see Note 3), the
Company entered into a five year licensing agreement pursuant to which the
Company will pay a license fee equal to 4% of the revenues generated by the
acquired assets with a minimum annual fee of $281 to $393 and a maximum annual
fee of $786.
Contingencies
The Company is the defendant or plaintiff in various actions which
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, results of operation or cash flows.
The Company was previously involved in a legal dispute with Philips
Electronics North America Corporation ("Philips"). On May 25, 1999, the Company
announced a compromise settlement agreement between Philips and CLI. The
settlement agreement, valued at less than $900, stipulates payment by CLI in the
form of cash and a future payment under a note of $250 (See Note 8), as well as
warrants for VTEL common stock. These amounts had previously been accrued as
part of the reserve for contingent liabilities related to the merger (See Note
1). In addition, the settlement mutually releases each party from all future
claims, demands and causes of action.
14. SEGMENT INFORMATION
In 1999, the company adopted SFAS 131. 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 videoteleconferencing) 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 described in Note 2.
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 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 years
ended July 31, 1999:
47
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
SERVICES/
PRODUCTS OTHER CORPORATE/OTHER TOTAL
-------- --------- --------------- -----
FOR THE YEAR ENDING JULY 31, 1999
Revenues from unaffiliated customers $ 105,520 $ 46,082 $ - $ 151,602
Depreciation and amortization 168 1,884 9,745 11,797
Operating income (loss) 50,353 16,885 (82,803) (15,565)
FOR THE YEAR ENDING JULY 31, 1998
Revenues from unaffiliated customers $ 134,775 $ 44,909 $ - $ 179,684
Depreciation and amortization 219 932 7,719 8,870
Operating income (loss) 68,964 15,993 (82,178) 2,779
FOR THE YEAR ENDING JULY 31, 1997
Revenues from unaffiliated customers $ 150,791 $ 40,232 $ - $ 191,023
Depreciation and amortization* - - 12,667 12,667
Operating income (loss) 63,560 11,142 (118,973) (44,271)
* The company deemed it impracticable to determine depreciation and
amortization related to its reportable segments for the year ending July 31,
1997.
Revenue and long-lived assets related to operations in the United
States and foreign countries for the three years ended July 31, 1999 are
presented below. Revenues generated between foreign geographic locations have
historically been insignificant.
FOR THE YEARS ENDED JULY 31,
1997 1998 1999
Revenue from unaffiliated customers
United States $ 180,811 $ 163,381 $ 136,666
Foreign 10,212 16,303 14,936
Long-lived assets at the end of year
United States $ 36,104 $ 42,116 $ 51,806
Foreign 1,133 1,487 3,258
48
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
15. QUARTERLY INFORMATION (UNAUDITED)
The following tables contain selected unaudited consolidated statement
of income and earnings per share data for each quarter of fiscal year 1999.
FOR THE THREE MONTHS ENDED
OCT. 31, JAN 31, APRIL 30, JULY 31,
1998 1999 1999 1999
REVENUES:
Products $ 25,888 $ 26,386 $ 25,133 $ 28,113
Services and other 11,052 11,369 10,983 12,678
----------- ----------- ---------- ------------
Total revenues 36,940 37,755 36,116 40,791
----------- ----------- ---------- ------------
COST OF SALES:
Products 13,280 14,483 12,037 15,367
Services and other 7,348 7,485 6,362 8,002
----------- ----------- ---------- ------------
Total cost of sales 20,628 21,968 18,399 23,369
----------- ----------- ---------- ------------
Gross margin 16,312 15,787 17,717 17,422
----------- ----------- ---------- ------------
OPERATING EXPENSES:
Selling, general and administrative 18,503 15,916 13,254 13,182
Research and development 5,236 4,638 4,427 3,650
Amortization of intangible assets 252 259 379 381
Merger and other (235)
Restructuring expense - 2,915 203 (38)
----------- ----------- ---------- ------------
Total operating expenses 23,991 23,728 18,263 16,940
----------- ----------- ---------- ------------
Income (loss) from operations (7,679) (7,941) (546) 482
----------- ----------- ---------- ------------
OTHER INCOME (EXPENSE):
Interest income 288 248 165 91
Interest expense and other (48) (251) (193) (231)
----------- ----------- ---------- ------------
240 (3) (28) (140)
----------- ----------- ---------- ------------
Net income (loss) before provision
For income taxes (7,439) (7,944) (574) 342
Provision for income taxes - - - 50
----------- ----------- ---------- ------------
NET INCOME (LOSS) $ (7,439) $ (7,944) $ (574) $ 392
=========== =========== ========== ============
BASIC AND DILUTED INCOME (LOSS) PER SHARE: $ (0.32) (0.35) (0.02) 0.02
=========== =========== ========== ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 23,085 22,987 23,734 24,235
=========== =========== ========== ============
Diluted 23,085 22,987 23,734 24,919
=========== =========== ========== ============
* *
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINAN-
CIAL DISCLOSURES
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the captions
"Election of Directors" will be filed with the Company's Definitive Proxy
Statement pursuant to Regulation 14A on or before November 26, 1999.
ITEM 11. EXECUTIVE COMPENSATION
In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the caption
"Executive Compensation" will be filed with the Company's Definitive Proxy
Statement pursuant to Regulation 14A on or before November 26, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the caption
"Security Ownership of Certain Beneficial Owners and Management" will be filed
with the Company's Definitive Proxy Statement pursuant to Regulation 14A on or
before November 26, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the caption "Certain
Relationships and Transactions" will be filed with the Company's Definitive
Proxy Statement pursuant to the regulation 14A on or before November 26, 1999.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
(a)(1) The financial statements filed as part of this Report at Item 8 are
listed in the Index to Financial Statements and Financial Statement
Schedules on page 24 of this Report.
(a)(2) The financial statement schedule filed as part of this Report at Item 8
is listed in the Index to Financial Statements and Financial Statement
Schedules on page 24 of this Report.
(a)(3) The following exhibits are filed with this Annual Report on Form 10-K:
50
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
2.1 Agreement and Plan of Merger and Reorganization dated as of January 6, 1997
by and among VTEL, VTEL-Sub, Inc. and CLI (incorporated by reference to the
Exhibit 99.1 of VTEL's Report on Form 8-K dated January 6, 1997).
3.1 Fourth Amended Restated Certificate of Incorporation (incorporated by
reference the Exhibit 3.1 to the Company's quarterly report form 10-Q for
the period ended June 30, 1993.)
3.2 Amendment to Fourth Amended and Restated Certificate of Incorporation, as
filed on May 27, 1997 with the Secretary of State of Delaware (incorporated
by reference the Exhibit 3.1 to the Company's Annual Report on form 10-K
for the period ended July 31, 1997.)
3.3 Bylaws of the Company as adopted by the Board of Directors of the Company
effective as of June 11, 1989 (incorporated by reference to Exhibit 3.3 to
the Company's Registration Statement on Form S-1, File No. 33-45876, as
amended).
3.4 Amendment to Bylaws of the Company as adopted by the Board of Directors of
the Company effective as of April 28, 1992 (incorporated by reference to
Exhibit 19.1 to the Company's Quarterly Report on Form 10-Q for the three
months ended March 31, 1992).
3.5 Amendment to the Bylaws of the Company as adopted by the Board of Directors
of the Company effective as of July 10, 1996 (incorporated by reference to
Exhibit 4.5 to the Company's Current Report on Form 8-K dated July 10,
1996).
4.1 Specimen Certificate for the Common Stock (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-1, File No.
33-45876, as amended).
4.2 Rights Agreement dated as of July 10, 1996 between VTEL Corporation and
First National Bank of Boston, which includes the form of Certificate of
Designations for Designating Series A Preferred Stock, $.01 par value, the
form of Rights Certificate, and the Summary of Rights to Purchase Series A
Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated July 10, 1996).
10.1 License Agreement, dated as of November 7, 1990, between Universite de
Sherbrooke, as Licenser, and the Company, as Licensee (incorporated by
reference to Exhibit 10.5 to the Company's Registration Statement on Form
S-1, File No. 33-45876, as amended).
10.2 VideoTelecom Corp. 1989 Stock Option Plan, as amended (incorporated by
reference to Exhibit 4.1 to the Company's Registration on Form S-8, File
No. 33-51822).
51
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
10.3 Form of VideoTelecom Corp. Nonqualified Stock Option Agreement
(incorporated by reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1, File No. 33-45876, as amended).
10.4 Form of VideoTelecom Corp. Incentive Stock Option Agreement (incorporated
by reference to Exhibit 10.17 to the Company's Registration Statement on
Form S-1, File No. 33-45876, as amended).
10.5 Distributor Agreement dated January 8, 1990, between US WEST Communications
Services, Inc. and the Company (incorporated by reference to Exhibit 10.18
to the Company's Registration Statement on Form S-1, File No. 33-45876, as
amended).
10.6 Purchase Agreement effective October 1, 1990, between GTE Service
Corporation and the Company, as amended July 1, 1991 (incorporated by
reference to Exhibit 10.19 to the Company's Registration Statement on Form
S-1, File No. 33-45876, as amended).
10.7 Distribution Agreement, made and entered into November 1, 1991, by and
between Microsoft Corporation and the Company (incorporated by reference to
Exhibit 10.22 to the Company's Registration Statement on Form S-1, File No.
33-45876, as amended).
10.8 VideoTelecom Corp. 1992 Director Stock Option Plan (incorporated by
reference to Exhibit 4.1 to the Company's Registration on Form S-8, File
No. 33-51822).
10.9 VideoTelecom Corp. Employee Stock Purchase Plan (incorporated by reference
to Exhibit 4.1 to the Company's Registration on Form S-8, File No.
33-51822).
10.10 Lease agreement, executed by Waterford HP, Ltd. on June 14, 1994, as
Landlord, and the Company, as Tenant, together with First Amendment of
Lease Agreement between Waterford HP, Ltd., as Landlord, and the Company,
as Tenant, dated November 2, 1994, Second Amendment of Lease Agreement
between Waterford HP, Ltd., as Landlord, and the Company, as Tenant, dated
February 1, 1995, and Net Profits Agreement, executed between Waterford
HP, Ltd. on June 14, 1994 and the Company (incorporated by reference to
Exhibit 10.17 to the Company's 1994 Annual Report on Form 10-K).
10.11 Subscription Agreement dated June 14, 1995 by and between VTEL
Corporation, Accord Video Telecommunications, Ltd., Nizanim Fund (1993)
Ltd., the "Star Entities", Manakin Investments BV, Messrs. Gideon
Rosenfeld and Sigi Gavish, and Eduardo Shoval (incorporated by reference
to Exhibit 10.19 to the Company's 1995 Annual Report on Form 10-K. The
schedules referred to in the agreement have been omitted but will be
furnished to the Securities and Exchange Commission upon request).
10.12 Amendment to the VideoTelecom Corp. 1989 Stock Option Plan and the 1992
Director Stock Option Plan (the terms of which are incorporated by
reference to the Company's 1996 Definitive Proxy Statement).
52
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
10.13 The VTEL Corporation 1996 Stock Option Plan (the terms of which are
incorporated by reference to the Company's 1995 Definitive Proxy
Statement).
10.14 Amendment to the VTEL Corporation 1996 Stock Option Plan (the terms of
which are incorporated by reference to the Company's Joint Proxy Statement
filed on April 24, 1997).
10.15 Compression Labs, Incorporated 1980 Stock Option Plan - the ISO Plan
(incorporated by reference to the Annual Report on Form 10-K of
Compression Labs, Inc. for the year ended December 31, 1994).
10.16 Revised forms of Incentive Stock Option and Early Exercise Stock Purchase
Agreement used in connection with the issuance and exercise of options
under the ISO Plan (incorporated by reference to the Registration
Statement on Form S-8 of Compression Labs, Inc. filed on June 6, 1994).
10.17 Consulting and separation agreement between Compression Labs, Incorporated
and John E. Tyson dated February 16, 1996 (incorporated by reference to
the Annual Report on Form 10-K of Compression Labs, Inc. for the year
ended December 31, 1995).
10.18 Lease Agreement, dated January 30, 1998, between 2800 Industrial, Inc.,
Lessor and VTEL Corporation, Lessee (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the three months
ended April 30, 1998).
10.19 First Amendment, dated March 11, 1998, to Lease Agreement dated January
30, 1998, between 2800 Industrial, Inc., Lessor and VTEL Corporation,
Lessee (incorporated by reference to Exhibit 10.2 to the Company's
` Quarterly Report on Form 10-Q for the three months ended April 30, 1998).
10.20 The VTEL Corporation 1998 Restricted Stock Plan (the terms of which are
incorporated by reference to the Company's 1998 Definitive Proxy
Statement)
10.21 Loan and Security Agreement, dated May 5, 1999, between Silicon Valley
Bank and Comerica Bank-Texas, as Creditors, and the Company, as Borrower.
53
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
10.22 Change-in-Control Agreements with members of senior management of the
Company (incorporated by reference to exhibit 10.21 to the Company's
Annual Report on Form 10-K for the year ended July 31, 1999)
10.22 (a) Stephen L. Von Rump
10.22 (b) Rodney S. Bond
10.22 (c) Dennis M. Egan
10.22 (d) Vinay Goel
10.22 (e) Steve F. Keilen
10.22 (f) F.H. (Dick) Moeller
10.22 (g) Ly-Huong T. Pham
10.22 (h) Michael J. Steigerwald
10.22 (i) Bob R. Swem
10.22 (j) Judy A. Wallace
21.1 - List of Subsidiaries
23.1 - Consent of PricewaterhouseCoopers LLP.
27.1 - Financial Data Schedule (filed electronically only)
- ---------------
(B) Reports on Form 8-K:
Press release filed on October 1, 1999(incorporated by reference
to Form 8-K filed on October 1, 1999).
(C) See subitem 14(a)(3) above.
(D) See subitem 14(a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ Rodney S. Bond
----------------------------------
Rodney S. Bond
CHIEF FINANCIAL OFFICER,
VICE PRESIDENT-FINANCE,
SECRETARY AND ASSISTANT TREASURER
54
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Stephen L. Von Rump President and Director October 29, 1999
- ------------------------------------------------ (Principal Executive Officer) ------------------------
Stephen L. Von Rump
/s/ Rodney S. Bond Chief Financial Officer, October 29, 1999
- ------------------------------------------------ Vice President - Finance, ------------------------
Rodney S. Bond Secretary and Assistant Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Eric L. Jones Director October 29, 1999
- ------------------------------------------------ ------------------------
Eric L. Jones
/s/ Max Hopper Director October 29, 1999
- ------------------------------------------------ ------------------------
Max Hopper
/s/ Gordon Matthews Director October 29, 1999
- ------------------------------------------------ ------------------------
Gordon Matthews
/s/ F.H. (Dick) Moeller Chairman of the Board October 29, 1999
- ------------------------------------------------ ------------------------
F.H. (Dick) Moeller
/s/ Dick Snyder Director October 29, 1999
- ------------------------------------------------ ------------------------
Dick Snyder
/s/ T. Gary Trimm Director October 29, 1999
- ------------------------------------------------ ------------------------
T. Gary Trimm
55
VTEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
- -------------------------------------------------------------------------------------------------------------------
PROVISION FOR WRITE-OFF OF
BALANCE AT DOUBTFUL UNCOLLECTIBLE BALANCE AT
BEGINNING ACCOUNTS ACCOUNTS END OF
OF PERIOD RECEIVABLE RECEIVABLE YEAR
(IN THOUSANDS)
Accounts receivable -
Allowances for
Doubtful accounts
Year ended July 31, 1997 7,875 6,086 (3,239) 10,722
Year ended July 31, 1998 10,722 (119) (1,156) 9,447
Year ended July 31, 1999 9,447 278 (8,502) 1,223
56