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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1998
Commission file number 0-20008
VTEL CORPORATION
A Delaware Corporation IRS Employer ID No. 74-2415696
108 Wild Basin Road
Austin, Texas 78746
(512) 437-2700
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 21,215,873 shares of the registrant's Common Stock
held by nonaffiliates on September 18, 1998 was approximately $84,863,492. 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 8, 1998 there were 23,282,700 shares of the registrant's Common
Stock, $.01 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders in
connection with the 1998 Annual Meeting are incorporated by reference into Part
III.
A list of all Exhibits to this Annual Report on Form 10-K is located at
pages 52 through 56.
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PART I.
ITEM 1. BUSINESS
GENERAL
VTEL Corporation ("VTEL" or the "Company") designs, manufactures,
markets and supports digital visual communication systems. The Company's product
line is based on the latest microprocessor technology, a unique integration of
hardware and software that provides features which are far beyond traditional
video and audio conferencing. The use of open PC architecture and standard
Microsoft(R) operating systems allows users to bring virtually any kind of data
into a meeting or training environment. These new digital visual communications
systems allow access and sharing of any information available on the World Wide
Web, data that resides on an organization's Local Area Network or Intranet, or
local PC files and software applications. The Company's systems are built upon a
system platform that is based on industry-standard, PC-compatible open hardware
and software architecture. The PC-architecture also provides a natural pathway
to connect the Company's digital visual communication systems to either Internet
Protocol (IP) networks or traditional telephone networks on a call by call basis
through simple software commands. The Company's network management software uses
industry standard protocols to allow large digital visual communications
networks to be operated in the same manner currently used in traditional data
networks, thereby leveraging the rapidly expanding network infrastructures being
deployed in organizations throughout the world. The Company offers a wide range
of global professional services to assist customers in designing, installing,
operating and supporting organizational digital visual communications networks
wordwide.
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 digital visual communication 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
manufacturing, education, government, health care, and financial institution
market segments and certain portions of the general business market. VTEL
primarily distributes its systems through third-party resellers which include
major telecommunications providers and distributors such as Ameritech, Anixter,
GTE, MCI, Norstan, PacBell, SBC, 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 28,000 group digital visual communication systems.
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 allowed 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.
On May 23, 1997, shareholders of VTEL and Compression Labs,
Incorporated, a Delaware corporation ("CLI"), approved the merger (the "Merger")
of VTEL-Sub, Inc., a Delaware corporation and direct wholly-owned subsidiary of
VTEL ("Merger Sub"), with and into CLI, pursuant to an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement"), with CLI becoming a direct
wholly-owned subsidiary of VTEL. As a result of the Merger, (a) the outstanding
shares of CLI's Common Stock, par value $.001 per share ("CLI Common Stock"),
were converted into the right to receive 0.46 shares of Common Stock of VTEL,
par value $.01 per share ("VTEL Common Stock"), per share of CLI Common Stock
converted (or cash in lieu of fractional shares otherwise deliverable in respect
thereof), and (b) the outstanding shares of CLI Series C Preferred Stock, par
value $.001 per share ("CLI Preferred Stock"), were converted into the right to
receive 3.15 shares of VTEL
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Common Stock per share of CLI Preferred Stock converted (or cash in lieu of
fractional shares otherwise deliverable in respect thereof). The CLI shares were
exchanged for a total of 8,424,741 shares of VTEL Common Stock. The acquisition
was accounted for as a pooling of interests.
The Merger was completed for the following reasons, among others:
1. The Merger permits VTEL to broaden and diversify its product lines with
complementary technology, creating additional opportunities for overall
growth and reducing the risk of dependence on individual products.
2. The economies of scale that can be realized by the combined companies in
development, administration, marketing and sales and the improvement in
product gross margins that may also be realized by the combined companies.
Historically, VTEL's gross profit margins have been significantly higher
than CLI's, and a material portion of the combined companies revenues may
shift to higher margin products.
3. VTEL's experienced management team and product development organization, in
combination with key CLI managers, will provide a stronger management team
with greater depth and experience to lead the combined company.
The synergy created as a result of the Merger was first demonstrated
with the introduction of StandardsPlus Video, the next generation of video
quality that is based on industry standards, but vastly improves the image
quality through innovation and software coding techniques. StandardsPlus Video
improves video quality in terms of motion handling and image clarity while
maintaining interoperability with standards-based systems.
The Company's executive offices are located at 108 Wild Basin Road,
Austin, Texas 78746, and its telephone number is (512) 437-2700.
INDUSTRY BACKGROUND
Digital visual communications systems enable users at remote locations
to meet and share information face-to-face. A wide range of business or
professional meetings, education and training classes, and technical or medical
consultations make use of this innovative technology to reduce operating costs,
improve customer services, reduce cycle times, or improve intra- or
inter-company communications. A videoconference entails the transmission of
video, audio and data signals between two or more locations over a network
connection. Video, audio and data conferencing involves a large amount of
digital information. In order to transmit this information over digital
networks, the video, audio and data signals must be digitized and compressed
without substantially reducing the information content. Improved compression
algorithms reduce transmission costs by allowing more information to be sent
over lower capacity digital networks. Improved quality and lower costs of
videoconferencing systems and network services have made videoconferencing
applications more attractive to a broader group of users worldwide. Also
contributing to the wider use of videoconferencing is the increased availability
of switched digital telephone service and the use of Internet Protocol networks,
allowing a videoconference to be initiated with nearly the ease of a normal
telephone call.
The major change occurring in the industry today involves the
evolutionary migration of telecommunications networks from circuit-switched
technology (like traditional telephone lines) to packet-switched technology
(Internet Protocol networks). The Company is ideally positioned to take
advantage of this change because its underlying product technology is built upon
an open PC architecture. The Company can accommodate and support customer
migration to Internet Protocol networks through simple software upgrades to
existing products.
Videoconferencing systems are also becoming simpler to use. Current
videoconferencing systems can be configured as "set-top" appliances or
"roll-about" room systems that can be used without the need for trained
operators or special room requirements. In general, the videoconferencing market
can be grouped into four complementary categories: personal conferencing,
set-top conferencing, workgroup conferencing, and group conferencing. The
personal conferencing market is targeted at the individual. As such, solutions
are typically priced in the $1,000 to $6,000 range. The set-top conferencing
market is targeted at groups of two to three individuals. Systems in this market
range from $4,000 to $9,000. The workgroup conferencing market is targeted at
the project teams or executive offices
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that require collaborative data and software interaction. Solutions in this
market range from $6,000 to $15,000. The group conferencing market is targeted
at larger groups, typically eight or more individuals. Application uses vary
greatly from boardrooms to large classrooms. These group systems are priced at
$10,000 and above.
Another factor contributing to the growth of videoconferencing is the
continuing emergence of international industry standards designed to allow
interoperability of videoconferencing systems manufactured by different vendors.
The International Telecommunications Union ("ITU-T") sets international
standards used by the industry. The Company has been a leader in promoting
standards across the industry and delivers standards-based products to its
customers.
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. VTEL has taken a leadership position in this exact form of
high-value digital visual communication technology due to its open PC platform
and flexible architecture.
CORPORATE STRATEGY
The Company's primary focus is on high-value digital visual
communication systems which provide high functionality tailored to the needs of
markets targeted by the Company. This results in a range of offerings from the
desktop to the boardroom. 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. The Company's principal digital visual communication
systems are built upon a system platform which integrates video, audio and data
compression technologies in a PC-compatible open hardware and software
architecture. This open architecture allows 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 system 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.
Centralized Management and Administration. Using the industry standard
Simple Network Management Protocol "SNMP", VTEL is able to centrally manage and
administer large, distributed digital visual communication networks. The
Company's SmartVideoNet Manager product provides advanced functionality for
management in the videoconferencing industry. It leverages the industry standard
SNMP for statistics, controls, and alerts. These functions allow for centralized
problem determination and resolution, thereby eliminating the requirement for
on-site expert personnel to support the system. An additional benefit of
SmartVideoNet Manager is the ability to establish video calls from a centralized
console with no local user intervention. Using this, meeting participants simply
arrive at the conference room or classroom and the video call is already in
session waiting for their participation.
Consistent Operating Platform. An important characteristic of each
product in the family is the consistent use of standard Microsoft operating
systems (Windows 95(R), Windows 98(R), Windows NT(R)). This consistency combines
the PC-microprocessor architecture with a recognized software platform and
provides a familiar look and feel for the user throughout the product family
architecture. Windows operating systems support a wide variety of software and
hardware applications that can be integrated into a videoconference as
stand-alone features or as shared applications by digital visual communication
users through the Company's collaboration capability.
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Multi-media Functionality. The Company's digital visual communication
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 digital visual communication
technology, combine video and audio, document exchange, shared whiteboard, and
computer application sharing. 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 a
Microsoft Windows(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. This same user interface is used across the entire
product family for consistency, commonality, and ease of use.
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 digital
visual communication systems and multipoint products comply with the leading
ITU-T standards for videoconferencing. 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, PCI, Intel x86, SNMP, and Microsoft
Windows(R)), involving video, audio, graphics, communications, computers,
peripherals, and network management. The Company has been an active participant
on the relevant 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
digital visual communication systems onto local area networks (LANs) and wide
area networks (WANs), thereby leveraging the rapidly expanding network
infrastructures being deployed in organizations throughout the world. 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. 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 digital visual communication 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.
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 digital visual communication 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
manufacturing, education, government, health care, financial institution markets
and certain portions of the general business market. The Company intends to
focus its product strategy in the 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.
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PRODUCT LINE MANAGEMENT. In 1997, the Company added increased emphasis
to the lifecycle management of key platforms and services. As such, Strategic
Business Units (SBUs) were defined for Personal and Workgroup Systems,
Networking Systems, Enterprise Systems, and Professional Services. These SBUs
are responsible for product management, marketing, and development.
Additionally, the SBUs have product line profit and balance sheet
responsibility.
DISTRIBUTION STRATEGY. The Company primarily relies on third parties
worldwide to sell, install and support its digital visual communication systems
in an effort to leverage the sales forces of the resellers which provide
telecommunications and support services to potential purchasers of digital
visual communication systems. The Company has established relationships with
many of the leading telecommunications providers in the United States, including
Ameritech, GTE, MCI, Norstan, PacBell, 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.
VTEL also sells products directly to certain end-user customers,
generally large global end user customers which have sophisticated global
digital visual communication networks and require and demand much more
involvement of the Company to support the sale, installation and maintenance of
the network.
PRODUCTS
The Company offers a complete line of interoperable multi-media digital
visual communication systems. The Company differentiates its systems from
competitive products by a high level of advanced functionality, such as
presentation graphics and access to PC-based software and hardware peripherals.
Because VTEL systems are based on open PC-architecture, and most functionality
is contained in software, many system upgrades are accomplished via software,
enabling customers to protect their investment in the Company's Systems. VTEL
systems may be configured with LAN connections so that data and presentations
may be created at an individual PC workstation, stored on the LAN and retrieved
by the digital visual communication system for presentation or transfer to the
remote location during a videoconference.
Videoconferences can range from simple point-to-point connections
between two locations of a single organization to connections between multiple
locations of multiple organizations in several countries. The Company's primary
digital visual communication systems are based upon one of two architectures,
either its SmartStation Architecture (SSA) for personal and workgroup digital
visual communication or its Enterprise Series Architecture (ESA) for group
conferencing.
ENTERPRISE SERIES ARCHITECTURE PLATFORM. VTEL's Enterprise Series
ArchitectureTM ("ESA(TM)") is the hardware and software platform for a family of
products designed to meet the needs of large and small groups. The ESA platform
is a PC-based, open architecture digital visual communication system configured
around an Intel Pentium(TM) PC chassis containing the ESA video-audio processing
boardset. The ESA system contains, in addition to the standard internal disk
drive and 3.5 inch floppy drive, a CD-ROM drive as well as an expansion chassis
which contains all the audio and video input/output ports. The ESA platform
utilizes the Microsoft Windows(R) operating system as its software platform and
incorporates the AppsView(TM) software user interface and control system.
Through AppsViewTM, the user controls all conference functions with on-screen
software icons which may be customized for each user or application. The ESA
platform contains open PC card slots for application-specific peripherals.
The ESA platform supports industry standards for video, audio, and data
compression and is interoperable with any other system supporting the H.320
standard. The platform operates over digital communication bandwidths
transmitting at data rates from 56 Kbps to T1 or E1 rates in point-to-point and
multipoint conferences. ESA connections can be made over public dial-up digital
networks or private digital dedicated facilities. During 1999, ESA connectivity
will be expanded to include Internet Protocol networks.
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Configurations of the ESA(TM) platform include the Company's Team
Conferencing(TM) and Leadership Conferencing(TM) Systems. The Team Conferencing
or "TC" systems are single or dual monitor systems built on the ESA platform and
designed to provide mid-range products for users seeking high quality video and
audio and digital visual communication capability in a small to mid-sized group
setting. Data rates from 56 Kbps to 512 Kbps are provided. The systems provide
higher performance PC-based functionality through the use of the Intel
Pentium(TM) microprocessor, inclusion of a CD-ROM drive, the Microsoft
Windows(TM) operating system and the AppsView(TM) user interface. Product
features include LAN connectivity, Internet access, both document and computer
conferencing, 30 frame per second video and capability of including software
applications designed for Microsoft Windows(TM) as part of the videoconference.
The TC systems have suggested list prices of $21,495 to $46,995.
The Leadership Conferencing LC5000 system is the flagship model of the
ESA(TM) platform. The LC5000 provides for high-speed data rates up to T1 or E1
and delivers extremely sharp, smooth video. A document stand with VTEL's
SmartView software allows users to utilize printed material as easily as using
an overhead projector. LC5000 configurations vary in price from $53,995 to
$57,995.
WG500. The WG500 is a series of workgroup digital visual communication
systems targeted at the project team or executive office where the ability to
share and interactively create a work product is required. As such, it is
designed to utilize industry leading collaborative multi-media tools such as
Microsoft NetMeeting(TM). Based on a high performance, multi-media PC platform,
the WG500 fills the price-point and functionality gap between the personal
desktop conferencing market and the large group conferencing market. The WG500
has suggested list prices of $9,995 to $14,995.
SETTOP 250. The SETTOP 250 is the first business-class, set-top
videoconferencing system in the industry priced under $5,000. Combining
ease-of-use with high-quality features, the SETTOP 250 is the best solution for
enterprise users who require entry-level group conferencing with
industry-standard voice and video. The SETTOP 250 includes an intuitive user
interface, an easy, color-coded installation process, and comes in both 128 Kbps
and 384 Kbps models.
SMARTSTATION. The SmartStation(TM) converts a Windows-based PC into a
videoconferencing system for personal use. Incorporating the performance of the
ESA(TM) products with its high-quality audio and video, the SmartStation(TM)
allows users to collaborate while still leveraging the power and versatility of
their desktop PC. In one easy-to-install package, SmartStation(TM) includes
VTEL's AppsView(TM) graphical conference control interface for consistent
operation across all of VTEL's digital visual communication solutions.
SmartStation(TM) supports data rates up to 384 Kbps for high-quality desktop
conferencing and supports the T.120 standard for data collaboration by
integrating Microsoft NetMeeting 2.0(TM).
SMARTVIDEONET MANAGER(TM). SmartVideoNet Manager(TM) software is a tool
designed to help customers simplify the administration of video networks and
reduce the operating costs. Based on the Windows NT platform and utilizing the
SNMP communications protocol, SmartVideoNet Manager(TM) leverages the PC-based
architecture of the Company's systems to allow customers to use their existing
Intranet to provide continuous monitoring of their video network. SmartVideoNet
Manager(TM) allows administrators to remotely control, configure, diagnose and
troubleshoot VTEL systems, all from their PC console on their desk.
NETWORK EQUIPMENT. VTEL carries an extensive line of equipment to
optimize connectivity in a variety of network environments. In order to
maximize communication effectiveness, many customers choose to purchase
multipoint control units to link multiple users into a single meeting. The
SmartLink Multimedia Conference Server(TM) ("MCS(TM)") is the hub of a
videoconferencing meeting, allowing interactive communications with up to 48
participants. The SmartLink MCS(TM) provides translation capabilities for a
number of line rates and video and audio algorithms to ensure maximum
flexibility. Additionally, the SmartLink MCS(TM) is manageable through
SmartVideoNet Manager(TM). SmartLink MCS(TM) configurations range in price from
$19,900 to over $150,000 for advanced configurations. VTEL's MCU-II product
line supports up to 20 participants and has a list price of $49,995 for a
four-port configuration.
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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:
SOFTWARE SYSTEM PLATFORM. The SmartStation(TM) Architecture and ESA(TM)
platforms are the Company's proprietary software architectures. 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(TM) operating systems and is OLE-2
compatible. AppsView(TM) is now available on all of the Company's primary
digital visual communication systems.
PERSONAL DIGITAL VISUAL COMMUNICATION SYSTEMS. Increased performance of
semiconductor processors specifically designed for video and image processing
allow for the cost-effective design and packaging of small group digital visual
communication systems and high functionality personal desktop systems which are
compatible with small and large group digital visual communication systems. The
Company recently introduced the SmartStation(TM) digital visual communication
cardset which was developed utilizing the capability of the Company's digital
visual communication software ported to a suitable hardware platform. The
principal hardware-related resource commitment in the development process is the
effort to find and test boardset candidates for suitability for the Company's
software.
AUDIO COMPRESSION/ECHO CANCELLATION. Audio quality is an important
element in any video conference. At lower transmission rates, the amount of
bandwidth allocated to audio decreases, thereby requiring audio compression
algorithms to maintain acceptable audio quality. The Company produces its own
proprietary, integrated echo canceller to improve audio quality. The Company
offers audio compression capability at allocated bandwidths of 8, 12, 32 and 74
Kbps through audio subsystems.
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. Shortly following the
merger with CLI, VTEL announced StandardsPlus(TM) Video which provides improved
video quality using industry standards. Significant video quality improvements
using industry technology standards was achieved via a collaborative development
effort between VTEL engineers in Austin and San Jose.
SMARTVIDEONET MANAGER(TM). In the summer of 1997, VTEL introduced the
industry's first standards-based management and administration platform for
distributed digital visual communication networks. Using the SNMP standard,
SmartVideoNet Manager(TM) allows VTEL customers to centrally control their
digital visual communication network for functions such as problem
determination, problem resolution, call setup and conference statistics. Using
this management framework, conference support can be provided centrally with no
requirement for local user intervention, even for networks with hundreds of
digital visual communication system endpoints.
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SALES AND MARKETING
VTEL believes that a well-positioned distribution channel is critical
to marketing success. The Company primarily relies on third parties to sell,
install and support its digital visual communication 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
digital visual communication systems. 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 their respective countries. 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. The use of
resellers is expected to continue to account for a large percentage of the
Company's revenues in the foreseeable future.
Consistent with its focus on its targeted market segments, the Company
works with a number of VARs that specialize in specific applications, geographic
areas and markets such as education, health care, project management and
government procurement. Typically, the Company's agreements with its resellers
and VARs involve non-exclusive arrangements which may be canceled by either
party at will and contain no minimum purchase requirements on the part of the
resellers.
VTEL also sells products directly to certain end-user customers,
generally large global end user customers which have sophisticated global
digital visual communication networks and require much more involvement of the
Company to support the sale, installation and maintenance of the network.
PRODUCT SUPPORT AND EXPANSION OF SUPPORT CAPABILITIES
Currently, end-user support and installation of the Company's products
are provided by resellers and VARs, by Dictaphone in the United States,
Fujitsu-Bell Atlantic and ICL Sorbus (a wholly-owned subsidiary Fujitsu-Bell
Atlantic) in most foreign markets as third-party service providers or directly
by the Company in order to provide a comprehensive service offering for its
worldwide customer base. The Company trains the service employees of Dictaphone,
Fujitsu/Bell Atlantic and ICL Sorbus and VTEL's resellers on diagnostics and
service of its products. Dictaphone, Fujitsu/Bell Atlantic and ICL Sorbus and
the reseller service network are supported by trained technicians at 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 enhances its resellers' ability to sell the Company's digital
visual communication 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 acquisition allowed 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 completed the ICS Transaction with the payment of $10.7
million in cash, which includes $0.14 million of transaction expenses, and the
issuance of 260,000 shares of the Company's unregistered Common Stock. The
Company also assumed certain ICS liabilities (see Note 3 to the Consolidated
Financial Statements).
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COMPETITION
The videoconferencing industry is highly competitive. The Company
believes that the principal competitive factors in the industry are product
architecture, ease of use, video and audio quality, functionality, service and
support, market visibility, and price. The Company faces competition from a
number of companies that market communications systems for videoconferencing.
Currently in the United States, PictureTel Corporation, Sony Corporation, Nippon
Electric Corporation, Polycom Corporation, and Tandberg, among others, are
marketing roll-about group videoconferencing systems and multipoint control
units. Internationally, videoconferencing systems are available from, among
others, British Telecommunications plc., PictureTel Corporation, Sony
Corporation, Nippon Electric Corporation, Mitsubishi, Ltd., Fujitsu, Ltd.,
Panasonic Ltd., Polycom Corporation, and Tandberg. Intel Corporation also
entered the low-end work group system market in mid 1997.
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, set-top systems, and
software-based internet/intranet visual communications systems, which may help
to increase awareness in the value of visual communications products while also
resulting in increased competition. Microsoft has introduced visual components
to its NetMeeting Release 2.0(TM) product, PictureTel has announced its intent
to deliver a client/server architected brand of desktop videoconferencing, and
Intel has delivered a minimal set of video and audio extensions in the MMX
enhancements to its Pentium microprocessors. The Company intends to continue
its focus on large-, small-, and work-group digital visual communication
systems, in addition to gateways and other products, where the Company believes
it can add significant value through software, user interfaces, integrated
environments, and applications designed to meet the needs of its targeted
markets.
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.
It is possible for these factors to have an adverse impact on the Company's
competitive position.
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 has passed subsequent audits 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 consistent 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.
However, there can be no assurance that such components will be readily
available when needed. Similarly, excessive rework costs associated with
defective components or process errors could adversely affect 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
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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.
PATENTS AND TRADEMARKS
The Company has 13 patents issued by the United States Patent and
Trademark Office and 11 patent applications pending related to the Company's
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 been issued two trademarks and two service marks by the
United States Patent and Trademark Office covering the "VTEL" mark and the
Company's logo as well as trademarks and service marks issued by certain foreign
countries and entities. Applications for other trademarks are currently pending
both in the United States and abroad.
EMPLOYEES
At July 31, 1998, the Company employed 740 full-time employees as
follows:
NUMBER OF
FUNCTION EMPLOYEES
Sales and marketing 256
Research and development 158
Service, support and
systems integration 148
Manufacturing 78
Finance and administration 100
-----------------
Total 740
=================
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.
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EXECUTIVE OFFICERS
The Company's executive officers are as follows:
JERRY S. BENSON, JR., age 42, is currently Chief Executive Officer and
President. He joined the Company in May 1997 as President and Chief Operating
Officer and assumed his current position in September 1998. Prior to joining
VTEL, Mr. Benson spent 10 years at NEC Technologies, Inc., the last two years as
President and Chief Operating Officer. Mr. Benson also served in the Office of
the Chairman and on the Board of Directors of NEC Technologies. He also served
as a director on the Board of Directors of Packard Bell. Prior to his role as
President and Chief Operating Officer at NEC Technologies, Mr. Benson held a
number of significant operational and general management roles at NEC
Technologies. These included general management positions in several NEC groups,
divisions and strategic business units. Before NEC, he held marketing and sales
management positions at Wyse, Amdek, and Ericsson.
RODNEY S. BOND, age 54, 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.
CHARLES M. DENTON, age 58, joined the Company in May 1993 as the Area
Vice President of Sales for the Eastern Area of the United States based in
Washington D. C. In July 1996, he was named Vice President Indirect Sales
responsible for channel strategy and operations based in Austin, Texas. In July
1997, Mr. Denton was named to the position of Vice President - North American
Sales where he was responsible for the overall sales operations including
indirect channels as well as direct sales. In August 1998, he was named to his
current position of Vice President - Global Sales Development where he is
responsible for channel development, training, vertical marketing, lead
generation and sales support operations. Mr. Denton has held various Sales
Management positions with Ascend Communications, PictureTel and Motorola.
DENNIS M. EGAN, age 47, 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 1985 to January 1993, Mr.
Egan was Vice President and General Manager of the Integrated Communications
Systems Group of Peirce-Phelps. Mr. Egan's pre-1985 experience includes 13 years
serving in various sales and management positions with Peirce-Phelps.
VINAY GOEL, age 32, joined the Company in July 1998 as Vice President
and General Manager for the Personal and Workgroup Systems strategic business
unit. Immediately prior to joining VTEL, Mr. Goel spent two years as the Vice
President and General Manager at Microwave Systems Corporation focused on the
digital television and and internet phone markets. Before Microwave, he held
marketing positions at General Instruments, Intel and Oracle.
FRANK S. KAPLAN, age 43, joined the Company in September 1995 as Vice
President - International Sales and Marketing. In August 1998, Mr. Kaplan was
named to the position of Vice President - Worldwide Sales. Prior to joining
VTEL, Mr. Kaplan spent seven years at Compression Labs, Inc., the last two years
as Regional Vice President - Sales for Asia Pacific and Latin America. Mr.
Kaplan's previous experience includes working for AT&T for seven years in
various sales positions, the last two years as District Sales Manager in San
Francisco, California.
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STEVE F. KEILEN, age 39, joined the Company in July 1998 as Vice
President and General Manager of Enterprise Systems Strategic Business Unit.
Prior to joining VTEL, Mr. Keilen served as the Director for Systems Marketing
North America at Compaq Computer Corporation and was Director of Desktop
Marketing and Product Management at Digital Equipment Corporation prior to the
merger of these two companies. He previously held management positions at
Digital Equipment Corporation and Hewlett-Packard Company.
F.H. (DICK) MOELLER, age 53, joined the Company in October 1989 and is
currently Chairman of the Board of Directors. From 1989 to September 1998, Mr.
Moeller was also President and Chief Executive Officer of the Company. 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. Mr.
Moeller also serves as General Partner of SSM Ventures.
LY-HUONG T. PHAM, age 40, joined the Company in October 1997 as Chief
Technology Officer and Vice President of Research and Development. From May 1992
to October 1997, Ms. Pham served in numerous senior management positions at
Apple Computer, most recently serving as senior director, Operating Systems
Technologies. Prior to Apple, Ms. Pham spent 12 years at Wang Laboratories where
she held a variety of technical and senior management positions.
BARRY RUMAC, age 57, joined the Company in June 1995 as Director of
Investor Relations. In May 1998, he was named to the position of Vice President
of Corporate Communications. Before joining the Company, Mr. Rumac was
responsible for advertising at Dell Computer Corporation.
MICHAEL J. STEIGERWALD, age 39, joined the Company in June 1998 as Vice
President and General Manager of the Professional Services strategic business
unit, based in King of Prussia, Pennsylvania. Prior to joining the Company, Mr.
Steigerwald held the position of Vice President at Newbridge Networks, where he
lead the Global Service and Support organization responsible for the company's
ViVID Internetworking Products business unit. For thirteen years prior to his
experience with Newbridge Networks, Mr. Steigerwald held several services
management positions at Ungermann-Bass Networks, an early pioneer in the LAN
industry, with his last position being that of Vice President, Worldwide
Customer Care.
BOB R. SWEM, age 61, joined the Company in September 1992 as Vice
President - Manufacturing. From June 1981 to July 1992, Mr. Swem held various
positions with the Austin Division of Tandem Computers, Inc., ranging from
Manager of Manufacturing to Director of Operations.
STEPHEN L. VON RUMP, age 40, joined the Company as Chief Marketing
Officer in September 1998. Mr. Von Rump spent the last eight years at MCI
Corporation most recently as Vice President, Enterprise Services Marketing.
JUDY A. WALLACE, age 47, joined the Company in March 1997 as Vice
President - Human Resources. Prior to joining the Company, Ms. Wallace was the
Director of Human Resources with Falcon Seaboard Holdings L.P. She previously
spent five years at Enron Corp. as Human Resource Manager and 11 years at
Weatherford International as Human Resource Supervisor.
ITEM 2. PROPERTIES
The Company's headquarters, product development, and sales and
marketing facility occupies approximately 139,000 square feet in Austin, Texas
under a lease which expires in March 2013. 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 70,000 square feet of a
facility that is situated in a light industrial area in Austin, Texas where the
Company's manufacturing, training and spare parts depot are located. The
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Company's manufacturing facilities and equipment are currently utilized
generally on a one shift per day basis. Should additional manufacturing capacity
be needed during the next year, the Company believes that it could provide the
necessary manufacturing capacity through the addition of work shifts or
subcontractors and additional warehouse space.
The Company occupies 52,500 square feet in Sunnyvale, California. The
lease expires in April 2008. The Company has a research and development,
technical assistance and service and support group in its Sunnyvale location.
The Company's Professional Services group occupies a facility of approximately
41,000 square feet in the Philadelphia, Pennsylvania vicinity which is leased
through June 2006.
ITEM 3. LEGAL PROCEEDINGS
CLI is currently engaged in several legal proceedings relating to
matters arising prior to the Merger. There can be no assurance that CLI's legal
proceedings can be resolved favorably to CLI or VTEL. Such legal proceedings, if
continued for an extended period of time, could have an adverse effect upon
CLI's working capital and management's ability to concentrate on its business.
An unfavorable outcome in any one or several such legal proceedings could have a
material adverse effect on CLI and hence, VTEL.
In a complaint filed on December 20, 1993 in the United States District
Court in Dallas, Texas, Datapoint Corporation ("Datapoint") alleged that CLI had
infringed two United States patents owned by Datapoint relating to video
conferencing networks. The complaint sought a judgment of infringement, monetary
damages, injunctive relief and attorneys' fees. CLI responded to the complaint
by denying the material allegations of the complaint and asserting affirmative
defenses. In July 1998, the United States District Court dismissed the civil
action filed by Datapoint.
In June 1997, Keytech, S.A. ("Keytech") filed suit against CLI in the
United States District Court in Tampa, Florida. Keytech was a distributor of
satellite encoder and decoder products manufactured by a division of CLI which
was sold by CLI in June 1996. Keytech has asserted that the equipment sold was
defective and did not conform to contract specifications and express and implied
warranties. Keytech has asserted damages in excess of $20 million based on its
allegations of breach of contract, breach of warranties and fraud. CLI has filed
an answer denying liability and has asserted cross-claims against Keytech for
amounts due and unpaid for equipment sold by CLI to Keytech.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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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 fiscal quarter of 1996,
1997 and 1998:
CALENDAR YEAR FISCAL YEAR FISCAL YEAR
1996 1997 1998
HIGH LOW HIGH LOW HIGH LOW
1st Quarter $17.250 $ 8.813 $10.625 $ 6.625 $ 8.875 $ 5.438
2nd Quarter $12.625 $ 9.500 $11.000 $ 8.250 $ 8.438 $ 5.625
3rd Quarter $ -- $ -- $ 8.625 $ 4.875 $ 7.688 $ 5.250
4th Quarter $ -- $ -- $ 7.125 $ 5.500 $ 7.063 $ 4.750
In May 1996, the Company changed its fiscal year end from December 31
to July 31. Therefore, the above quarterly information for 1996 reflects the
first two calendar quarters of the year and the information relating to the
remainder of calendar 1996 is included in the fiscal 1997 quarters (the first
fiscal quarter beginning on August 1, 1996), except for July 1996 which had a
low stock price of $6.375 and a high stock price of $9.6875.
The Company has not paid cash dividends on its Common Stock and
presently intends to continue a policy of retaining earnings for reinvestment in
its business.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth consolidated financial data for VTEL as
of the dates and for the periods indicated. All such data reflects the Merger
with CLI on May 23, 1997, which was accounted for as a pooling of interests. The
consolidated operations data for the year ended December 31, 1995, the seven
months ended July 31, 1996, and the years ended July 31, 1997 and 1998 has been
derived from the audited consolidated financial statements of VTEL included
elsewhere herein. The consolidated operations data for the year ended December
31, 1993 and 1994 has been derived from the audited consolidated financial
statements of VTEL not included herein.
The consolidated balance sheet data as of July 31, 1997 and 1998 has
been derived from the audited consolidated financial statements of VTEL included
elsewhere herein. The consolidated balance sheet data as of December 31, 1993,
1994 and 1995 and July 31, 1996 has been derived from the audited consolidated
financial statements of VTEL not included herein.
The consolidated financial data as of July 31, 1995 and for the seven
months then ended have been derived from the unaudited consolidated financial
statements of VTEL not included herein. The unaudited consolidated financial
data include all adjustments, consisting of normal recurring adjustments, which
VTEL considers necessary for a fair presentation of its financial position as of
such dates and the results of operations and cash flows for such periods. The
selected financial data should be read in conjunction with the consolidated
financial statements of VTEL and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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THE RESTATEMENT OF THE CONSOLIDATED FINANCIAL INFORMATION COMBINES THE
FINANCIAL INFORMATION OF VTEL AND CLI GIVING RETROACTIVE EFFECT TO THE MERGER AS
IF THE TWO COMPANIES HAD OPERATED AS A SINGLE COMPANY FOR ALL PERIODS PRESENTED.
HOWEVER, THE TWO COMPANIES OPERATED INDEPENDENTLY PRIOR TO THE MERGER THAT WAS
CONSUMMATED IN MAY 1997 AND THE HISTORICAL CHANGES AND TRENDS IN THE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THESE TWO COMPANIES RESULTED FROM
INDEPENDENT ACTIVITIES.
FOR THE
FOR THE YEARS SEVEN MONTHS FOR THE YEARS
ENDED ENDED ENDED
DECEMBER 31, JULY 31, JULY 31,
1993 1994 1995 1995 1996 1997 1998
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues $ 126,547 $ 169,189 $ 191,074 $ 98,079 $ 96,962 $ 191,023 $ 179,684
Gross margin 39,089 66,380 66,843 39,971 35,980 74,702 84,957
Net income (loss) from
continuing operations (21,518) (4,816) (17,301) (4,335) (18,507) (44,271) 2,779
Net income (loss) (12,817) 169 (53,843) (3,811) (18,507) (52,054) 2,779
Net income (loss) per share
from continuing operations (1.51) (0.27) (0.90) (0.24) (0.87) (2.10) 0.12
Net income (loss) per share (0.90) 0.01 (2.81) (0.21) (0.87) (2.45) 0.12
BALANCE SHEET DATA:
Working capital $ 85,335 $ 85,088 $ 93,330 $ 76,023 $ 77,091 $ 39,528 $ 41,503
Total assets 170,469 178,086 223,061 182,082 175,092 131,135 129,289
Long-term liabilities 1,020 494 985 1,278 -- -- 3,848
Stockholders' equity 117,595 124,185 139,512 126,739 122,238 76,765 81,258
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY
On May 23, 1997, shareholders of VTEL and CLI approved the Merger of
VTEL-Sub, Inc., a Delaware corporation and direct wholly-owned subsidiary of
VTEL ("Merger Sub"), with and into CLI, pursuant to an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement"), with CLI becoming a direct
wholly-owned subsidiary of VTEL. As a result of the Merger, (i) the outstanding
shares of CLI's Common Stock, par value $.001 per share ("CLI Common Stock"),
were converted into the right to receive 0.46 shares of Common Stock of VTEL,
par value $.01 per share ("VTEL Common Stock"), per share of CLI Common Stock
converted (or cash in lieu of fractional shares otherwise deliverable in respect
thereof), and (ii) the outstanding shares of CLI Series C Preferred Stock, par
value $.001 per share ("CLI Preferred Stock"), were converted into the right to
receive 3.15 shares of VTEL Common Stock per share of CLI Preferred Stock
converted (or cash in lieu of fractional shares otherwise deliverable in respect
thereof). The CLI shares were exchanged for a total of 8,424,741 shares of VTEL
Common Stock. The acquisition was accounted for as a pooling of interests and
accordingly, the consolidated financial information has been restated for all
periods to include the accounts of both VTEL and CLI.
The restatement of the consolidated financial information combines the
financial information of VTEL and CLI giving retroactive effect to the Merger as
if the two companies had operated as a single company for all periods presented.
However, the two companies operated independently prior to the Merger that was
consummated in May 1997 and the historical changes and trends in the financial
condition and results of operations of these two companies resulted from
independent activities. Nonetheless, the following Management's Discussion and
Analysis of Financial Condition and Results of Operations attempts to relate the
activities which resulted in the changes in financial condition and results of
operations of the combined company, taking into consideration that a trend or
change in the historical results of the combined entity was caused by many
events related to each individual company operating independently as
competitors. The financial information presented on a historical restated basis
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is not indicative of the financial condition and results of operations that may
have been achieved in the past or will be achieved in the future had the
companies operated as a single entity for the periods presented. The following
discussion of the consolidated operations and financial condition of the Company
should be read in conjunction with the Company's consolidated financial
statements and related notes thereto included elsewhere herein.
In May 1996, the Company changed its fiscal year end from December 31
to July 31. The accompanying financial information includes 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.
RESULT OF OPERATIONS
The following table sets forth for the fiscal periods indicated the
percentage of revenues represented by certain items in the Company's
consolidated statement of operations:
FOR THE FOR THE SEVEN FOR THE
YEAR ENDED MONTHS ENDED YEARS ENDED
DECEMBER 31, JULY 31, JULY 31,
1995 1995 1996 1997 1998
(UNAUDITED)
Revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin 35.0 40.8 37.1 39.1 47.3
Selling, general and 32.7 32.0 40.1 34.2 36.1
administrative
Research and development 11.1 12.1 16.8 12.8 11.1
Total operating expenses 44.4 45.0 58.0 62.9 46.8
Other income, net 0.4 0.2 1.8 0.6 1.1
Net income (loss) from continuing
operations (9.1) (4.4) (19.1) (23.2) 1.6
Net income (loss) (28.2)% (3.9)% (19.1)% (27.3)% 1.6%
FOR THE YEARS ENDED DECEMBER 31, 1995 AND JULY 31, 1997 AND 1998 AND THE SEVEN
MONTHS ENDED JULY 31, 1995 AND 1996.
Revenues
The following table summarizes the Company's group digital visual
communication and multipoint control unit sales activity:
FOR THE FOR THE SEVEN FOR THE
YEAR ENDED MONTHS ENDED YEARS ENDED
DECEMBER 31, JULY 31, JULY 31,
1995 1995 1996 1997 1998
(Unaudited)
Large-group digital visual
communication systems 3,607 1,903 1,654 3,595 3,518
Small-group digital visual
communication systems 334 201 69 690 632
Multipoint control units 223 113 81 213 140
----- ----- ----- ----- -----
Total units 4,164 2,217 1,804 4,498 4,290
===== ===== ===== ===== =====
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Consolidated revenues decreased from $191.1 million in fiscal 1995 to
$191.0 million in fiscal 1997 and to $180.0 million in fiscal 1998. Consolidated
revenues decreased from $98.1 million for the seven months ended July 31, 1995
to $97.0 million for the seven months ended July 31, 1996.
Revenues for the year ended December 31, 1995 included amounts
generated from the broadcast products division which was sold by the Company's
wholly-owned subsidiary, CLI, in June 1996. Revenues for the year ended July 31,
1997 were consistent with revenues for the year ended December 31, 1995 due to
an increase in revenues generated by sales of digital visual communications
systems and professional services which replaced the decline in revenues as a
result of the sale of the broadcast products division.
Revenues for the year ended July 31, 1998 decreased in comparison with
revenues for the year ended July 31, 1997 due to Merger transition issues.
During the year ended July 31, 1998, the Company combined the sales forces of
VTEL and CLI, migrated to a single product platform by eliminating the former
CLI platform, and combined the management and operations of the two companies
into a single organization. The Company has completed all Merger transition
activities and is operating effectively as a single organization. The Company
expects to be able to continue to improve operational efficiency and to increase
revenues in the future.
Revenues decreased from the seven months ended July 31, 1995 to the
seven months ended July 31, 1996 as a result of a trend of decreasing digital
visual communication product revenues by the Company's wholly-owned subsidiary,
CLI. The decrease in revenue was due to product transition issues and the
distraction of the attention of CLI's management in an attempt to diversify the
broadcast products division that ultimately was sold in June 1996.
The Company has experienced a trend of revenue growth in consolidated
service and other revenues as a result of an increase in service and systems
integration revenues generated from the assets acquired in the ICS Transaction
in November 1995 (see Note 3 to the Consolidated Financial Statements) and an
increase in the installed base of digital visual communication products
resulting in a larger revenue base for services.
International sales as a percentage of total consolidated product
revenues were 23%, 26% and 24% for the years ended December 31, 1995 and July
31, 1997 and 1998 and were 22% and 21% for the seven months ended July 31, 1995
and 1996. While the Company has been able to penetrate foreign markets such as
Europe, China, the Far East and Latin America, the decline in international
revenue as a percentage of total revenue during fiscal 1998 is the result of the
economic downturn ongoing in the Far East.
One of the Company's initiatives is to grow revenues from non-U.S.
markets. Non-U.S. operations are subject to certain risks inherent in conducting
business abroad including price and currency exchange fluctuations and
restrictive government actions. The Company believes its foreign currency
exposure to be relatively low as foreign sales are predominantly in U.S.
dollars. The Company utilizes currency hedging programs that utilize foreign
currency forward contracts on a limited basis and reviews the credit worthiness
of its customers to mitigate foreign currency exchange and credit risk. There
can be no assurance that the Company's foreign currency hedging program will
effectively hedge foreign currency exchange risk.
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 primarily 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.
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Gross margin
Gross margins were 35%, 39% and 47% for the years ended December 31,
1995 and July 31, 1997 and 1998 and were 41% and 37% for the seven months ended
July 31, 1995 and 1996.
The Company's gross margin trend has been positively affected by
changes in the Company's sales mix to higher margin products with more features
and lower per unit manufacturing costs realized by the distribution of
relatively fixed manufacturing overhead costs. This trend has been offset by the
impact of lower average selling prices and a higher proportion of service and
systems integration revenues, which generally carry a lower gross margin than
the Company's digital visual communication products. The gross margin for the
year ended December 31, 1995 reflects an $11.0 million charge taken in November
1995 by the Company's subsidiary, CLI, to reduce the carrying amount of certain
assets, primarily inventory and capitalized software related to a restructuring
of its digital videoconferencing products division. During fiscal 1998, the
products that were previously developed by the Company's wholly-owned
subsidiary, CLI, represented a smaller proportion of total product revenue due
to the transition of the Company's combined product offering to the Company's
ESA-based products. The products of the Company's wholly-owned subsidiary, CLI,
generally have a lower gross margin than the ESA-based products. During the year
ended July 31, 1997 the Company's restated combined revenues consisted of a
higher proportion of revenues from CLI, which resulted in a lower gross margin
on a combined basis. The higher proportion of product revenues from the ESA
platform products resulted in a higher blended gross margin for the year ended
July 31, 1998.
Gross margins declined from the seven months ended July 31, 1995 to the
seven months ended July 31, 1996 as service and integration revenues became a
larger proportion of total revenues during the seven months ended July 31, 1996
due to incremental revenues generated by the Company's systems integration and
service operations which were acquired in November 1995. The Company's systems
integration and service operations carry a lower gross margin percentage than
its product revenues such that the Company's overall gross margin is lower.
Although the systems integration and service revenues related to assets acquired
in connection with the ICS Transaction generally carry a lower gross margin, the
systems integration and service activities also generally carry lower operating
expenses than the Company's other revenue sources.
The Company expects gross margin pressures due to price competitiveness
in the industry, shifts in the product sales mix and anticipated offerings of
new products, which may carry a lower gross margin. The Company expects that
overall price competitiveness in the industry will continue to become more
intense as users of digital visual communication systems attempt to balance
performance, functionality and cost. The Company's gross margin is subject to
fluctuation based on pricing, production costs and sales mix.
Selling, general and administrative
Selling, general and administrative expenses of $64.8 million in fiscal
1998 decreased by 1% from $65.4 million in fiscal 1997, which increased by 5%
from $62.5 million in fiscal 1995. Selling, general and administrative expenses
were 33%, 34% and 36% of revenues for the years ended December 31, 1995 and July
31, 1997 and 1998.
Selling, general and administrative expenses increased from the year
ended December 31, 1995 to the year ended July 31, 1997 despite consistent
revenues during these periods. The increase in selling, general and
administrative expenses is due to the incremental selling, general and
administrative expenses associated with the Company's Professional Services
Group which was acquired in connection with the ICS Transaction in November
1995. The selling, general and administrative expenses incurred by the
Professional Services Group resulted in an increase of nearly 100% in
professional services revenues from the year ended December 31, 1995 to the year
ended July 31, 1997.
Selling, general and administrative expenses increased from the year
ended July 31, 1997 to the year ended July 31, 1998 despite a decline in
revenues during these periods. The increase was due to investments made by the
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Company during the year ended July 31, 1998 related to marketing and branding
campaigns which were designed to provide brand awareness for VTEL's products and
to establish VTEL as an industry leader in digital visual communications.
Additionally, Merger transition issues related to the combination of the sales
forces of VTEL and CLI contributed to an increase in selling, general and
administrative expenses without a proportionate increase in revenues. The
Company has completed all Merger transition activities and its sales force is
operating effectively as a single organization. Therefore, the Company expects
to be able to generate higher revenue productivity in the future from the
combined sales force.
Selling, general and administrative expenses increased from $31.4
million for the seven months ended July 31, 1995 to $38.8 million for the seven
months ended July 31, 1996, an increase of 24%. Selling, general and
administrative expenses were 32% and 40% of revenues for the seven months ended
July 31, 1995 and 1996. Selling, general and administrative expenses increased
from the seven months ended July 31, 1995 to the seven months ended July 31,
1996 due to the incremental selling, general and administrative expenses
associated with the Professional Services Group acquired in connection with the
ICS Transaction in November 1995 and a $1.7 million charge taken by the
Company's wholly-owned subsidiary, CLI, during the seven months ended July 31,
1996 to restructure its videoconferencing business. The charges related
primarily to severance and related costs associated with headcount reductions.
Research and development expense
Research and development expenses of $19.9 million in fiscal 1998
decreased by 19% from $24.5 million in fiscal 1997, which increased by 15% from
$21.3 million in 1995. Research and development expenses were 11%, 13% and 11%
of revenues for the years ended December 31, 1995 and July 31, 1997 and 1998.
The increase in research and development expenses from the year ended December
31, 1995 to the year ended July 31, 1997 is the result of higher software
development costs capitalized during the year ended December 31, 1995.
Subsequent to December 31, 1995, the Company's wholly-owned subsidiary, CLI,
reduced its development emphasis on projects which required software
capitalization resulting in a reduction of capitalized software development
costs during the year ended July 31, 1997. Merger-related expenses recorded
during the year ended July 31, 1997 included a $3.2 million charge for the
write-off of capitalized research and development cost incurred by CLI for
products that were discontinued subsequent to the Merger.
The decrease in research and development expenses from the year ended
July 31, 1997 to the year ended July 31, 1998 reflects the efficiencies realized
by combining the research and development efforts of VTEL and CLI subsequent to
the Merger. The Company migrated to a single product platform by eliminating
CLI's product platform. The research and development capabilities of both
companies were then focused on a single platform such that Company could make a
larger investment in its ESA(TM) platform while reducing the overall research
and development expenses of the combined companies. Additionally, during the
year ended July 31, 1998, the Company capitalized $0.98 million of software
development costs related to new product developments resulting in a reduction
in research and development expenses recorded during the year.
Research and development expenses increased from $11.9 million for the
seven months ended July 31, 1995 to $16.3 million for the seven months ended
July 31, 1996, an increase of 37%. Research and development expenses were 12%
and 17% of revenues for the seven months ended July 31, 1995 and 1996. Research
and development expenses increased from the seven months ended July 31, 1995 to
the seven months ended July 31, 1996 as a result of the Company's efforts to
develop its Leadership Conferencing(TM) and Team Conferencing(TM) systems which
were introduced at the end of calendar 1995 and the beginning of calendar 1996,
respectively. Research and development expenses also increased as a result of
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 (see Note 9 to the Company's Consolidated Financial Statements).
Additionally, research and development expenses increased as a result of the
Company's wholly-owned subsidiary, CLI, shifting its development efforts from
software development to hardware development during the seven months ended July
31, 1996, which resulted in less capitalization of development costs related to
software development.
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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. 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.
Merger and other expense
Merger and other expense decreased from $29.4 million in fiscal 1997 to
a $1.5 million credit to income in fiscal 1998. Merger and other expenses of
$29.4 million recorded during fiscal 1997 consisted of transaction expenses of
$5.7 million and restructuring and other expenses of $23.7 million. Management
determined that, based on favorable events that occurred during fiscal 1998 a
reversal of certain Merger and other accruals totaling $1.5 million should be
recorded.
Interest income and expense
Interest income was $1.8 million, $2.7 million and $1.2 million for the
years ended December 31, 1995 and July 31, 1997 and 1998 and was $0.7 million
and $1.9 million for the seven months ended July 31, 1995 and 1996. Changes in
interest income are based on interest rates earned on invested cash and cash
balances available for investment. In October 1995, the Company completed a
secondary offering which generated net proceeds of approximately $57.0 million.
The increase in the cash balances of the Company resulted in the increases in
interest income for the seven months ended July 31, 1996 and the year ended July
31, 1997. Similarly in October 1996, the Company's wholly-owned subsidiary, CLI,
completed a private placement of preferred stock which generated net proceeds of
approximately $7.0 million. The resulting increase in cash balances caused
interest income for fiscal 1997 to be higher as compared with the previous
periods presented. The decrease in the interest income during fiscal 1998 is the
result of the reduced cash balances due to Merger related expenditures incurred.
Interest expense was $1.1 million, $1.6 million and nil for the years
ended December 31, 1995 and July 31, 1997 and 1998 and was $0.7 million and $0.4
million for the seven months ended July 31, 1995 and 1996. Interest expense
relates almost entirely to the Company's wholly-owned subsidiary, CLI, which
relied on lines of credit to fund working capital and capital investment
requirements. Interest expense increased from the year ended December 31, 1995
to the year ended July 31, 1997 as a result of higher average borrowings at
higher interest rates during the year ended July 31, 1997. The Company incurred
less interest expense during the seven months ended July 31, 1996 in comparison
with the seven months ended July 31, 1995 as a result of a decrease in average
borrowings during the seven months ended July 31, 1996. No interest expense was
incurred during fiscal 1998 as the Company repaid all outstanding debt prior to
July 31, 1997.
Income taxes
The Company has experienced substantial changes in ownership as defined
by the Internal Revenue Code. These changes result in annual limitations of the
amount of net operating loss carryforward generated prior to each change which
can be utilized to offset future taxable income. As a result of the ownership
change at CLI at the date of the Merger, a portion of CLI's net operating loss
carryforward generated prior to the Merger will never be available to offset
future taxable income due to the effect of the annual limitation and the
expiration of the related net operating losses. Therefore, the unavailable
portion of the net operating loss carryforward is not considered in determining
the deferred tax asset at July 31, 1998.
At July 31, 1998, the Company had total domestic net operating loss
carryforwards of $85.7 million ($26.6 million and $59.1 million for VTEL and
CLI, respectively). The portions of these carryforwards available for
utilization during fiscal 1999 (in consideration of the annual limitations) are
$52.7 million. Additional net operating
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losses created prior to the changes in control of $2,574 become available in
each subsequent year and accumulate if not used until such net operating losses
expire.
Due to the uncertainty surrounding the timing of realizing the benefits
of its favorable tax attributes in future tax returns, the Company has placed a
full valuation allowance against its net deferred tax asset. Accordingly, no
deferred taxes have been recorded for the year ended December 31, 1995, for the
seven months ended July 31, 1996 and for the years ended July 31, 1997 and 1998.
Discontinued operations
In November 1995, the Company's wholly-owned subsidiary, CLI, adopted a
plan to discontinue operations of its broadcast products division and focus its
efforts and resources in developing and marketing videoconferencing products.
CLI subsequently developed a restructuring plan for its videoconferencing
products division which resulted in adjustments that were recorded during the
year ended December 31, 1995 related to the carrying amounts of certain assets,
primarily inventories, capitalized software development costs and accounts
receivable. During the seven months ended July 31, 1996, CLI also reduced its
workforce and identified a number of offices that would be closed. Severance and
other expenses totaling approximately $1.7 million associated with these actions
are reflected in the result of operations for the seven months ended July 31,
1996.
In June 1996, CLI completed the sale of certain assets of its broadcast
products division. During the year ended July 31, 1997, CLI revised the amount
of loss associated with disposing of the broadcast products division and
recorded an additional charge of $7.8 million, primarily due to additional
at-risk receivables that were subsequently identified (see Note 6 to the
Consolidated Financial Statements).
Net income (loss)
The Company generated net losses from continuing operations of $17.3
and $44.3 million for the years ended December 31, 1995 and July 31, 1997 and
$4.3 million and $18.5 million for the seven months ended July 31, 1995 and
1996. In fiscal 1998, the Company recorded net income from continuing operations
of $2.8 million. The net loss incurred during the year ended December 31, 1995
reflects charges taken by CLI related to settlement of litigation and
restructuring charges. A larger net loss was incurred for the year ended July
31, 1997 due to charges of $29.4 million taken related to the Merger (see Note 1
to the Consolidated Financial Statements). The Company generated net income
during fiscal 1998 as a result of a reduction of operating expenses which was
greater than the decline in revenues and several nonrecurring events. The
reduction of operating expenses was due to operating efficiencies gained by
combining VTEL and CLI after the Merger, including the elimination of duplicate
costs and focusing combined company resources on a single product platform and
operating plan. Additionally, the Company generated income of approximately $1.3
million (net of expenses) from a planned non-recurring real estate transaction
which eliminated duplicate corporate headquarter facilities. During the year
ended July 31, 1998, the Company capitalized approximately $0.8 million of
internal costs associated with the implementation of the Oracle(R) Enterprise
Resource Planning System and $0.98 million of software development costs. Due to
the favorable resolution of certain Merger-related issues during the year ended
July 31, 1998, the Company was able to record a net credit to income of
approximately $1.5 million due to the reversal of certain Merger and other
accruals that were recorded as of July 31, 1997. As management had anticipated
the additional income increase and operating expense reductions, the Company was
able to take advantage of these benefits by investing in discretionary marketing
and branding campaigns to provide brand awareness for VTEL's products and to
establish VTEL as an industry leader in digital visual communications.
The increase in net losses incurred from the seven months ended July
31, 1995 to the seven months ended July 31, 1996 is the result of independent
charges taken by both VTEL and its wholly-owned subsidiary, CLI, related to
restructuring activities and the effect of CLI's decision to discontinue
operations relating to its broadcast products division in November 1995.
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Other factors affecting results of operations
The Company's future results of operations and financial condition
could be impacted by the following factors, among others: trends in the
videoconferencing market segment, introduction of new products by competitors,
increased competition due to the entrance of other companies into the
videoconferencing market segment - especially more established companies with
greater resources than those of the Company, delay in the introduction of higher
performance products, market acceptance of new products introduced by the
Company, price competition, interruption of the supply of low-cost products from
third-party manufacturers, changes in general economic conditions in any of the
countries in which the Company does business, adverse legal disputes and delays
in purchases relating to federal government procurement.
There can be no assurance that the present and potential customers of
the Company will continue their current buying patterns without regard to the
Merger, and any significant delay or reduction in orders could have an adverse
effect on the near-term business and results of operations of the combined
company.
Generally, the shares issued by the Company to consummate the Merger
are freely tradable, subject to certain resale restrictions for affiliates
pursuant to Rules 144 or 145 under the Securities Act. An aggregate of
approximately 1.1 million of the shares issued in the Merger are beneficially
owned by affiliates of CLI and therefore, subject to resale restrictions.
However, the Company provided certain registration rights to the holders of such
shares. The sale of a significant number of the foregoing shares could cause
substantial fluctuations in the price of the Company's Common Stock over short
time periods.
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 have been, and future earnings and stock price
potentially may be, subject to significant volatility, particularly on a
quarterly basis. Past financial performance should not be considered a reliable
indicator of future performance and investors are cautioned in using historical
trends to anticipate results or trends in future periods. Any shortfall in
revenue or earnings from the levels anticipated by securities analysts could
have an immediate and significant effect on the trading price of the Company's
Common Stock in any given period. Also, the Company participates in a highly
dynamic industry which often contributes to the volatility of the Company's
Common Stock price.
Further, this Annual Report on Form 10-K contains forward-looking
statements, within the meaning of the Private Securities Litigation Reform Act
of 1995, that relate to future results or events and are based on the Company's
current expectations. There are many factors that affect the Company's business
and results of operations, all of which involve risks and uncertainties that
could cause actual results to differ materially from those reflected in those
forward-looking statements, including the risks discussed above and elsewhere
herein.
Share repurchase program
During the seven months ended July 31, 1996, the Company adopted a
share repurchase program pursuant to which the Company repurchased shares of its
Common Stock in the open market. During fiscal 1997, the Company purchased
455,200 shares of its Common Stock for approximately $3.7 million. All of the
repurchased shares were reissued during fiscal 1997 to fulfill requirements for
the Company's Common Stock. In February 1997, the Company terminated the stock
repurchase program.
In August 1998, the Company announced its plan to repurchase up to
2,000,000 shares of VTEL Common Stock. As of October 12, 1998, the Company had
repurchased approximately 465,000 shares of its Common Stock for approximately
$2.0 million. The repurchased shares will be used to fulfill requirements for
the Company's stock including stock option exercises or stock issuances under
business combination transactions.
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Liquidity and capital resources
At July 31, 1998, the Company had working capital of $41.5 million,
including $29.7 million in cash, cash equivalents and short-term investments.
Cash provided by operating activities was $8.8 million for the year ended
December 31, 1995. Cash used by operating activities was $15.2 million for the
year ended July 31, 1997. Cash provided by operating activities was $19.6
million for the year ended July 31, 1998. Cash used by operating activities was
$1.0 million and $11.1 million for the seven months ended July 31, 1995 and
1996. Changes in cash from operating activities are primarily the result of the
net losses or income generated by the Company and changes in working capital,
primarily increases and decreases in accounts receivable, inventories and
accounts payable.
Cash used in investing activities was $77.9 million for the year ended
December 31, 1995 as compared to cash provided by investing activities of $23.3
million for the year ended July 31, 1997. Cash used in investing activities
during the 1995 period was the result of increased capital expenditures for
property and equipment used to support the growth in the Company's operations,
primarily sales and marketing and product development efforts, and the
investment of the cash proceeds from the Company's secondary offering in
November 1995 which netted approximately $57.0 million less the cash used of
approximately $10.7 million to purchase the systems integration and service
operations in connection with the ICS Transaction. During fiscal 1997, cash
provided by investing activities was primarily due to the net sale of
investments to finance the Company's operations during the period, which
included large cash requirements associated with the Merger. Cash used in
investing activities was $10.6 million for the year ended July 31, 1998 and was
primarily the result of expenditures related to leasehold improvements in Austin
and Sunnyvale, the implementation of the Oracle(R) Enterprise Resource Planning
System and purchases of equipment.
Cash used in investing activities was $16.4 million for the seven
months ended July 31, 1995 compared with cash provided by investing activities
of $1.2 million for the seven months ended July 31, 1996. Cash used in investing
activities was primarily the result of capital expenditures. Capital
expenditures were $11.0 million and $11.1 million for the seven months ended
July 31, 1995 and 1996. Cash provided by investing activities during the seven
months ended July 31, 1996 included the proceeds from the sale of assets related
to discontinued operations of the Company's wholly-owned subsidiary, CLI.
Cash provided by financing activities was $69.2 million for the year
ended December 31, 1995 as compared to cash used by financing activities of $5.1
million for the year ended July 31, 1997 and cash provided by financing
activities of $1.6 million for the year ended July 31, 1998. Cash used in
financing activities during fiscal 1997 was primarily the result of the purchase
of treasury stock by the Company and the repayment of debt by the Company's
wholly-owned subsidiary, CLI, offset by the sale of preferred stock by CLI
during the year ended July 31, 1997. Cash provided by financing activities for
the year ended July 31, 1998 relates to the issuance of stock under the
Company's stock option and stock purchase plans (see Note 8 to the Company's
Consolidated Financial Statements).
Cash provided by financing was $4.9 million for the seven months ended
July 31, 1995 compared to cash used in financing activities of $3.9 million for
the seven months ended July 31, 1996. Cash provided by financing activities
during the seven months ended July 31, 1995 was related to the sale of stock by
the Company's wholly-owned subsidiary, CLI, which netted approximately $4.9
million. Cash used in financing activities during the seven months ended July
31, 1996 was related to the reduction in borrowings of approximately $4.4
million from cash generated from the sale of the broadcast products division in
June 1996 by CLI.
The Company has a $25.0 million revolving line of credit available with
a banking syndicate. The Company has issued a letter of credit totaling $1.2
million under its revolving line of credit as a lease deposit on one of its
facilities. No amounts have been drawn under the syndicated line of credit. The
Company's principal sources of liquidity at July 31, 1998 consist of $29.7
million of cash, cash equivalents and short-term investments and amounts
available under the Company's revolving line of credit.
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Impact of Year 2000
Many computer systems experience problems handling dates beyond the
year 1999. Therefore, some computer hardware and software will need to be
modified prior to the Year 2000 in order to remain functional. The Company
believes that its products are Year 2000 compliant. While the Company is not
currently aware of any Year 2000 compliance issues with its products, no
assurances can be made that problems will not arise such as customer problems
with other software programs, operating systems or hardware that disrupt their
use of the Company's products. There can be no assurances that such disruption
would not negatively impact costs and revenues in future years.
The Company has been assured by the vendor of its Enterprise Resource
Planning System that the system is Year 2000 compliant. The Company began
assessing Year 2000 issues and Year 2000 testing of its significant management
information systems during fiscal 1998.
The Company presently believes that with modifications to existing
software and conversions to new software, the Year 2000 issue can be mitigated.
It is not anticipated that there will be a significant increase in costs as much
of the Year 2000 activities will be a continuation of the on-going process to
improve all the Company's systems. The Company has not estimated the total costs
of Year 2000 compliance and related contingency planning as Year 2000 compliance
assessments are still in process. However, the company does not anticipate that
Year 2000 issues will result in material incremental costs to the Company. The
Company plans to complete the Year 2000 project during fiscal 1999. However, if
such modifications and conversions are not made, or are not completed in a
timely manner, the Year 2000 issue could have a material impact on the
operations of the Company. Specific factors that might cause a material impact
include, but are not limited to, availability and cost of personnel trained in
this area, the ability to locate and correct all relevant computer codes,
failure by third parties to timely convert their systems, and similar
uncertainties.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 will require the
Company to report, in addition to net income, comprehensive income and its
components including, as applicable, foreign currency items and unrealized gains
and losses on certain investments in debt and equity securities. The Company is
required to adopt SFAS No. 130 for its fiscal year ended July 31, 1999. The
Company expects that the adoption of SFAS No. 130 will not have a material
impact on its financial position or its results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for reporting information about a company's operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under SFAS No. 131, operating segments are
to be determined consistent with the way management organizes and evaluates
financial information internally for making operating decisions and assessing
performance. The Company is required to adopt SFAS No. 131 for its fiscal year
ended July 31, 1999. The Company expects that the adoption of SFAS No. 131 will
not have a material impact on its financial position or its results of
operations.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 requires the recognition
of all derivatives as either assets or liabilities in the statement of financial
position and the measurement of those instruments at fair value. The Company is
required to adopt this standard in the first quarter of fiscal 2000. The Company
expects that the adoption of SFAS No. 133 will not have a material impact on its
financial position or its results of operations.
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In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SoP) 97-2, "Software Revenue Recognition," which
provides guidance for recognizing revenue on software sales such that certain
amounts are deferred for future obligations such as software upgrades and
product support. The Company will adopt SOP 97-2 effective August 1, 1998. The
Company does not expect that the new pronouncement will have a material impact
on its financial position or results of operations.
In March 1998, the Accounting Standards Executive Committee of the
American institute of Certified Public Accountants, issued Statement of Position
98-1 (SoP 98-1), "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use," which requires the capitalization of certain
internal costs related to the implementation of computer software obtained for
internal use. In consideration of the Company's implementation of the Oracle
Enterprise Resource Planning Software System, the Company early adopted SoP 98-1
during fiscal 1998. In accordance with SoP 98-1, the Company capitalized $0.8
million of internal costs associated with the implementation of the Oracle
Enterprise Resource Planning Software System during the year ended July 31,
1998.
* * *
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INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants 28
Independent Auditors' Report 29
Financial Statements:
Consolidated Balance Sheet as of July 31, 1997 and 1998 30
Consolidated Statement of Operations for the year ended December 31, 1995,
the seven months ended July 31, 1995 (unaudited) and 1996, and the
years ended July 31, 1997 and 1998 31
Consolidated Statement of Changes in Stockholders' Equity for the year
ended December 31, 1995, the seven months ended July 31, 1996 and the
years ended July 31, 1997 and 1998 32
Consolidated Statement of Cash Flows for the year ended December 31, 1995,
the seven months ended July 31, 1995 (unaudited) and 1996, and the
years ended July 31, 1997 and 1998 33
Notes to Consolidated Financial Statements 34
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts 58
Schedules other than those listed above have been omitted since they are
either not required, not applicable or the information is otherwise
included
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28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of VTEL Corporation
In our opinion, based upon our audits and the report of other auditors,
the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of VTEL Corporation and
its subsidiaries at July 31, 1997 and 1998, and the results of their operations
and their cash flows for the year ended December 31, 1995, for the seven months
ended July 31, 1996, and for each of the two years in the period ended July 31,
1998 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 did not audit the financial statements of Compression Labs,
Incorporated, which statements reflect total revenues of $112,979,000 for the
year ended December 31, 1995. Those statements were audited by other auditors
whose report thereon has been furnished to us, and our opinion expressed herein,
insofar as it related to the amounts included for Compression Labs,
Incorporated, is based solely on the report of the other auditors. We conducted
our audits of the consolidated financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Austin, Texas
September 22, 1998
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29
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
of Compression Labs, Incorporated
We have audited the consolidated statements of operations, changes in
stockholders' equity and of cash flows of Compression Labs, Incorporated and
subsidiaries for the year ended December 31, 1995 (not presented herein). In
connection with our audits of the aforementioned consolidated financial
statements, we have also audited the financial statement schedule. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements of Compression
Labs, Incorporated referred to above present fairly, in all material respects,
the results of their operations and their cash flows for the year ended December
31, 1995, in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth herein.
KPMG Peat Marwick LLP
Mountain View, California
March 13, 1996
29
30
VTEL CORPORATION
CONSOLIDATED BALANCE SHEET
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
JULY 31,
1997 1998
ASSETS
Current assets:
Cash and equivalents $ 4,757 $ 15,191
Short-term investments 20,299 14,484
Accounts receivable, net of allowance for doubtful
accounts of $10,722 and $9,447 at July 31, 1997 and 1998 43,707 40,527
Inventories 22,244 12,951
Prepaid expenses and other current assets 2,891 2,533
--------- ---------
Total current assets 93,898 85,686
Property and equipment, net 21,660 28,106
Intangible assets, net 12,768 11,812
Other assets 2,809 3,685
--------- ---------
$ 131,135 $ 129,289
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,699 $ 22,600
Accrued merger and other expenses 9,704 1,741
Accrued compensation and benefits 4,552 5,258
Other accrued liabilities 3,070 2,791
Deferred revenue 11,345 11,793
--------- ---------
Total current liabilities 54,370 44,183
Long-term liabilities -- 3,848
--------- ---------
Total liabilities 54,370 48,031
--------- ---------
Commitments and contingencies (Note 11) -- --
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 authorized;
none issued or outstanding -- --
Common stock, $.01 par value; 40,000,000 authorized;
22,873,000 and 23,227,000 issued and outstanding
at July 31, 1997 and 1998 229 232
Additional paid-in capital 254,880 256,594
Accumulated deficit (178,234) (175,455)
Cumulative translation adjustment 5 (37)
Unearned compensation (115) (76)
--------- ---------
Total stockholders' equity 76,765 81,258
--------- ---------
$ 131,135 $ 129,289
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
30
31
VTEL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
FOR THE YEAR FOR THE SEVEN FOR THE YEARS
ENDED MONTHS ENDED ENDED
DECEMBER 31 JULY 31, JULY 31,
1995 1995 1996 1997 1998
(UNAUDITED)
REVENUES:
Products $ 169,455 $ 89,207 $ 74,098 $ 150,791 $ 134,775
Services and other 21,619 8,872 22,864 40,232 44,909
--------- --------- --------- --------- ---------
191,074 98,079 96,962 191,023 179,684
--------- --------- --------- --------- ---------
COST OF SALES:
Products 109,653 52,523 44,390 87,231 65,811
Services and other 14,578 5,585 16,592 29,090 28,916
--------- --------- --------- --------- ---------
124,231 58,108 60,982 116,321 94,727
--------- --------- --------- --------- ---------
Gross margin 66,843 39,971 35,980 74,702 84,957
--------- --------- --------- --------- ---------
Selling, general and administrative 62,511 31,397 38,842 65,399 64,802
Research and development 21,283 11,878 16,274 24,460 19,892
Merger and other 897 897 553 29,397 (1,536)
Amortization of intangible assets 80 -- 560 960 960
--------- --------- --------- --------- ---------
Total operating expenses 84,771 44,172 56,229 120,216 84,118
--------- --------- --------- --------- ---------
Income (loss) from operations (17,928) (4,201) (20,249) (45,514) 839
--------- --------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 1,802 699 1,901 2,736 1,242
Interest expense (1,142) (655) (424) (1,582) (27)
Other 54 164 265 77 762
--------- --------- --------- --------- ---------
714 208 1,742 1,231 1,977
--------- --------- --------- --------- ---------
Net income (loss) from continuing operations
before benefit (provision) for income taxes (17,214) (3,993) (18,507) (44,283) 2,816
Benefit (provision) for income taxes (87) (342) -- 12 (37)
--------- --------- --------- --------- ---------
Net income (loss) from continuing operations (17,301) (4,335) (18,507) (44,271) 2,779
--------- --------- --------- --------- ---------
DISCONTINUED OPERATIONS:
Net income (loss) from discontinued operations (1,941) 524 -- (7,783) --
Loss on disposal (34,601) -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) from discontinued operations (36,542) 524 -- (7,783) --
--------- --------- --------- --------- ---------
Net income (loss) $ (53,843) $ (3,811) $ (18,507) $ (52,054) $ 2,779
========= ========= ========= ========= =========
COMPUTATION OF NET INCOME (LOSS) PER SHARE:
Net income (loss) from continuing operations $ (17,301) $ (4,335) $ (18,507) $ (44,271) $ 2,779
Deemed preferred stock dividend related to
conversion discount -- -- -- (2,527) --
--------- --------- --------- --------- ---------
Adjusted net income (loss) from continuing operations (17,301) (4,335) (18,507) (46,798) 2,779
Net income (loss) from discontinued operations (36,542) 524 -- (7,783) --
--------- --------- --------- --------- ---------
Net income (loss) applicable to common stock $ (53,843) $ (3,811) $ (18,507) $ (54,581) $ 2,779
========= ========= ========= ========= =========
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
Income (loss) from continuing operations $ (0.90) $ (0.24) $ (0.87) $ (2.10) $ 0.12
Income (loss) from discontinued operations (1.91) 0.03 -- (0.35) --
--------- --------- --------- --------- ---------
Net income (loss) per share $ (2.81) $ (0.21) $ (0.87) $ (2.45) $ 0.12
========= ========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 19,131 17,821 21,393 22,255 23,057
========= ========= ========= ========= =========
Diluted 19,131 17,821 21,393 22,255 23,458
========= ========= ========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
31
32
VTEL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
COMMON STOCK
------------------------ ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT OTHER EQUITY
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1994 16,759 $ 168 $ 175,235 $ (51,363) $ 145 $ 124,185
Proceeds from sale of stock 3,312 33 61,927 -- -- 61,960
Proceeds from stock issued
under employee plans 546 5 3,220 -- -- 3,225
Exercise of stock warrants 15 -- 249 -- -- 249
Stock issued for acquired
assets (Note 3) 260 3 3,721 -- -- 3,724
Amortization of unearned
compensation -- -- -- -- 21 21
Foreign currency translation
adjustment -- -- -- -- (9) (9)
Net loss -- -- -- (53,843) -- (53,843)
--------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1995 20,892 209 244,352 (105,206) 157 139,512
Proceeds from stock issued
under employee plans 178 2 1,237 -- -- 1,239
Proceeds from exercise
of stock warrants 428 4 (4) -- -- --
Foreign currency translation
adjustment -- -- -- -- (6) (6)
Net loss -- -- -- (18,507) -- (18,507)
--------- --------- --------- --------- --------- ---------
BALANCE AT JULY 31, 1996 21,498 215 245,585 (123,713) 151 122,238
Proceeds from sale of stock 1,258 13 7,703 -- -- 7,716
Proceeds from stock issued
under employee plans 572 1 2,503 -- -- 2,504
Purchase and issuance of
treasury stock (455) -- (1,275) (2,467) -- (3,742)
Unearned compensation -- -- 364 -- (364) --
Amortization of unearned
compensation -- -- -- -- 249 249
Foreign currency translation
adjustment -- -- -- -- (146) (146)
Net loss -- -- -- (52,054) -- (52,054)
--------- --------- --------- --------- --------- ---------
BALANCE AT JULY 31, 1997 22,873 229 254,880 (178,234) (110) 76,765
Proceeds from stock issued
under employee plans 344 3 1,473 -- -- 1,476
Common stock and warrants
issued for acquisition 10 -- 153 -- -- 153
Unearned compensation -- -- 88 -- (88) --
Amortization of unearned
compensation -- -- -- -- 127 127
Foreign currency translation
adjustment -- -- -- -- (42) (42)
Net income -- -- -- 2,779 -- 2,779
--------- --------- --------- --------- --------- ---------
BALANCE AT JULY 31, 1998 23,227 $ 232 $ 256,594 $(175,455) $ (113) $ 81,258
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
32
33
VTEL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
FOR THE YEAR FOR THE SEVEN FOR THE YEARS
ENDED MONTHS ENDED ENDED
DECEMBER 31, JULY 31, JULY 31,
1995 1995 1996 1997 1998
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (53,843) $ (3,811) $ (18,507) $ (52,054) $ 2,779
Adjustments to reconcile net income (loss)
to net cash from operations:
Depreciation and amortization 20,898 7,858 8,294 12,667 8,870
Provision for doubtful accounts 40 8 18 4,145 (119)
Amortization of unearned compensation 21 11 -- 249 127
Amortization of deferred gain (100) (57) (56) -- --
Foreign currency translation gain (loss) 40 (83) (216) (3) 112
(Increase) decrease in accounts receivable (4,007) (15,651) 10,324 106 3,299
(Increase) decrease in inventories 9,647 (725) (7,367) 7,064 10,758
(Increase) decrease in prepaid expenses
and other current assets 2,107 (76) 2,522 (492) 358
Increase (decrease) in accounts payable 7,430 263 (11,216) 5,005 (3,099)
Increase (decrease) in accrued expenses 16,156 3,973 (14,562) 6,535 (5,505)
(Decrease) in research and
development advance (190) (190) -- (5) --
Increase (decrease) in deferred revenues (912) (1,098) (1,378) 2,195 2,172
Increase (decrease) in accrued expenses,
discontinued operations 11,503 8,614 21,016 (657) --
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
operating activities 8,790 (964) (11,128) (15,245) 19,752
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (707,280) (65,148) (241,994) (391,628) (247,223)
Sales and maturities of short-term investments 664,545 68,327 253,671 419,636 253,038
Purchases of property and equipment (16,759) (11,027) (11,139) (18,781) (15,835)
Sales of property and equipment 1,775 1,054 1,307 11,208 260
Cash paid for acquired assets (Note 3) (10,684) -- -- -- --
(Increase) decrease in capitalized software (9,371) (2,958) (681) 3,561 (984)
(Increase) decrease in other assets (103) (6,662) 69 (745) 104
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
investing activities (77,877) (16,414) 1,233 23,251 (10,640)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock 65,434 6,255 1,014 8,044 1,476
Purchase of treasury stock -- -- -- (3,742) --
Proceeds from the sale of treasury stock -- -- -- 1,275 --
Principal payments under capital lease obligations (844) (436) (549) -- --
(Payments) borrowings under line of credit
agreements 2,993 (2,801) (2,766) -- --
Collateralized borrowings (payments) 1,597 1,850 (1,589) -- --
Repayment of short-term debt -- -- -- (10,656) --
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities 69,180 4,868 (3,890) (5,079) 1,476
---------- ---------- ---------- ---------- ----------
Effect of translation exchange rates on cash (49) 125 210 (143) (154)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and equivalents 44 (12,385) (13,575) 2,784 10,434
Cash and equivalents at beginning of period 15,504 15,504 15,548 1,973 4,757
---------- ---------- ---------- ---------- ----------
Cash and equivalents at end of period $ 15,548 $ 3,119 $ 1,973 $ 4,757 $ 15,191
========== ========== ========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 74 $ 27 $ -- $ -- $ --
========== ========== ========== ========== ==========
Interest paid $ 1,142 $ 655 $ 424 $ 1,582 $ --
========== ========== ========== ========== ==========
Stock issued for acquired assets (Note 3) $ 3,724 $ -- $ -- $ -- $ 153
========== ========== ========== ========== ==========
Note payable issued for acquired asset $ -- $ -- $ -- $ -- $ 837
========== ========== ========== ========== ==========
Stock issued in lieu of repayment of research
and development advance $ -- $ -- $ -- $ 901 $ --
========== ========== ========== ========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
33
34
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
1. THE COMPANY
VTEL Corporation ("VTEL" or the "Company") designs, manufactures,
markets, services and supports integrated, multi-media digital visual
communication systems which operate over private and switched digital
communication networks. VTEL distributes its systems to a domestic and
international marketplace through a reseller network and directly to end-user
customers.
On May 23, 1997, shareholders of VTEL and Compression Labs,
Incorporated, a Delaware corporation ("CLI"), approved the merger (the "Merger")
of VTEL-Sub, Inc., a Delaware corporation and direct wholly-owned subsidiary of
VTEL ("Merger Sub"), with and into CLI, pursuant to an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement"), with CLI becoming a direct
wholly-owned subsidiary of VTEL. As a result of the Merger, (a) the outstanding
shares of CLI's Common Stock were converted into the right to receive 0.46
shares of Common Stock of VTEL for each share of CLI Common Stock converted (or
cash in lieu of fractional shares otherwise deliverable in respect thereof), and
(b) the outstanding shares of CLI Series C Preferred Stock were converted into
the right to receive 3.15 shares of VTEL Common Stock for each share of CLI
Preferred Stock converted (or cash in lieu of fractional shares otherwise
deliverable in respect thereof). The CLI shares were exchanged for a total of
8,424,741 shares of VTEL Common Stock.
The acquisition was accounted for as a pooling of interests and
accordingly, the consolidated financial statements have been restated for all
periods to include the accounts of CLI. Revenues, net income (loss) from
continuing operations and net income (loss) of the separate companies for the
periods preceding the acquisition were as follows:
VTEL CLI TOTAL
--------- --------- ---------
YEAR ENDED DECEMBER 31, 1995
Revenues $ 78,095 $ 112,979 $ 191,074
Net income (loss) from continuing
operations 3,739 (21,040) (17,301)
Net income (loss) 3,739 (57,582) (53,843)
SEVEN MONTHS ENDED JULY 31, 1996
Revenues $ 50,109 $ 46,853 $ 96,962
Net loss from continuing operations (9,899) (8,608) (18,507)
Net loss (9,899) (8,608) (18,507)
YEAR ENDED JULY 31, 1997 *
Revenues $ 124,438 $ 66,585 $ 191,023
Net loss from continuing operations ** 556 (44,827) (44,271)
Net loss (508) (51,546) (52,054)
* Information for CLI is through the date of the Merger, May 23, 1997.
** Includes loss of $29,397 related to the merger.
34
35
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
In connection with the Merger, the Company recorded merger and other
expenses of $29,397 during the year ended July 31, 1997 as follows:
TRANSACTION EXPENSES:
Investment banking fees $ 2,391
Legal and accounting fees 1,600
Other 1,663
----------
5,654
----------
RESTRUCTURING AND OTHER:
Asset impairments 12,469
Reserve for contingent liabilities 5,271
Severance and termination benefits 3,457
Other 2,546
----------
23,743
----------
Total $ 29,397
==========
Changes to accrued merger and other and the reserve for asset
impairments during the year ended July 31, 1998 were as follows:
BALANCE
AT PAID IN TRANSFERRED WRITTEN-OFF REVERSED IN BALANCE AT
JULY 31, FISCAL IN FISCAL IN FISCAL FISCAL JULY 31,
1997 1998 1998 1998 1998 1998
--------- --------- ----------- ----------- ----------- ----------
Asset impairments $ 5,617 $ -- $ 1,000 $ (6,235)(1) $ -- $ 382
========= ========= ========= ========= ========= =========
ACCRUED MERGER AND OTHER
EXPENSES:
Reserve for contingent liabilities $ 6,662 $ (2,556) $ (1,086) $ -- $ (1,536)(2) $ 1,484
Severance and termination
Benefits 2,414 (2,243) 86 -- -- 257
Other 628 (628) -- -- -- --
--------- --------- --------- --------- --------- ---------
$ 9,704 $ (5,427) $ (1,000) $ -- $ (1,536) $ 1,741
========= ========= ========= ========= ========= =========
(1) Represents final write-down of assets acquired in the Merger.
(2) Based on favorable events which occurred during fiscal 1998, the
Company recorded a credit to income of $1.5 million related to the
reversal of certain Merger and other accruals.
35
36
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and include the accounts of VTEL's
wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. Preparation of the consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The more significant
estimates made by management include the provision for doubtful accounts
receivable, inventory write-downs for potentially excess or obsolete inventory,
warranty reserves, the valuation allowance for the gross deferred tax asset,
contingency reserves and the amortization period for intangible assets. Actual
amounts could differ from the estimates made. Management periodically evaluates
estimates used in the preparation of the financial statements for continued
reasonableness. Appropriate adjustments, if any, to the estimates used are made
prospectively based upon such periodic evaluation.
In May 1996, VTEL changed its fiscal year end from December 31 to July
31. The accompanying consolidated 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.
Revenue Recognition
Product revenues, recorded net of discounts, are recognized at the time
a product is shipped or services are performed and the Company has no
significant further obligations to the customer. Customer prepayments are
deferred until product shipment has occurred or services have been rendered and
there are no significant further obligations to the customer. Service revenues
are recognized at the time the services are rendered and the Company has no
significant further obligations to the customer. Revenues for extended warranty
contracts are recorded over the contract period. The Company records an
allowance to reduce sales revenue by an amount which reflects management's
estimate of potential future sales returns, exchanges, customer stock rotations
or price protection discounts.
Warranty Costs
The Company generally warrants its products against hardware defects
for one year from the date of installation but not to exceed fifteen months from
date of shipment. A warranty is provided for software defects for ninety days
from the date of installation. The Company provides currently for the estimated
costs which may be incurred in the future under the warranty program.
Software Development Costs
Costs incurred in connection with the development of software products
are accounted for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed." Costs incurred prior to the establishment of
technological feasibility are charged to research and development expense.
Amortization of capitalized software begins upon initial product shipment.
Software development costs are amortized (a) over the estimated life of the
related product (generally thirty-six months), using the straight-line method or
(b) based on the ratio of current revenues from the related products to total
estimated revenues for such products, whichever is greater.
36
37
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
The Company capitalized internal software development costs of $9,276,
$1,622 and $984 for the years ended December 31, 1995 and July 31, 1997 and
1998, respectively, and $2,957 and $563 for the seven months ended July 31, 1995
and 1996. Amortization of such costs was $17,411, $1,827 and $50 for the years
ended December 31, 1995 and July 31, 1997 and 1998, respectively, and $1,996 and
$947 for the seven months ended July 31, 1995 and 1996, respectively. In
connection with the Merger, the Company recorded an impairment charge of $3,218
related to capitalized software development costs during the year ended July 31,
1997 due to the elimination of the product line to which the capitalized
software development costs related.
Cash and Equivalents
Cash and equivalents include cash and investments in liquid money
market accounts.
Short-term Investments
Short-term investments are carried at market value, which approximates
cost, at the balance sheet date. Short-term investments consist of funds
primarily invested in mortgage-backed securities guaranteed by the U.S.
government, government securities and commercial paper. Investment securities
generally have maturities of less than one year.
The Company accounts for investment securities under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
requires investment securities to be classified as held-to-maturity, trading or
available-for-sale based on the characteristics of the securities and the
activity in the investment portfolio. At July 31, 1997 and 1998, all investment
securities are classified as available-for-sale. No unrealized gains or losses
have been recorded as a separate component of equity for the current period or
prior year as market values approximate cost due to the short-term nature of the
investments.
Inventories
Inventories are stated at the lower of cost (determined under the
first-in, first-out method) or market. Cost includes the acquisition of
purchased components, parts and sub-assemblies, labor and overhead.
Property and Equipment
Property and equipment is recorded at cost. Internal support equipment
consists of certain demonstration and development systems manufactured by the
Company and is recorded at manufactured cost. Depreciation and amortization are
provided using the straight-line method over the estimated economic lives of the
assets, ranging from two to ten years, or over the lease term of the respective
assets, as applicable. Repair and maintenance costs are expensed as incurred.
37
38
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Intangible Assets
During the year ended December 31, 1995, VTEL acquired certain assets
and a service and support infrastructure related to an operating group of
another company (see Note 3). The estimated value of the intangible assets is
being amortized over a period of 15 years, which is the period over 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 digital visual communication equipment. In accordance with
Accounting Principles Board Opinion ("APB") No. 17, "Intangible Assets," the
Company periodically evaluates the amortization period associated with the
acquired intangible assets based upon anticipated periods of future benefit,
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.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are
measured using the local currency as the functional currency. Accordingly,
assets and liabilities of the subsidiaries are translated at current rates of
exchange at the balance sheet date. The resultant gains or losses from
translation are included in a separate component of stockholders' equity. Income
and expense from the subsidiaries are translated using monthly average exchange
rates.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes," which requires the liability method of accounting for income
taxes. Under the liability method, deferred taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
Net Income (Loss) Per Share
During the fiscal year ended July 31, 1998, the Company adopted SFAS
No. 128, "Earnings Per Share." Under SFAS No. 128, basic earnings per share is
based on the weighted effect of all common shares issued and outstanding, and is
calculated by dividing net income available to common stockholders by the
weighted average shares of common stock outstanding during the period. Diluted
earnings per share is calculated by dividing net income available to common
stockholders by the weighted average number of common shares used in the basic
earnings per share calculation plus the number of common shares that would be
issued assuming conversion of all potentially dilutive shares outstanding. All
historical earnings per share data have been restated to conform to the current
year presentation.
38
39
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
The calculation of the number of weighted average shares outstanding
for basic and dilutive earnings (loss) per share for each of the periods
presented is as follows:
FOR THE FOR THE SEVEN FOR THE
YEAR ENDED MONTHS ENDED YEARS ENDED
DECEMBER 31, JULY 31, JULY 31,
1995 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
Weighted average shares
Outstanding - basic 19,131 17,821 21,393 22,255 23,057
--------- --------- --------- --------- ---------
EFFECT OF DILUTIVE SECURITIES:
Stock options -- -- -- -- 400
Warrants to purchase common stock -- -- -- -- 1
--------- --------- --------- --------- ---------
Dilutive potential common shares -- -- -- -- 401
--------- --------- --------- --------- ---------
Weighted average shares
Outstanding - diluted 19,131 17,821 21,393 22,255 23,458
========= ========= ========= ========= =========
Antidilutive securities 3,880 4,001 4,435 3,648 1,764
========= ========= ========= ========= =========
Net loss applicable to common stock for the year ended July 31, 1997 is
computed by increasing the net loss from continuing operations by $2,527 which
represents a deemed dividend related to the 20% conversion discount on Series C
Preferred Stock measured at the date of original issuance.
Concentration of Credit Risk
The Company sells its products to various companies across several
industries, including third-party resellers. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potential credit losses.
The Company requires advanced payments or secured transactions when deemed
necessary.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, including
cash and equivalents, short-term investments and short-term trade receivables
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 in investment quality financial
instruments and limits the amount invested in any one institution or in any type
of instrument. The Company has not experienced any significant losses on its
investments.
Long-lived Assets
The Company evaluates its long-lived assets and intangibles based on
guidance provided by SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used for long-lived assets and certain identifiable intangibles to be disposed
of.
39
40
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Employee Stock Plans
The Company determines the fair value of grants of stock, stock options
and other equity instruments issued to employees in accordance with SFAS No.
123, "Accounting and Disclosure of Stock-Based Compensation." SFAS No. 123
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options, and other equity instruments to employees
based on their estimated fair market value on the date of grant. The Company has
opted to continue to apply the existing accounting rules contained in APB No.
25, "Accounting for Stock Issued to Employees." As such, SFAS No. 123 has had no
effect on the Company's financial position or results of operations.
The Company records unearned compensation related to stock options that
are issued at exercise prices which are below the fair market value of the
underlying stock on the measurement date. Such unearned compensation is
amortized ratably over the vesting period of the related stock options.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 will require the
Company to report, in addition to net income, comprehensive income and its
components including, as applicable, foreign currency items and unrealized gains
and losses on certain investments in debt and equity securities. The Company is
required to adopt SFAS No. 130 for its fiscal year ended July 31, 1999. The
Company expects that the adoption of SFAS No. 130 will not have a material
impact on it financial position or its results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for reporting information about a company's operating segments. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under SFAS No. 131, operating segments are
to be determined consistent with the way management organizes and evaluates
financial information internally for making operating decisions and assessing
performance. The Company is required to adopt SFAS No. 131 for its fiscal year
ended July 31, 1999. The Company expects that the adoption of SFAS No. 131 will
not have a material impact on it financial position or its results of
operations.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 requires the recognition
of all derivatives as either assets or liabilities in the statement of financial
position and the measurement of those instruments at fair value. The Company is
required to adopt this standard in the first quarter of fiscal 2000. The Company
expects that the adoption of SFAS No. 133 will not have a material impact on it
financial position or its results of operations.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SoP) 97-2, "Software Revenue Recognition," which
provides guidance for recognizing revenue on software sales such that certain
amounts are deferred for future obligations such as software upgrades and
product support. The Company will adopt SOP 97-2 effective August 1, 1998. The
Company does not expect that the new pronouncement will have a material impact
on its financial position or results of operations.
40
41
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
In March 1998, the Accounting Standards Executive Committee of the
American institute of Certified Public Accountants, issued Statement of Position
98-1 (SoP 98-1), "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use," which requires the capitalization of certain
internal costs related to the implementation of computer software obtained for
internal use. In consideration of the Company's implementation of the Oracle
Enterprise Resource Planning Software System, the Company early adopted SoP 98-1
during fiscal 1998. In accordance with SoP 98-1, the Company capitalized $808 of
internal costs associated with the implementation of the Oracle Enterprise
Resource Planning Software System during the year ended July 31, 1998.
Reclassifications
Certain amounts related to the year ended July 31, 1997 have been
reclassified to conform to the current year presentation.
3. PURCHASE TRANSACTIONS
In November 1995, VTEL 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 VTEL
acquiring certain tangible assets primarily consisting of inventories, prepaid
expenses and fixed assets and assuming certain deferred revenues related to
extended warranty service contracts. The acquired service and support
infrastructure includes a trained workforce possessing specialized systems
integration and process knowledge. The transaction will allow VTEL to enhance
its ability to support its resellers' abilities to offer systems integration,
installation and end-user support to the ultimate purchaser of its 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.
VTEL completed the ICS Transaction with the payment of $10,684 in cash,
which includes $142 of transaction expenses, and the issuance of 260,000 shares
of VTEL's unregistered Common Stock with an estimated market value at the time
of the transaction of $3,723. The transaction was accounted for under the
purchase method pursuant to which VTEL determined that approximately $14,400 of
the purchase price related to intangible assets which are primarily represented
by the service and support infrastructure. Amortization of the intangible asset
was $80, $560, $960, $960 for the year ended December 31, 1995, the seven months
ended July 31, 1996 and the years ended July 31, 1997 and 1998, respectively.
As part of the Company's initiative to expand its international
presence, the Company consummated the acquisition of certain of the assets of
the videoconferencing division of one of its German resellers effective July 1,
1998. The consideration paid by the Company consisted of restricted stock,
warrants, a note payable, and the assumption of certain payables and other
liabilities. Subsequent to July 31, 1998, the Company completed the acquisition
of one of its French resellers through a stock for stock transaction. The
consideration paid by the Company consisted of restricted stock. The total
consideration paid for both acquisitions was less than $3 million.
41
42
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
4. INVENTORIES
Inventories consist of the following:
JULY 31,
1997 1998
Raw materials $ 9,493 $ 5,938
Work-in-process 4,143 517
Finished goods 7,490 5,833
Finished goods held for
Evaluation and rental
Agreements 1,118 663
--------- ---------
$ 22,244 $ 12,951
========= =========
Finished goods held for evaluation and under rental agreements consists
of completed digital visual communication systems used for demonstration and
evaluation purposes, which are generally sold during the next year.
5. PROPERTY AND EQUIPMENT
Property and equipment is composed of the following:
JULY 31,
1997 1998
Furniture, machinery and equipment $ 28,803 $ 30,045
Internal support equipment 10,991 12,513
Customer service assets 11,752 15,263
Leasehold improvements 2,872 6,686
--------- ---------
54,418 64,507
Less accumulated depreciation (32,758) (36,401)
--------- ---------
$ 21,660 $ 28,106
========= =========
Depreciation and amortization expense relating to property and
equipment was approximately $20,818, $8,379, $12,991 and $7,910 for the year
ended December 31, 1995, the seven months ended July 31, 1996, and the years
ended July 31, 1997 and 1998, respectively.
42
43
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
6. DISCONTINUED OPERATIONS
During November 1995, CLI adopted a strategic plan to discontinue
operations of its broadcast products division. This division generally
manufactured and sold broadcast video products to commercial end-users. The
results for the division have been accounted for as discontinued operations in
accordance with APB No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," and the accompanying
consolidated financial statements have been presented to reflect the
discontinuation of the division.
On June 27, 1996, CLI completed the sale of certain assets of its
broadcast products division to another company in exchange for $12,500 in cash
and the assumption of $2,000 in liabilities. The purchaser assumed past warranty
obligations associated with the product family covered by the sale. With the
exception of the accounts receivable, CLI disposed of the remaining assets of
the division to a separate buyer. During the year ended July 31, 1997, the
Company recorded a provision for probable losses to fully reserve the remaining
accounts receivable of the discontinued operations that were considered to be
uncollectible. Such provision is reflected in the accompanying consolidated
statement of operations in the net loss from discontinued operations.
Revenues from the discontinued division were approximately $36,974 for
the year ended December 31, 1995 and $11,201 for the seven months ended July 31,
1996. No revenues from discontinued operations were recorded during the years
ended July 31, 1997 and 1998.
7. LINES OF CREDIT
On December 4, 1997, the Company executed a credit agreement with a
banking syndicate which established a $25,000 revolving line of credit. Under
the line of credit, the Company may borrow up to 80% of eligible accounts
receivable. The credit agreement also provides that the Company may request the
issuance of letters of credit up to a maximum of $10,000 and foreign exchange
contracts up to a maximum of $10,000. Each of the aforementioned provisions are
subject to certain limitations.
Any amounts outstanding under the credit agreement will bear interest
at the prime rate (8.5 % at July 31, 1998) or, at the option of the Company,
LIBOR plus a range of basis points (7.1% to 7.6% at July 31, 1998) based on the
number of profitable quarters the Company has achieved at the time of the credit
advance (LIBOR) option. All such advances and accrued interest under the credit
agreement will be payable on the maturity date of December 3, 1999 unless the
Company converts the revolving advances to a two-year term loan, which will bear
interest at the prime rate or the LIBOR option rate and will be payable in equal
monthly installments. The Company pays an annual commitment fee of 0.2% on its
unused line of credit.
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. The
Company has issued a letter of credit totaling $1,200 under the line of credit
as a lease deposit on one of its facilities. At July 31, 1998, the Company had
no amounts drawn under the credit line.
43
44
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
8. STOCKHOLDERS' EQUITY
General
In October 1995, VTEL completed a secondary offering of its Common
Stock which consisted of the sale of 3,000,000 shares of VTEL's Common Stock
generating net proceeds to VTEL of approximately $57,000.
In June 1995, Intel purchased 51,898 shares of VTEL's common stock for
approximately $396 pursuant to an agreement, since terminated, which enabled
Intel to maintain its percentage ownership interest in VTEL. In October 1995,
Intel delivered notice of its intent to exercise its warrant to purchase
1,199,124 shares of VTEL'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 VTEL and Intel. Pursuant to
the modified agreement, Intel agreed to sell to VTEL concurrently with the
exercise of the warrant, and VTEL agreed to purchase from Intel, 771,464 shares
of VTEL's Common Stock at a price of $17.875, the closing price of VTEL'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, VTEL completed the warrant exercise and related stock redemption
transaction such that Intel increased its ownership of VTEL's Common Stock by
427,660 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. VTEL registered the shares acquired by Intel as
provided under the Stock Agreement. In May 1997, VTEL issued 155,040 shares of
Common Stock, at the fair market value, to Intel in lieu of repayment of the
remaining $901 advance under the Development Agreement (see Note 9 to the
Consolidated Financial Statements) that was unused at that time.
In November 1995, VTEL issued 260,769 shares of its unregistered Common
Stock in connection with the ICS Transaction (see Note 3).
Share Repurchase Program
During the seven months ended July 31, 1996, VTEL adopted a share
repurchase program pursuant to which VTEL repurchased shares of its Common Stock
in the open market. During the year ended July 31, 1997, VTEL repurchased
455,200 shares of its Common Stock for approximately $3,700. In February 1997,
VTEL terminated the stock repurchase program. All repurchased shares were issued
from time to time prior to the CLI Merger in May 1997. VTEL applies the cost
method of accounting for its treasury stock.
In August 1998, the Company announced its plan to repurchase up to
2,000,000 shares of VTEL Common Stock. As of October 12, 1998, the Company had
repurchased approximately 465,000 shares of its common stock for approximately
$2,000.
CLI Redeemable Convertible Preferred Stock
On October 25, 1996, CLI completed a private placement of 350,000
shares of Class C Preferred Stock and stock warrants for the purchase of 375,000
shares of CLI Common Stock for approximately $7,000, before certain issuance
costs, pursuant to a purchase agreement with an institutional investor. The
preferred stock was exchanged for 1,102,500 shares of VTEL Common Stock and both
the number and exercise price of the warrants were converted into warrants for
the purchase of VTEL Common Stock based on the exchange ratio of 0.46 in
connection with the Merger. The converted warrants, totaling 172,500 VTEL
shares, have an exercise price of $12.39 and expire in October 2001.
44
45
TION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Stock and Stock Option Plans
VTEL has three stock option plans, the 1989 Stock Option Plan (the
"1989 Plan"), the 1996 Stock Option Plan (the "1996 Plan") and the 1992 Director
Stock Option Plan (the "1992 Plan"). The 1989 Plan and the 1996 Plan both
provide for the issuance of non-qualified and incentive stock options to key
employees, directors and consultants of the Company. Stock options are generally
granted at the estimated fair market value at the time of grant, and the options
vest ratably over 48 months and are generally exercisable for a period of ten
years beginning with date of grant. The 1992 Plan provides for the issuance of
stock options to nonemployee directors at the estimated fair market value at the
time of grant. Such options vest ratably over 36 months and are exercisable for
a period of ten years beginning with the date of the grant.
CLI had employee and director stock option plans prior to the merger
with VTEL. On May 23, 1997, all options outstanding under these plans were
converted into options for Common Stock of VTEL. Both the number of shares
subject to option and the per share exercise price under each option were
adjusted by the exchange ratio of 0.46.
The Company applies APB No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost is
recognized for its stock option plans unless options are issued at exercise
prices which are below the market price on the measurement date. Had
compensation cost for the Company's stock option plans been determined based on
the fair market value at the grant dates for awards under those plans consistent
with the method provided by SFAS No. 123, the Company's net loss and net loss
per share would have been reflected by the following pro forma amounts for the
seven months ended July 31, 1996 and the years ended July 31, 1997 and 1998:
FOR THE SEVEN FOR THE YEARS
MONTHS ENDED ENDED
JULY 31, JULY 31,
1996 1997 1998
Net income (loss) As reported $ (18,507) $ (52,054) $ 2,779
Pro forma $ (20,638) $ (55,276) $ (1,589)
Basic and diluted net income (loss)
per common share As reported $ (.87) $ (2.45) $ 0.12
Pro forma $ (.96) $ (2.60) $ (0.07)
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 years ended July 31, 1997 and 1998:
FOR THE SEVEN
MONTHS ENDED FOR THE YEARS ENDED
JULY 31, JULY 31,
1996 1997 1998
Dividend yield -- -- --
Expected volatility 84.83% 92.31% 63.12%
Risk-free rate of return 6.56% 5.90% 5.52%
Expected life 4.94 years 5.12 years 5.65 years
45
46
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
The following table summarizes activity under all Plans for the year
ended December 31, 1995, the seven months ended July 31, 1996 and the years
ended July 31, 1997 and 1998. This information includes stock options relating
to CLI's stock option plans. Both the number of shares and the per share
exercise price have been adjusted by the exchange ratio of 0.46.
1995 1996 1997 1998
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 1,638 $ 3.97 1,879 $ 8.80 2,187 $ 9.40 3,648 9.42
Converted from CLI -- -- -- -- 1,798 17.43 -- --
Granted 701 17.37 449 10.99 2,098 6.44 896 6.43
Exercised (371) 3.66 (77) 3.13 (324) 3.14 (186) 4.00
Canceled (89) 8.88 (64) 10.39 (2,111) 14.58 (420) 7.55
--------- --------- --------- --------- --------- --------- --------- ---------
Outstanding at the
end of the year 1,879 $ 8.80 2,187 $ 9.40 3,648 $ 9.42 3,938 $ 8.65
========= ========= ========= ========= ========= ========= ========= =========
Options exercisable at
year end 1,851 $ 8.74 2,165 $ 9.40 3,402 $ 9.20 3,710 $ 8.42
========= ========= ========= ========= ========= ========= ========= =========
Weighted average fair
value of options granted
during the year $ 12.07 $ 7.77 $ 3.42 $ 4.12
========= ========= ========= =========
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-AVERAGE
NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF OUTSTANDING AT CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE AT EXERCISE PRICE
EXERCISE PRICES JULY 31, 1998 JULY 31, 1998
$0.30 - $5.75 710,094 6.59 years $ 3.92 710,094 $ 3.92
5.78 - 6.11 201,994 9.09 6.02 187,326 6.02
6.13 - 6.13 1,368,837 8.87 6.13 1,354,169 6.13
6.19 - 7.88 646,012 8.38 7.00 636,345 7.00
8.06 - 42.66 1,010,979 6.04 16.96 822,282 17.72
================= ============ ======== ======== ========= ===========
$0.30 - $42.66 3,937,916 7.66 years $ 8.65 3,710,216 $ 8.42
================= ============ ======== ======== ========= ===========
Generally, options are exercisable immediately upon grant. However,
stock issued upon exercise of a stock option is subject to repurchase by the
Company at the exercise price until the option vesting period has elapsed. At
July 31, 1998, options to purchase 1,852,530 shares were vested. At July 31,
1998, no unvested options had been exercised.
46
47
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Employee Stock Purchase Plan
On April 29, 1993, VTEL adopted an Employee Stock Purchase Plan
("Employee Plan") which enables all employees to acquire VTEL stock under the
plan. The Employee Plan authorizes the issuance of up to 950,000 shares of
VTEL's Common Stock. The Employee Plan allows participants to purchase shares of
the Company's Common Stock at a price equal to the lesser of (a) 85% of the fair
market value of the Common Stock on the date of the grant of the option or (b)
85% of the fair market value of the Common Stock at the time of exercise. Shares
of Common Stock issued under the Employee Plan totaled 66,087, 37,121, 105,549
and 158,073 respectively, for the year ended December 31, 1995, the seven months
ended July 31, 1996 and the years ended July 31, 1997 and 1998.
The fair value of the employees' purchase rights was estimated using
the Black-Scholes model with the following assumptions for the seven months
ended July 31, 1996 and the years ended July 31, 1997 and 1998:
FOR THE SEVEN FOR THE FOR THE
MONTHS ENDED YEAR ENDED YEAR ENDED
JULY 31, 1996 JULY 31, 1997 JULY 31, 1998
SECTION 16 SECTION 16 SECTION 16
OFFICERS OTHERS OFFICERS OTHERS OFFICERS OTHERS
Dividend yield -- -- -- -- -- --
Expected volatility 95.78% 90.29% 82.89% 79.83% 52.10% 51.68%
Risk-free rate of return 5.18% 5.12% 5.31% 5.23% 5.40% 5.34%
Expected life (in years) .50 .25 .50 .25 .50 .25
Weighted-average fair value of
purchase rights granted $3.13 $2.30 $2.54 $2.11 $1.96 $1.66
9. DEVELOPMENT AND LICENSE AGREEMENT
On October 22, 1993, VTEL entered into a Development and License
Agreement (the "Development Agreement") with Intel Corporation ("Intel"),
pursuant to which the companies agreed to engage in a series of development
efforts with respect to video compression software as well as other video
technology such as processes and designs. The agreement contains certain
provisions for licensing agreements and royalties between the two companies for
the use of the technology developed under the agreement.
The initial term of the Development Agreement has renewed until
December 31, 1999 and will continue to automatically renew thereafter for
successive terms of one year unless written notice is given by either party six
months prior to the expiration of the initial term or any successor term.
VTEL was advanced $3,000 under the agreement to be used for the initial
reimbursements of research and development costs incurred by VTEL in performing
the work specified in the Development Agreement. During the years ended December
31, 1995 and July 31, 1997, the Company reduced gross research and development
expenses by approximately $190 and $5, 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 and the year ended July 31, 1998 as a result of the
Development Agreement. In May 1997, VTEL issued 155,040 shares of Common Stock,
at the fair market value, to Intel in lieu of repayment of the remaining $901
advance that was unused at that time. As of July 31, 1998, the Company had no
research and development activities in process or planned related to the
Development Agreement.
47
48
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
10. FEDERAL INCOME TAXES
Under the provisions of SFAS No. 109, the components of the net
deferred tax amount are as follows:
JULY 31,
1997 1998
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 23,198 $ 29,140
Research and development credit carryforwards 3,376 3,458
Minimum tax credit carryforwards 110 110
Inventory and warranty provisions 3,562 1,246
Charitable contributions -- 22
Compensation accruals 1,932 635
Depreciation 2,698 630
Deferred revenue 703 1,796
Accrued expenses 2,385 841
Accounts receivable 3,996 3,163
Other 281 558
---------- ----------
Gross deferred tax asset 42,241 41,599
---------- ----------
DEFERRED TAX LIABILITIES:
Capitalized software -- (274)
---------- ----------
Gross deferred tax liability -- (274)
---------- ----------
Valuation allowance (42,241) (41,325)
---------- ----------
Net deferred tax asset $ -- $ --
========== ==========
The Company's net operating loss carryforwards expire in varying
amounts from 1999 through 2013. Research and development tax credit
carryforwards expire in varying amounts from 1998 through 2013. Minimum tax
credit carryforwards do not expire and carry forward indefinitely. Net operating
losses related to the Company's foreign subsidiary (totaling $5,033) are
available to offset future foreign taxable income.
The Company has experienced substantial changes in ownership as defined
by the Internal Revenue Code. These changes result in annual limitations of the
amount of net operating loss carryforward generated prior to each change which
can be utilized to offset future taxable income. As a result of the ownership
change at CLI at the date of the Merger, a portion of CLI's net operating loss
carryforward generated prior to the Merger will never be available to offset
future taxable income due to the effect of the annual limitation and the
expiration of the related net operating losses. Therefore, the unavailable
portion of the net operating loss carryforward is not considered in determining
the deferred tax asset at July 31, 1998.
At July 31, 1998, the Company had total domestic net operating loss
carryforwards of $85,705 ($26,592 and $59,113 for VTEL and CLI, respectively).
The portions of these carryforwards available for utilization during fiscal 1999
(in consideration of the annual limitations) are $52,660. Additional net
operating losses created prior to the changes in control of $2,574 become
available in each subsequent year and accumulate if not used until such net
operating losses expire.
48
49
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
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 net deferred tax asset. Accordingly, no deferred
taxes have been recorded for the year ended December 31, 1995, for the seven
months ended July 31, 1996 and for the years ended July 31, 1997 and 1998.
The tax provisions reflected in the accompanying consolidated financial
statements is due primarily to federal alternative minimum taxes and state
income taxes.
11. COMMITMENTS AND CONTINGENCIES
Lease Commitments
VTEL leases furniture and equipment, manufacturing facilities and
office space under noncancelable leases which expire at various dates through
2013. Certain leases obligate VTEL to pay property taxes, maintenance and repair
costs.
Future minimum lease payments under all operating leases as of July 31, 1998
were as follows:
FISCAL YEAR ENDING:
1999 $ 7,430
2000 7,082
2001 6,771
2002 6,592
2003 6,315
Thereafter 21,377
--------
$ 55,567
========
Total rent expense under all operating leases for the years ended
December 31, 1995, for the seven months ended July 31, 1996, and for the years
ended July 31, 1997 and 1998 was $6,188, $4,713, $4,601 and $4,301 respectively.
During the year ended July 31, 1998, the Company completed the planned
elimination of duplicate headquarter facilities by terminating the lease for the
former CLI headquarters. The landlord paid the Company a $1,800 termination fee
which is recorded (net of termination expenses) as Other Income in the
accompanying Statement of Operations.
In connection with the acquisition of certain of the assets of the
videoconferencing division of one of its German resellers, (see Note 3), the
Company entered into a five year licensing agreement pursuant to which the
Company will pay a license fee equal to 4% of the revenues generated by the
acquired assets with a minimum annual fee of $281 to $393 and a maximum annual
fee of $786.
49
50
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
Contingencies
CLI is currently engaged in several legal proceedings relating to
matters arising prior to the Merger. There can be no assurance that CLI's legal
proceedings can be resolved favorably to CLI or VTEL. Such legal proceedings, if
continued for an extended period of time, could have an adverse effect upon
CLI's working capital and management's ability to concentrate on its business.
The Company has recorded an estimate of the costs to defend and discharge the
claims. Such amount is included in the charges recorded as contingent
liabilities (see Note 1 to the Consolidated Financial Statements). In the
opinion of management, such reserves should be sufficient to discharge the
liabilities, if any. However, an unfavorable outcome in any one or several such
legal proceedings could have a material adverse effect on CLI and hence, VTEL.
In a complaint filed on December 20, 1993 in the United States District
Court in Dallas, Texas, Datapoint Corporation ("Datapoint") alleged that CLI had
infringed two United States patents owned by Datapoint relating to video
conferencing networks. The complaint sought a judgment of infringement, monetary
damages, injunctive relief and attorneys' fees. CLI responded to the complaint
by denying the material allegations of the complaint and asserting affirmative
defenses. In July 1998, the United States District Court dismissed the civil
action filed by Datapoint.
In June 1997, Keytech, S.A. ("Keytech") filed suit against CLI in the
United States District Court in Tampa, Florida. Keytech was a distributor of
satellite encoder and decoder products manufactured by a division of CLI which
CLI sold in June 1996. Keytech has asserted that the equipment sold was
defective and did not conform to contract specifications and express and implied
warranties. Keytech has asserted damages in excess of $20 million based on its
allegations of breach of contract, breach of warranties and fraud. CLI has filed
an answer denying liability and has asserted cross-claims against Keytech for
amounts due and unpaid for equipment sold by CLI to Keytech.
12. 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:
FOR THE YEAR ENDED
JULY 31, 1998
UNITED STATES EUROPE AND ELIMINATIONS CONSOLIDATED
OTHER
Sales to unaffiliated customers $ 163,264 $ 16,420 $ -- $ 179,684
Transfer between geographic areas 9,616 -- (9,616) --
--------- --------- --------- ---------
Total sales $ 172,880 $ 16,420 $ (9,616) $ 179,684
========= ========= ========= =========
Net income (loss) from continuing operations $ 2,155 $ 530 $ 94 $ 2,779
========= ========= ========= =========
Net income (loss) $ 2,155 $ 530 $ 94 $ 2,779
========= ========= ========= =========
Identifiable assets $ 132,914 $ 9,871 $ (13,496) $ 129,289
========= ========= ========= =========
50
51
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
- --------------------------------------------------------------------------------
FOR THE YEAR ENDED
JULY 31, 1997
UNITED STATES EUROPE AND ELIMINATIONS CONSOLIDATED
OTHER
Sales to unaffiliated customers $ 180,811 $ 10,212 $ -- $ 191,023
Transfer between geographic areas 12,612 -- (12,612) --
---------- ---------- ---------- ----------
Total sales $ 193,423 $ 10,212 $ (12,612) $ 191,023
========== ========== ========== ==========
Net loss from continuing operations $ (40,942) $ (3,144) $ (185) $ (44,271)
========== ========== ========== ==========
Net loss $ (48,725) $ (3,144) $ (185) $ (52,054)
========== ========== ========== ==========
Identifiable assets $ 139,051 $ 8,008 $ (15,924) $ 131,135
========== ========== ========== ==========
FOR THE SEVEN MONTHS ENDED
JULY 31, 1996
UNITED STATES EUROPE AND ELIMINATIONS CONSOLIDATED
OTHER
Sales to unaffiliated customers $ 93,728 $ 3,234 $ -- $ 96,962
Transfer between geographic areas 2,383 -- (2,383) --
---------- ---------- ---------- ----------
Total sales $ 96,111 $ 3,234 $ (2,383) $ 96,962
========== ========== ========== ==========
Net loss $ (16,721) $ (1,834) $ 48 $ (18,507)
========== ========== ========== ==========
Identifiable assets $ 179,799 $ 3,131 $ (7,838) $ 175,092
========== ========== ========== ==========
FOR THE YEAR ENDED
DECEMBER 31, 1995
UNITED STATES EUROPE AND ELIMINATIONS CONSOLIDATED
OTHER
Sales to unaffiliated customers $ 184,471 $ 6,603 $ -- $ 191,074
Transfer between geographic areas 3,475 -- (3,475) --
---------- ---------- ---------- ----------
Total sales $ 187,946 $ 6,603 $ (3,475) $ 191,074
========== ========== ========== ==========
Net loss from continuing operations $ (16,912) $ (520) $ 131 $ (17,301)
========== ========== ========== ==========
Net loss $ (53,454) $ (520) $ 131 $ (53,843)
========== ========== ========== ==========
Identifiable assets $ 219,616 $ 3,445 $ -- $ 223,061
========== ========== ========== ==========
* * *
51
52
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" will be filed with the Company's Definitive Proxy
Statement pursuant to Regulation 14A on or before November 28, 1998.
ITEM 11. EXECUTIVE COMPENSATION
In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the caption
"Executive Compensation" will be filed with the Company's Definitive Proxy
Statement pursuant to Regulation 14A on or before November 28, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the caption
"Security Ownership of Certain Beneficial Owners and Management" will be filed
with the Company's Definitive Proxy Statement pursuant to Regulation 14A on or
before November 28, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In accordance with paragraph G(3) of the General Instructions to the
Annual Report on Form 10-K, the information contained under the caption "Certain
Relationships and Transactions" will be filed with the Company's Definitive
Proxy Statement pursuant to the regulation 14A on or before November 28, 1998.
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 27 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 27 of this Report.
(a)(3) The following exhibits are filed with this Annual Report on Form 10-K:
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
2.1 - Agreement and Plan of Merger and Reorganization dated as of
January 6, 1997 by and among VTEL, VTEL-Sub, Inc. and CLI
(incorporated by reference to the Exhibit 99.1 of VTEL's Report
on Form 8-K dated January 6, 1997).
52
53
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
3.1 - Fourth Amended Restated Certificate of Incorporation
(incorporated by reference the Exhibit 3.1 to the Company's
quarterly report form 10-Q for the period ended June 30, 1993.)
3.2 - Amendment to Fourth Amended and Restated Certificate of
Incorporation, as filed on May 27, 1997 with the Secretary of
State of Delaware (incorporated by reference the Exhibit 3.1 to
the Company's Annual Report on form 10-K for the period ended
July 31, 1997.)
3.3 - Bylaws of the Company as adopted by the Board of Directors of
the Company effective as of June 11, 1989 (incorporated by
reference to Exhibit 3.3 to the Company's Registration Statement
on Form S-1, File No. 33-45876, as amended).
3.4 - Amendment to Bylaws of the Company as adopted by the Board of
Directors of the Company effective as of April 28, 1992
(incorporated by reference to Exhibit 19.1 to the Company's
Quarterly Report on Form 10-Q for the three months ended March
31, 1992).
3.5 - Amendment to the Bylaws of the Company as adopted by the Board
of Directors of the Company effective as of July 10, 1996
(incorporated by reference to Exhibit 4.5 to the Company's
Current Report on Form 8-K dated July 10, 1996).
4.1 - Specimen Certificate for the Common Stock (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-1, File No. 33-45876, as amended).
4.2 - Rights Agreement dated as of July 10, 1996 between VTEL
Corporation and First National Bank of Boston, which includes the
form of Certificate of Designations for Designating Series A
Preferred Stock, $.01 par value, the form of Rights Certificate,
and the Summary of Rights to Purchase Series A Preferred Stock
(incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated July 10, 1996).
10.1 - License Agreement, dated as of November 7, 1990, between
Universite de Sherbrooke, as Licenser, and the Company, as
Licensee (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1, File No. 33-45876,
as amended).
10.2 - VideoTelecom Corp. 1989 Stock Option Plan, as amended
(incorporated by reference to Exhibit 4.1 to the Company's
Registration on Form S-8, File No. 33-51822).
10.3 - Form of VideoTelecom Corp. Nonqualified Stock Option Agreement
(incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).
53
54
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
10.4 - Form of VideoTelecom Corp. Incentive Stock Option Agreement
(incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).
10.5 - Distributor Agreement dated January 8, 1990, between US WEST
Communications Services, Inc. and the Company (incorporated by
reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1, File No. 33-45876, as amended).
10.6 - Purchase Agreement effective October 1, 1990, between GTE
Service Corporation and the Company, as amended July 1, 1991
(incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).
10.7 - Distribution Agreement, made and entered into November 1, 1991,
by and between Microsoft Corporation and the Company
(incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).
10.8 - VideoTelecom Corp. 1992 Director Stock Option Plan (incorporated
by reference to Exhibit 4.1 to the Company's Registration on Form
S-8, File No. 33-51822).
10.9 - VideoTelecom Corp. Employee Stock Purchase Plan (incorporated by
reference to Exhibit 4.1 to the Company's Registration on Form
S-8, File No. 33-51822).
10.10 - Lease agreement, executed by Waterford HP, Ltd. on June 14,
1994, as Landlord, and the Company, as Tenant, together with
First Amendment of Lease Agreement between Waterford HP, Ltd., as
Landlord, and the Company, as Tenant, dated November 2, 1994,
Second Amendment of Lease Agreement between Waterford HP, Ltd.,
as Landlord, and the Company, as Tenant, dated February 1, 1995,
and Net Profits Agreement, executed between Waterford HP, Ltd. on
June 14, 1994 and the Company (incorporated by reference to
Exhibit 10.17 to the Company's 1994 Annual Report on Form 10-K).
10.11 - Subscription Agreement dated June 14, 1995 by and between VTEL
Corporation, Accord Video Telecommunications, Ltd., Nizanim Fund
(1993) Ltd., the "Star Entities", Manakin Investments BV, Messrs.
Gideon Rosenfeld and Sigi Gavish, and Eduardo Shoval
(incorporated by reference to Exhibit 10.19 to the Company's 1995
Annual Report on Form 10-K. The schedules referred to in the
agreement have been omitted but will be furnished to the
Securities and Exchange Commission upon request).
10.12 - Amendment to the VideoTelecom Corp. 1989 Stock Option Plan and
the 1992 Director Stock Option Plan (the terms of which are
incorporated by reference to the Company's 1996 Definitive Proxy
Statement).
54
55
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
10.13 - The VTEL Corporation 1996 Stock Option Plan (the terms of which
are incorporated by reference to the Company's 1995 Definitive
Proxy Statement).
10.14 - Amendment to the VTEL Corporation 1996 Stock Option Plan (the
terms of which are incorporated by reference to the Company's
Joint Proxy Statement filed on April 24, 1997).
10.15 - Compression Labs, Incorporated 1980 Stock Option Plan - the ISO
Plan (incorporated by reference to the Annual Report on Form 10-K
of Compression Labs, Inc. for the year ended December 31, 1994).
10.16 - Revised forms of Incentive Stock Option and Early Exercise
Stock Purchase Agreement used in connection with the issuance and
exercise of options under the ISO Plan (incorporated by reference
to the Registration Statement on Form S-8 of Compression Labs,
Inc. filed on June 6, 1994).
10.17 - Consulting and separation agreement between Compression Labs,
Incorporated and John E. Tyson dated February 16, 1996
(incorporated by reference to the Annual Report on Form 10-K of
Compression Labs, Inc. for the year ended December 31, 1995).
10.18 - Lease Agreement, dated January 30, 1998, between 2800
Industrial, Inc., Lessor and VTEL Corporation, Lessee
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the three months ended April
30, 1998).
10.19 - First Amendment, dated March 11, 1998, to Lease Agreement dated
January 30, 1998, between 2800 Industrial, Inc., Lessor and VTEL
Corporation, Lessee (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the three months
ended April 30, 1998).
10.20 - Loan and Security Agreement, dated December 4, 1997, between
Silicon Valley Bank and Texas Commerce Bank National Association,
as Creditors, and the Company, as Borrower.
55
56
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
10.21 - Change-in-Control Agreements with members of senior management
of the Company.
10.21 (a) Jerry S. Benson, Jr.
10.21 (b) Rodney S. Bond
10.21 (c) Charles M. Denton
10.21 (d) Dennis M. Egan
10.21 (e) Vinay Goel
10.21 (f) Frank S. Kaplan
10.21 (g) Steve F. Keilen
10.21 (h) F.H. (Dick) Moeller
10.21 (i) Ly-Huong T. Pham
10.21 (j) Barry Rumac
10.21 (k) Michael J. Steigerwald
10.21 (l) Bob R. Swem
10.21 (m) Stephen L. Von Rump
10.21 (n) Judy A. Wallace
21.1 - List of Subsidiaries
23.1 - Consent of PricewaterhouseCoopers LLP.
23.2 - Consent of KPMG Peat Marwick LLP.
27.1 - Financial Data Schedule (filed electronically only)
- ---------------
(b) Reports on Form 8-K:
None
(c) See subitem 14(a)(3) above.
(d) See subitem 14(a)(2) above.
56
57
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/ Jerry S. Benson, Jr. Chief Executive Officer, President and October 22, 1998
- -------------------------------------- Director (Principal Executive Officer) --------------------------
Jerry S. Benson, Jr.
/s/ Rodney S. Bond Chief Financial Officer, October 22, 1998
- -------------------------------------- Vice President- Finance, --------------------------
Rodney S. Bond Treasurer and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Arthur G. Anderson Director October 22, 1998
- -------------------------------------- --------------------------
Arthur G. Anderson
/s/ Eric L. Jones Director October 22, 1998
- -------------------------------------- --------------------------
Eric L. Jones
/s/ Max Hopper Director October 22, 1998
- -------------------------------------- --------------------------
Max Hopper
/s/ Gordon Matthews Director October 22, 1998
- -------------------------------------- --------------------------
Gordon Matthews
/s/ F.H. (Dick) Moeller Chairman of the Board October 22, 1998
- -------------------------------------- --------------------------
F.H. (Dick) Moeller
/s/ Dick Snyder Director October 22, 1998
- -------------------------------------- --------------------------
Dick Snyder
/s/ T. Gary Trimm Director October 22, 1998
- -------------------------------------- --------------------------
T. Gary Trimm
57
58
VTEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
- --------------------------------------------------------------------------------
PROVISION FOR WRITE-OFF OF
BALANCE AT DOUBTFUL UNCOLLECTIBLE BALANCE AT
BEGINNING ACCOUNTS ACCOUNTS END OF
OF PERIOD RECEIVABLE RECEIVABLE YEAR
(IN THOUSANDS)
Accounts receivable -
Allowances for
Doubtful accounts
Year ended December 31, 1995 $ 2,137 $ 11,389 $ (3,313) $ 10,213
Seven months ended July 31, 1996 10,213 (132) (2,206) 7,875
Year ended July 31, 1997 7,875 6,086 (3,239) 10,722
Year ended July 31, 1998 10,722 (119) (1,156) 9,447
58
59
INDEX TO EXHIBITS
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
2.1 - Agreement and Plan of Merger and Reorganization dated as of
January 6, 1997 by and among VTEL, VTEL-Sub, Inc. and CLI
(incorporated by reference to the Exhibit 99.1 of VTEL's Report
on Form 8-K dated January 6, 1997).
3.1 - Fourth Amended Restated Certificate of Incorporation
(incorporated by reference the Exhibit 3.1 to the Company's
quarterly report form 10-Q for the period ended June 30, 1993.)
3.2 - Amendment to Fourth Amended and Restated Certificate of
Incorporation, as filed on May 27, 1997 with the Secretary of
State of Delaware (incorporated by reference the Exhibit 3.1 to
the Company's Annual Report on form 10-K for the period ended
July 31, 1997.)
3.3 - Bylaws of the Company as adopted by the Board of Directors of
the Company effective as of June 11, 1989 (incorporated by
reference to Exhibit 3.3 to the Company's Registration Statement
on Form S-1, File No. 33-45876, as amended).
3.4 - Amendment to Bylaws of the Company as adopted by the Board of
Directors of the Company effective as of April 28, 1992
(incorporated by reference to Exhibit 19.1 to the Company's
Quarterly Report on Form 10-Q for the three months ended March
31, 1992).
3.5 - Amendment to the Bylaws of the Company as adopted by the Board
of Directors of the Company effective as of July 10, 1996
(incorporated by reference to Exhibit 4.5 to the Company's
Current Report on Form 8-K dated July 10, 1996).
4.1 - Specimen Certificate for the Common Stock (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-1, File No. 33-45876, as amended).
4.2 - Rights Agreement dated as of July 10, 1996 between VTEL
Corporation and First National Bank of Boston, which includes the
form of Certificate of Designations for Designating Series A
Preferred Stock, $.01 par value, the form of Rights Certificate,
and the Summary of Rights to Purchase Series A Preferred Stock
(incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated July 10, 1996).
10.1 - License Agreement, dated as of November 7, 1990, between
Universite de Sherbrooke, as Licenser, and the Company, as
Licensee (incorporated by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1, File No. 33-45876,
as amended).
10.2 - VideoTelecom Corp. 1989 Stock Option Plan, as amended
(incorporated by reference to Exhibit 4.1 to the Company's
Registration on Form S-8, File No. 33-51822).
10.3 - Form of VideoTelecom Corp. Nonqualified Stock Option Agreement
(incorporated by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).
60
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
10.4 - Form of VideoTelecom Corp. Incentive Stock Option Agreement
(incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).
10.5 - Distributor Agreement dated January 8, 1990, between US WEST
Communications Services, Inc. and the Company (incorporated by
reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1, File No. 33-45876, as amended).
10.6 - Purchase Agreement effective October 1, 1990, between GTE
Service Corporation and the Company, as amended July 1, 1991
(incorporated by reference to Exhibit 10.19 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).
10.7 - Distribution Agreement, made and entered into November 1, 1991,
by and between Microsoft Corporation and the Company
(incorporated by reference to Exhibit 10.22 to the Company's
Registration Statement on Form S-1, File No. 33-45876, as
amended).
10.8 - VideoTelecom Corp. 1992 Director Stock Option Plan (incorporated
by reference to Exhibit 4.1 to the Company's Registration on Form
S-8, File No. 33-51822).
10.9 - VideoTelecom Corp. Employee Stock Purchase Plan (incorporated by
reference to Exhibit 4.1 to the Company's Registration on Form
S-8, File No. 33-51822).
10.10 - Lease agreement, executed by Waterford HP, Ltd. on June 14,
1994, as Landlord, and the Company, as Tenant, together with
First Amendment of Lease Agreement between Waterford HP, Ltd., as
Landlord, and the Company, as Tenant, dated November 2, 1994,
Second Amendment of Lease Agreement between Waterford HP, Ltd.,
as Landlord, and the Company, as Tenant, dated February 1, 1995,
and Net Profits Agreement, executed between Waterford HP, Ltd. on
June 14, 1994 and the Company (incorporated by reference to
Exhibit 10.17 to the Company's 1994 Annual Report on Form 10-K).
10.11 - Subscription Agreement dated June 14, 1995 by and between VTEL
Corporation, Accord Video Telecommunications, Ltd., Nizanim Fund
(1993) Ltd., the "Star Entities", Manakin Investments BV, Messrs.
Gideon Rosenfeld and Sigi Gavish, and Eduardo Shoval
(incorporated by reference to Exhibit 10.19 to the Company's 1995
Annual Report on Form 10-K. The schedules referred to in the
agreement have been omitted but will be furnished to the
Securities and Exchange Commission upon request).
10.12 - Amendment to the VideoTelecom Corp. 1989 Stock Option Plan and
the 1992 Director Stock Option Plan (the terms of which are
incorporated by reference to the Company's 1996 Definitive Proxy
Statement).
61
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
10.13 - The VTEL Corporation 1996 Stock Option Plan (the terms of which
are incorporated by reference to the Company's 1995 Definitive
Proxy Statement).
10.14 - Amendment to the VTEL Corporation 1996 Stock Option Plan (the
terms of which are incorporated by reference to the Company's
Joint Proxy Statement filed on April 24, 1997).
10.15 - Compression Labs, Incorporated 1980 Stock Option Plan - the ISO
Plan (incorporated by reference to the Annual Report on Form 10-K
of Compression Labs, Inc. for the year ended December 31, 1994).
10.16 - Revised forms of Incentive Stock Option and Early Exercise
Stock Purchase Agreement used in connection with the issuance and
exercise of options under the ISO Plan (incorporated by reference
to the Registration Statement on Form S-8 of Compression Labs,
Inc. filed on June 6, 1994).
10.17 - Consulting and separation agreement between Compression Labs,
Incorporated and John E. Tyson dated February 16, 1996
(incorporated by reference to the Annual Report on Form 10-K of
Compression Labs, Inc. for the year ended December 31, 1995).
10.18 - Lease Agreement, dated January 30, 1998, between 2800
Industrial, Inc., Lessor and VTEL Corporation, Lessee
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the three months ended April
30, 1998).
10.19 - First Amendment, dated March 11, 1998, to Lease Agreement dated
January 30, 1998, between 2800 Industrial, Inc., Lessor and VTEL
Corporation, Lessee (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the three months
ended April 30, 1998).
10.20 - Loan and Security Agreement, dated December 4, 1997, between
Silicon Valley Bank and Texas Commerce Bank National Association,
as Creditors, and the Company, as Borrower.
62
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
10.21 - Change-in-Control Agreements with members of senior management
of the Company.
10.21 (a) Jerry S. Benson, Jr.
10.21 (b) Rodney S. Bond
10.21 (c) Charles M. Denton
10.21 (d) Dennis M. Egan
10.21 (e) Vinay Goel
10.21 (f) Frank S. Kaplan
10.21 (g) Steve F. Keilen
10.21 (h) F.H. (Dick) Moeller
10.21 (i) Ly-Huong T. Pham
10.21 (j) Barry Rumac
10.21 (k) Michael J. Steigerwald
10.21 (l) Bob R. Swem
10.21 (m) Stephen L. Von Rump
10.21 (n) Judy A. Wallace
21.1 - List of Subsidiaries
23.1 - Consent of PricewaterhouseCoopers LLP.
23.2 - Consent of KPMG Peat Marwick LLP.
27.1 - Financial Data Schedule (filed electronically only)