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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, 2000
Commission file number 0-20008
VTEL CORPORATION
A Delaware Corporation IRS Employer ID No. 74-2415696
108 Wild Basin Road
Austin, Texas 78746
(512) 437-2700
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 21,089,661 shares of the registrant's Common Stock
held by nonaffiliates on October 13, 2000 was approximately $76,956,172. For
purposes of this computation all officers, directors and 5% beneficial owners of
the registrant are deemed to be affiliates. Such determination should not be
deemed an admission that such officers, directors and beneficial owners are, in
fact, affiliates of the registrant.
At October 13, 2000 there were 24,824,352 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 2000 Annual Meeting are incorporated by reference into Part
III.
General
VTEL Corporation (VTEL, we or our) has designed, manufactured, sold and
serviced videoconferencing systems since its inception in 1985. As a pioneer of
the videoconferencing industry, we led the early innovation of utilizing an open
PC architecture for our videoconferencing endpoints. By integrating the
functionality and applications of a personal computer with videoconferencing
hardware early on, we were one of the first players in the industry to provide a
videoconference solution that included virtually any PC application available as
well as simultaneous access to the Internet. With our software enhanced
innovations, we have manufactured and installed more than 30,000
videoconferencing endpoints. In addition, we currently have more than 10,000
endpoints under service contracts. Our experience in the videoconferencing
industry, however, has taught us that successful visual communication relies as
much on the quality of the network as the endpoint itself. We have learned that
the network has to be designed to support visual communications. This is
becoming especially true with the proliferation of high-speed broadband
communication networks. We have determined that to be successful in the visual
communications industry, we need to be more than a provider of innovative
communication endpoints. We must provide a network solution that will support
the vast amount of visual communication applications that are becoming possible
with increased bandwidth.
In August 2000, VTEL announced its plans to embark on a new business
charter that leverages our service and system integration capabilities as well
as our experience in the development of videoconferencing endpoints.
Videoconferencing has never reached the broad-based market appeal necessary to
support the production of videoconferencing endpoints alone. This is
demonstrated by the fact that most of the videoconferencing industry is
struggling to grow and to attain profitability. Our goal is to become the leader
in visually enabled broadband networks and begins with the continued support and
advancement of our current customers. They are the early adopters of the
videoconferencing industry and likely will be the early adopters of visual
communications over broadband networks. Our goal is to communicate our new
mission to these customers so they will look to VTEL as a partner in visually
enabling their broadband networks. This planned new direction of VTEL does not
remove us from the business of supplying videoconferencing endpoints. We will
simultaneously embrace and integrate a much broader array of third-party
technology, including other videoconferencing endpoint providers who
traditionally have been our competitors. The development and production of
innovative videoconferencing endpoints has been the backbone of our company. We
will continue to market our ESA(TM) product line, and to market and develop our
flagship videoconferencing product, Galaxy(TM), as we expand our development
focus toward software, specifically network management software, building on our
current SmartVideoNet Manager(TM) platform. To facilitative the change, special
attention will be paid to enhancing the interoperability of all the components
in a broadband video network, and expand our current test labs to create a
center of excellence for standards testing and integration. We will need to
develop additional consulting and solutions competencies, and ultimately
transform the majority of our revenue base from VTEL endpoint products to
software and complete solution services.
We believe VTEL has the industry's best videoconferencing network
management solution on which to build. As an innovator in the industry, we
believe the future of videoconferencing will be in driven by software
applications over broadband networks. We have experience in bringing together
all the pieces to create complete solutions for customers such as Jackson Public
Schools, Kinko's and Citicorp. Under the new business charter, it is our plan to
expand on these competencies, build our business model around them and drive
visual solutions onto the mainstream network. VTEL will become the provider of
choice for software, consulting services and integration of product peripherals
such as cameras, microphones and monitors. We will continue to support our
existing product lines including our flagship Galaxy(TM) videoconferencing
endpoint as this transition continues. We feel that refocusing our efforts in
this area will provide the greatest opportunity for long-term success for VTEL
and its shareholders
Industry Background
Visual communications systems (commonly referred to as
videoconferencing) enable users at remote locations to meet and share
information face-to-face. A wide range of business or professional meetings,
education and training classes, and technical or medical consultations make use
of this innovative technology to reduce operating costs, improve customer
services, reduce cycle times, and improve intra- or inter-company
communications. Videoconferencing first became available on a commercial basis
in the early 1980's. A single endpoint for a videoconference includes a
compression/decompression (or Codec) device, monitor, camera and microphones
that are housed within movable furniture compartment for ease of portability.
The industry has evolved around the production of the various Codecs as each
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manufacturer has developed its own proprietary software that compresses and
decompresses the video and audio signal. Over the years, there have been
relatively few manufacturers of videoconferencing endpoints. The product
offerings of the various manufacturers have been distinguished mostly by
differences in the user interface, available use of other software applications
during a video conference call as well as the look and design of the furniture.
VTEL's products, in particular, have been characterized by the innovation of
placing the Codec within a standard PC using an open architecture as opposed to
operating the Codec on a proprietary operating system in a more appliance type
fashion. By incorporating a PC into the videoconferencing endpoint, VTEL
products allow for the inclusion of software applications such as PowerPoint(TM)
presentations, spreadsheets and the ability to use whiteboard annotations during
a videoconference as well as other applications.
The development of endpoints within the videoconferencing industry has
diverged into two distinct categories. The room or group videoconferencing
products tailored for targeted markets with specific application needs and the
set-top products for the individuals who require strictly video and audio
communication during a call. The room system products are typically marketed to
institutions such as education, government and major corporations who use
videoconferencing in larger group setting. These larger installations will
involve several endpoints and often times include such requirements as automatic
camera control, multiple cameras and microphones and customized monitor size.
Set-top videoconferencing systems are usually standard configurations with a
single camera and microphone. Initially the industry experienced demand for
high-end systems from the larger institutions that could afford the costs of
dedicated networks and the high cost per endpoint. In recent years, while the
demand for high-end systems primarily in the distance education market has
remained stable, the growth in the industry has been in the lower cost set-top
products.
Also within the industry, a desktop market has emerged. The desktop
product is typically an additional board set that is installed within a PC or a
PC appliance that is plugged into the USB connection. These additional boards or
appliances, with attached cameras and microphones, allow for a videoconference
to take place at the desk over a computer.
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 the processing of 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. In recent years,
telecommunications networks have evolved from circuit-switched technology (like
traditional telephone lines) to packet-switched technology (Internet Protocol
(IP) networks). More recently, a major effort has been in place, mostly in the
United States, to install fiber optic networks that utilize wavelengths of light
to transmit IP data at higher speeds that would otherwise be accomplished over
traditional telephone lines. These networks have become increasingly popular as
a means of transmitting Internet related data such as electronic commerce,
distributed computing, electronic mail, facsimile transmission, electronic
transaction processing, remote access telecommuting and local and wide area
networking. Videoconferencing also utilizes these networks as represented by
VTEL's latest generation videoconferencing product line, Galaxy(TM), which
allows calls to be placed either over traditional phone lines or over IP
networks on a call-by-call basis. Because of the large amount of bandwidth
required in a videoconference as well as the unprecedented growth in demand for
IP networks, network management is becoming increasingly important. Providers of
networking equipment such as Cisco, Lucent, Ciena and others have developed
networking solutions that redirect network traffic more efficiently. We expect
that IP network traffic will continue to become more efficient in the future.
With the increased availability and efficiency of the IP networks, a wide array
of products that utilize visual communications are becoming increasingly
available. We believe that our experience in providing solutions for specific
customer's needs makes VTEL uniquely qualified to take advantage of the business
opportunities that are being created by broadband network proliferation. We
believe that while the growth in the industry will continue to be directed
toward demand for set-top videoconferencing, technological developments will
reduce the endpoint to a software application with minimal additional hardware
attached to the PC. We also believe that the key to our success in the visual
communications industry will be based on our ability to develop software and
offer services and solutions that can be delivered to the end users of visual
communications.
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Corporate Strategy
VTEL has long been a leader in the design, manufacture and sale of
videoconferencing hardware and software with thousands of satisfied customers
around the world. Our primary focus has been on delivering the high-end visual
communication systems that provide superior functionality to customers in
markets such as education, government and health care. However, despite our
ongoing efforts to expand the industry and make visual communications as
ubiquitous as e-mail or the telephone, the entire industry is struggling with
sales declining for high-end systems. Softer demand for high-end
videoconferencing systems has caused prices to decline as industry players
compete for customers on price. Overall, videoconferencing has yet to live up to
its promise as a critical component of business communications.
In recent years, however, a change is taking place in the industry that we
feel will unlock the promise of visual communications. The expansion of Internet
Protocol (IP) networks that connect large businesses and organizations and the
steady growth of fiber optic or "broadband" cable lines to serve these networks,
create a new environment for visual communications - video over IP. This is the
future area of growth from which VTEL is poised to lead and benefit. On August
23, 2000, we announced plans to transform our business model from the
traditional manufacture and sale of videoconferencing products to one that is
focused on leading the transition to video over IP. Our new business model will
involve executing the following strategies:
|X| developing industry-wide interoperability to ensure that all video network
hardware and software are compatible, which in turn will drive growth in
the market;
|X| designing back-office software products that can become the standard for
video over IP;
|X| designing and developing entire video networks that integrate existing IP
enterprise networks;
|X| serving as an industry consultant and expert on video over IP;
|X| managing video networks;
|X| establishing multi-vendor services and support;
|X| fulfilling multi-vendor endpoint and network product and service
requirements.
We anticipate revenue to originate from the sale of product elements such
as software, integration, network consulting services and endpoint and network
equipment sales and maintenance. We will focus our solution-oriented sales
effort in the commercial marketplace, while maintaining our reseller and channel
partner relationships in our existing markets for videoconferencing endpoints.
Because we expect continued demand for high-end videoconferencing particularly
in the education marketplace, we will continue to support our Galaxy(TM)
endpoint videoconferencing systems.
As we transform our core business into becoming a visual communications
solutions provider, we also are aware that the proliferation of the Internet has
created an urgency for video applications in a web environment. Consequently, we
are investing in subsidiary businesses that are focused in that area, namely
Onscreen24 and Articulearn. These two initiatives provide VTEL entry points into
the evolving Internet domain. We believe that Internet applications such as
education and other visual communication tools can grow and become profitable.
These initiatives are currently in the development stage, but should produce
products and services during fiscal 2001.
Our corporate strategy in the near term is to manage this transition and
generate profitable results from operations as quickly as possible. This process
will include the restructuring of our operations, which began during the first
quarter of fiscal 2001. We are also in the process of implementing relationships
with other vendors of visual communication software and hardware products
whereby VTEL would become a sales and development partner. While there are risks
involved in such a strategy, we believe our years of expertise, customer
relationships and existing software and hardware product offerings can be
leveraged for future financial success.
System Integration and Services
A key strategy in our business plan to become a solutions provider for
visually enabling broadband networks lies in our existing expertise as a
provider of systems integration and maintenance services. VTEL Global Services,
based in King of Prussia, PA, originated from an acquisition in 1995. At the
time of the acquisition, Global Services was operating as a value-added reseller
for VTEL and other industry players providing systems integration, installation
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and customer support for the various videoconferencing products available within
the industry. Global Services has consistently provided profitable results as a
division primarily focused on the delivery of integration, installation and
services of VTEL products. As part of our new strategy, we will once again
actively market our ability to integrate, install and service a wide offering of
VTEL and third-party products, including the products of traditional VTEL
competitors.
Within Global Service, our Integrated Systems group has developed a
worldwide reputation as a visual communications solutions provider. We have
successfully integrated systems into boardrooms and auditoriums for our
corporate customers as well as classrooms in primary schools, colleges and
universities. Our Integrated Systems group has provided solutions for customers
who have required multiple voice activated cameras, custom user-interface and
other customized requirements. The experience gained by addressing these needs
is a primary reason why VTEL is ideally positioned to become the focal point and
leader in visually enabling existing and emerging network infrastructures.
Our service and maintenance group is a global operation, supporting VTEL
technicians located on five continents and a worldwide network of service
subcontractors. We currently support more than 10,000 endpoint systems that are
under VTEL service contracts. These include VTEL products, legacy products of
our wholly owned subsidiary CLI, network products for which VTEL acts as a
reseller and some service contracts for our competitors' products. As part of
our new strategy, we intend to actively pursue additional support and
maintenance contracts for our competitor's products as well as other products
that emerge in the broadband visual communications industry. We believe this
strategy will further position VTEL as the industry expert in visual
communication solutions.
In addition to our existing service and maintenance offerings, we
intend to enhance our network management service capabilities. In 1997, VTEL
introduced the industry's first standards-based management and administration
platform for distributed visual communication networks. Using the Simple Network
Management Protocol "SNMP" standard, VTEL's SmartVideoNet ManagerTM provides the
ability to centrally control visual communication networks for functions such as
problem determination, problem resolution, call setup and conference statistics.
An example of the application for this network management product is the
Kinko's(R) network of videoconferencing endpoints. This nationwide network of
VTEL videoconferencing endpoints is managed through SmartVideoNet ManagerTM. We
intend to further develop our networking product for use on broadband IP
networks and offer network management support on a contract basis.
Products
VTEL differentiates its videoconferencing systems from other systems by
a high level of advanced functionality, such as presentation graphics and access
to PC-based software and hardware peripherals. The software that runs our
videoconferencing systems operates on an open architecture using a standard PC
with additional boards and ports for the cameras and microphones. VTEL's
videoconferencing systems run on a MS Windows operating system which makes it
compatible with other common software programs. This is a primary reason our
products deliver such advanced functionality. Since our products utilize open PC
architecture, many system upgrades are accomplished with software only, enabling
customers to protect their investment in VTEL systems.
Our latest line of videoconference products, Galaxy(TM), was introduced
in October 1999. The software within the Galaxy(TM) line is H.323 capable for
videoconferencing over Internet Protocol networks and/or H.320 capable for
videoconferencing over traditional circuit switched networks. The Galaxy(TM)
product line provides state of the art audio and video with high resolution
slide capture and send graphics. Within this product family there are solutions
that support single or dual monitor configurations, with data rates from 128Kbps
to 1920Kbps (T1/E1). With the MiniTower, introduced in April 2000, we added a
set-top solution to the Galaxy(TM) line of videoconferencing products. With the
MiniTower our customers have the affordability of a set-top videoconferencing
product as well as the ability to easily upgrade to high-end large room
functionality. Despite our plans to embark on a broader array of visual
communications products, we intend to continue to develop the features of
Galaxy(TM) in order to support our customers who have already invested in this
feature-rich product.
5
As stated earlier, we believe the future of videoconferencing will be
driven by software applications over broadband networks. While software
development has been at the heart of our videoconferencing philosophy, we also
offer other visual communication tools for the Internet such as streaming or
webcasting products, network software that remotely manages and troubleshoots
videoconferencing networks and network bridging equipment for multi-point calls
manufactured by third parties. In August 2000, we announced our Multi-Vendor
Solutions Program (MVP). This program is designed to identify the state of the
art Internet products for visual communications and allow us to incorporate them
as part of our overall solution for visual communications.
In June of 1999 we introduced our TurboCast(TM) product. TurboCast(TM)
software allows customers to capture, store, distribute, and view live or in
replay mode media streams across the Internet and be accessed by clients using
standard web browsers. The TurboCast solution utilizes a Java(R) applet, that
allows a media stream to play directly within browsers such as Microsoft
Internet Explorer(R) and Netscape Navigator(R) without downloading additional
software. Since TurboCast can be used with any Java(R)-enabled browser,
broadcasts can be viewed on PC and Unix systems as well as some Java(R)-based
hand-held consumer devices. We expect to offer enhancements to the TurboCast
products during fiscal 2001 which is currently available as either a standalone
product or included within our videoconferencing endpoints.
SmartVideoNet ManagerTM software is a network tool designed to help
customers simplify the administration of video networks and reduce operating
costs. Based on the Windows NT platform and utilizing the SNMP communications
protocol, SmartVideoNet ManagerTM leverages the PC-based architecture of our
systems to allow customers to use their existing Intranet to provide continuous
monitoring of their video network. SmartVideoNet ManagerTM allows administrators
to remotely control, configure, diagnose and troubleshoot VTEL systems, all from
a PC console.
VTEL offers a variety of third-party manufactured equipment to optimize
connectivity in a variety of network environments. In order to maximize
communication effectiveness, many customers choose to purchase multi-point
control units (MCUs) to link multiple users into a single meeting. We identify
the best MCUs available in the marketplace, test and certify their
interoperability with the other visual communication products we offer and
deliver them to our customers. As with all of our products, we offer
installation and maintenance services on the networks products we sell.
The Multi-Vendor Solutions Program is part of our new charter designed
to expand our integration and services business. The MVP provides solutions that
visually enable broadband networks. One of the first products included within
our Multi-Vendor Solutions Program is the VBrick(TM). This product provides the
ability to stream high quality video and audio MPEG files over a private
broadband network. With our new business strategy, we expect to continue to add
to the list of visual communication products that we offer as we deliver to our
customers the ability to conduct business over the Internet.
Internet Strategy
During the year ended July 31, 2000, VTEL established two entities
within its combined organizational structure to pursue business strategies over
the Internet. With these entities, we plan to leverage our expertise in visual
communications as an extension to our core business strategy of delivering
products and services. Onscreen24 focuses on developing and marketing visual
communication tools for the Internet such as video mail and streaming
technologies. Articulearn will develop the E-Commerce infrastructure to support
the delivery of web-based training and the user identification and transaction
capabilities that are needed to effectively deliver this service. The
capabilities will be available on a ready-made basis for customers who want to
provide web based training to either their own employees, customers or an
audience at large. In addition, Articulearn offers professional services to
assist companies as they develop educational content to be offered over the
Internet.
Distribution Strategy
Traditionally, VTEL has relied on third-parties to sell its videoconferencing
products. The majority of these sales are through providers of networks that
also subcontract with us for installation and maintenance services. Part of our
new business strategy is to further develop these relationships and partner with
the network providers to offer the end user the best possible visual
communication solutions available. We intend to leverage these consulting
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services into long-term service contracts for network management and maintenance
as well as product training revenues.
The VTEL services business primarily delivers its capabilities directly
to the end-user customers. These services will generally involve larger
customers that have sophisticated visual communication networks and require more
involvement to support the sale, installation and maintenance of the network. As
we intend to offer a broader range of visual communication products, we also
expect to develop a broader range of direct customers especially as broadband
networks become available and affordable to small businesses.
Competition
While there are several manufacturers of videoconferencing endpoints,
very few companies are dedicated to developing a sales and consulting business
around visual communications over broadband networks. While the big network
providers will sell videoconferencing equipment along with the network they are
installing, they do not usually provide post-installation services such as
network management and product services and training. Meanwhile, other
videoconferencing manufacturers do not usually provide network consulting
services. Certain of our current smaller niche market customers may potentially
be our competitors for certain customers. It is our intent to partner when
appropriate, to offer the end-user the best visual communication solution
possible.
While we believe that by embarking on this new business strategy that
we are focusing on a niche that is being ignored by the industry, there can be
no assurances that this strategy will be successful. Furthermore, if this
strategy is successful it is likely that other companies will attempt to
duplicate this business model.
Patents and Trademarks
VTEL has 22 patents issued by the United States Patent and Trademark
Office and 23 patent applications pending related to our technology.
There can be no assurance that the pending patents will be issued or
that issued patents can be defended successfully. However, we do not consider
patent protection crucial to our success. We believe that, due to the rapid pace
of technological change in the videoconferencing industry, legal protection for
our products are less significant than factors such as our use of an open
architecture, the success of our distribution strategy, the ongoing product
innovation and the knowledge, ability and experience of our employees.
VTEL has been issued two trademarks and two service marks by the United
States Patent and Trademark Office covering the "VTEL" mark and our logo as well
as trademarks and service marks issued by certain foreign countries and
entities. Applications for other trademarks are currently pending both in the
United States and abroad.
Employees
At July 31, 2000, we employed 592 full-time employees as follows:
Number of
Function Employees
Sales and marketing 173
Research and development 91
Service, support and 163
Systems integration
Manufacturing 55
Finance and administration 110
-------------
Total 592
=============
With the announcement of the New Charter on August 23, 2000, we also
announced the restructuring of our organization. The restructuring will involve
the termination of approximately 200 employees or 34% of our workforce. Despite
this reduction, our success will depend on our ability to attract and retain
trained and qualified personnel who are in great demand throughout the industry.
None of our employees are represented by a labor union. We believe that our
employee relations are good.
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VTEL'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. We use incentives, including competitive compensation
and stock option plans, to attract and retain well-qualified employees. There
can be no assurance, however, that we will continue to attract and retain
personnel with the requisite capabilities and experience. The loss of one or
more of our key management or technical personnel also could have a material and
adverse affect. VTEL generally does not have employment agreements with its key
management personnel or technical employees. Our future success is also
dependent upon our ability to effectively attract, retain, train, motivate and
manage our employees. Failure to do so could have a material adverse effect on
our business and operating results.
Executive Officers
Our executive officers are as follows:
Stephen L. Von Rump, age 42, was appointed President of VTEL in July
1999. He joined VTEL as Chief Marketing Officer in September 1998. Prior to
joining VTEL, Mr. Von Rump spent thirteen years at MCI Corporation most recently
as Vice President, Enterprise Services Marketing where he was responsible for
their data and Internet services strategy. As one of MCI's top data marketing
executives, he lead the transition of their enterprise business offerings from
legacy data services into the new era of virtual data and internet services.
Prior to MCI, Mr. Von Rump was a member of the technical staff at AT&T Bell
Laboratories. He holds a master's degree in electrical engineering, has authored
numerous technical and marketing publications and served as keynote speaker for
numerous professional conferences in the U.S. and abroad.
Michael J. Steigerwald, age 41, joined VTEL in June 1998 as Vice
President and General Manager of the Professional Services division, based in
King of Prussia, Pennsylvania. Mr. Steigerwald currently holds the position
Chief Operating Officer. Prior to joining VTEL, Mr. Steigerwald held the
position of Vice President at Newbridge Networks, where he lead the Global
Service and Support organization responsible for their ViVID Internetworking
Products business unit. For thirteen years prior to his experience with
Newbridge Networks, Mr. Steigerwald held several services management positions
at Ungermann-Bass Networks, an early pioneer in the LAN industry, with his last
position being that of Vice President, Worldwide Customer Care.
Jay C. Peterson, age 43, was appointed Vice President of Finance and
interim Chief Financial officer in May 2000. Mr. Peterson joined VTEL in
September 1995 as manager of Corporate Planning. Prior to joining VTEL, Mr.
Peterson held various financial positions with IBM Corporation.
Steve L. Cox, age 46, joined VTEL in June of 1996 as Vice President -
Chief Information Officer. From 1990 to 1996 Mr. Cox served as Corporate
Director of Information Systems for NEC North America, Inc. From 1976 to 1990,
Mr. Cox served as Manager of Information Systems for Alumax, Inc. / Howmet
Aluminum Corporation.
Dennis M. Egan, age 49, joined VTEL in November 1995 as Vice President
- - Service. From January 1993 to November 1995, Mr. Egan served as Senior Vice
President of Peirce-Phelps, Inc. From June 1985 to January 1993, Mr. Egan was
Vice President and General Manager of the Integrated Communications Systems
Group of Peirce-Phelps. Mr. Egan's pre-1985 experience includes 13 years serving
in various sales and management positions with Peirce-Phelps.
Bob R. Swem, age 63, joined VTEL in September 1992 as Vice President -
Manufacturing. From June 1981 to July 1992, Mr. Swem held various positions with
the Austin Division of Tandem Computers, Inc., ranging from Manager of
Manufacturing to Director of Operations.
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Item 2. Properties
VTEL's headquarters, product development, and sales and marketing
facility leases approximately 139,000 square feet in Austin, Texas under a lease
which expires in March 2013. During fiscal 1999, we reduced the workforce of
VTEL (see Restructuring Activities in Item 7.) and as a result were able to
sublet approximately 15,000 square feet during the later part of fiscal 1999 and
the first quarter of fiscal 2000. In fiscal 2001, we intend to sublease an
additional 45,000 square feet in order to consolidate space and take advantage
of a favorable real estate market in the Austin area. We believe that the
remaining facilities are adequate to meet our current requirements, and that
suitable additional space will be available, as needed, to accommodate further
physical expansion of corporate and development operations and for additional
sales and marketing offices. VTEL occupies approximately 60,000 square feet of a
facility that is situated in a light industrial area in Austin, Texas where our
manufacturing, training and spare parts depot are located. VTEL's manufacturing
facilities and equipment are currently utilized generally on a one-shift per day
basis. Should additional manufacturing capacity be needed during the next year,
we believe that it could provide the necessary manufacturing capacity through
the addition of work shifts or subcontractors and additional warehouse space.
VTEL leases 52,500 square feet in Sunnyvale, California under a lease
that expires in April 2008. We have a research and development group in our
Sunnyvale location. As a result of its restructuring activities, VTEL has sublet
approximately 5,200 square feet at its Sunnyvale location. . In fiscal 2001, we
intend to sublease additional space in order to consolidate space and take
advantage of a favorable real estate market in the Sunnyvale area. VTEL's
Professional Services group occupies a facility of approximately 41,000 square
feet in the Philadelphia, Pennsylvania vicinity which is leased through June
2006.
Item 3. Legal Proceedings
VTEL is the defendant or plaintiff in various actions which arose in
the normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on our
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
9
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Market information
Since April 7, 1992, VTEL's Common Stock has been traded in the
NASDAQ-National Market System under the symbol "VTEL". The following table sets
forth the range of high and low closing prices for each fiscal quarter of 1999
and 2000:
Fiscal Year Fiscal Year
1999 2000
High Low High Low
1st Quarter $ 5.875 $ 2.875 $ 3.750 $ 3.063
2nd Quarter $ 4.750 $ 2.500 $ 5.719 $ 2.625
3rd Quarter $ 9.250 $ 2.000 $ 10.625 $ 3.875
4th Quarter $ 6.500 $ 4.000 $ 4.938 $ 3.063
VTEL has not paid cash dividends on its Common Stock and presently
intends to continue a policy of retaining earnings for reinvestment in its
business.
On of September 15, 2000, VTEL's common stock closed at $2.750 on the
NASDAQ. At that date there were approximately 17,791 stockholders of record of
the common stock.
Item 6. Selected Financial Data
The following table sets forth consolidated financial data for VTEL as
of the dates and for the periods indicated. All such data reflects the Merger
with CLI on May 23, 1997, which was accounted for as a pooling of interests. The
consolidated operations data for the years ended July 31, 1998, 1999 and 2000
has been derived from the audited consolidated financial statements of VTEL
included elsewhere herein. The consolidated operations data for the seven months
ended July 31, 1996 and the year ended July 31, 1997 has been derived from the
audited consolidated financial statements of VTEL not included herein.
The consolidated balance sheet data as of July 31, 1999 and 2000 have
been derived from the audited consolidated financial statements of VTEL included
elsewhere herein. The consolidated balance sheet data as of July 31, 1996, 1997
and 1998 have been derived from the audited consolidated financial statements of
VTEL not included herein.
The consolidated financial data as of July 31, 1995 and for the seven
months then ended have been derived from the unaudited consolidated financial
statements of VTEL not included herein. The unaudited consolidated financial
data include all adjustments, consisting of normal recurring adjustments, which
VTEL considers necessary for a fair presentation of its financial position as of
such dates and the results of operations and cash flows for such periods. The
selected financial data should be read in conjunction with the consolidated
financial statements of VTEL and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The restatement of the consolidated financial information combines the
financial information of VTEL and CLI giving retroactive effect to the Merger as
if the two companies had operated as a single company for all periods presented.
However, the two companies operated independently prior to the Merger that was
consummated in May 1997 and the historical changes and trends in the financial
condition and results of operations of these two companies resulted from
independent activities.
10
For the
Seven Months For the Years
Ended Ended
July 31, July 31,
1995(a) 1996(a) 1997(b) 1998(c) 1999(d) 2000(e)
--------------------------------------------------------------------------
Unaudited
In thousands, except per share amounts
Statement of Operations Data:
Product revenues $ 89,207 $ 74,098 $ 150,791 $ 134,775 $ 105,520 $ 89,085
Services and other revenues 8,872 22,864 40,232 44,909 46,082 45,226
Gross margin 39,971 35,980 74,702 84,957 67,238 47,279
Net income (loss) from continuing
operations (4,335) (18,507) (44,271) 2,779 (15,565) 2,297
Net income (loss) (3,811) (18,507) (52,054) 2,779 (15,565) 2,297
Net income (loss) per share from
continuing operations (0.24) (0.87) (2.10) 0.12 (0.66) .09
Net income (loss) per share (0.21) (0.87) (2.45) 0.12 (0.66) .09
Balance Sheet Data:
Working capital $ 76,023 $ 77,091 $ 39,528 $ 41,503 $ 28,135 $ 50,307
Total assets 182,082 175,092 131,135 129,289 124,091 123,533
Long-term liabilities 1,278 - - 3,848 15,930 4,665
Stockholders' equity 126,739 122,238 76,765 81,258 68,019 82,661
(a) Net loss for the seven months ended July 31, 1995 and 1996 combines
the pro forma results of VTEL and its wholly-owned subsidiary which
were merged on May 23, 1997.
(b) Net loss for the year ended July 31, 1997 includes merger and other
expenses totaling $29.4 million related to the merger between VTEL and
CLI.
(c) Net income for the year ended July 31, 1998 includes the reversal of
$1.5 million of merger and other expenses and a gain from a
non-recurring real estate transaction of $1.3 million.
(d) Net loss for the year ended July 31, 1999 includes expense for
restructuring totaling $3.1 million.
(e) Net income for the year ended July 31, 2000 includes a non-recurring
gain of $44.5 million and an expense for the write-down of impaired
assets of $14.1 million.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company
New Charter
On August 23, 2000, VTEL announced a new business charter and strategy for
transforming our business from that of a developer, manufacturer and distributor
of videoconferencing endpoints to a business model whereby we leverage our
existing sales, services and system integration capabilities. By executing this
change in business strategy, our goal is to become the industry leader in
providing visual communication solutions over broadband networks. We believe we
can execute this change in business strategy by doing the following:
o In addition to our current product offerings, we will begin to actively
market other manufacturers' products that deliver visual communication
solutions;
o We will expand our customer service and systems integration capabilities to
cover other visual communication products available within the industry;
o We will focus our research and development efforts to enhance our network
management software platform that will interoperate in a multi-vendor
environment to manage visual communication traffic over IP networks;
o Building upon our existing services and integration business', we will
market and deliver additional but related services such as system design,
implementation, management and training.
11
The following discussion and analysis references the term "New Charter",
which is synonymous with current or future operational activities that fall
under VTEL's new business strategy to visually enable broadband networks. In
that discussion, any mention or projection of financial performance measures
that we may currently anticipate should be considered forward-looking
statements, which may involve risks and uncertainties that could cause actual
results to differ materially from those expected or desired (see Cautionary
statement regarding risks and uncertainties that may affect future results.)
Result of Operations
The following table sets forth for the fiscal periods indicated the
percentage of total revenues represented by certain items in VTEL's consolidated
statement of operations:
For the Years Ended
July 31,
1998 1999 2000
Product revenues 75.0% 69.6% 66.3%
Services and other revenues 25.0 30.4 33.7
Gross margin 47.3 44.4 35.2
Selling, general and administrative 36.1 40.1 41.5
Research and development 11.1 11.8 12.9
Total operating expenses 46.8 54.7 66.0
Other income, net 1.1 0.1 33.0
Net income (loss) 1.5% (10.3)% 1.7%
For the Years Ended July 31, 1998, 1999, and 2000.
Revenues
Consolidated revenue was $179.7 million in fiscal 1998, $151.6 million
in fiscal 1999, and $134.3 million in fiscal 2000. The decline was $28.1 million
from 1998 to 1999 and $17.3 million from 1999 to 2000. This is a decrease of 16%
for 1999 and 11% for 2000.
The decline in overall revenue during the three-year period is largely
due to the decline in product revenues whereas services revenues have remained
relatively stable over the same period. The decline in product revenues is
largely the result of reduced average sales prices as our customers have shifted
their demand from high-end high-functionality products to lower cost units that
offer the more basic videoconferencing functions. Total unit sales decreased
from fiscal 1998 to fiscal 1999 but have remained relatively flat from fiscal
1999 to fiscal 2000.
This shift in the product mix is reflected within the industry by the
relative success of manufacturers of high volume, low margin set-top
videoconferencing products. We believe that the demand for high-end
videoconferencing endpoints that offer multimedia software applications most
often used in an educational environment have been and will continue to be
stable. The marketing costs and cycle times associated with the sale of these
high-end systems, however, makes it cost prohibitive to focus on this market
alone. Furthermore, we expect the margins on set-top videoconferencing products
to continue to decline as IP networks place more emphasis on software solutions
for videoconferencing. As a result, in August 2000, VTEL announced its plans to
embark on a new business charter that leverages our services and systems
integration capabilities as well as our experience in the development of
videoconferencing endpoints. We believe that we can become the company in the
industry that leads the effort to visually enable broadband communication
networks (see New Charter). During this transition we will attempt to maintain
the sales levels of our VTEL designed videoconferencing endpoints. However, as
we expect the visual communications industry to continue to shift towards
software solutions, we also anticipate downward pressure on product revenues.
Service revenue was $44.9 million in fiscal 1998, $46.1 million in
fiscal 1999, and $45.2 million in fiscal 2000. The increase was $1.2 million
from 1998 to 1999 and the decline was $0.9 million from 1999 to 2000. This is an
12
increase of 3% for 1999 and a decrease of 2% for 2000. Service represents 25%,
30% and 34%, of total revenues for the years ended July 31, 1998, 1999 and 2000,
respectively.
Service revenue represents the combined revenues of our Global Services
division which provides installation and maintenance services as well as custom
videoconferencing integration solutions. While overall service revenues have
been relatively flat over the three-year reporting period, service revenue as a
percentage of total revenue has increased significantly. The ability of our
Global Services division to maintain consistent revenue streams from service and
maintenance contracts despite declining product revenues reflects the quality of
our service performance as indicated by customers' renewal of their maintenance
contracts.
Revenue from integration solutions was $16.2 million, $16.4 million
and $18.0 million in fiscal 1998, 1999 and 2000 respectively. While integration
revenue has been relatively flat over the three-year reporting period, we
believe, at least in part, that this is attributable to a primary focus on the
integration of VTEL products. With the adoption of our new business model, we
plan to market our integrated solutions approach using a wider array of visual
communications products. We believe that the integration business, which is
currently profitable, can establish further growth.
International sales were $32.7 million in fiscal 1998, $20.1 million in
fiscal 1999 and $23.3 million in fiscal 2000. This represents revenue from the
export sales of our domestic operations as well as sales from our foreign
subsidiaries. Our wholly owned subsidiary CLI, which merged with VTEL in 1997,
had developed a strong presence in the Far East and specifically in the Peoples
Republic of China. The decline in international revenues during 1999 was
attributable in part to the economic downturn in the Far East. In addition, we
have experienced increased competition from manufacturers of videoconferencing
equipment within the Peoples Republic of China. During fiscal 2000, we completed
the regulatory process by which we are approved to manufacture and distribute
product and services as a wholly owned foreign enterprise within the Peoples
Republic of China. We believe that this will further enhance our competitiveness
in the Chinese market, which is increasingly adopting methods of visual
communications. In 1998 and 1999, we acquired two subsidiaries in Europe that
had previously been successful value-added resellers of videoconferencing
products. We believe our European subsidiaries' strict focus on the VTEL product
line impaired their competitiveness as the demand in Europe for
videoconferencing products shifted toward the low-end even more rapidly than in
the United States. As a result, we have substantially reduced the scope of
European operating activities, while increasing the emphasis on sales and
customer service activities beginning in the first quarter of fiscal 2001.
VTEL primarily sells its products through resellers. For the years
ended July 31, 1998, 1999 and 2000 reseller sales were 77%, 80% and 76% of
product and integration sales, respectively. We expect that VTEL developed
videoconferencing endpoints will continue to predominately be sold through
reseller sales channels. As we develop our new business model, which includes
sales of a broader range of third-party visual communications software and
equipment, we expect that a larger percentage of our overall revenues will
become more direct in nature.
We have made the decisions to take the business in a new direction
because we expect that product revenues will continue to decline. There can be
no assurance that product revenues will not decline faster than we have
predicted nor can we be certain that our service revenues will increase as
intended. Our expense levels are based, in part, on our expectations as to
future revenue levels, which are difficult to predict, and our expense base is
relatively fixed in the short term. If revenue levels are below expectations,
operating results may be materially and adversely affected and net income is
likely to be disproportionately adversely affected.
Gross margin
Consolidated gross margins were 47% for fiscal 1998, 44% for fiscal
1999, and 35% for fiscal 2000. Gross margins for service were 36% in fiscal
1998, 37% in fiscal 1999, and 29% in fiscal 2000.
Over the last few years, VTEL and the industry overall has experienced
a lower margin/lower average sales price trend. This trend has been driven by
the introduction of lower cost videoconferencing appliances. Nevertheless,
average sales prices for high-end systems, where VTEL has focused its sales
efforts, have remained in the $20,000 to $30,000 range for the past several
13
years. While VTEL has focused on the high-end/high-margin videoconferencing
marketplace, a competitive trend toward lower average sales prices has reduced
our margin returns. During our growth phase from 1993 to 1998, we developed the
capability to deliver systems that incorporated high-end videoconferencing
quality. However, our existing manufacturing and channel distribution process
cannot deliver high-end products with profitable margins. As part of the New
Charter, we plan to develop a more efficient product delivery model.
The gross margins generated by our Global Services division, which
provides maintenance and systems integration revenues, have historically been
lower than the gross margins from our product sales. Whereas service costs are
relatively fixed, integration margins are subject to product mix shifts based on
the types of integration solutions we produce. The decline in service margins
during fiscal 2000 was attributable to a higher percentage of larger custom
integration projects that generated higher revenue's yet lower gross margins.
The integration business also acts as a conduit to deliver service maintenance
contracts on the projects we deliver.
We believe that, as part of our new charter, service revenues can grow
as we offer our service capabilities to a broader range of third-party visual
communications products. Despite apparent lower gross margins, service revenues
do not carry the associated cost of sales that product sales do. Therefore, we
believe a predominately service-based business model will provide greater
overall profitability.
We expect to experience continued gross margin pressures due to price
competitiveness in the industry, which we believe will continue to become more
intense as users of visual communication systems attempt to balance performance,
functionality and cost.
Selling, general and administrative
Selling, general and administrative expenses were $64.8 million in
fiscal 1998, $60.9 million in fiscal 1999, and $55.8 million in fiscal 2000. The
decline was $3.9 million from 1998 to 1999 and $5.1 million from 1999 to 2000.
This is a decrease of 6% for 1999 and 8% for 2000. Selling, general and
administrative expenses were 36%, 40% and 42% of revenues for the years ended
July 31, 1998, 1999 and 2000.
Even though we have reduced total selling, general and administrative
expenses year over year, these costs increased as a percentage of revenue over
the three-year reporting period. We believe this trend is the result of our
continued focus on the high-end videoconferencing market during a period of time
when that market has been either flat or declining. As the high-end
videoconferencing market has narrowed itself primarily toward the government and
education sectors, the sales cycle times and the cost for technical
professionals to complete these sales have not declined in the same manner as
the associated product revenues. To a certain degree, the technical intricacies
involved in the sales cycle indicate the need in the marketplace for qualified
turnkey visual communications network integrators. These indications have
contributed to our decision to change our business model and attempt to become
the provider of choice for customers who want to visually enable their broadband
networks. We feel that knowledge drawn from our product sales experience can be
leveraged into new revenue streams as we reposition ourselves in the industry as
a leader in evaluating, designing, installing, testing and servicing visual
communications networks.
Another aspect of our increasing selling, general and administrative
costs as a percentage of revenue is the development, during our years of
significant growth, of a sales and marketing infrastructure that was designed to
support a growing business. Although we took measures to reduce costs during
fiscal 1999 (see Restructuring Activities), we had projected that our revenue
levels would increase and, therefore, we continued to support certain strategic
efforts in anticipation of further growth. During the first quarter of fiscal
2001, we announced a restructuring of our operations that is intended to reduce
not only manufacturing costs but also a large amount of our global
administrative infrastructure. Our intent is to significantly reduce our
administrative costs as a percent of expected revenues. We believe we can
accomplish this by, among other actions, consolidating our occupied office space
and subleasing underutilized space in markets where real estate conditions have
moved in our favor. We also have eliminated certain subsidiaries and reexamined
our overall staffing needs. Despite the cost reducing measures that we are
undertaking, there can be no assurance that we will be able reduce costs enough
to become profitable in a declining revenue scenario.
14
Research and development
Research and development expenses were $19.9 million in fiscal 1998,
$18.0 million in fiscal 1999, and $17.4 million in fiscal 2000. The decline was
$1.9 million from 1998 to 1999 and $0.6 million from 1999 to 2000. This is a
decrease of 10% for 1999 and 3% for 2000. Research and development expenses were
11.1%, 11.8% and 12.9% of revenues for the years ended July 31, 1998, 1999, and
2000.
The decrease in research and development expense reflects the
capitalization of software development costs and the reduction of expenses to
keep in line with lower revenues. The capitalization of development costs
totaled $1.0 million in fiscal 1998, $6.4 million in fiscal 1999 and $4.7
million in fiscal 2000. Software development costs are capitalized after a
product is determined to be technologically feasible and is in the process of
being developed for market. At the time the product is released, the capitalized
software is amortized over the estimated economic life of the related projects.
The research and development projects that were capitalized were related to the
user interface software resident in our Galaxy(TM) product, and software for
visual communications over IP networks. In October 1999, the user interface
software was released with our new Galaxy(TM) line of visual communication
systems. As of July 31, 2000 we had amortized $1.4 million of the capitalized
development cost related to the Galaxy product line.
During the year ended July 31, 2000, VTEL created two subsidiaries
focused on the development and delivery of visual communication products and
services over the Internet. In January of 2000, we announced the formation of
OnScreen24 which is comprised primarily of VTEL research and development
engineers who are developing and marketing visual communication delivery
products for use over the Internet . They are developing products such as video
mail as well as the further development of our web streaming product line,
Turbocast(TM), which utilizes the technology acquired in our acquisition of
Vosaic during fiscal 1999. In March of 2000, we announced the formation of
Articulearn which will create and manage custom e-learning portals that enable
organizations to create, deliver and manage their learning content directly
online. In addition, ArticuLearn offers various professional services to assist
organizations in the production of their web-based learning content. Jointly we
refer to these two new business' within our organization as our Internet
ventures. During the year ended July 31, 2000 expenses totaling $8.2 million
associated with OnScreen24 were included in research and development expenses.
During the year ended July 31, 1999, research and development expenses
included a charge for in-process research and development related to the
acquired assets of Vosaic L.L.C. (see "Acquisition" below). As part of the
valuation associated with Vosaic, we recorded a charge to research and
development expense of $474,000. The charge is based on our estimate of purchase
price associated with research and development on projects that were in-process
at the time of acquisition. The charge for research and development that was
in-process relates to the next generation video streaming product that was
approximately 20% complete at the date of acquisition.
Our ability to successfully develop software solutions to visually
enable broadband networks will be a significant factor in VTEL's success. As we
shift our research and development strategy, we anticipate additional costs
associated with the recruiting and retention of engineering professionals adept
at broadband technologies. We will also maintain sustaining engineering efforts
on our existing product lines including our flagship endpoint product,
Galaxy(TM). We will attempt to maintain research and development expenses at
historic levels in terms of percentage of revenue. We believe, however, that our
ultimate future success is based primarily on our commitment to the new charter
as well as our Internet ventures. If revenues decline faster than anticipated,
or profitability is not achieved in the near term, research and development
expenses could be significantly higher as a percentage of revenues than they
have been in the past.
Write-down of Impaired Assets
As a result of the New Charter, we determined that
significant changes were necessary in the manner and extent to which certain of
our long-lived assets used solely in the manufacturing operations would be
deployed. Pursuant to SFAS 121 "Accounting for the Impairment of Long-Lived
15
Assets and for Long-Lived Assets to be Disposed Of", we evaluated the
recoverability of our long-lived assets including property, plant and equipment,
goodwill and other intangibles and capitalized software. The evaluation
indicated that the future undiscounted cash flows related to certain long-lived
assets were below the carrying value of the assets associated with their future
operations. Further, the closure of certain foreign offices and the termination
of the software capitalization projects resulted in the identification of only
minimal future cash flows. During the fourth quarter of fiscal 2000, we adjusted
the long-lived assets associated with our manufacturing operations and the
long-lived assets related to the foreign operations and capitalized software. We
determined their estimated fair value to be $9.4 million, resulting in a
non-cash impairment charge of $14.1 million (including $6.1 million related to
property, plant and equipment, $2.2 million related to intangible assets and
$5.8 million related to capitalized software). The estimated fair value for the
long-lived assets was based on anticipated future cash flows discounted at a
rate commensurate with the risk involved. The impairment loss has been recorded
as a loss from the write-down of impaired assets in the consolidated statement
of operations. The remaining useful lives of certain assets were shortened and
thus, depreciation and amortization will be higher in fiscal 2001.
Merger and other expense
Merger expense was a credit to expense of $1.5 million in fiscal 1998,
a credit to expense of $0.2 million in fiscal 1999, and $0.0 million in fiscal
2000. The decline was $1.3 million from 1998 to 1999 and $0.2 million from 1999
to 2000. This is a decrease of 87% for 1999 and 100% for 2000. Merger expenses
were (0.83 %), (0.13%) and 0% of revenues for the years ended July 31, 1998,
1999, and 2000.
Merger expense relates to the May 23, 1997 merger of VTEL and
Compression Labs Incorporated "CLI" and resulted in CLI becoming a wholly owned
subsidiary of VTEL. Based on favorable events that occurred during fiscal 1998,
including resolution of certain litigation and other matters, a reversal of
certain accruals related to the merger totaling $2.6 million was recorded in
fiscal 1998. Separately, a charge of $1.0 million was recorded to reflect the
final write-off and disposal costs of remaining discontinued CLI inventory,
which had previously been held for sale. These items resulted in a $1.6 million
credit to expense in 1998. During the year ended July 31, 1999, the final
significant contingent liabilities, involving CLI as a defendant in litigation,
were either settled or dismissed in court. Merger related payments totaling $1.3
million were paid during 1999. In addition, we recorded a note payable to
Philips Electronics North America Corporation for $0.3 million as part of terms
of that settlement agreement. Since no determinable contingent liabilities
remained in relation to the Merger, the final balance of accrued liabilities
totaling $0.2 million were returned as a credit to the Consolidated Statement of
Operations.
Restructuring Activities
With the announcement of the New Charter on August 23, 2000, we also
announced the restructuring of our organization. The restructuring will involve
the termination of approximately 200 employees or 34% of our workforce and the
consolidation of leased office space in Austin, Texas and Sunnyvale, California.
We expect to record a restructuring charge in the first fiscal quarter of 2001
of approximately $6.0 to $8.0 million.
In November 1998, management adopted a restructuring plan that was
intended to match the size and complexity of the organization with our planned
path and recorded a charge of $3.1 million in fiscal 1999. The plan included the
involuntary reduction of 138 employees from all departments, including
manufacturing, sales, management and finance, and were effective immediately for
most employees upon announcement. We also made the decision to reduce our
operating costs by exiting other activities and reducing related overhead costs.
These activities included the closure of certain field sales offices and the
Sunnyvale, California spare parts depot. All of the termination benefits were
paid and closure costs were incurred by October 31, 1999. The following schedule
summarizes the components and activities of the restructuring plan (in
thousands):
Termination and severance benefits $ 2,311
Facility closure and other (primarily non-cancelable lease
obligations) 769
-----------------
$ 3,080
=================
16
Non-Recurring Events
On March 3, 2000 VTEL settled a lawsuit pending in the 126th Judicial
District Court in Travis County, Texas which VTEL had previously initiated
against five former employees who left VTEL in September 1996 to form Via Video
Communications, Inc. ("Via Video"). Via Video was subsequently acquired by
Polycom, Inc. Pursuant to the settlement agreement, the former employees of VTEL
paid $2.5 million in cash and delivered to VTEL 300,800 shares of common stock
of Polycom, Inc. in settlement of the claims asserted by VTEL. When the shares
were received on March 3, 2000, the market value of the shares was $39.1
million. These shares were sold during fiscal 2000 for $33.7 million net of
settlement costs. The parties have agreed to dismissal of all claims and
counterclaims and third party claims in the lawsuit, ending the litigation.
Separately, VTEL voluntarily dismissed Polycom, Inc. and Via Video from the case
without consideration.
On March 3, 2000, VTEL granted non-exclusive licenses to Polycom,
Inc.("Polycom") to use three of its patented technologies, and Polycom paid a
one time fee to VTEL of $8.3 million as a fully paid up royalty in exchange for
such license. In turn and without any payments by VTEL, Polycom also has granted
VTEL a non-exclusive sublicense to its rights under its license agreement with
Brown University pertaining to its single camera tracking technology. Through
this technology exchange, the parties will have access to specified distinctive
technologies of the other for use in their product offerings.
Interest income and expense
Interest income was $1.2 million in fiscal 1998, $0.8 million in fiscal
1999, and $1.2 million in fiscal 2000. The decline was $0.4 million from 1998 to
1999 and the increase was $0.4 million from 1999 to 2000. This is a decrease of
33% for 1999 and an increase of 50% for 2000. Interest income was 0.7 %, 0.5 %
and 0.9% of revenues for the years ended July 31, 1998, 1999, and 2000.
Changes in interest income are based on interest rates earned on
invested cash and cash balances available for investment. The decrease in
interest income during fiscal 1999 is the result of the reduced cash balances
primarily due to operating losses. The increase in interest income during fiscal
2000 is the result of an increase in the cash balance due to income from
non-recurring events.
Income taxes
Income tax expense of $0.6 million for the year ended July 31, 2000 was
primarily attributable to alternative minimum taxes and state taxes applied to
the taxable income related to non-recurring events. As of July 31, 2000, VTEL
had federal net operating loss carryforwards of $95.8 million, research and
development credit carryforwards of $5.4 million, and alternative minimum tax
credit carryforwards of $0.5 million. The net operating loss and credit
carryforwards will expire in varying amounts from 2001 through 2019, if not
utilized. Minimum tax credit carryforwards do not expire and carry forward
indefinitely. Net operating losses related to our foreign subsidiaries of $8.9
million are available to offset future foreign taxable income.
As a result of various acquisitions completed in prior years,
utilization of our net operating losses and credit carryforwards may be subject
to a substantial annual limitation due to the "change in ownership" provisions
of the Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses before utilization. Also, due to the
uncertainty surrounding the timing of realizing the benefits of its favorable
tax attributes in future tax returns, we have placed a valuation allowance
against our net deferred tax asset. Accordingly, no deferred tax benefits have
been recorded for the tax years ended July 31, 1998, 1999 and 2000. The
valuation allowance increased by $1.4 million during the year ended July 31,
2000.
Net income (loss)
Net income was $2.8 million in fiscal 1998, net loss was $15.6 million
in fiscal 1999, and net income was $2.3 million in fiscal 2000. The decline was
$ 18.4 million from 1998 to 1999 and the increase was $17.9 million from 1999 to
2000. Net income (loss) was 1.6%, (10.3)% and 1.7% of revenues for the years
ended July 31, 1998, 1999, and 2000.
17
Net income during fiscal 1998 was largely attributable to certain
nonrecurring events. A gain of approximately $1.3 million (net of expenses) was
realized from a real estate transaction which eliminated the duplicate corporate
headquarter facilities created by our merger with CLI. Also, due to the
favorable resolution of certain Merger-related issues during the year ended July
31, 1998, we were able to record a net credit to income of approximately $1.5
million due to the reversal of certain Merger and other accruals that were
recorded as of July 31, 1997.
The loss generated during fiscal 1999 was the result of lower revenues
as demand for large group, high-end videoconferencing systems began to shift
toward the lower-end segments of the videoconferencing industry. Since our
expense levels are based to a large extent on revenue expectations we
experienced significant losses during the first and second quarters of the year.
During fiscal 1999, we were able to complete a restructuring (see Restructuring
Activities) and align more closely our expense levels with projected revenue. As
a result of these actions, we were able to generate results from operations near
breakeven levels during the third and fourth quarters.
During fiscal 2000, unit demand in the videoconferencing industry has
continued to shift toward the low-end set-top videoconferencing appliance
products. Because our customers continued to demand VTEL's high-end PC-based
systems coupled with our desire to remain competitive, we have been unable to
effectively reduce our costs to manufacture, market and sell our products and
therefore have continued to incur large operating losses. We hope to reverse
this trend and return to profitability through our implementation of a new
business strategy that is intended to leverage the strengths of our existing
services, integration and sales teams to offer visual communication solutions
for the emerging broadband marketplace. Net income during fiscal 2000 was the
result of favorable non-recurring events totaling $44.5 million (see
Non-recurring events). In addition to operating losses, we also recorded a
write-down for impaired assets totaling $14.1 million in connection with our
announcement in August 2000 of the New Charter. While we hope that our efforts
to change the business will be successful, there can be no assurances that this
business strategy will succeed in generating net operating income in the future.
Other factors affecting results of operations
VTEL's future results of operations and financial condition could be
impacted by many factors, but our ability to implement our new charter is
critical to our future success. Although we expect product revenues under the
New Charter to initially decline, one of the risks we face is that current
product revenue may decline faster than expected and that our integration and
services revenues will not increase as fast as we anticipate. Other factors that
could affect our success are other competitors entering the same market,
technical problems in delivering video solutions over broadband networks, and
slow adoption to videoconferencing over broadband networks.
Due to the factors noted above and elsewhere in Management's Discussion
and Analysis of Financial Condition and Results of Operations, our past earnings
and stock price have been, and future earnings and stock price potentially may
be, subject to significant volatility, particularly on a quarterly basis. Past
financial performance should not be considered a reliable indicator of future
performance and investors are cautioned in using historical trends to anticipate
results or trends in future periods. Any shortfall in revenue or earnings from
the levels anticipated by securities analysts could have an immediate and
significant effect on the trading price of VTEL's Common Stock in any given
period. Also, we participate in a highly dynamic industry which often
contributes to the volatility of VTEL's Common Stock price.
Liquidity and capital resources
Cash provided by operating activities was $19.8 million in fiscal 1998,
cash used in operating activities was $10.7 million in fiscal 1999, and cash
provided by operating activities was $43.9 million in fiscal 2000. The decline
was $30.5 million from 1998 to 1999 and the increase was $54.6 million from 1999
to 2000.
At July 31, 2000, we had working capital of $50.3 million, including
$46.6 million in cash, cash equivalents and short-term investments. Changes in
cash from operating activities are primarily the result of the net losses or
income generated and changes in working capital, primarily increases and
decreases in accounts receivable, inventories and accounts payable. Included in
net income for fiscal 2000 was the favorable settlement of litigation in which
VTEL received $44.5 million in cash and securities. (See Non-recurring events)
18
Cash used in investing activities was $10.6 million in fiscal 1998,
$4.6 million in fiscal 1999 and $33.8 million in fiscal 2000. During fiscal
1998, cash used in investing activities was primarily the result of expenditures
related to leasehold improvements in Austin and Sunnyvale, the implementation of
our Enterprise Resource Planning System, our transaction processing and
financial accounting system, and purchases of equipment. During fiscal 1999, the
cash used in investing activities were spent primarily to complete the
acquisition of property and equipment and capitalize the costs associated with
the research and development of our next generation of visual communication
products. These were partially offset by the net sale and maturity of short-term
investments. During fiscal 2000, the cash used in investing activities was
primarily from the investment of cash received from the settlement of litigation
(see Non-recurring events). Investments were also made in additional property
and equipment and capitalized research and development.
Cash provided by financing activities was $1.5 million for the year
ended July, 31 1998 and $8.0 million for the year ended July 31, 1999. For the
year ended July 31, 2000, cash used in financing activities was $11.0 million.
Cash provided by financing activities for the year ended July 31, 1998 relates
to the issuance of stock under VTEL's stock option and stock purchase plans (see
Note 10 to our Consolidated Financial Statements). Cash provided by financing
activities for the year ended July 31, 1999 relates to borrowings under our line
of credit and was offset by the purchase of treasury stock and payments on notes
payable. Cash used in financing activities for the year ended July 31, 2000
relates to the repayment of cash borrowed under the line of credit and payment
on notes payable.
During fiscal 1999 we initiated a stock repurchase program and
repurchased 526,000 shares of VTEL's Common Stock for $2.3 million. The
repurchased shares have been used to fulfill requirements for VTEL's stock
including stock option exercises or stock issuances under business combination
transactions. No additional share repurchases are currently planned, although we
are authorized to repurchase up to 1,474,000 additional shares.
VTEL's principal sources of liquidity at July 31, 2000 consist of $46.6
million of cash, cash equivalents and short-term investments, and the ability to
generate cash from operations. The $46.6 million includes $10.7 million in stock
of Accord Networks (Accord), a networking equipment manufacturer. Since this
investment was not readily marketable prior to its initial public offering in
June of 2000, we had previously reported this asset at cost in other assets-long
term. Since Accord now has a readily available market price, we have recorded
the unrealized gain of $10.0 million as part of other comprehensive income and
included the asset as part of short-term investments on our Consolidated Balance
Sheet at July 31, 2000. The shares of Accord are available for sale upon
completion of a regulatory holding period of not less than six months. Our
capital budget for fiscal 2001 is $3.4 million, which will be used principally
to invest in third-party demonstration equipment, interoperability testing lab
equipment, system sustaining equipment and on going operational requirements.
In March 2000, we repaid the outstanding balance on our line of credit
with a banking syndicate. At July 31, 2000, we did not have a line of credit in
place but management expects to obtain an alternative line of credit in fiscal
2001.
Legal Matters
VTEL is the defendant or plaintiff in various actions which arose in
the normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse affect on our
financial condition or results of operations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 requires the recognition
of all derivatives as either assets or liabilities in the statement of financial
position and the measurement of those instruments at fair value. We are required
to adopt this standard in the first quarter of fiscal 2001. We expect that the
adoption of SFAS No. 133 will not have a material impact on our financial
position or our results of operations.
19
In December 1999, the SEC staff issued Staff Accounting Bulletin 101
"Revenue Recognition in Financial Statements" which provides guidance on revenue
recognition issues. VTEL is required to implement SAB 101 in fiscal 2001. We
have not determined the effect of implementing SAB 101 on our financial position
or results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation", which further clarifies APB
Opinion No. 25, "Accounting for Stock Issued to Employees". We believe that this
Interpretation will not have a material effect on our results of operations or
financial position.
Cautionary Statement Regarding Risks and Uncertainties That May Affect Future
Results
Certain portions of this report contain forward-looking statements
about the business, financial condition and prospects of VTEL. Our actual
results could differ materially from those indicated by the forward-looking
statements because of various risks and uncertainties. This risks include,
without limitation our ability to execute the business strategy outlined in the
"New Charter", changes in competition, economic conditions, interest rates
fluctuations, changes in the capital markets, and other risks indicated in our
filings with the Securities and Exchange Commission. These risks and
uncertainties are beyond the ability of our control, and in many cases, we
cannot predict all of the risks and uncertainties that could cause actual
results to differ materially from those indicated by the forward-looking
statements. When used in this report, the words "believes," "estimates,"
"plans," "expects," "anticipates" and similar expressions as they relate to VTEL
or its management are intended to identify forward-looking statements.
20
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
We identify our principal market risks as foreign currency exchange
rate fluctuations, interest rate risk related to short-term investments and the
market value of our Accord investment (see Liquidity and capital resources).
Foreign currency exchange rate fluctuations are mostly related to the settlement
of net intercompany receivables due from our foreign subsidiaries. The amount of
risk is mitigated by the practice of requiring where possible the repayment of
such receivables in U.S. currency. In the normal course of business, we employ
established policies and procedures to manage these risks. Interest rate
exposure with regard to our investments is minor due to the short-term nature of
our investments. We previously invested in Accord Networks (Accord) an
Israeli-based manufacturer of networking equipment. In June of 2000, Accord
filed an initial public offering on the NASDAQ stock exchange in which VTEL was
apportioned 1.3 million shares. Since that time, its stock price has ranged from
a low of $7.80 to a high of $12.70. We are not attempting to hedge this position
during the regulatory holding period which will expire in December 2000.
Foreign Exchange Risk
Our objective in managing our exposure to foreign currency exchange
rate fluctuations is to reduce the impact of adverse fluctuations in earnings
and cash flows associated with foreign currency exchange rate changes.
Accordingly, we utilize forward contracts to hedge our foreign currency exposure
on firm commitments. The principal currencies hedged during fiscal year 2000
were the Euro and Australian dollar. We monitor our foreign currency exchange
exposures to ensure the overall effectiveness of our foreign currency hedge
positions. However, there can be no assurance our foreign currency hedging
activities will offset the impact of substantial fluctuations in currency
exchange rates on our results of operations and financial position.
The following are summarized market risks of forward contracts at July 31, 1999
and 2000 by foreign currencies in which we do business:
1999
(Thousands except contract rates) Notional Average Unrealized
Settlement Contract Gain
Functional Currency Amount Rate (Loss)
- ------------------------------- ----------------- ---------------- ---------------
Euros $ 2,261 1.07 $ (19)
Australian Dollars 452 0.65 1
-------- ------
$ 2,713 $ (18)
======== ======
2000
(Thousands except contract rates) Notional Average Unrealized
Settlement Contract Gain
Functional Currency Amount Rate
- ------------------------------- ----------------- ---------------- ---------------
Euros $ 1,868 .94 $ 34
Australian Dollars 825 .58 4
-------- ------
$ 2,693 $ 38
======== ======
Since these forward contracts are used to hedge foreign currency
exposures, the net cash amounts paid or received on the contracts are accrued
and recognized as an adjustment to currency translation adjustments in the
statement of operations.
21
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Auditors and Accountants 23
Financial Statements:
Consolidated Balance Sheets as of July 31, 1999 and 2000 25
Consolidated Statements of Operations for the years ended
July 31, 1998, 1999 and 2000 26
Consolidated Statements of Changes in Stockholders' Equity for the
years ended July 31, 1998, 1999 and 2000 27
Consolidated Statements of Cash Flows the years ended July 31, 1998,
1999 and 2000 28
Notes to Consolidated Financial Statements 29
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 50
Schedules other than those listed above have been omitted since they are
either not required, not applicable or the information is otherwise
included
22
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Stockholders of VTEL Corporation
We have audited the accompanying consolidated balance sheet of VTEL
Corporation and its subsidiaries as of July 31, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. Our audit also included the financial statement schedule as
of and for the fiscal year ended July 31, 2000 listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of VTEL
Corporation and subsidiaries at July 31, 2000, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule as of and for the fiscal year
ended July 31, 2000, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst and Young LLP
Austin, Texas
August 25, 2000
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of VTEL Corporation
In our opinion, the consolidated balance sheet as of July 31, 1999 and
the related consolidated statements of operations, of changes in stockholders'
equity and of cash flows for each of the two years in the period ended July 31,
1999 (listed in the accompanying index) present fairly, in all material
respects, the financial position, results of operations and cash flows of VTEL
Corporation and its subsidiaries at July 31, 1999 and for each of the two years
in the period ended July 31, 1999, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. We have
not audited the consolidated financial statements of VTEL Corporation for any
period subsequent to July 31, 1999.
PricewaterhouseCoopers LLP
Austin, Texas
September 24, 1999
24
VTEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data
- --------------------------------------------------------------------------------
July 31,
1999 2000
---------------- ----------------
ASSETS
Current assets:
Cash and equivalents $ 7,805 $ 6,868
Short-term investments 4,308 39,742
Accounts receivable, net of allowance for doubtful
accounts of $1,223 and $888 at July 31, 1999 and
July 31, 2000, respectively 38,291 23,368
Inventories 15,553 14,733
Prepaid expenses and other current assets 2,320 1,803
---------- ----------
Total current assets 68,277 86,514
Property and equipment, net 29,704 19,275
Intangible assets, net 15,841 11,994
Capitalized software 7,351 4,728
Other assets 2,918 1,022
---------- ----------
$ 124,091 $ 123,533
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,375 $ 14,957
Accrued compensation and benefits 4,916 4,773
Other accrued liabilities 3,555 3,981
Notes payable, current portion 2,234 610
Deferred revenue 11,062 11,886
---------- ----------
Total current liabilities 40,142 36,207
Long-term liabilities:
Borrowings under line of credit 11,200 -
Notes payable 554 -
Other long-term obligations 4,176 4,665
---------- ----------
Total long-term liabilities 15,930 4,665
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.01 par value; 10,000
authorized; none issued or outstanding - -
Common stock, $.01 par value; 40,000 authorized;
24,423 and 24,847 issued at July 31, 1999
and July 31, 2000, respectively 244 248
Additional paid-in capital 260,057 261,712
Accumulated deficit (191,665) (189,368)
Unearned compensation (385) (4)
Stock subscriptions receivable (150) -
Accumulated other comprehensive income (loss) (82) 10,073
---------- ----------
Total stockholders' equity 68,019 82,661
---------- ----------
$ 124,091 $ 123,533
========== ==========
The accompanying notes are an integral part
of these consolidated financial statements
25
VTEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
For the
Years Ended July 31,
1998 1999 2000
----------------- ---------------- ----------------
Revenues:
Products $ 134,775 $ 105,520 $ 89,085
Services and other 44,909 46,082 45,226
------------- ------------- ------------
Total revenues 179,684 151,602 134,311
------------- ------------- ------------
Cost of sales:
Products 65,811 55,167 54,723
Services and other 28,916 29,197 32,309
------------- ------------- ------------
Total cost of sales 94,727 84,364 87,032
------------- ------------- ------------
Gross margin 84,957 67,238 47,279
------------- ------------- ------------
Operating expenses:
Selling, general and administrative 64,802 60,855 55,753
Research and development 19,892 17,951 17,357
Write-down of impaired assets - - 14,072
Merger and other (1,536) (235) -
Amortization of intangible assets 960 1,271 1,443
Restructuring expense - 3,800 -
------------- ------------- ------------
Total operating expenses 84,118 82,922 88,625
------------- ------------- ------------
Income (loss) from operations 839 (15,684) (41,346)
------------- ------------- ------------
Other income (expense):
Interest income 1,242 792 1,186
Non-recurring events - - 44,501
Interest expense and other 735 (723) (1,431)
------------- ------------- ------------
1,977 69 44,256
------------- ------------- ------------
Income (loss) before income taxes 2,816 (15,615) 2,910
Benefit (provision) for income taxes (37) 50 (613)
------------- ------------- ------------
Net income (loss) $ 2,779 $ (15,565) $ 2,297
============= ============= ============
Basic income (loss) per share $ 0.12 $ (0.66) $ 0.09
============= ============= ============
Diluted income (loss) per share $ 0.12 $ (0.66) $ 0.09
============= ============= ============
Weighted average shares outstanding:
Basic 23,057 23,509 24,530
============= ============= ============
Diluted 23,458 23,509 25,044
============= ============= ============
The accompanying notes are an integral part
of these consolidated financial statements
26
VTEL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands)
- --------------------------------------------------------------------------------
Common stock Additional Accumulated Total
--------------------------- Other
Number of Paid-in Unearned Comprehensive Stockholders'
Accumulated Income
Shares Amount Capital Deficit Compensation (Loss) Equity
------------- ------------- -------------- ------------- ------------- ------------ --------------
Balance at July 31, 1997 22,873 $ 229 $ 254,880 $ (178,234) $ (115) $ 5 $ 76,765
Proceeds from stock
issued under employee
plans 344 3 1,473 - - - 1,476
Common stock
issued for
acquisition 10 - 153 - - - 153
Unearned compensation - - 88 - (88) - -
Amortization of
unearned compensation - - - - 127 - 127
Net income - - - 2,779 - - -
Foreign currency
translation adjustment - - - - - (42) -
Comprehensive Income - - - - - - 2,737
------------- ------------- -------------- ------------- ------------- ------------ --------------
Balance at July 31, 1998 23,227 232 256,594 (175,455) (76) (37) 81,258
Proceeds from stock
issued under employee
plans 47 1 103 - - - 104
Purchase of treasury
stock (526) 1 (2,265) - - - (2,265)
Issuance of treasury
stock under employee
plans 357 - 1,438 (645) - - 793
Treasury stock issued
for acquisition 169 - 826 - - - 826
Common stock
issued for acquisition 1,149 11 2,596 - - - 2,607
Warrants issued in
legal settlement (Note 13) - - 52 - - - 52
Stock subscriptions receivable - - 150 - (150) - -
Unearned compensation - - 563 - (563) - -
Amortization of unearned
compensation - - - - 254 - 254
Net loss - - - (15,565) - - -
Foreign currency translation
adjustment - - - - - (45) -
Comprehensive Loss - - - - - - (15,610)
------------- ------------- -------------- ------------- ------------- ------------ --------------
Balance at July 31, 1999 24,423 244 260,057 (191,665) (535) (82) 68,019
Proceeds from stock
issued under employee
plans 592 6 2,234 2,240
Receipts from stock
subscriptions receivable 150 150
Forfeiture of stock
held in escrow (150) (2) (324) (326)
Amortization of
unearned compensation 126 126
Forfeiture of unearned
compensation (18) (255) 255 -
Net income 2,297 -
Unrealized gain on
available-for-sale
securities 10,003 -
Foreign currency
translation aadjustment 152 -
Comprehensive Income 12,452
------------- ------------- -------------- ------------- ------------- ------------ --------------
Balance at July 31, 2000 24,847 248 261,712 (189,368) (4) 10,073 82,661
============= ============= ============== ============= ============= ============ ==============
The accompanying notes are an integral part
of these consolidated financial statements.
27
VTEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
- --------------------------------------------------------------------------------
For the Years Ended July 31,
1998 1999 2000
Cash flows from operating activities:
Net income (loss) $ 2,779 $ (15,565) $ 2,297
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 8,870 11,797 12,580
Impairment of long-lived assets 14,072
Provision for doubtful accounts and returns (119) 436 474
Amortization of unearned compensation 127 254 126
Foreign currency translation gain 112 88 267
(Gain) loss on sale of fixed assets - (132) 271
Changes in operating assets and liabilities:
Accounts receivable 3,299 2,206 14,449
Inventories 10,758 (1,294) 820
Prepaid expenses and other current assets 358 220 410
Accounts payable (3,099) (5,539) (3,418)
Accrued expenses and other long term obligations (5,505) (2,967) 551
Deferred revenue 2,172 (178) 1,045
------------ ------------- ----------
Net cash provided by (used in) operating activities 19,752 (10,674) 43,944
Cash flows from investing activities:
Purchases of short-term investments (247,223) (150,828) (199,748)
Sales and maturities of short-term investments 253,038 161,004 175,048
Purchases of property and equipment (15,835) (8,778) (4,568)
Sales of property and equipment 260 1,441 -
Cash paid for acquired assets - (231) -
(Issuance) collection of notes receivable - (750) 84
Increase in capitalized software (984) (6,367) (4,726)
(Increase) decrease in other assets 104 (67) 132
------------ ------------- ----------
Net cash used in investing activities (10,640) (4,576) (33,778)
Cash flows from financing activities:
Net proceeds from issuance of stock 1,476 104 2,240
Purchase of treasury stock - (2,265) -
Proceeds fr