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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
( ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
( X ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM JANUARY 1, 1996 TO JULY 31, 1996
Commission file number 0-20008
VTEL CORPORATION
A Delaware Corporation IRS Employer ID No. 74-2415696
108 Wild Basin Road
Austin, Texas 78746
(512) 314-2700
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 12,397,839 shares of the registrant's Common
Stock held by nonaffiliates on October 1, 1996 was approximately $101,513,506.
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 25, 1996 there were 13,901,073 shares of the registrant's Common
Stock, $.01 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
A list of all Exhibits to this Annual Report on Form 10-K is located at
pages 51 through 56.
PART I.
ITEM 1. BUSINESS
GENERAL
The Company designs, manufactures and markets multi-media conferencing systems.
The Company's systems integrate traditional video and audio conferencing with
additional functions, including the sharing of PC software applications and the
transmission of high-resolution images and facsimiles. Through the use of the
Company's multi-media conferencing systems, users are able to replicate more
closely the impact and effectiveness of face-to-face meetings. The Company's Pen
Pal GraphicsTM and AppsViewTM user interfaces make its multi-media conferencing
systems simple to use. The Company's systems are built upon a system platform
which is based on industry-standard, PC-compatible open hardware and software
architecture. By leveraging this open architecture design, the Company is able
to integrate into the videoconference PC-compatible hardware and software
applications which allow users to customize the systems to meet their unique
needs. The PC-architecture also provides a natural pathway to connect the
Company's videoconferencing systems onto local area networks (LAN's) and wide
area networks (WAN's) thereby leveraging the rapidly expanding network
infrastructures being deployed in organizations throughout the world. Also
complementing this open architecture is the Company's compliance with emerging
industry video standards. The Company's open architecture and compliance with
data and telecommunications standards permit the incorporation of new functions
through software upgrades, thereby extending the useful life of the user's
investment.
The cornerstone of the Company's business strategy is to identify end-user
customer markets that can most benefit from the advanced functionality of the
Company's multi-media conferencing systems and to focus a substantial portion
of its sales and marketing efforts on these targeted markets. Consistent with
this strategy, the Company has targeted the education, government, health
care and certain segments of the commercial markets. VTEL distributes its
systems almost exclusively through third-party resellers which include major
telecommunications providers such as Ameritech, ATS, GTE, MCI,
Southwestern Bell, Sprint, US West and other value-added resellers. The
Company has built an extensive marketing and sales organization to support its
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 the
Company's targeted market strategy. Since the Company's inception, it has sold
over 6,000 conferencing systems and multipoint control units.
In November 1995, the Company completed the acquisition of certain
assets and a specified work force of the Integrated Communications Systems
Group ("ICS") of Peirce-Phelps, Inc. (the "ICS Transaction"). As part
of Peirce-Phelps, ICS was a value-added reseller of systems manufactured by
several videoconferencing manufacturers, including the Company, and also
provided integration, installation and maintenance services to certain of the
end-users of these manufacturers. The completion of the acquisition allows the
Company to significantly enhance its ability to support the Company's resellers'
abilities to offer systems integration, installation and end-user support to the
ultimate purchaser of the Company's products, thereby allowing the resellers to
more effectively provide an essential part of the services that are integral to
the purchase of the Company's products.
The Company's executive offices are located at 108 Wild Basin Road, Austin,
Texas 78746, and its telephone number at such offices is (512) 314-2700.
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INDUSTRY BACKGROUND
Videoconferencing enables users at remote locations to hold face-to-face
meetings through the use of video and audio telecommunications, eliminating
travel time and expense. A videoconference entails the transmission of video and
audio signals between two or more locations over a digital telephone connection.
A video image contains a large amount of information. In order to transmit that
image over digital telephone lines, the video and audio signals must be
digitized and compressed without substantially reducing the information content.
Improved compression algorithms have increased video and audio quality while
reducing transmission costs by allowing more information to be sent over lower
capacity digital telephone lines. This improved quality and lower cost of both
systems and transmission has made videoconferencing systems more attractive to a
broader group of users. Also contributing to the wider use of videoconferencing
is the increased availability of switched (''dial-up'') digital telephone
service which allows a videoconference to be initiated with nearly the ease of a
normal telephone call. In the last few years, switched digital telephone service
has become increasingly accessible. Growth in the availability of Integrated
Services Digital Network (''ISDN'') lines for basic rate service is also
increasing in the U.S. In the absence of switched services, videoconferencing
users must have dedicated telephone circuits installed.
As digital networks have been built and capacity has increased, the price of
switched digital circuits has decreased significantly, thereby lowering the cost
of using videoconferencing systems. In addition to the lower cost of using
videoconferencing systems, the cost of the videoconferencing systems themselves
has decreased due to the availability and lower cost of components, including
the increased use of very large scale integration semiconductor technology.
Videoconferencing systems are also becoming simpler to use. In the past,
videoconferencing systems required trained operators and specialized dedicated
conference rooms. Current videoconferencing systems can be configured as ''roll-
about'' room systems that can be used without the need for trained operators or
special room requirements. Large-group systems, which are designed for groups of
five or more individuals, are typically priced at $20,000 and above. Lower cost
and improved ease of use has also led to the creation of the small-group systems
market segment, addressed primarily by systems priced below $20,000 which are
designed for use by two to five individuals. In addition, a personal desktop
market segment is emerging, providing audio and video conference capabilities
as an adjunct to personal computers at prices ranging from $1,000 to $3,000.
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 for interactive video communication (commonly known as the ''H.320
standard'') for coding and decoding audio and video images for transmission over
digital networks at data transmission rates from 64 Kbps to 2.048 Mbps and for
the T.120 standard which provides for interoperability in still frame,
annotation and data file transmission. In February 1992, the Company began
shipping its software implementation of the H.320 standard. Since 1992, the
Company's primary competitors have shipped products complying with the H.320
standard, and the Company and its competitors have demonstrated video and
audio interoperability among the Company's products and competing products.
The Company plans to offer T.120 protocols and applications for its products.
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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. The Company believes 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.
AGREEMENTS WITH INTEL CORPORATION
In August 1993, Intel Corporation ("Intel") and the Company announced a
strategic relationship designed to develop and market a compatible family of PC-
based, video-assisted teleconferencing products. As a part of this relationship,
on October 25, 1993, the Company entered into a Development Agreement with
Intel, pursuant to which the companies have engaged in a series of development
efforts with respect to video compression software as well as other video
technology such as processes and designs. The Development Agreement contains
certain provisions for licensing agreements and royalties between the two
companies for the use of the technology developed under the Development
Agreement. The initial term of the Development Agreement will continue until
December 31, 1996 and will automatically renew thereafter for successive terms
of one year unless written notice is given by either party at least six months
prior to the expiration of the initial term or any successor term. As part of
the Development Agreement, Intel advanced the Company $3.0 million for
reimbursement of research and development costs to be incurred by the Company in
performing the work specified in the Development Agreement. The Company is
required to report periodically to Intel the amount of costs incurred which
qualify for reimbursement from the advance. As of July 31, 1996, the Company had
incurred approximately $2.1 million of research and development costs related to
the Development Agreement. There can be no assurance that the remaining
approximately $900,000 of the initial $3.0 million advance will be used for the
reimbursement of future research and development expenditures. As of July 31,
1996, the Company had no research and development activities in process or
planned related to the Development Agreement.
In conjunction with the Development Agreement, the Company and Intel also
entered into a Stock Purchase and Warrant Agreement (the "Stock Agreement")
whereby the Company sold 970,201 shares of unregistered Common Stock
(which represented 10% of the Company's then outstanding Common Stock after
the sale), and a warrant for the purchase of an additional 10% of the Company's
Common Stock, or 1,199,124 shares, for a purchase price of $7.0 million.
In conjunction with Intel's investment in the Company, the Company and Intel
entered into an Investor Rights Agreement (the ''Investor Rights Agreement'')
which granted Intel certain rights as an investor in the Company. In June
1995, the Company sold an additional 51,898 shares of unregistered Common
Stock to Intel for $396,000 pursuant to Intel's contractual right, since
terminated, to acquire such shares in order to maintain its percentage
ownership interest in the Company pursuant to the Investor Rights Agreement.
In September 1995, the Company and Intel entered into a new agreement
which modified the Investor Rights Agreement and the Stock Agreement. The
modified agreement also resulted in Intel agreeing to terminate its rights
(other than registration rights) specified in the Investor Rights Agreement
between the Company and Intel. In October 1995, Intel delivered notice of its
intent to exercise its warrant to purchase 1,199,124 shares of the Company's
Common Stock at an exercise price of $11.50 per share. Pursuant to the modified
agreement, Intel agreed to sell to the Company concurrently with the exercise of
the warrant, and the Company agreed to purchase from Intel, 771,464 shares of
the Company's Common Stock at a price of
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$17.875, the closing price of the Company's Common Stock on the day immediately
preceding the date in which Intel delivered notice of its intent to exercise the
warrant. During the six months ended July 31, 1996, the Company
completedexecuted the warrant exercise and related stock redemption transaction
such that Intel increased its ownership of the Company's Common Stock by
a427,660 shares. Intel possesses rights to require the Company to register the
shares under the Securities Act of 1933, as amended.
CORPORATE STRATEGY
The Company's primary focus is on large- and small-group conferencing
systems which provide high functionality tailored to the needs of markets
targeted by the Company. The following are the components of the Company's
corporate strategy.
PRODUCT DIFFERENTIATION. THE COMPANY'S STRATEGY IS TO DIFFERENTIATE ITS
PRODUCTS FROM THE PRODUCTS MARKETED BY ITS COMPETITORS. KEY ELEMENTS OF THIS
STRATEGY ARE AS FOLLOWS:
Open Architecture. Each of the Company's current multi-media conferencing
systems is 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 the Company 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. The Company's PC-based systems platforms are field-upgradable and
easily accommodate software upgrades, thereby extending the useful life of the
customer's investment and providing the Company with incremental revenues
through these upgrade sales.
Consistent Operating Platform. The Company introduced the Enterprise Series
product family in late 1995 and an important characteristic of each product
in the family is the consistent use of Microsoft Windows 95(R) as the operating
system. 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. Windows 95(R) supports a wide variety of
software and hardware applications that can be integrated into a videoconference
as stand-alone features or as shared applications by videoconferencing users
through the Company's computer collaboration capability.
Multi-media Functionality. The Company's conferencing systems provide a wide
range of functions that enable users to exchange information and interact
through a variety of media and, as such, more closely replicate the impact and
effectiveness of face-to-face meetings. These functions, referred to by the
Company as MediaConferencingTM, combine video and audio, document exchange,
shared whiteboard, computer application sharing and a form of video electronic
mail. The Company strives to make this functionality easily accessible to the
user. The Company's Pen Pal GraphicsTM and AppsViewTM user interfaces are
designed to make the Company's group systems easy to use. AppsViewTM, which was
introduced in early 1995 and is now fully integrated into all of the Company's
products, is a customizable user interface that runs on the Microsoft Windows
95(R) operating system. AppsViewTM integrates all application functions under a
set of software-defined icons which can be customized by the user to meet
specific needs.
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Standards Compliance. The Company believes the continued adoption and
implementation of industry standards for interoperability are critical to the
continued growth of the videoconferencing market. All of the Company's
conferencing systems and multipoint products comply with the H.320 and ITU-T
standards for group systems manufactured by different vendors. The Company
believes that it was the first manufacturer in the United States to deliver to
its users products which were fully compliant with the H.320 standard. The
Company's platforms also comply with an extensive array of additional
communications and computer industry standards, both formal and de facto (such
as ISA, Intel x86, MS-DOS and MS-Windows), involving video, audio, graphics,
communications, computers and peripherals.
The T.120 standard is an ITU-T series of recommendations for multipoint data and
graphics protocols. The highest level of the T.120 specifications, or the
application level, provides for interoperability in still frame, annotation, and
data file transmission. The Company plans to offer T.120 protocols and
applications for its AppsView(TM) operating environment and Windows 95(R) -based
products across the entire VTEL product line.
The Company has been an active participant on the appropriate ITU-T committees
and intends 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 the
Company's products provides a natural pathway to connect the Company's
videoconferencing systems onto local area networks (LAN's) and wide area
networks (WAN's); thereby leveraging the rapidly expanding network
infrastructures being deployed in organizations throughout the world. The
Company believes 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. To
support centralized management of large and widely dispersed videoconferencing
networks, the Company announced the development of a product called SmartNet
which will provide the capabilities to monitor call status, equipment usage, to
perform diagnostics, to schedule conferences as well as to provide security all
from a single location within the network. The Company believes that
development of network integration and network management capabilities will be
an important success factor to the Company's strategy.
Service and Systems Integration Capabilities. The Company determined that it
would be advantageous to establish the capacity to offer installation,
integration and support services to resellers of its products, which could be
resold by the resellers to the ultimate purchasers of the Company's products. By
enhancing the Company's resellers' abilities to offer systems integration,
installation and end-user support to the ultimate purchasers of the Company's
products, the Company believes that it would enhance its resellers' ability to
sell the Company's conferencing systems as well as generate additional revenues
to the Company from the sales of such services to the Company's resellers.
In November, 1995 the Company completed the ICS Transaction (see "Business -
General"). The completion of the ICS Transaction allows the Company to
significantly enhance its ability to support the Company's resellers' abilities
to offer systems integration, installation and end-user support to the ultimate
purchaser of the Company's products, thereby allowing the resellers to more
effectively provide an essential part of the services that are integral to the
purchase of the Company's products.
6
TARGETED MARKETS. The cornerstone of the Company's business strategy is
to identify end-user customer markets that can most benefit from the advanced
functionality of the company's multi-media conferencing systems, and to focus a
substantial portion of its sales and marketing efforts on these targeted
markets. Consistent with this strategy, the Company has targeted the education,
government, health care and certain segments of the commercial markets. The
Company intends to focus its product strategy in its targeted markets in which
the Company is currently the leader and in other markets in which the Company
believes it has the highest potential for increasing its market share.
In order to deliver the highest level of customer support and to sustain the
successful strategy of focusing on key targeted markets, the Company reorganized
in 1996 into four Customer Business Units (CBU's). These CBU's support customer
segments in education, government, health care, service and commercial markets.
The objective of the CBU organzation is to align closely with the customer
segments in all areas of support ranging from product marketing, product
development and service, to quality control and customer satisfaction. Through
this close coupling with the customer segments, the Company believes that it
will be able to rapidly respond to customers with customized solutions that
match unique customer requirements.
DISTRIBUTION STRATEGY. The company relies on third parties to sell, install and
support its videoconferencing systems in an effort to leverage the sales forces
of the resellers which provide telecommunications and support services to
potential purchasers of videoconferencing equipment. The Company has established
relationships with many of the leading telecommunications providers in the
United States, including Ameritech, GTE, MCI, Southwestern Bell, Sprint, and US
West. Consistent with its focus on its targeted market segments, the Company
works with a number of value added resellers ("VARS") that specialize in
specific applications, geographic areas and markets such as education, health
care, project management and government procurement. The Company has built an
extensive marketing and sales organization to support its 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 the Company's targeted market
strategy.
PRODUCTS
The Company offers a complete line of interoperable multi-media conferencing
systems. The Company differentiates its systems from competitive products by a
high level of advanced functionality, such as graphics annotation and access to
PC-based software and hardware peripherals. Because all VTEL systems are based
on open PC architecture, and most functionality is contained in software, system
upgrades are generally accomplished through software diskettes sent by mail,
enabling customers to protect their investment. VTEL systems may be configured
with local area network ("LAN") connections so that data and presentations may
be created at an individual PC workstation, stored on the LAN and retrieved by
the videoconferencing 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. The Company's multi-media
conferencing systems are based upon one of three platforms, either its
MediaMax(TM) platform, its S-Max(TM) platform, or its new Lynx platform,
and are offered in a variety of configurations designed to meet the
conferencing needs of large groups, small groups and individuals.
MEDIAMAX(TM) PLATFORM. The MediaMax(TM) is the hardware platform upon
which the Company's high-end systems are built. It is a PC-based, open
architecture system which may be adapted with hardware peripherals and software
to meet specific market applications, such as education and health care, and is
designed to meet the videoconferencing needs of large and small groups.
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The MediaMax(TM) platform contains the hardware and software necessary to
closely replicate the impact and effectiveness of face-to-face meetings. These
functions, depending on system configuration, include video and audio
compression and coding, multiple video and audio inputs, video switching, audio
echo cancellation, still frame graphics and annotation and sharing of live PC-
based software applications and hardcopy facsimiles between endpoints. The
MediaMax(TM) PC hardware is based on the Intel microprocessor and contains
random access memory and hard drive memory capacity consistent with high-end PC
platforms. The MediaMax(TM) chassis also contains open PC card slots for user
peripherals.
The MediaMax(TM) platform supports both the H.320 standard for video and
audio compression and the Company's proprietary video algorithm called Blue
Chip(TM), which provides video quality that exceeds the international standard
when connected with other VTEL systems. VTEL systems can connect to any system
which adheres to the H.320 standard. The MediaMax(TM) platform operates over
digital communications bandwidths transmitting at data rates from 56 to 1,544
Kbps in point-to-point and multipoint conferences. The MediaMax(TM) platform is
capable of transmitting and receiving video streams at up to 30 frames per
second when configured with the QuickFrame(TM) option. QuickFrame(TM), at
bandwidths above 128 Kbps, provides high video quality and is particularly well-
suited for high-end health care and education applications. MediaMax(TM)
connections can be made over public, dial-up digital networks or private,
digital dedicated facilities. The transmission can be by any digital medium,
such as copper, fiber, satellite or microwave.
The MediaMax(TM) platform is integrated with cameras, microphones, speakers,
monitors, cabinets, software and network connection devices tailored to meet
each customer's application requirements. Configurations of the MediaMax(TM)
platform include:
. Leadership Conferencing Systems. Introduced in 1995, Leadership Conferencing
or "LC" systems are VTEL's high-end single and dual monitor systems which are
based on the hardware architecture of the MediaMax(TM) platform, but the
software platform is built upon Microsoft's Windows 95(R) operating system.
Featuring Pentium microprocessors with 16 megabytes of RAM, the systems
provide the software-driven user interface developed by VTEL called
AppsView(TM). Through the added functionality that Windows 95(R) provides, the
"LC" features user interconnection into LAN's and the Internet and the
capability of using third party software packages designed to operate on
Windows 95(R) (TM) as an element of the videoconference. LC systems are
capable of running on bandwidths from 56Kbps to full T1 rates. "LC" systems
have suggested list prices of $55,000 to $72,000.
. F.R.E.D. Systems. The F.R.E.D. ("Friendly Rollabout Engineered for Doctors")
product was introduced in 1995 and is designed for specific application in a
medical environment. Based on the MediaMax(TM) platform, the F.R.E.D. system
may incorporate health care related peripherals such as an otoscope and an
electronic sphygmomanometer and features a 15 inch color monitor mounted on
top of an upright cabinet, scrubbable stainless-steel surfaces, large lockable
casters, an optional articulated camera arm assembly, a touch-screen user
interface and direct side-panel access to the video and audio ports. The
F.R.E.D. system has a suggested list price of $69,500.
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LYNX(TM) PLATFORM. VTEL'S Lynx(TM) is the hardware and software platform
for a mid-range family of products designed to meet the needs of large
groups, small groups and individuals. The Lynx(TM) platform is a PC-based,
open architecture videoconferencing system configured around an Intel
Pentium(TM) PC chassis containing the lynx(TM) video-audio processing boardset.
The Lynx(TM) system contains, in addition to the standard internal disk
drive and 3.5 inch floppy drive, a 4X-speed CD-ROM drive as well as an expansion
chassis which contains all the audio and video input/output ports. The Lynx(TM)
platform utilizes the Microsoft Windows 95(R) operating system as its
software platform and incorporates the AppsView(TM) software user interface and
control system. Through AppsView(TM), the user controls all conference
functions with on-screen software icons which may be customized for each user or
application. The Lynx(TM) platform contains open PC card slots for
application-specific peripherals.
The Lynx(TM) platform supports the H.320 industry standards for video and audio
compression and is interoperable with any other system supporting the H.320
standard. The Lynx(TM) platform is also capable of supporting the T.120 suite
of standards as applications become available. The platform operates over
digital communication bandwidths transmitting at data rates from 56 to 512 Kbps
in point-to-point and multipoint conferences. Lynx(TM) connections can be made
over public dial-up digital networks or private digital dedicated facilities.
The Lynx(TM) platform also contains many of the same advanced features as the
MediaMax(TM) platform. Video, audio, shared whiteboard and graphics annotation
are all supported on the Lynx(TM) platform. The Lynx(TM) also incorporates
Intel's ProShare(TM) Premier personal conferencing software to provide
collaborative computing capability. Cameras, monitors, microphones, speakers and
software are integrated in various combinations to meet each user's
requirements.
Configurations of the Lynx(TM) platform include the Company's Team
Conferencing(TM) Systems. The Team Conferencing(TM) or "TC" systems are single
or dual monitor systems built on the Lynx(TM) platform and designed to provide
mid-range products for users seeking high quality video and audio and multi-
media conferencing capability in a small group setting. 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
95(R) 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 Windows 95(R) as part of the videoconference. The "TC"
systems have suggested list prices of $22,995 to $46,995.
S-MAX(TM) PLATFORM. VTEL's S-Max(TM) product series, introduced in
late 1993, is the hardware and software platform for a low-cost family of
products designed to meet the needs of small groups and individuals. The
S-Max(TM) platform is a pc-based, open architecture videoconferencing system
configured around an intel pc chassis containing the s-maxtm video-audio
processing boardset. The S-Max(TM) system utilizes the Company's
AppsView(TM) user interface. The S-Max(TM) platform contains open PC
card slots for application-specific peripherals.
The S-Max(TM) platform supports the H.320 standard for video and audio
compression and can connect to any system which adheres to the H.320 standard.
The S-Max(TM) platform operates over digital communications bandwidths
transmitting at data rates from 56 to 384 Kbps in point-to-point and multipoint
conferences. S-Max(TM) connections can be made over public dial-up digital
networks or private digital dedicated facilities .
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The S-Max(TM) platform also contains many of the same advanced features as the
MediaMax(TM)and Lynx(TM) platforms including video, audio, shared whiteboard,
graphics annotation and collaborative computing. The ProShare(TM) Premier
application software package from Intel is integrated into the S-Max(TM)
platform to support the advanced functionality. Cameras, monitors, microphones,
speakers and software are integrated in various combinations to meet each user's
requirements.
Configurations of the S-Max(TM) platform include:
. 127S System. The 127S is an S-Max(TM)-based roll-about system. The system is
configured with a 27p monitor, pan/tilt/zoom camera, microphone and roll-
about cabinet and is designed for use by small groups. List prices for the
127S system start at $15,995.
. 115S and 117S Systems. The 115S and 117S are S-Max(TM)-based desktop
videoconferencing systems. The systems are configured with a 15p or 17p SVGA
monitor, camera, microphone and speaker and designed for use as an individual
videoconferencing station. List prices for the 115S and 117S start at $9,995.
PERSONAL COLLABORATOR. The VTEL Personal Collaborator(TM) ("VPC") is a complete
videoconferencing kit designed to deliver low-cost videoconferencing capability
to a Windows 95(R) desktop PC. The VPC is comprised of a camera, microphone,
speaker, cables and single card that installs into a standard ISA-bus slot which
provides all of the video/audio processing hardware as well as ISDN network
interface. The user interface is based on the AppsView(TM) videoconferencing
control software running on Windows 95(R). The VPC is compatible with H.320
standards for video and audio compression and is also capable of supporting the
T.120 suite of standards as applications become available. The VPC has a
suggested list price of $2,495.
MULTIPOINT CONTROL UNITS. Multipoint control units, or a "MCU's",
Videoconferencing users often purchase a MCU to act as their video network hub.
VTEL's MCU II(TM) is fully interoperable with the MediaMax(TM), S-Max(TM) and
Lynx(TM) systems and also supports the H.320 standard to enable multipoint
videoconferences with any standards-compliant system. The MCU II(TM) supports up
to 20 ports (one port equals one end-point connection) on a single chassis, and
multiple MCU IIs(TM) may be connected to multi-way conferences in excess of 20
participants if desired. The MCU II(TM) has a PC-based, open architecture and
can support numerous multi-location meetings simultaneously. The MCU II(TM)
provides support for the international standards for "chair control" as an
optional feature. Chair control includes the ability to control the video
switching for a more formal multi-way conference by having each site view one
speaker only and the ability to pass the chair control to a different site
during a conference. The MCU II(TM) has a list price of $49,995 for a four-port
configuration and $146,990 for a 20-port configuration. The units may be
cascaded together to provide additional capacity. In June 1995, the Company
announced a strategic alliance with Accord Video Telecommunications, Ltd. of
Israel to develop product enhancements and to market the MCU II(TM) to markets
not served by the Company.
PRODUCT DEVELOPMENT
The Company'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. To the extent that market needs cannot be met
by available third-party resources, the Company may undertake the development of
such resources. The following represent development efforts that have been
undertaken by the Company:
10
SOFTWARE SYSTEM PLATFORM. The MediaMax(TM), S-Max(TM), and Lynx(TM) platforms
are implemented through a software architecture. The characteristics of the
Company's 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. The Company's 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.
USER INTERFACE. The Company has developed a Microsoft Windows(TM)-based user
interface called AppsView(TM). The feature is software driven and provides a
customized menu of application icons that the user creates. This user interface
runs on the Microsoft Windows 95(R) operating system and is OLE-2 compatible.
AppsView(TM) is now available on all of the Company's MediaConferencing(TM)
systems.
SMALL GROUP AND DESKTOP PERSONAL SYSTEMS. Increased performance of semiconductor
processors specifically designed for video and image processing allow for the
cost-effective design and packaging of small group conferencing systems and high
functionality personal desktop systems which are compatible with small and large
group conferencing systems. The Company recently introduced the VPC
videoconferencing cardset which was developed utilizing the capability of the
Company's videoconferencing software to be ported to a suitable hardware
platform. The principal hardware-related resource commitment from development is
the effort to search for, find and test board-set candidates for suitability for
the software function. Thus, the time to develop and introduce a product is
shorter and the cost to develop is smaller.
AUDIO COMPRESSION/ECHO CANCELLATION. Audio quality is an important element in
any long-distance conference. At lower transmission rates, the amount of
bandwidth allocated to audio decreases, thereby requiring audio compression
algorithms to maintain acceptable audio quality. In 1988, the Company produced
its own proprietary, integrated echo canceller to improve audio quality. In
1993, the Company introduced a higher fidelity audio subsystem called
TrueTalk(TM) 7. The Company offers audio compression capability at allocated
bandwidths of 8, 12, 32 and 74 Kbps through the TrueTalk(TM) audio subsystem. In
1995, the Company introduced an upgrade to TrueTalk(TM) 7.
VIDEO/IMAGE COMPRESSION. Both the Company's H.320 standard-based video
compression algorithm and its proprietary algorithm are products of compression
research started in 1988. The Company's continuing video compression development
activity is focused on the refinement of both algorithms for higher resolution
video capabilities and the integration of that technology.
The Company incurred gross research and development expenses of $8.9 million,
$11.5 million, $10.5 million and $8.6 million during the seven months ended July
31, 1996 and the years ended December 31, 1995, 1994 and 1993, respectively.
Research and development expenses, net of reimbursements from Intel under the
Development Agreement, were $8.9 million, $11.3 million, $8.8 million and $8.4
million during the seven months ended July 31, 1996 and the years ended December
31, 1995, 1994 and 1993, respectively.
11
SALES AND MARKETING
VTEL believes that a well-positioned distribution channel is critical to
marketing success. The Company relies on third parties to sell, install and
support its conferencing systems in an effort to leverage the sales forces of
the resellers which are already providing telecommunications and systems
integration services to potential purchasers of videoconferencing equipment. The
Company believes that its early commitment to indirect distribution has resulted
in a relatively comprehensive, well-trained group of resellers, many of which
are leading telecommunications providers in the United States. All of its major
resellers maintain demonstration networks, with trained sales and support
personnel motivated by quotas and commissions for marketing the Company's
products.
Consistent with its focus on its targeted market segments, the Company works
with a number of value-added resellers ("VARs") that specialize in specific
applications, geographic areas and markets such as education, health care,
project management and government procurement. Typically, the Company's
agreements with its resellers and VAR's 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.
Approximately 93% and 943%, respectively, of the Company's product revenues for
the seven months ended July 31, 1996 and the year ended December 31, 1995 were
generated from its reseller and VAR network. Sales to the Company's top ten
resellers accounted for approximately 53% and 56%, respectively, of the
Company's revenues for the seven months ended July 31, 1996 and the year ended
December 31, 1995. The Company's top five resellers for the seven months ended
July 31, 1996 included Ameritech, Anixter, GTE, Southwestern Bell, and Sprint.
Of this group, GTE was the only reseller that accounted for more than 10% of the
Company's revenue for the seven months ended July 31, 1996. The Company believes
that telecommunications providers are well positioned to market the Company's
products because of their familiarity with the network requirements for the
videoconferencing systems and because many of their existing customers represent
potential users of the Company's videoconferencing systems. The use of resellers
is expected to continue to account for almost all of the Company's revenues in
the foreseeable future.
PRODUCT SUPPORT AND EXPANSION OF SUPPORT CAPABILITIES
Currently, end-user support and installation of the Company's products is
provided by the resellers and VARs, by ING., C., Olivetti & C., S.p.A.
("Olivetti") and Dictaphone as third-party service providers, or directly by the
Company. To provide a comprehensive service offering for its worldwide customer
base, VTEL maintains service agreements with Olivetti and Dictaphone which
provide comprehensive installation and support services to users of VTEL
equipment. The Company trains the staffs of Olivetti, Dictaphone and VTEL's
resellers on diagnostics and service of its products. Olivetti, Dictaphone and
the reseller service network are supported by trained technicians at the
Company's Technical Assistance Center.
In 1995, the Company determined that it would be advantageous to establish the
capacity to offer installation, integration and support services to resellers of
its products, which could be resold by the resellers to the ultimate purchasers
of the Company's products. By enhancing the Company's resellers' abilities to
offer systems integration, installation and end-user support to the ultimate
purchasers of the Company's products, the Company believes that it will enhance
its resellers' ability to sell the Company's conferencing systems as well as
generate additional revenues to the Company from the sales of such services to
the Company's resellers.
12
In November 1995, the Company completed the ICS Transaction (see "Business -
General"). The completion of the acquisition allows the Company to significantly
enhance its ability to support the Company's resellers' abilities to offer
systems integration, installation and end-user support to the ultimate purchaser
of the Company's products, thereby allowing the resellers to more effectively
provide an essential part of the services that are integral to the purchase of
the Company's products.
The assets and employees acquired in the transaction were employed by ICS to
sell videoconferencing systems and render integration and maintenance services
directly to end-users of videoconferencing systems manufactured by the Company
and several competitors of the Company. As a result of the acquisition, the
Company will not continue to sell competitors' systems. Furthermore, while ICS
formerly sold equipment and services associated with turn-key integrated
videoconferencing systems directly to end-users, as a result of the acquisition,
the Company will sell system integration services to the Company's resellers for
resale to end-users rather than directly to those end-users. The Company's
resellers will continue to sell most of the videoconferencing equipment to end-
users.
The Company completed the ICS Transaction with the payment of $10.7 million in
cash, which includes $142,000 of transaction expenses, and the issuance of
260,000 shares of the Company's unregistered Common Stock with an estimated
market value of $3.7 million. The consideration paid to Peirce-Phelps for the
acquisition provides for a series of transactions pursuant to which the Company
will pay approximately $20.7 million, consisting of $14.7 million in cash and
approximately 260,000 shares of Common Stock of the Company, and The Company
also assumed certain ICS liabilities, including obligations under existing
service contracts which will expire within 12 months (see Note 2 to the
Consolidated Financial Statements).
COMPETITION
The videoconferencing industry is highly competitive. The Company believes that
the principal competitive factors in the industry are video and audio quality,
service and support, functionality, market visibility and price. The Company
faces competition from a number of companies that market communications systems
for videoconferencing. Currently in the United States, PictureTel Corporation
and Compression Labs, Incorporated, among other companies, are marketing roll-
about group videoconferencing systems and multipoint control units.
Internationally, videoconferencing systems are available from, among others,
British Telecommunications plc, General Plessey Telecommunications, Sony
Corporation, Nippon Electric Corporation, Mitsubishi, Ltd., Fujitsu, Ltd., and
Panasonic, Ltd.
Certain of the Company's competitors have devoted significant resources to the
development and marketing of person-to-person visual communications products,
such as desktop videoconferencing systems and videophones, which may result in
increased competition. PictureTel has entered into a non-exclusive agreement for
the development of desktop videoconferencing systems with Compaq and non-
exclusive co-marketing and reselling agreements with AT&T and IBM. As additional
forms of conferencing systems emerge, such as desktop videoconferencing systems,
manufacturers and suppliers of desktop computer systems and software may elect
to enter the market for videoconferencing products, thereby increasing
competition. In order to compete in the market for business personal
videoconferencing systems, the Company introduced the VTEL 115S and 117S
systems, which began shipping in the first quarter of 1994, and the VPC cardset,
which began shipping in the first calendar quarter of 1996. Rather than expend
significant resources in the low-cost personal systems segment of the
conferencing market, the Company forms strategic alliances with other companies
to participate in the development of these low-cost systems. The Company intends
to continue its focus on large- and small-group conferencing systems where the
Company believes that it can add significant value through software, user
interfaces and applications designed to meet the needs of its targeted markets.
13
The Company's competitors and many of its potential competitors are more
established, benefit from greater market recognition and have greater financial,
technological, production and marketing resources than the Company. These
factors may adversely affect the Company's competitive position and accordingly,
there can be no assurance that the Company will be able to compete successfully
in the future.
MANUFACTURING
The Company's manufacturing operations consist of integration and testing of
subsystems and assemblies. The Company's manufacturing strategy is to contract
work to established vendors, with the Company fulfilling the quality and
materials management functions. Substantially all of the integrated circuits,
subsystems and assemblies used in the Company's products are made to Company
specifications by third parties under contract. The Company establishes the
relationship with the component vendors, qualifies the vendors and arranges for
shipment to the Company 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. The Company's manufacturing
quality system was certified in December 1994 as meeting the standards of ISO
9002 as set by the International Standards Organization. The Company passed a
follow-on audit in September of 1995 with no corrective action needed.
The Company relies on outside vendors for supplying substantially all of its
electronic components, subsystems and assemblies. Although the Company uses
standard parts and components for its products that are generally available from
multiple vendors, certain components are currently available only from sole
sources and embody such parties' proprietary technology. The Company depends
upon its suppliers to deliver products which are free from defects, competitive
in functionality and price and in accordance with the Company's specifications
and delivery schedules. The failure of a supplier to provide such products could
delay or interrupt the Company's manufacture and delivery of products and
thereby adversely affect the Company's business and operating results. The
Company endeavors 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, but
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 the Company's business and operating
results. The Company does not have contracts with many of its suppliers ensuring
continued availability of key components.
The Company attempts to forecast orders and to purchase certain long lead-time
components in advance of receipt of purchase orders from customers to enable the
Company to provide timely deliveries to customers when customer orders are
received. In addition, the Company from time to time enters into development
arrangements with other third parties to develop and incorporate new features
and functions into the Company's products. As such, the Company is 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 the Company's results of operations.
14
PATENTS AND TRADEMARKS
The Company has two patents issued by the United States Patent and Trademark
Office and nine patent applications pending related to the Company's
videoconferencing technology.
There can be no assurance that the pending patents will be issued or that issued
patents can be defended successfully. However, the Company does not consider
patent protection crucial to its success. The Company believes that, due to the
rapid pace of technological change in the videoconferencing industry, legal
protection for its products are less significant than factors such as the
Company's use of an open architecture, the success of the Company's distribution
strategy, the Company's ongoing product innovation and the knowledge, ability
and experience of the Company's employees.
The Company has two trademark applications and two service mark applications
pending with the United States Patent and Trademark Office covering the "VTEL"
mark and the Company's logo.
EMPLOYEES
At July 31, 1996, the Company employed 482 full-time employees
as follows:
NUMBER OF
FUNCTION EMPLOYEES
Sales and marketing 153
Research and development 106
Service, support and
systems integration 105
Manufacturing 55
Finance and administration 63
--------------
Total 482
==============
The Company's continued success will depend, in large part, on its ability to
attract and retain trained and qualified personnel who are in great demand
throughout the industry. None of the Company's employees is represented by a
labor union. The Company believes that its employee relations are good.
The Company's development, management of its growth and other activities depend
on the efforts of key management and technical employees. Competition for such
personnel is intense. The Company uses incentives, including competitive
compensation and stock option plans, to attract and retain well-qualified
employees. There can be no assurance, however, that the Company will continue to
attract and retain personnel with the requisite capabilities and experience. The
loss of one or more of the Company's key management or technical personnel also
could materially and adversely affect the Company. The Company generally does
not have employment agreements with its key management personnel or technical
employees. The Company's future success is also dependent upon its ability to
effectively attract, retain, train, motivate and manage its employees. Failure
to do so could have a material adverse effect on the Company's business and
operating results.
15
EXECUTIVE OFFICERS
The Company's executive officers are as follows:
F.H. (DICK) MOELLER joined the Company in October 1989 and is currently Chairman
of the Board of Directors and Chief Executive Officer. 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. In 1995, Mr. Moeller was
elected to the Board of Directors of Accord Telecommunications, Ltd., a
strategic partner of the Company. In 1996, Mr. Moeller was elected to the Board
of Directors of AMX Corp., one of the Company's suppliers.
RODNEY S. BOND joined the Company in May 1990 as Chief Financial Officer, Vice
President - Finance and Assistant Secretary and Treasurer. He has served as
Secretary of the Company since February 1993. From 1989 until he joined the
Company, 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.
J. MICHAEL O'DELL joined the Company in July 1993 as Senior Vice President -
Development and now serves as the General Manager of the Company's Education and
Government Customer Business Unit. From October 1989 until July 1993, he served
in various positions with Dell Computer Corporation, including the position of
Vice President - PC Products. From December 1980 until October 1989, Mr. O'Dell
held various management positions with IBM in its Austin Development Laboratory.
THOMAS C. STEVENSON joined the Company in August 1994 as Vice President -
Marketing. Prior to joining the Company, Mr. Stevenson founded and managed
Correl Co., an Atlanta-based consulting firm. From 1987 to 1989, Mr. Stevenson
served as Vice President of Sales and Marketing for VideoSeven, a manufacturer
of add-in graphics boards. From 1985 to 1987, Mr. Stevenson served as Vice
President of Operations for PacTel InfoSystems, a division of Pacific Telesis.
Mr. Stevenson also served in various sales and marketing management positions
for IBM for more than 16 years.
BOB R. SWEM joined the Company in September 1992 as Vice President -
Manufacturing and now serves as the Company's Vice President - Operations. 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.
MICHAEL P. CRONIN joined the Company in August 1994 as Vice President - Sales
for the Western Region and now serves as Vice President - Sales for North
America. From August 1992 to August 1994, Mr. Cronin was the Vice President -
Sales for Compression Labs, Inc. From 1982 to 1994, Mr. Cronin served in various
sales and management positions for Rolm.
DENNIS M. EGAN joined the Company 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 1995 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 12 years serving in various
sales and management positions with Peirce-Phelps.
16
ITEM 2. PROPERTIES
The Company's headquarters, product development, and sales and marketing
facility occupies approximately 93,000 square feet in Austin, Texas under a
lease which expires in April 1998, with an option to extend the lease an
additional two years. As part of this lease, the Company has rights of first
refusal on adjacent space with a total potential expansion, subject to current
leases, of an additional 24,000 square feet. The Company believes that these
facilities are adequate to meet its 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. The Company occupies approximately 38,000 square feet of a
facility that is situated in a light industrial area in Austin, Texas where the
Company's manufacturing, technical assistance and training operations are
located. As part of this lease, the Company has rights to lease an additional
20,000 square feet in the same facility. The Company's manufacturing facilities
and equipment are currently utilized generally on a one shift per day basis. The
Company believes that its current manufacturing capacity is adequate to meet
anticipated demand during the next year. Should additional manufacturing
capacity be needed during the next year, the Company believes that it could
provide the necessary manufacturing capacity through the addition of work shifts
or subcontractors, without the need for any significant capital expenditures for
facilities or equipment.
The Company's service and system integration operations occupy a facility of
approximately 41,000 square feet in the Philadelphia, Pennsylvania vicinity.
ITEM 3. LEGAL PROCEEDINGS
As of October 25, 1996, there were no material pending legal actions to
which the Company is party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since April 7, 1992, the Company'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 calendar quarter of 1994, 1995
and 1996:
1994 1995 1996
HIGH LOW HIGH LOW HIGH LOW
1st Quarter $8.250 $4.125 $12.000 $ 8.125 $17.250 $8.813
2nd Quarter $5.500 $4.000 $13.375 $ 8.375 $12.625 $9.500
3rd Quarter $7.000 $5.125 $26.000 $13.250 - -
4th Quarter $9.000 $5.625 $25.125 $16.625 - -
The high and low prices for the month of April 1996 were $9.6875 and $6.375,
respectively.
The Company has not paid cash dividends on its Common Stock and presently
intends to continue a policy of retaining earnings, if any, for reinvestment in
its business.
17
ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEARS FOR THE TWELVE MONTHS FOR THE SEVEN MONTHS
ENDED DECEMBER 31, ENDED JULY 31, ENDED JULY 31,
1991 1992 1993 1994 1995 1995 1996 1995 1996
UNAUDITED - PRO FORMA UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues $11,019 $26,067 $ 31,452 $54,231 $ 78,095 $65,833 $ 90,630 $37,574 $ 50,109
Gross margins 4,796 13,048 14,619 27,837 39,425 34,878 38,554 20,044 19,173
Operating income (loss) (2,537) 718 (10,019) (869) 2,084 2,611 (10,694) 733 (12,045)
Net income (loss) (2,426) 1,487 (9,334) 62 3,739 3,841 (7,679) 1,519 (9,899)
Net income (loss) per share (0.46) 0.18 (1.05) 0.01 0.30 0.35 (0.57) .14 (0.70)
Weighted average shares outstanding 5,248 8,451 8,876 10,544 12,451 10,991 13,495 11,060 14,237
BALANCE SHEET DATA:
Working capital $ 5,500 $35,162 $ 33,318 $31,268 $ 78,071 $30,815 $ 64,979 $30,815 $ 64,979
Total assets 11,391 42,274 45,547 46,435 118,308 50,003 111,903 50,003 111,903
Long-term lease obligations, less
current portion 25 10 4 - - - - - -
Stockholders' equity 6,376 38,306 36,258 37,223 103,838 40,154 94,416 40,154 94,416
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
RESULTS OF OPERATIONS
The Company changed its fiscal year end from December 31 to July 31. The
following table sets forth the unaudited pro forma results of operations for
each of the fiscal quarters in the twelve months ended July 31, 1996:
FOR THE QUARTER ENDED
OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1995 1996 1996 1996
(UNAUDITED - PRO FORMA)
Revenues $19,510 $23,909 $23,101 $24,110
Gross margin 9,922 10,151 9,167 9,314
Selling, general and administrative 7,120 7,953 8,956 10,307
Research and development 2,969 3,049 3,806 3,895
Amortization of intangible assets - 160 240 240
Restructuring expense - - - 553
Total operating expenses 10,089 11,162 13,002 14,995
Other income, net 320 878 1,061 777
Net income (loss) 132 (136) (2,771) (4,904)
18
The following table sets forth for the fiscal periods indicated the percentage
of revenues represented by certain items in the Company's statement of
operations:
FOR THE FOR THE SEVEN
YEARS ENDED MONTHS ENDED
DECEMBER 31, JULY 31,
1993 1994 1995 1995 1996
(UNAUDITED)
Revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin 46.4 51.3 50.5 53.3 38.3
Selling, general and administrative 51.8 36.6 33.3 34.2 44.6
Research and development 26.5 16.3 14.5 17.2 17.7
Total operating expenses 78.3 52.9 47.8 51.4 62.3
Other income, net 2.2 1.8 2.2 2.3 4.3
Net income (loss) (29.7)% 0.1% 4.8% 4.0% (19.8)%
FOR THE SEVEN MONTHS ENDED JULY 31, 1995 AND 1996 AND THE YEARS ENDED DECEMBER
31, 1993, 1994 AND 1995
Revenues. The Company's revenues consist primarily of sales of multi-media
videoconferencing systems. Additional videoconferencing-related revenues
were generated in the fourth quarter of calendar year 1995 from the assets
acquired in connection with the ICS Transaction (see Note 2 to the Consolidated
Financial Statements).
Revenues increased by 33% to $50.1 during the seven months ended July 31, 1996
from $37.6 million during the seven months ended July 31, 1995. Revenues for
the year ended December 31, 1995 increased by 44% to $78.1 million from $54.2
million in 1994. Revenues in 1994 increased by 72% to $54.2 million from $31.5
million in 1993.
The number of systems sold during the seven months ended July 31, 1996 decreased
to 892 from 910 during the seven months ended July 31, 1995, a decrease of 2%.
The number of systems sold in the year ended December 31, 1995 increased to
1,758 from 1,250 in 1994, an increase of 41%. The number of systems sold in 1994
increased to 1,250 from 705 in 1993, an increase of 77%. The following table
summarizes the Company's unit sales activity:
FOR THE FOR THE SEVEN
YEARS ENDED MONTHS ENDED
DECEMBER 31, JULY 31,
1993 1994 1995 1995 1996
Large-group conferencing systems 671 917 1,302 639 775
Small-group conferencing systems 3 201 334 201 69
Multipoint control units 31 132 122 70 48
----- ----- ----- ----- -----
Total units 705 1,250 1,758 910 892
===== ===== ===== ===== =====
19
The increase in large-group systems sold during the seven months ended July 31,
1996 as compared with the seven months ended July 31, 1995 was primarily
attributable to the introduction of the Company's Leadership Conferencing(TM)
system in the latter part of 1995 and its Team Conferencing(TM) system in the
early part of 1996. The decrease in sales of the Company's small-group
conferencing systems during the seven months ended July 31, 1996 in comparison
with the seven months ended July 31, 1995 is the result of a reduction of sales
of the S-Max(TM) conferencing systems due to more competitive products being
released by the Company's competitors. The Company's announcement in late June
1996 of the Team Conferencing(TM) Model 1000 system is positioned to regain
market presence in the small group system segment.
The sequential increase in units sold during 1993, 1994 and 1995 was primarily
attributable to continued market penetration of the Company's large group Media-
Max(TM) and small group S-Max(TM) conferencing systems; the ability of the
Company to successfully execute its business strategy which focuses on selected
targeted markets; and the continued development of the Company's third-party
reseller distribution channel.
Desktop system products represented approximately 4% and 1% of product sales for
the seven months ended July 31, 1996 and 1995, respectively.
Product revenues generated from third-party resellers represented 93% for the
seven months ended July 31, 1996 and 87%, 88% and 94% of total revenues for each
of the years ended December 31, 1993, 1994 and 1995, respectively.
The average selling price for a system was $39,000 for the seven months ended
July 31, 1996 and $45,000, $43,000 and $416,000 for each of the years ended
December 31, 1993, 1994 and 1995, respectively. Average selling prices declined
during the seven months ended July 31, 1996 in comparison with the prior years
due to the first shipments during the seven months ended July 31, 1996 of the
Team Conferencing(TM) systems which generally carry a lower average selling
price than the Company's MediaMax(TM) products. In addition, competitive market
forces also reduced the average selling prices of all of the Company's older
product lines.
Average selling prices declined from 1994 to 1995 due to price competitiveness
in the industry and a shift in the product sales mix such that sales of small-
group conferencing systems represented a larger percentage of total shipments
during 1995 in comparison with 1994. The small-group conferencing systems carry
a significantly lower average selling price than the Company's large-group
conferencing systems and multipoint control units. Average selling prices only
slightly decreased from 1993 to 1994 despite price competitiveness in the
industry as the Company experienced a shift to more fully-configured and high-
end systems which generally carry a higher selling price. The shift in the
product sales mix in 1994 to more fully-configured and high-end systems
increased the average selling price in 1994. However, the increase due to the
shift in the product sales mix was offset with an increase in sales of small-
group systems which carry a lower selling price, resulting in a slightly lower
overall selling price in 1994 as compared to 1993.
International sales consist of sales consummated by the Company's foreign
subsidiary and sales which are installed in foreign locations. International
sales comprised approximately 12% of total revenues during the seven months
ended July 31, 1996 compared to 19% for the year ended December 31, 1995. The
decline in international sales as a percentage of total revenues from 1995 to
1996 is due to growth in domestic sales, which includes all of the revenues
generated by the service and integration operations as a result of the ICS
Transaction, at a higher rate than growth in international sales.
20
International sales comprised approximately 18% and 13% of total revenues in
each of the years ended December 31, 1993 and 1994, respectively. International
sales increased in absolute terms during each of the years in the three-year
period ended December 31, 1995. However, the percentage of international sales
to total sales declined from 1993 to 1994 due to the higher growth in domestic
sales during 1994. The Company believes its foreign currency exposure to be
relatively low in that almost all foreign sales are in U.S. dollars, and it does
not engage in any currency hedging programs that utilize foreign currency
contracts, options or other derivative instruments to hedge the Company's
foreign currency risk.
Service, systems integration and rental revenues represented approximately 31%
of total revenues during the seven months ended July 31, 1996 and 3%, 4% and 13%
of total revenues during each of the years ended December 31, 1993, 1994 and
1995, respectively. Service, systems integration and rental revenues increased
as a percentage of total revenues during the seven months ended July 31, 1996 in
comparison with the prior years due to the incremental revenues generated during
the entire seven months ended July 31, 1996 by the assets acquired as a result
of the ICS Transaction (see Note 2 to the Consolidated Financial Statements).
Service, systems integration and rental revenues also increased as a percentage
of total revenues during the year ended December 31, 1995 in comparison with
prior years due to the incremental revenues generated as a result of the ICS
Transaction which occurred in the November of 1995.
While the Company strives 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, the Company's
business model is characterized by a very high degree of operating leverage. The
Company's expense levels are based, in part, on its expectations as to future
revenue levels, which are difficult to predict partly due to the Company's
strategy of distributing its products through resellers. Because expense levels
are based on the Company's expectations as to future revenues, the Company's
expense base is relatively fixed in the short term. If revenue levels are below
expectations, operating results may be materially and adversely affected and net
income is likely to be disproportionately adversely affected. In addition, the
Company's quarterly and annual results may fluctuate as a result of many
factors, including price reductions, delays in the introduction of new products,
delays in purchase decisions due to new product announcements by the Company or
its competitors, cancellations or delays of orders, interruptions or delays in
supplies of key components, changes in reseller base, customer base, business or
product mix and seasonal patterns and other shifts of capital spending by
customers. There can be no assurance that the Company will be able to increase
or even maintain its current level of revenues on a quarterly or annual basis in
the future. Due to all of the foregoing factors, it is possible that in one or
more future quarters the Company's operating results will be below the
expectations of public securities market analysts. In such event, the price of
the Company's Common Stock would likely be materially adversely affected.
The Company relies almost exclusively on third parties for the distribution of
its products. In contrast, many of the Company's competitors sell their products
directly to end-users. A reduction in the sales efforts by certain of the
Company's current resellers or a termination of their relationships with the
Company could have a material adverse effect on the Company's business and
operating results. Certain of these resellers also represent or may in the
future represent other lines of products, some of which compete with those of
the Company. While the Company attempts to encourage these resellers to focus on
selling the Company's products through marketing and support programs, there is
a risk that these resellers may give higher priority to products of other
suppliers, reducing their efforts devoted to selling the Company's products. The
Company's top ten resellers accounted for approximately 53% of the Company's
revenues for the seven months ended July 31, 1996 and 58%, 63% and 56% in each
of the
21
years ended December 31, 1993, 1994 and 1995. Typically, the Company's
agreements with its resellers involve non-exclusive arrangements which may be
canceled by either party at will and contain no minimum purchase requirements on
the part of the reseller. There can be no assurance that the Company's
distribution strategy will be successful or that the Company will be able to
retain its current resellers or to identify new resellers in the future that are
acceptable to the Company (see "Other Factors Affecting Results of Operations").
Gross Margin. Gross margins were 38% for the seven months ended July 31, 1996
and 46%, 51% and 51% for each of the years ended December 31, 1993, 1994 and
1995, respectively. A portion of the decrease in gross margin from the year
ended December 31, 1995 to the seven months ended July 31, 1996 results from a
shift in the sales mix such that product revenues represented a smaller
percentage of total revenues for the seven months ended July 31, 1996 due to the
incremental revenues generated by the Company's systems integration and service
operations which were acquired in the fourth quarter of 1995. The Company's
service and systems integration operations carry a lower gross margin percentage
than its product revenues such that the Company's overall gross margin is lower.
Although the service and systems integration revenues related to the assets
acquired in connection with the ICS Transaction generally carry a lower gross
margin, the service and system integration activities also generally carry lower
operating expenses than the Company's other revenue sources.
Additionally, the Company experienced a shift in its product sales mix such that
sales of its multipoint control units, which generally carry higher gross
margins, represented a smaller percentage of the Company's total product
revenues. Also contributing to the Company's lower gross margin during the seven
months ended July 31, 1996 was higher per unit manufacturing costs due to lower
than expected manufacturing throughput which resulted in the Company spreading
relatively fixed manufacturing costs over fewer units produced. The Company also
recorded approximately $1 million in inventory write-downs during the seven
months ended July 31, 1996 to provide for potential inventory issues related to
product transitions and to reflect the net realizable value of inventory
quantities on-hand at its foreign subsidiary in the United Kingdom. The
inventory adjustments had the effect of lowering the Company's gross margins
during the seven months ended July 31, 1996.
Gross margin remained stable at approximately 51% during 1994 and 1995. Gross
margin remained relatively stable from 1994 to 1995 despite lower average
selling prices due to lower per unit manufacturing costs realized by the
distribution of relatively fixed manufacturing overhead costs over the greater
number of units shipped in 1995. Also, certain service revenues which carry a
higher gross margin represented a larger percentage of total revenues in 1995 as
compared to 1994. Gross margin was stable during the first three quarters of
1995, but declined significantly during the fourth quarter of 1995 to 45%
primarily due to changes in the sales mix, such that lower margin products and
services represented a larger portion of the Company's total revenues, and price
competitiveness.
Although the Company expects to experience slightly higher gross margins during
fiscal 1997, it continues to expect gross margin pressures due to price
competitiveness in the industry, shifts in the product sales mix, and
anticipated offerings of new products which may carry a lower gross margin. The
Company expects that price competitiveness in the industry will continue to
become more intense as users of videoconferencing systems attempt to balance
performance, functionality and cost. The Company's gross margin is subject to
fluctuation based on pricing, production costs, and sales mix (see "Other
Factors Affecting Results of Operations").
Gross margin increased from 46% in 1993 to 51% in 1994. The increase in gross
margin was primarily attributable to the shift in the product sales mix to
products with higher gross margins, primarily the multipoint control units, and
lower per unit manufacturing costs realized by the distribution of relatively
fixed manufacturing overhead costs over the greater number of units shipped in
1994.
22
Selling, General and Administrative. Selling, general and administrative
expenses increased by $8.4 million or 65% from $12.9 million during the seven
months ended July 31, 1995 to $21.2 million during the seven months ended July
31, 1996. The increase in selling, general and administrative expenses is
primarily due to the incremental expenses incurred during the seven months ended
July 31, 1996 which relate to the Company's service and systems integration
operations which were acquired in November 1995 and to increases in sales
expenses to provide the capacity for future revenue growth.
Selling, general and administrative expenses increased by $6.1 million or 31%
from $19.9 million in 1994 to $26.0 million in 1995 and increased by $3.6
million or 22% from $16.3 million in 1993 to $19.9 million in 1994. Selling,
general and administrative expenses as a percentage of revenues were 52%, 37%
and 33% for the years ended December 31, 1993, 1994 and 1995, respectively. The
sequential decline in selling, general and administrative expenses as a
percentage of revenues is primarily the result of sequential increases in
revenues from 1993 to 1995 and because the Company has managed the growth of
selling, general and administrative expenses such that revenues have grown at a
faster rate than selling, general and administrative expenses. The Company has
been able to generate revenue growth during each of the years in the three-year
period ended December 31, 1995 without a proportionate increase in selling,
general and administrative expenses due to higher sales productivity of its
sales organization and its resellers, which was the result of sales and
marketing programs and investments which were made in 1992 and 1993. The Company
is committed to continuing to make investments in selling, general and
administrative activities to continue to increase penetration and revenues in
its targeted markets; however, the Company expects that the growth of selling,
general and administrative expenses will continue at a slower rate than revenues
during fiscal 1997.
Research and Development. Research and development expenses increased by $2.4
million or 37% from $6.5 million during the seven months ended July 31, 1995 to
$8.9 million during the seven months ended July 31, 1996. The increase in
research and development expenses is primarily due to the Company's efforts
related to the development of its new Leadership Conferencing(TM) systems and
Team Conferencing(TM) systems which were introduced at the end of 1995 and early
in 1996, respectively. Additionally, the increase in research and development
expenses resulted from the reassignment of Company research and development
personnel who had been involved with the Intel joint development projects in
1995 to the Company's other projects.
Research and development expenses increased by $2.5 million or 28% from $8.8
million in 1994 to $11.3 million in 1995 and increased by $496,000 or 6% from
$8.4 million in 1993 to $8.8 million in 1994. Research and development expenses
as a percentage of revenues were 27%, 16% and 15% for the years ended December
31, 1993, 1994 and 1995, respectively. The increase in research and development
expenses during 1993, 1994 and 1995 reflects the Company's increased investment
in the development of new products. The Company substantially increased research
and development expenses in 1993 to produce new products, including a platform
for its personal desktop system, a small-group system, and its second-generation
multipoint control unit, the MCU II(TM). Several of the Company's new products
began production shipments during the first quarter of 1994. Therefore,
investments in research and development for new products in 1993 resulted in
increased revenues during 1994 and 1995. As a result, research and development
expenses as a percentage of revenues decreased sequentially from 1993 to 1995.
During the third quarter of 1993, the Company entered into a Development
Agreement with Intel in which the two companies agreed to cross-license certain
video-based technologies. In conjunction with the Development Agreement, the
Company and Intel also entered into a Common Stock and Warrant Purchase
Agreement (the "Stock Agreement"), whereby Intel also agreed to purchase an
equity interest in the Company, as well as a warrant to purchase additional
shares of the Company's Common Stock, for
23
approximately $7.0 million (see Note 9 to the Consolidated Financial
Statements). As part of the Development Agreement, Intel advanced to the Company
$3.0 million to enable the Company to jointly research and develop
videoconferencing products with Intel. During the years ended December 31, 1993,
1994 and 1995 the Company reduced gross research and development expenses by
approximately $255,000, $1.6 million and $190,000, respectively, for
reimbursable research and development costs under the terms of the Development
Agreement. The Company was not engaged in any research and development projects
related to the Development Agreement during the seven months ended July 31,
1996. As of July 31, 1996, the Company had no research and development
activities in process or planned related to the Development Agreement.
During the year ended December 31, 1995, the Company entered into a strategic
alliance with Accord Telecommunications, Ltd. ("Accord"), an Israel-based
telecommunications Company (see Note 15 to the Consolidated Financial
Statements). The alliance involves technology, manufacturing, and marketing
licenses, as well as joint product development for the enhancement of multi-
media, multipoint control units and the creation of new products. As such, the
Company's research and development costs related to the enhancement of its
current multipoint control unit and the development of future multipoint control
units is expected to decline as Accord begins to assume the development effort
related to the multipoint control units.
Although the percentage of revenues invested by the Company in research and
development may vary from period to period, the Company is committed to
investing in its research and development programs. All of the Company's
research and development costs and internal software development costs have been
expensed as incurred.
During the year ended December 31, 1993, a civil action was filed against the
Company for alleged patent infringement relating to technology used in the
Company's multipoint control unit product. The Company responded alleging
invalidity and non-infringement of the patent. In August 1994, a settlement was
reached such that all claims were dismissed. The Company was provided a license
for certain multipoint switching technology for the remaining life of the
patents which purportedly protects such technology. The Company made a single
payment of $500,000 for the settlement agreement, which is being amortized over
the life of the technology licensed under the settlement.
Restructuring Expenses. During the seven months ended July 31, 1996, the Company
finalized its plan to realign its resources into Customer Business Units
("CBU"). These CBU's will provide the framework for moving decision making
closer to the customer and for responding to customer requirements quickly. The
realignment of resources resulted in the Company recording a charge during the
seven months ended July 31, 1996 of approximately $553,000 related to
restructuring costs that the Company will incur in adjusting its business
operations and resources such that the Company will be able to effectively
implement its CBU model. These restructuring charges primarily represent the
costs associated with the elimination of positions which do not support the CBU
strategy.
24
Product transition. The market for the Company'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 products, by either the Company or its competitors,
embodying new technology and the emergence of new industry standards may render
existing products obsolete and unmarketable. The Company's 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 the Company's ability to grow and to
remain competitive (see "Other Factors Affecting Results of Operations"). The
Company expects that a majority of its product revenues for fiscal 1997 will be
derived from new products introduced in 1995 and 1996.
Other Income, Net. Other income, net was $852,000 and $2.1 million during the
seven months ended July 31, 1995 and 1996 respectively. The increase is due to
significantly higher cash and short-term investments balances resulting from the
completion of the Company's secondary offering during the fourth quarter of 1995
which generated net proceeds of approximately $57.0 million.
Other income, net was $685,000, $971,000 and $1,742,000 in 1993, 1994 and 1995,
respectively. The increase from 1993 to 1994 relates to higher rates of interest
earned during 1994. The increase from 1994 to 1995 is due to significantly
higher cash and short-term investment balances resulting from the completion of
the Company's secondary offering.
Income Taxes. At July 31, 1996, the Company had total domestic net operating
loss carryforwards of approximately $21.0 million which expire in varying
amounts from 2002 through 2011. The portion of this carryforward available for
utilization in fiscal 1997 (in consideration of annual limitations) is
approximately $17.7 million. In each fiscal year subsequent to 1997, an
additional $421,000 will become available for utilization through 2004.
For the short tax year ended July 31, 1996, a net operating loss was incurred
and no tax provision was recorded. During the years ended December 31, 1995 and
1994, the Company utilized net operating loss carryforwards of $3.5 million and
$733,000, respectively, to offset current year taxable income. However, a
provision of $87,000 and $40,000 was recorded during the years ended December
31, 1995 and 1994, respectively, for federal alternative minimum taxes and state
incomes taxes. The Company incurred a net operating loss during the year ended
December 31, 1993. Accordingly, no provision for income taxes was necessary for
this year. Due to the uncertainty surrounding the timing of realizing the
benefits of its favorable tax attributes in future tax returns, the Company has
placed a valuation allowance against its otherwise recognizable net deferred tax
asset. Accordingly, no deferred taxes have been recorded for the seven months
ended July 31, 1996 and the years ended December 31, 1993, 1994 and 1995.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." The implementation of
SFAS No. 109 had no effect on the Company's consolidated financial statements.
Net Income. The Company generated net income of $1.5 million and incurred a net
loss of $9.9 million during the seven months ended July 31, 1995 and 1996,
respectively. The net loss incurred during the seven months ended July 31, 1996
is the result of lower gross margins generated by the Company, incremental
operating expenses related to the growth in the Company's operations and its
service and system integration operations, inventory write-downs during the
period, and restructuring expenses recorded during the period. The net income
generated during the seven months ended July 31, 1995 was the result of revenues
increasing at a faster rate than operating expenses and of higher gross margins
generated by the Company.
25
The Company generated net income of $62,000 and $3.7 million during the years
ended December 31, 1994 and 1995, respectively. The Company incurred a net loss
of $9.3 million during the year ended December 31, 1993. The net income
generated in 1994 and 1995 was the result of gross margins of approximately 51%
in each year on revenues that grew at a faster rate than operating expenses. The
loss incurred in 1993 was primarily caused by the large planned increase in
operating expenses related to investments in sales and marketing activities (see
"Selling, General and Administrative" and "Research and Development").
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting and
Disclosure of Stock-Based Compensation." SFAS No. 123 introduces a fair-value
based method of accounting for stock-based compensation. It 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 Opinion No. 25,
"Accounting for Stock Issued to Employees." As such, SFAS No. 123 did not have
any effect on the Company's financial position or results of operations.
SHARE REPURCHASE PROGRAM
During the seven months ended July 31, 1996, the Company adopted a share
repurchase program whereby the Company may repurchase shares of its Common Stock
in the open market provided that the aggregate purchase price of the shares
repurchased does not exceed $8.4 million and the repurchase price for any shares
does not exceed $12 per share. The repurchased shares will be issued from time
to time to fulfill requirements for the Company's Common Stock under its
employee stock plans. Subsequent to July 31, 1996, the Company repurchased
455,200 shares of its Common Stock for $3.6 million.
OTHER FACTORS AFFECTING FUTURE RESULTS OF OPERATIONS
Product introductions. The Company has in the past experienced delays in
introducing certain of its products, primarily due to the Company's failure to
adequately anticipate the resources necessary for its development efforts and,
in some cases, the Company's decision to devote development resources to other
activities. While the Company believes it has made improvements in each of these
areas, there can be no assurance that it will not encounter technical or other
difficulties that could delay introduction of new products in the future. If the
Company is unable, for technological or other reasons, to develop competitive
products in a timely manner in response to changes in the industry, the
Company's business and operating results will be materially and adversely
affected.
Competition. The market for videoconferencing products is extremely competitive.
The Company currently experiences significant competition from other
manufacturers. The Company's existing competitors and many of its potential
competitors are more established, benefit from greater market recognition and
have greater financial, technological, production and marketing resources than
those of the Company. These factors may materially and adversely affect the
Company's competitive position, and accordingly, there can be no assurance that
the Company will be able to compete successfully in the future. There can be no
assurance that the Company will have sufficient resources to make continued new
investments in product development and sales and marketing or that the Company
will be able to make technological advances necessary to remain competitive.
26
Dependence on key employees. The Company's development, management of its growth
and other activities depend on the efforts of key management and technical
employees. Competition for such personnel is intense. The Company uses
incentives, including competitive compensation and stock option plans, to
attract and retain well-qualified employees. There can be no assurance, however,
that the Company will continue to attract and retain personnel with the
requisite capabilities and experience. The loss of one or more of the Company's
key management or technical personnel could materially and adversely affect the
Company. The Company generally does not have employment agreements with key
management personnel or technical employees. The Company's future success is
also dependent upon its ability to attract, retain, train, motivate and manage
its employees. Failure to do so could have a material adverse effect on the
Company's business and operating results.
Management of growth. The Company has recently experienced a period of rapid
growth that has placed and will continue to place a significant strain on the
Company's management, operational and financial resources. The integration of
the assets acquired in connection with the ICS Transaction (see Note 2 to the
Consolidated Financial Statements) has placed additional strains on these
management, operational and financial resources, and possible future
acquisitions could place further strains on the Company's resources. The
Company's future operating results will depend on its ability to broaden and
develop its senior management and to attract and retain skilled employees, as
well as its ability to manage its growth successfully.
Customer concentration. The cornerstone of the Company's sales and marketing
strategy is to focus a substantial portion of the Company's efforts on
generating sales to ultimate end-user customers in the Company's targeted
markets of education, government and health care. Since 1993, the Company has
devoted significant resources to market penetration programs to generate sales
of its products within these targeted markets. A reduction or adverse change in
patterns of capital spending by participants in the Company's targeted markets
due to general economic conditions affecting any of these markets, fiscal
policies of government, possible reforms in health care laws and other factors
beyond the control of the Company may materially and adversely affect the
Company's revenues and operating results.
Dependence on third parties. Substantially all of the Company's electronic
components, subsystems, and assemblies are made by outside vendors. Certain
components are currently available only from sole sources and embody such
parties' proprietary technology. Disruption in supply, a significant increase
in price of one or more of these components or failure of a third-party supplier
to remain competitive in functionality or price could have a material adverse
effect on the Company's business and operating results. There can be no
assurance that the Company will not experience such problems in the future.
Similarly, excessive rework costs associated with defective components or
process errors could adversely affect the Company's business and operating
results. The Company does not have contracts with many of its suppliers
ensuring continued availability of key electronic components.
In addition, the Company from time to time enters into development arrangements
with other third parties to develop and incorporate new features and functions
into the Company's products. As such, the Company is 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 the Company's results of operations.
General. The markets for the Company's products are characterized by a highly
competitive and rapidly changing environment in which operating results are
subject to the effects of frequent product introductions, manufacturing
technology innovations and rapid fluctuations in product demand. While the
Company attempts to identify and respond to these changes as soon as possible,
prediction of and reaction to such events will be an ongoing challenge and
may result in revenue shortfalls during certain periods of time.
27
The Company's future results of operations and financial condition could be
impacted by the following factors, among others: trends in the videoconferencing
market, introduction of new products by competitors, increased competition due
to the entrance of other companies into the videoconferencing market -
especially more established companies with greater resources than those of the
Company, delay in the introduction of higher performance products, market
acceptance of new products introduced by the Company, price competition,
interruption of the supply of low-cost products from third-party manufacturers,
adverse changes in general economic conditions in any of the countries in which
the Company does business, and adverse legal disputes and delays in
purchases relating to federal government procurement.
Due to the factors noted above and elsewhere in Management's Discussion and
Analysis of Financial Condition and Results of Operations, the Company's past
earnings and stock price has been, and future earnings and stock price
potentially may be subject to significant volatility, particularly on a
quarterly basis. Past financial performance should not be considered a reliable
indicator of future performance and investors are cautioned in using
should nohistorical 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
the Company's Common Stock in any given period. Also, the Company participates
in a highly dynamic industry which often results in volatility of the Company's
Common Stock price.
BACKLOG
Backlog consists of firm commitments from its customers which have a specified
delivery schedule within six months. The Company had a backlog of approximately
$15.3 million, $13.3 million, $6.6 million, and $6.8 million as of July 31,
1996 and December 31, 1995, 1994 and 1993, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1996, the Company had working capital of $65.0 million, including
$50.3 million in cash, cash equivalents and short-term investments. The primary
uses of cash during the seven months ended July 31, 1996 were to purchase
property and equipment, to purchase leasehold improvements for the Company's new
service and systems integration facility in Philadelphia, Pennsylvania and to
fund working capital needs. The primary uses of cash during the seven months
ended July 31, 1995 were to purchase property and equipment, to purchase
leasehold improvements for the Company's new manufacturing and service facility
in Austin, Texas and to fund working capital needs.
The primary uses of cash during the year ended December 31, 1995 were to
complete the ICS Transaction (see Note 2 to the Consolidated Financial
Statements), to fund working capital requirements, to purchase property and
equipment, and to purchase leasehold improvements for the Company's new
manufacturing and service facility and to as well as to make other investments
in other assets including such as the 12% interest that the Company acquired in
Accord Video Telecommunications, Ltd. in June 1995 (see Note 15 to the
Consolidated Financial Statements). The primary uses of cash during the year
ended December 31, 1993 and 1994 were to purchase property and equipment and to
fund working capital needs.
Cash used in operating activities was $5.1 million and $1.6 million,
respectively, for the seven months ended July 31, 1996 and 1995. Cash provided
by operating activities was $2.1 million and $1.5 million, respectively, for the
years ended December 31, 1994 and 1995. Cash used in operating activities was
$6.5 million for the year ended December 31, 1993. Cash from operating
activities is attributable to the Company's net income or loss, as adjusted for
noncash expenses and changes in operating assets and liabilities.
28
Cash provided by investing activities was $3.5 million for the seven months
ended July 31, 1996 and was primarily the result of the utilization of
investments to finance the Company's operations during the period. Cash from
the Company's investments were also used to invest in leasehold improvements for
the Company's new service and systems integration facility in Philadelphia,
Pennsylvania and to invest in capital assets to support the Company's revenue
growth. Cash used in investing activities of $1.8 million for the seven months
ended July 31, 1995 was primarily the result of investments in leasehold
improvements for the Company's new manufacturing and service facility in Austin,
Texas and in capital assets to support the Company's revenue growth.
Cash provided by investing activities was $1.2 million for the year ended
December 31, 1993 compared with cash used in investing activities of $2.6
million and $61.9 million for the years ended December 31, 1994 and 1995,
respectively. Cash was provided by investing activities during 1993 as
investments were utilized to finance the Company's operations during a period of
increased investment in sales and marketing programs. Cash was used in investing
activities in 1994 and 1995 primarily to acquire capital assets necessary to
manage the growth in the business. Also, the Company invested the proceeds of
its 1995 secondary offering primarily in short-term investments. During the year
ended December 31, 1995, the Company cash flows used in investing activities
included the investment of the net proceeds of its secondary offering primarily
in short-term investments and to purchase certain assets as a result of the ICS
Transaction (see Note 2 to the Consolidated Financial Statements).
The Company invests its excess cash primarily in highly liquid investments such
as mortgage-backed securities guaranteed by the U.S. government, government
securities and commercial paper. The net amounts of purchases of investments
during the seven months ended July 31, 1996 and 1995 and the years ended
December 31, 1993, 1994 and 1995, respectively, were determined primarily based
on cash flows from operating activities, cash requirements for acquisitions of
property and equipment and manufacturing capacity, and cash generated by the
Company's secondary offering during the fourth quarter of 1995.
Cash flows from financing activities were $483,000 for the seven months ended
July 31, 1996 and primarily relates to the sale of the Company's stock under
employee stock plans. Cash flows from financing activities were $1.4 million for
the seven months ended July 31, 1995 and primarily relates to the sale of the
Company's stock under employee stock plans and the approximate $396,000 purchase
of stock by Intel pursuant to an agreement, since terminated, which enabled
Intel to maintain its percentage ownership in the Company. Fluctuations in
purchases of stock under employee stock plans are attributable to changes in the
Company's stock price.
Cash flows from financing activities were $7.3 million, $631,000, and $59.1
million for the years ended December 31, 1993, 1994 and 1995, respectively. Cash
flows from financing activities during the year ended December 31, 1993 were
provided primarily from the $7.0 million investment in the Company by Intel
under the Stock Agreement. Cash was provided by financing activities during the
year ended December 31, 1994 primarily as a result of the sale of stock under
employee stock purchase and option plans. Cash was provided by financing
activities during the year ended December 31, 1995 primarily as a result of the
Company's secondary offering which generated net proceeds to the Company of
approximately $57.0 million, the purchase of stock by Intel as described above,
and the sale of stock under employee stock purchase and option plans.
At July 31, 1996, the Company had a $10 million revolving line of credit
available with a financial institution. No amounts have been drawn or are
outstanding under the line of credit. The Company's principal sources of
liquidity at July 31, 1996 consist of $50.3 million of cash, cash equivalents
and short-term investments, and amounts available under the Company's revolving
line of credit.
29
The Company believes that existing cash and cash equivalent balances, short-term
investments and cash generated from product sales and its revolving line of
credit will be sufficient to meet the Company's cash and capital requirements
for at least the next 12 months.
ITEM 8. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Index to Financial Statements and Financial Statement Schedules:
Financial Statements:
Report of Independent Accountants 31
Consolidated Balance Sheet as of
December 31, 1994 and 1995 and July 31, 1996 32
Consolidated Statement of Operations
for the years ended December 31, 1993,
1994 and 1995 and the seven months
ended July 31, 1995 (unaudited) and 1996 33
Consolidated Statement of Changes in
Stockholders' Equity for the years
ended December 31, 1993, 1994 and
1995 and the seven months ended July
31, 1995 (unaudited) and 1996 34
Consolidated Statement of Cash Flows
for the years ended December 31, 1993,
1994 and 1995 and the seven months
ended July 31, 1995 (unaudited) and 1996 35
Notes to the Consolidated Financial Statements 36
Financial Statement Schedules:
For the three years ended December 31, 1995
and the seven months ended July 31, 1996:
Schedule II - Valuation and Qualifying Accounts S-1
Schedules other than those listed above have been omitted since they are either
not required, not applicable, or the information is otherwise included.
30
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 subsidiary at July 31, 1996 and December 31, 1995 and 1994,
and the results of their operations and their cash flows for the seven months
ended July 31, 1996 and each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these 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.
PRICE WATERHOUSE
Austin, Texas
October 10, 1996
31
VTEL CORPORATION
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------------------------------------------
December 31, December 31, July 31,
1994 1995 1996
ASSETS
Current assets:
Cash and equivalents $4,185,000 $2,910,000 $1,973,000
Short-term investments 17,249,000 59,984,000 48,307,000
Accounts receivable, net of allowance for doubtful
accounts of $145,000, $185,000 and $203,000 at
December 31, 1994 and 1995 and July 31, 1996 12,227,000 18,875,000 15,585,000
Inventories 5,654,000 9,731,000 15,004,000
Prepaid expenses and other current assets 1,065,000 1,041,000 1,597,000
Total current assets 40,380,000 92,541,000 82,466,000
Property and equipment, net 4,912,000 9,650,000 13,906,000
Intangible assets, net - 14,285,000 13,730,000
Other assets 1,143,000 1,832,000 1,801,000
$46,435,000 $118,308,000 $111,903,000
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,849,000 $5,150,000 $9,831,000
Accrued compensation and benefits 1,918,000 1,752,000 1,529,000
Accrued warranty expense 750,000 1,061,000 697,000
Other accrued liabilities 671,000 1,351,000 1,544,000
Research and development advance 1,096,000 906,000 906,000
Deferred revenue 828,000 4,250,000 2,980,000
Total current liabilities 9,112,000 14,470,000 17,487,000
Other liabilities 100,000 - -
Total liabilities 9,212,000 14,470,000 17,487,000
----------- ------------ ------------
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; 25,000,000 authorized;
10,017,000, 13,766,000 and 14,308,000 issued and
outstanding at December 31, 1994 and 1995
and July 31, 1996 100,000 138,000 143,000
Additional paid-in capital 60,886,000 123,712,000 124,190,000
Accumulated deficit (23,908,000) (20,169,000) (30,068,000)
Cumulative translation adjustment 166,000 157,000 151,000
Unearned compensation (21,000) - -
Total stockholders' equity 37,223,000 103,838,000 94,416,000
----------- ------------ ------------
$46,435,000 $118,308,000 $111,903,000
=============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
32
VTEL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the Years Ended Months Ended
December 31, July 31,
1993 1994 1995 1995 1996
(Unaudited)
Revenues:
Products $30,534,000 $52,157,000 $68,156,000 $35,175,000 $34,564,000
Services and other 918,000 2,074,000 9,939,000 2,399,000 15,545,000
----------- ----------- ----------- ----------- -----------
31,452,000 54,231,000 78,095,000 37,574,000 50,109,000
----------- ----------- ----------- ----------- -----------
Cost of sales:
Products 16,384,000 25,685,000 33,009,000 16,706,000 19,408,000
Services and other 449,000 709,000 5,661,000 824,000 11,528,000
----------- ----------- ----------- ----------- -----------
16,833,000 26,394,000 38,670,000 17,530,000 30,936,000
----------- ----------- ----------- ----------- -----------
Gross margin 14,619,000 27,837,000 39,425,000 20,044,000 19,173,000
----------- ----------- ----------- ----------- -----------
Selling, general and administrative 16,288,000 19,860,000 25,952,000 12,861,000 21,245,000
Research and development 8,350,000 8,846,000 11,309,000 6,450,000 8,860,000
Amortization of intangible assets - - 80,000 - 560,000
Restructuring expense - - - - 553,000
----------- ----------- ----------- ----------- -----------
Total operating expenses 24,638,000 28,706,000 37,341,000 19,311,000 31,218,000
----------- ----------- ----------- ----------- -----------
Income (loss) from operations (10,019,000) (869,000) 2,084,000 733,000 12,045,000
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest income 692,000 874,000 1,688,000 688,000 1,881,000
Interest expense (12,000) (6,000) - - -
Other 5,000 103,000 54,000 164,000 265,000
----------- ----------- ----------- ----------- -----------
685,000 971,000 1,742,000 852,000 2,146,000
----------- ----------- ----------- ----------- -----------
Net income (loss) before provision
for income taxes (9,334,000) 102,000 3,826,000 1,585,000 (9,899,000)
Provision for income taxes - (40,000) (87,000) (66,000) -
----------- ----------- ----------- ----------- -----------
Net income (loss) ($9,334,000) $62,000 $3,739,000 $1,519,000 (9,889,000)
=========== =========== =========== =========== ===========
Primary net income (loss) per share ($1.05) $0.01 $0.30 $0.14 ($0.70)
Fully diluted net income (loss) per share ($1.05) $0.01 $0.30 $0.13 ($0.70)
Weighted average shares outstanding - primary 8,876,000 10,544,000 12,451,000 11,060,000 14,237,000
=========== =========== =========== =========== ===========
Weighted average shares outstanding - fully
diluted 8,876,000 10,544,000 12,451,000 11,821,000 14,237,000
=========== =========== =========== =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
33
VTEL CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Common stock
----------------------- Total
Number of Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Other Equity
------------ ------- -------------- --------------- ----------- ------------
Balance at December 31, 1992 8,607,000 $86,000 $52,923,000 ($14,636,000) ($67,000) $38,306,000
Proceeds from sale of stock 970,000 10,000 6,999,000 - - 7,009,000
Proceeds from stock issued
under employee plans 201,000 2,000 320,000 - - 322,000
Amortization of unearned
compensation - - - - 23,000 23,000
Foreign currency translation
adjustment - - - - (68,000) (68,000)
Net loss - - - (9,334,000) - (9,334,000)
----------- --------- ------------- ------------- --------- ------------
Balance at December 31, 1993 9,778,000 98,000 60,242,000 (23,970,000) (112,000) 36,258,000
Proceeds from stock issued
under employee plans 239,000 2,000 644,000 - - 646,000
Amortization of unearned
compensation - - - - 23,000 23,000
Foreign currency translation
adjustment - - - - 234,000 234,000
Net income - - - 62,000 - 62,000
----------- --------- ------------- ------------- --------- ------------
Balance at December 31, 1994 10,017,000 100,000 60,886,000 (23,908,000) 145,000 37,223,000
Proceeds from sale of stock 3,052,000 31,000 57,106,000 - - 57,137,000
Stock issued for acquired
assets (Note 2) 260,000 3,000 3,721,000 - - 3,724,000
Proceeds from stock issued
under employee plans 437,000 4,000 1,999,000 - - 2,003,000
Amortization of unearned
compensation - - - - 21,000 21,000
Foreign currency translation
adjustment - - - - (9,000) (9,000)
Net income - - - 3,739,000 - 3,739,000
----------- --------- ------------- ------------- --------- ------------
Balance at December 31, 1995 13,766,000 138,000 123,712,000 (20,169,000) 157,000 103,838,000
Exercise of stock warrants 428,000 4,000 (4,000) - - -
Proceeds from stock issued
under employee plans 114,000 1,000 482,000 - - 483,000
Foreign currency translation
adjustment - - - - (6,000) (6,000)
Net loss - - - (9,899,000) - (9,899,000)
----------- --------- ------------- ------------- --------- ------------
Balance at July 31, 1996 14,308,000 $143,000 $124,190,000 ($30,068,000) $151,000 $94,416,000
=========== ========== ============= ============== ======== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
34
VTEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
For the Seven
For the Years Ended Months Ended
December 31, July 31,
1993 1994 1995 1995 1996
(Unaudited)
Cash flows from operating activities:
Net income (loss) ($9,334,000) $62,000 $3,739,000 $1,519,000 ($9,899,000)
Adjustments to reconcile net income (loss)
to net cash from operations:
Depreciation and amortization 2,461,000 1,934,000 3,661,000 1,632,000 4,494,000
Provision for doubtful accounts 96,000 80,000 40,000 8,000 18,000
Amortization of unearned compensation 23,000 23,000 21,000 11,000 -
Amortization of deferred gain - (107,000) (100,000) (57,000) (56,000)
Foreign currency translation gain - 48,000 40,000 (83,000) (216,000)
(Increase) decrease in accounts receivable (3,371,000) (816,000) (6,688,000) (3,302,000) 3,272,000
(Increase) decrease in inventories (404,000) 513,000 (1,659,000) (1,558,000) (5,273,000)
(Increase) decrease in prepaid expenses
and other current assets (1,306,000) 353,000 450,000 (471,000) (559,000)
Increase in accounts payable 1,187,000 44,000 1,301,000 889,000 4,681,000
Increase (decrease) in accrued expenses 651,000 1,456,000 829,000 (301,000) (338,000)
Increase (decrease) in research and 2,745,000 (1,649,000) (190,000) (190,000) -
development adance
Increase (decrease) in deferred revenues 756,000 194,000 50,000 299,000 (1,270,000)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities (6,496,000) 2,135,000 1,494,000 (1,604,000) (5,146,000)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of short-term investments (71,470,000) (111,679,000) (707,280,000) (65,148,000) (241,994,000)
Sales and maturities of short-term investments 75,382,000 113,989,000 664,545,000 68,327,000 253,671,000
Purchases of property and equipment (4,482,000) (5,076,000) (9,524,000) (5,270,000) (9,499,000)
Sales of property and equipment 2,049,000 701,000 1,775,000 1,054,000 1,307,000
Cash paid for acquired assets (Note 2) - - (10,684,000) -
(Increase) decrease in other assets (314,000) (496,000) (689,000) (742,000) 31,000
----------- ----------- ----------- ----------- ----------
Net cash provided by (used in)
investing activities 1,165,000 (2,561,000) (61,857,000) (1,779,000) 3,516,000
----------- ----------- ----------- ----------- ----------
Cash flows from financing activities:
Principal payments under capital lease obligatio (18,000) (15,000) (4,000) (3,000) -
Net proceeds from issuance of stock 7,331,000 646,000 59,141,000 1,359,000 483,000
Net cash provided by financing activities 7,313,000 631,000 59,137,000 1,356,000 483,000
----------- ----------- ----------- ----------- ----------
Effect of translation exchange rates on cash (68,000) 186,000 (49,000) 125,000 210,000
----------- ----------- ----------- ----------- ----------
Net increase (decrease) in cash and equivalents 1,914,000 391,000 (1,275,000) (1,902,000) (937,000)
Cash and equivalents at beginning of period 1,880,000 3,794,000 4,185,000 4,185,000 2,910,000
----------- ----------- ----------- ----------- ----------
Cash and equivalents at end of period $3,794,000 $4,185,000 $2,910,000 $2,283,000 $1,973,000
=========== =========== ========== =========== ==========
Supplemental Cash Flow Information:
Income taxes paid $ 26,000 $ 31,000 $ 74,000 $ 27,000 -
=========== =========== ========== =========== ==========
Interest paid $ 12,000 $ 6,000 - - $ -
=========== =========== ========== =========== ==========
Stock issued for acquired assets (Note 2) $ - $ - $3,723,000 - $ -
=========== =========== ========== =========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
VTEL Corporation (the "Company") designs, manufactures, and markets, services
and supports integrated, multi-media videoconferencing systems which operate
over private and switched digital communication networks. The Company
distributes its systems to a domestic and international marketplace primarily
through third parties.
Basis of presentation
------------------------
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the
Company's wholly-owned subsidiary, VTEL Europe Limited,- which is located in
England,. The accompanying financial statements include the accounts of the
Company and its wholly-owned subsidiary after elimination of all significant
intercompany transactions and balances. 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, the valuation allowance for the gross deferred tax asset,
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 consolidated financial statements for
continued reasonableness. Appropriate adjustments, if any, to the estimates
used are made prospectively based upon such periodic evaluation.
The Company changed its fiscal year end from December 31 to July 31. The
accompanying financial statements include the results of operations and cash
flows for the seven month transition period ended July 31, 1996 with
comparative presentation of the unaudited results for the seven months ended
July 31, 1995. Results of operations for the seven month periods ended July
31, 1996 and 1995 are not necessarily indicative of the operating results
which would be expected for a full year.
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.
Warranty costs
--------------
The Company generally warrants its products against defects for one year from
the date of installation, but not to exceed fifteen months from date of
shipment. The Company provides currently for the estimated costs which may be
incurred in the future under the warranty program for products sold during
the year.
36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. To
date, the Company has not capitalized any internal software development
costs.
Cash and equivalents
--------------------
Cash and equivalents include cash and certificates of deposit with original
maturities of three months or less at the date of acquisition. Certificates
of deposit totaled $32,000 at July 31, 1996 and $32,000 and $396,000 at
December 31, 1995 and 1994, respectively.
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.
Included in short-term investments is approximately $885,000 of restricted
investments which are pledged to collateralize letters of credit obtained to
secure an advance made to the Company under a development and license
agreement (see Note 9).
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, 1996 and December
31, 1995 and 1994, 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 value
approximates cost due to the short-term nature of the investments.
Inventories
-----------
Inventories are stated at the lower of cost (based on the weighted average
method for raw materials and work in process and first-in, first-out for
finished goods) or market. Cost includes the acquisition of purchased
components, parts and sub-assemblies, freight costs, labor and overhead.
Property and equipment
----------------------
Property and equipment is recorded at cost. Internal support equipment
consists of certain demonstration and development systems manufactured by the
Company and is recorded at manufactured cost. Equipment acquired under
capital lease obligations is recorded at the lower of fair market value or
the present value of the future minimum lease payments at the inception of
the lease. 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 of the respective assets, as applicable.
Repair and maintenance costs are expensed as incurred.
37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Intangible assets
- -----------------
During the year ended December 31, 1995, the Company acquired certain assets
and a service and support infrastructurespecified workforce related to an
operating group of another company (see Note 2). The estimated value of the
intangible assets is being amortized over a period of 15 years, which is the
period in which the Company expects to be able to continue to effectively
utilize the service and support infrastructure to support its resellers in
the offering of broader services to users of videoconferencing equipment. In
accordance with Accounting Principles Board Opinion No. 17, "Intangible
Assets", the Company will periodically evaluate the amortization period
associated with the acquired intangible assets based upon anticipated periods
of future benefit, including factors such as loss of employees with key or
unique knowledge, the Company's ability to continue to successfully utilize
the specialized integration and process knowledge to provide integration and
support services, 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.
Research and development advance
--------------------------------
Research and development advance represents a cash advance received by the
Company under a development and license agreement (see Note 9) for the
reimbursement of research and development costs incurred by the Company in
performing work specified in the agreement. The amounts used to reimburse
costs incurred under the agreement are recognized as reductions of research
and development expenses.
Foreign currency translation
----------------------------
The financial statements of the Company's foreign subsidiary are measured
using the local currency as the functional currency. Accordingly, assets and
liabilities of the subsidiary 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 subsidiary are translated using monthly average exchange rates.
Income taxes
------------
The Company accounts for income taxes underadopted SFAS No. 109, "Accounting
for Income Taxes" which . SFAS No. 109 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. The implementation of
SFAS No. 109 had no effect on the Company's consolidated financial statements
for the year ended December 31, 1993 or for previous years.
38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Net income (loss) per share
- ---------------------------
Primary net income (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares and common share equivalents
outstanding (if dilutive) during each period. Common share equivalents
represent incremental shares of common stock calculated using the treasury
stock method related to common stock which may be issuable at the average
market price of the Company's common stock during the period upon exercise of
outstanding stock options or warrants. Fully diluted net income per share is
calculated in the same manner as primary earnings per share except the
dilutive effect of common share equivalents is calculated at the end-of-
period market price of the Company's stock if substantially different from
the average market price.
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 secures 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 and
payables, approximates fair value. 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 investments only in high
credit 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.
Employee stock plans
--------------------
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting and
Disclosure of Stock-Based Compensation." SFAS No. 123 introduces a fair-value
based method of accounting for stock-based compensation. It 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 Opinion
No. 25, "Accounting for Stock Issued to Employees." As such, SFAS No. 123 did
not have any effect on the Company's financial position or results of
operations.
2. PURCHASE TRANSACTION
In November 1995, the Company purchased certain assets and a service and
support infrastructure related to the Integrated Communications Systems Group
of another company (the "ICS Transaction"). The transaction resulted in the
Company acquiring certain tangible assets primarily consisting of
inventories, prepaid expenses and fixed assets and assuming certain deferred
revenuesliabilities related to extended warranty service contracts. The
acquired service and support infrastructure
39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
includes a trained workforce possessing specialized systems integration and
process knowledge. The transaction will allow the Company to enhance its
ability to support the Company's resellers' abilities to offer systems
integration, installation and end-user support to the ultimate purchaser of the
Company's products, thereby allowing the resellers to more effectively provide
an essential part of the services that are integral to the purchase of the
Company's products.
The Company completed the ICS Transaction with the payment of $10,684,000 in
cash, which includes $142,000 of transaction expenses, and the issuance of
260,000 shares of the Company's unregistered Common Stock with an estimated
market value of $3,723,000. The transaction was accounted for under the
purchase method pursuant to which the Company determined that approximately
$14,400,000 of the purchase price related intangible assets which are
primarily represented by the service and support infrastructure.
3. INVENTORIES
Inventories consist of the following:
DECEMBER 31, DECEMBER 31, JULY 31,
1994 1995 1996
Raw materials $2,340,000 $6,074,000 $ 8,959,000
Work in process 548,000 161,000 920,000
Finished goods 1,620,000 2,895,000 4,508,000
Finished goods held for evaluation 1,146,000 601,000 617,000
---------- ---------- -----------
$5,654,000 $9,731,000 $15,004,000
========== ========== ===========
Finished goods held for evaluation consists of completed multi-media
communication systems used for demonstration and evaluation purposes, which
are generally sold during the next year.
4. PROPERTY AND EQUIPMENT
Property and equipment is composed of the following:
DECEMBER 31, DECEMBER 31, JULY 31,
1994 1995 1996
Furniture and equipment $ 2,312,000 $ 5,634,000 $ 8,990,000
Internal support equipment 5,738,000 9,172,000 12,880,000
Leasehold improvements 797,000 1,629,000 2,209,000
----------- ----------- ------------
8,847,000 16,435,000 24,079,000
Less - accumulated depreciation (3,935,000) (6,785,000) (10,173,000)
----------- ----------- ------------
$ 4,912,000 $ 9,650,000 $ 13,906,000
=========== =========== ============
Depreciation and amortization expense relating to property and equipment
during the seven months ended July 31, 1996 was approximately 3,934,000.
Depreciation and amortization expense relating to property and equipment was
approximately $3,581,000, $1,934,000, and $2,461,000 for the years ended
December 31, 1995, 1994 and 1993, respectively, of which $3,000, $8,000 and
$40,000, respectively, related to amortization of property and equipment held
under capital leases.
40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. CREDIT AGREEMENT
On November 28, 1994, the Company executed a credit agreement with a
financial institution which established a $10 million revolving line of
credit. Under the line of credit, the Company may borrow up to $10 million
based on eligible accounts receivable. The line of credit provides a minimum
borrowing base of $5 million. The credit agreement also provides that the
Company may request the issuance of letters of credit up to a maximum of $4
million and foreign exchange contracts subject to certain limitations.
Any amounts outstanding under the credit agreement will bear interest at the
prime rate and will be payable on the maturity date of November 15, 1996
unless the Company converts the revolving advances to a three-year term loan,
which will bear interest at the prime rate and will be payable in equal
monthly installments.
Any amounts outstanding under the credit agreement will be secured by the
Company's inventory and accounts receivable. The credit agreement requires
the Company to maintain certain financial ratios and other covenants. At
July 31, 1996, the Company had no amounts outstanding under the credit line.
6. STOCKHOLDERS' EQUITY
In October 1995, the Company completed a secondary offering of its Common
Stock which consisted of the sale of 3,000,000 shares of the Company's Common
Stock generating net proceeds to the Company of approximately $57,000,000.
In June 1995, Intel purchased 51,898 shares of the Company's Common Stock
for approximately $396,000 pursuant to an agreement, since terminated, which
enabled Intel to maintain its percentage ownership interest in the Company.
In October 1995, Intel delivered notice of its intent to exercise its warrant
to purchase 1,199,124 shares of the Company's Common Stock at an exercise
price of $11.50 per share under an agreement which modified the provisions of
the Common Stock and Warrant Purchase Agreement (the "Stock Agreement")
between the Company and Intel. Pursuant to the modified agreement, Intel
agreed to sell to the Company concurrently with the exercise of the warrant,
and the Company agreed to purchase from Intel, 771,464 shares of the
Company's Common Stock at a price of $17.875, the closing price of the
Company's Common Stock on the day immediately preceding the date in which
Intel delivered notice of its intent to exercise the warrant. During the
seven months ended July 31, 1996, the Company completedexecuted the
warrant exercise and related stock redemption transaction such that Intel
increased its ownership of the Company's Common Stock by a427,660 shares.
The modified agreement also resulted in Intel agreeing to terminate certain
of its rights specified in the Investor Rights' Agreement between the Company
and Intel.
The Stock Agreement provides that under certain circumstances the Company may
be required to register the shares sold under the agreements at its sole
cost.
In November 1995, the Company issued 260,769 shares of its unregistered
Common Stock in connection with the ICS Transaction (see Note 2).
41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. SHARE REPURCHASE PROGRAM
During the seven months ended July 31, 1996, the Company adopted a share
repurchase program whereby the Company may repurchase shares of its Common
Stock in the open market provided that the aggregate purchase price of the
shares repurchased does not exceed $8.4 million and the repurchase price for
any shares does not exceed $12 per share. The repurchased shares will be
issued from time to time to fulfill requirements for the Company's Common
Stock under its employee stock plans. Subsequent to July 31, 1996, the
Company repurchased 455,200 shares of its Common Stock for $3.6 million.
8. EMPLOYEE STOCK OPTION PLANS
The Company applies APB Opinion No.25 and related Interpretations in
accounting for its stock option plans, which are described below.
Accordingly, no compensation cost has been recognized for its stock option
plans. 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 income (loss) and net income (loss) per share would have been
reflected by the following pro forma amounts for the seven months ended July
31, 1996 and the year ended December 31, 1995:
FOR THE YEAR FOR THE SEVEN
ENDED MONTHS ENDED
DECEMBER 31, JULY 31,
1995 1996
Net income (loss) As reported $3,739,000 $ (9,899,000)
Pro forma $2,801,000 $(11,426,000)
Primary net income (loss) per share As reported $ .30 $ (.70)
Pro forma $ .22 $ (.80)
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 during the seven months ended July 31, 1996 and
the year ended December 31, 1995:
FOR THE YEAR FOR THE SEVEN
ENDED MONTHS ENDED
DECEMBER 31, JULY 31,
1995 1996
Dividend yield - -
Expected volatility 84.21% 84.83%
Risk-free rate of return 5.43% 6.56%
Expected life 4.94 years 4.94 years
42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In June 1989, the Board of Directors adopted the 1989 Stock Option Plan (the
1989 Plan). The 1989 Plan provides for the issuance of both non-qualified
stock options and incentive stock options to key employees, directors, and
consultants of the Company. At December 31, 1995, tThe Company had
reserved 3,041,697 shares of Common Stock for issuance upon exercise of stock
options under the 1989 Plan.
Under the terms of the 1989 Plan, the Board may grant options to purchase
Common Stock. The stock options are granted at estimated fair market value at
the time of grant, unless the optionee owns greater than 10% of the combined
voting power of all classes of stock in which case the option price would be
110% of the fair market value at the date of grant. Options granted under
the 1989 Plan generally vest ratably over 48 months and are exercisable for a
period of ten years beginning with the date of grant unless the optionee
owns, at the time of grant, more than 10% of the voting power of all classes
of stock of the Company, in which case the option may only be exercised for a
period of five years beginning with the date of grant. These options expire
30 days after termination of employment. The 1989 Plan terminates ten years
after the date of its adoption unless terminated earlier by the Board of
Directors.
In April 1996, the Board of Directors adopted the 1996 Stock Option Plan (the
1996 Plan). The terms of the 1996 Plan are the same as those for the 1989
Plan, except that the maximum number of shares issuable under the 1996 Plan
is 700,000, plus shares which are reacquired pursuant to the share repurchase
plan.
In October 1992, the Board of Directors adopted the 1992 Director Stock
Option Plan (the 1992 Plan). Under the 1992 Plan, nonemployee directors
elected prior to October 14, 1994 received stock options to purchase 6,000
shares of the Company's Common Stock at an exercise price equal to the market
price on the date of grant. Nonemployee directors elected on or after
October 14, 1994 will receive stock options to purchase 12,000 shares of the
Company's Common Stock on the same terms. In addition, nonemployee directors
will receive stock options to purchase 6,000 shares of the Company's Common
Stock at the time that the prior options granted under the 1992 Plan become
fully exercisable and vested. The maximum number of shares which may be
issued under the 1992 Plan is 100,000 shares of Common Stock. Options
granted under the 1992 Plan vest ratably over 36 months and are exercisable
for a period of 10 years beginning with the date of the grant.
43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes activity under all Plans for each of the
three years ended December 31, 1995 and the seven month period ended July
31, 1996:
1993 1994 1995 1996
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE (000'S) PRICE
Outstanding at the
beginning of the year 1,377 $4.41 1,506 $3.41 1,638 $ 3.97 1,879 $ 8.80
Granted 937 4.84 361 5.61 701 17.37 449 10.99
Exercised (158) 0.80 (151) 1.68 (371) 3.66 (77) 3.13
Canceled (650) 8.23 (78) 5.17 (89) 8.88 (64) 10.39
------- -------- ------- -------- ------- -------- ------- --------
Outstanding at the
end of the year 1,506 $3.41 1,638 $3.97 1,879 $ 8.80 2,187 $ 9.40
======= ======== ======= ======== ======= ======== ======= ========
Options exercisable at
year end 1,488 $3.31 1,620 $3.92 1,851 $ 8.74 2,165 $ 9.40
======= ======== ======= ======== ======= ======== ======= ========
Weighted average fair
value of options granted
during the year $ - $ - $12.07 $ 7.77
======== ======== ======== ========
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-AVERAGE
NUMBER OUTSTANDING REMAINING WEIGHTED-AVERAGE NUMBER EXERCISABLE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES AT JULY 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE AT JULY 31, 1996 EXERCISE PRICE
$ 0.300 - $ 4.000 559,818 4.87 years $ 2.012 559,818 $ 2.012
4.375 - 7.250 455,449 7.13 5.662 450,449 5.656
7.375 - 11.000 457,335 9.03 9.389 450,001 9.392
11.250 - 20.563 664,250 9.37 17.087 655,250 17.066
24.125 49,935 9.13 24.125 49,935 24.125
- ----------------- ----------- ------ -------- ---------- --------
$ 0.300 - $24.125 2,186,787 7.67 years $ 9.399 2,165,453 $ 9.340
================= =========== ====== ======== ========== ========
Under the 1989 Plan, options became immediately exercisable upon grant
subject to repurchase by the Company until they are vested. At July 31, 1996
and December 31, 1995 and 1994, options to purchase 953,301, 772,017 and
777,277 shares of Common Stock, respectively, were vested under the 1989
Plan. Options to purchase 18,574 shares of Common Stock were available for
future grants under the 1989 plan at July 31, 1996.
At July 31, 1996 and December 31, 1995 and 1994, options to purchase 23,333,
22,632 and 21,720 shares of Common Stock, respectively, were vested under the
1992 Plan. These options expire 12 months after the optionee ceases to serve
as a director of the Company.
During September through December of 1991, the Company granted options to
purchase 65,400 shares at prices which are deemed to be less than fair market
value at the date of grant. Vesting was ratable over a period of four years
through 1995. Unearned compensation of $94,000 related to these options has
been recognized ratably over the vesting period. Compensation expense charged
to operations related to these options was $21,000, $23,000 and $23,000,
respectively, for years ended December 31, 1995, 1994 and 1993.
44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
During the year ended December 31, 1993, the Company adopted a program
pursuant to which all holders of options under the Company's 1989 Stock
Option Plan were given the opportunity to surrender their existing options
for new options having an exercise price of $4.00 per share, the fair market
value of the Company's Common Stock on the grant date of the new options.
Any vesting under the existing options was lost in an exchange under the
program. The new options vest ratably over a 48 month period. A total of
558,913 options were exchanged under the program.
Employee Stock Purchase Plan
----------------------------
On April 29, 1993, the Company adopted an Employee Stock Purchase Plan
("Employee Plan") which enables all employees to acquire the Company's stock
under the plan. The Employee Plan authorizes the issuance of up to 450,000
shares of the Company'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. Shares of Common Stock issued under the
Employee Plan totaled 37,121, 66,087, 88,740 and 41,988, respectively, for
the seven month period ended July 31, 1996 and the years ended December 31,
1995, 1994 and 1993.
The fair value of the employees' purchase rights was estimated using the
Black-Scholes model with the following assumptions for the seven month period
ended July 31, 1996 and the year ended December 31, 1995:
FOR THE FOR THE SEVEN
YEAR ENDED MONTHS ENDED
DECEMBER 31, 1995 JULY 31, 1996
SECTION 16 SECTION 16
OFFICERS OTHERS OFFICERS OTHERS
Dividend yield - - - -
Expected volatility 95.78% 90.29% 79.87% 79.68%
Risk-free rate of return 5.18% 5.12% 5.58% 5.43%
Expected life .50 years .25 years .50 years .25 years
Weighted-average fair value of
purchase rights granted $ 3.13 $ 2.30 $ 2.30 $ 2.07
9. DEVELOPMENT AND LICENSE AGREEMENT
On October 22, 1993, the Company 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.
45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The initial term of the Development Agreement will continue until December
31, 1996 and will 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.
The Company was advanced $3,000,000 under the agreement to be used for the
initial reimbursements of research and development costs incurred by the
Company in performing the work specified in the Development Agreement. The
Company is required to periodically report the amount of costs incurred which
have been reimbursed from the advance. The Company records reductions of the
advance as the specified work is performed and reimbursable costs are
incurred. However, reimbursements are actually approved for release to the
Company as specified projects or milestones are completed. Therefore, the
recorded reduction of the advance at December 31, 1994 is $845,000 more than
the amount of reimbursement released to the Company. Management believes
that this excess will be fully released under the terms of the agreement.
The Company may be is required to secure the remaining advance which
has not been released with letters of credit. Outstanding letters of credit
obtained by the Company to secure the advance totaled $885,000 at July 31,
1996.
During the years ended December 31, 1995, and 1994 and 1993,
the Company reduced gross research and development expenses by approximately
$190,000, and $1,649,000 and $255,000, respectively., for
reimbursable research and development costs under the terms of the
Development Agreement. No reductions of research and development expenses
were recorded during the seven months ended July 31, 1996 as a result of the
Development Agreement. As of July 31, 1996, the Company had no research and
development activities in process or planned related to the
Development Agreement.
10. SIGNIFICANT CUSTOMERS
Sales to significant customers (including third party resellers) which
represent 10% or more of net sales for the respective years were as follows:
DECEMBER 31, JULY 31,
1993 1994 1995 1996
Customer A 9% 11% 13% 19%
Customer B 14% 14% 10% 9%
Sales to ten of the Company's resellers accounted for approximately 53%, 56%,
63% and 578% of the Company's revenues for the seven months ended July
31, 1996 and the years ended December 31, 1995, 1994 and 1993, respectively.
46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. FEDERAL INCOME TAXES
Under the provisions of SFAS No. 109, the components of the net deferred tax
amount are as follows:
DECEMBER 31, DECEMBER 31, JULY 31,
1994 1995 1996
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 5,874,000 $ 5,821,000 $ 7,994,000
Research and development credit
carryforwards 950,000 836,000 836,000
Minimum tax credit carryforwards 28,000 97,000 110,000
Inventory and warranty provisions 726,000 623,000 500,000
Compensation accruals 176,000 249,000 346,000
Depreciation 709,000 1,135,000 1,200,000
Other (73,000) (116,000) 134,000
------------- ------------- -------------
Gross deferred tax asset 8,390,000 8,645,000 11,120,000
Valuation allowance (8,390,000) (8,645,000) (11,120,000)
------------- ------------- -------------
$ - $ - $ -
============= ============= =============
The Company's net operating loss and research and development credit
carryforwards expire in varying amounts from 2002 through 2011. Research and
development tax credit carryforwards expire in varying amounts from 2002
through 2008. Minimum tax credit carryforwards do not expire and
carryforward indefinitely. Net operating losses related to the Company's
foreign subsidiary (totaling $5,273,000) are available to offset future
foreign taxable income.
For the short tax year ended July 31, 1996, a net operating loss was incurred
and no tax provision was recorded. During the years ended December 31, 1995
and 1994, the Company utilized net operating loss carryforwards of $3,455,000
and $733,000, respectively, to offset current year taxable income. However,
a provision of $87,000 and $40,000 was recorded during the years ended
December 31, 1995 and 1994, respectively, for federal alternative minimum
taxes and state incomes taxes. The Company incurred a net operating loss
during the year ended December 31, 1993. Accordingly, no provision for income
taxes was necessary for this year. Due to the uncertainty surrounding the
timing of realizing the benefits of its favorable tax attributes in future
tax returns, the Company has placed a valuation allowance against its
otherwise recognizable net deferred tax asset. Accordingly, no deferred taxes
have been recorded for the seven months ended July 31, 1996 and the years
ended December 31, 1995, 1994 and 1993.
In 1989 and again in 1992, the Company 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.
At July 31, 1996, the Company had total domestic net operating loss
carryforwards of $21,038,000. The portion of this carryforward available for
utilization during fiscal 1997 (in consideration of the annual limitations)
is $17,670,000. In each fiscal year subsequent to 1997, an additional
$421,000 will become available for utilization through 2004.
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. RESTRUCTURING EXPENSES
During the seven months ended July 31, 1996, the Company finalized its plan
to realign its resources into Customer Business Units ("CBU"). These CBU's
will provide the framework for moving decision making closer to the customer
and for responding to customer requirements quickly. The realignment of
resources resulted in the Company recording a charge during the seven months
ended July 31, 1996 of approximately $553,000 related to restructuring costs
that the Company will incur in adjusting its business operations and
resources such that the Company will be able to effectively implement its CBU
model. These restructuring charges primarily represent the costs associated
with the elimination of positions which do not support the CBU strategy.
13. COMMITMENTS AND CONTINGENCIES
Lease Commitments
-----------------
The Company leases furniture and equipment, manufacturing facilities and
office space under noncancelable leases which expire at various dates through
19992005. Certain leases obligate the Company to pay property taxes,
maintenance and repair costs.
During the year ended December 31, 1993, the Company entered into a sale and
leaseback agreement in which the Company sold furniture and equipment with an
aggregate net book value of $1,778,000 for $2,049,000 and leased such assets
back under a 37 month operating lease. The Company has deferred the excess
of the cash received over the aggregate net book value of the assets sold and
leased back and recognizes such amount over the term of the lease. The
Company is required to make monthly lease payments of $57,000 over the lease
term.
Future minimum lease payments under all leases as of July 31, 1996 were as
follows:
OPERATING
LEASES
Fiscal years ending:
1997 $ 3,190,000
1998 2,101,000
1999 886,000
2000 843,000
2001 853,000
Thereafter 2,802,000
---------------
$ 10,675,000
===============
Total rent expense under all operating leases for the seven months ended July
31, 1996 and the years ended December 31, 1995, 1994 and 1993 was $2,570,000,
$2,824,000, $2,692,000, and $906,000, respectively.
48
14. GEOGRAPHIC INFORMATION
The Company operates in one industry. Transfers between geographic areas are
recorded at cost plus a markup. Information about the Company's operations
in different geographic areas is as follows:
JULY 31, 1996
UNITED STATES EUROPE ELIMINATIONS CONSOLIDATED
Sales to unaffiliated customers $ 46,875,000 $ 3,234,000 $ - $ 50,109,000
Transfer between geographic areas 2,383,000 - (2,383,000) -
------------- ------------ ------------ -------------
Total sales $ 49,258,000 $ 3,234,000 $(2,383,000) $ 50,109,000
============= ============ ============ =============
Operating income (loss) $(10,259,000) $(1,834,000) $ 48,000 $(12,045,000)
============= ============ ============ =============
Identifiable assets $116,610,000 $ 3,131,000 $(7,838,000) $111,903,000
============= ============ ============ =============
DECEMBER 31, 1995
UNITED STATES EUROPE ELIMINATIONS CONSOLIDATED
Sales to unaffiliated customers $ 71,492,000 $ 6,603,000 $ - $ 78,095,000
Transfer between geographic areas 3,475,000 - (3,475,000) -
------------- ------------ ------------- -------------
Total sales $ 74,967,000 $ 6,603,000 $(3,475,000) $ 78,095,000
============= ============ ============= =============
Operating income (loss) $ 2,473,000 $ (520,000) $ 131,000 $ 2,084,000
============= ============ ============= =============
Identifiable assets $114,863,000 $ 3,445,000 $ - $118,308,000
============= ============ ============= =============
DECEMBER 31, 1994
UNITED STATES EUROPE ELIMINATIONS CONSOLIDATED
Sales to unaffiliated customers $ 50,501,000 $ 3,730,000 $ - $ 54,231,000
Transfer between geographic areas 3,683,000 - (3,683,000) -
------------- ------------ ------------ -------------
Total sales $ 54,184,000 $ 3,730,000 $(3,683,000) $ 54,231,000
============= ============ ============ =============
Operating income (loss) $ 1,140,000 $(1,537,000) $ (472,000) $ (869,000)
============= ============ ============ =============
Identifiable assets $ 43,278,000 $ 3,157,000 $ - $ 46,435,000
============= ============ ============ =============
DECEMBER 31, 1993
UNITED STATES EUROPE ELIMINATIONS CONSOLIDATED
Sales to unaffiliated customers $ 28,047,000 $ 3,405,000 $ - $ 31,452,000
Transfer between geographic areas 2,443,000 - (2,443,000) -
------------- ------------ ------------ -------------
Total sales $ 30,490,000 $ 3,405,000 $(2,443,000) $ 31,452,000
============= ============ ============ =============
Operating income (loss) $ (8,678,000) $(1,304,000) $ (37,000) $(10,019,000)
============= ============ ============ =============
Identifiable assets $ 43,023,000 $ 2,524,000 $ - $ 45,547,000
============= ============ ============ =============
49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
15. STRATEGIC ALLIANCE
During the year ended December 31, 1995, the Company entered into a strategic
alliance with Accord Telecommunications, Ltd. ("Accord"), an Israel-based
telecommunications company. The alliance involves technology, manufacturing,
and marketing licenses, as well as joint product development for the
enhancement of multi-media, multipoint control units and the creation of new
products. Both parties will receive royalties based on their contributed
technology. As part of the alliance, the Company acquired a 12% interest in
Accord. Such investment is being accounted for under the cost method and is
included in other assets at July 31, 1996.
50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL 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" and "Election of Directors - Certain Relationships and Related
Transactions" will be filed by amendment within 120 days of the Company's fiscal
year ended July 31, 1996.
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 by amendment within 120 days of the Company's fiscal
year ended July 31, 1996.
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 by
amendment within 120 days of the Company's fiscal year ended July 31, 1996.
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 "Election of
Directors - Certain Relationships and Related Transactions" will be filed by
amendment within 120 days of the Company's fiscal year ended July 31, 1996.
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 30 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 30 of this Report.
51
(a)(3) The following exhibits are filed with this Annual Report on Form 10-K:
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------- --------------------
3.1 - Fourth Amended and Restated Certificate of Incorporation, as filed
July 7, 1993 with the Secretary of State of Delaware (incorporated by
reference to Exhibit 3.1 to the Company's quarterly report filed on
Form 10-Q for the period ending June 30, 1993).
3.4 - 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).
3.5 - 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).
3.6 - 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).
10.2 - 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).
52
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------- --------------------
10.3 - 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).
10.4 - 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).
10.5 - 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).
10.6 - 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).
10.7 - 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).
10.8 - Original Equipment Manufacturer Agreement, effective August 28,
1989, made and entered into by and between Truevision, Inc., as
Supplier, and the Company, as Reseller, together with letter, dated
February 18, 1992, from Ann van Benten Hunt, Corporate Counsel,
Truevision, Inc., to Rod Bond of the Company (incorporated by
reference to Exhibit 10.21 to the Company's Registration Statement on
Form S-1, File No. 33-45876, as amended).
10.9 - 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).
53
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------- --------------------
10.10 - Lease agreement, executed on November 18, 1992, by and between
NationsBank of Texas, N.A., as Lessor, and the Company, as Lessee
(incorporated by reference to Exhibit 10.11 to the Company's 1992
Annual Report on Form 10-K).
10.11 - Lease agreement, executed on May 3, 1993 by Central Distributors,
Inc., as Landlord, and on April 29, 1993 by the Company, as Tenant
(incorporated by reference to Exhibit 10.12 to the Company's 1993
Annual Report on Form 10-K).
10.12 - 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).
10.13 - 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).
10.14 - Common Stock and Warrant Purchase Agreement between VTEL
Corporation and Intel Corporation, dated October 25, 1993, including
Exhibit A "Warrant", and Exhibit D "Investor Rights Agreement"
(incorporated by reference to Exhibit 4.1 to the Company's quarterly
report filed on Form 10-Q for the period ended September 30, 1993).
10.15 - Loan and Security Agreement, dated November 28, 1994, between Silicon
Valley Bank, as Creditor, and the Company, as Borrower (incorporated
by reference to Exhibit 10.16 to the Company's 1994 Annual Report on
Form 10-K).
10.16 - 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).
54
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------- --------------------
10.17 - G & L Consultants, Inc. Recordkeeping Service Agreement signed on
July 29, 1994 by Rodney S. Bond for the Company, as sponsor of the
VTEL 401(k) Plan, and Dianne Johnson, as Plan Trustee (incorporated
by reference to Exhibit 10.18 to the Company's 1994 Annual Report on
Form 10-K).
10.18 - 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).
10.19 - Agreement dated September 15, 1995 by and between VTEL Corporation
and Intel Corporation modifying the Common Stock and Warrant Purchase
Agreement between VTEL Corporation and Intel Corporation
(incorporated by reference to Exhibit 10.20 to the Company 1995
Annual Report on Form 10-K).
10.20 - Asset Purchase Agreement By and Among Peirce-Phelps, Inc. and VTEL-
ICS, Inc. and VTEL Corporation, dated November 22, 1995 (incorporated
by reference to Exhibit 10.21 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).
10.21 - 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).
10.22 - The VTEL Corporation 1996 Stock Option Plan (the terms of which are
incorporated by reference to the Company's 1995 Definitive Proxy
Statement).
11.1 - Computation of Per Share Earnings.
55
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- --------- --------------------
22.1 - List of Subsidiaries (incorporated by reference to Exhibit 22.1
to the Company's 1995 Annual Report on Form 10-K).
24.1 - Consent of Price Waterhouse LLP.
__________
(b) Reports on Form 8-K (incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
(c) See subitem 14(a)(3) above.
(d) See subitem 14(a)(2) above.
56
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, TREASURER
AND SECRETARY
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/ F.H. (Dick) Moeller Chief Executive Officer November 7, 1996
- ------------------------------------------------- -------------------
F.H. (Dick) Moeller Chairman of the Board, and
Director (Principal Executive
Officer)
/s/ Rodney S. Bond Chief Financial Officer, November 7, 1996
- ------------------------------------------------- -------------------
Rodney S. Bond Vice President- Finance,
Treasurer and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Eric L. Jones Director November 7, 1996
- ------------------------------------------------- -------------------
Eric L. Jones
/s/ John V. Jaggers Director November 7, 1996
- ------------------------------------------------- -------------------
John V. Jaggers
/s/ Max Hopper Director November 7, 1996
- ------------------------------------------------- -------------------
Max Hopper
/s/ Gordon Matthews Director November 7, 1996
- ------------------------------------------------- -------------------
Gordon Matthews
57
VTEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
- ---------------------------------------------------------------------------------------------------------
PROVISION FOR WRITE-OFF OF
BALANCE AT DOUBTFUL UNCOLLECTIBLE BALANCE AT
BEGINNING OF ACCOUNTS ACCOUNTS RECEIVABLE END OF
YEAR RECEIVABLE YEAR
Accounts receivable -
allowances for
doubtful accounts
Year ended December 31, 1993 $109,000 $ 96,000 $ - $205,000
Year ended December 31, 1994 205,000 80,000 (140,000) 145,000
Year ended December 31, 1995 145,000 40,000 - 185,000
Seven months ended July 31, 1996 185,000 118,000 (100,000) 203,000
S-1