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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ______________________
Commission file number: 0-25940
VIEW TECH, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0312442
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3760 CALLE TECATE, SUITE A
CAMARILLO, CA 93012
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (805) 482-8277
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the 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 the number of shares outstanding of each of the registant's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Class as of November 12, 1997
----- ------------------------
Common Stock, $.0001 par value 6,523,459
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VIEW TECH, INC.
TABLE OF CONTENTS
-----------------
PAGE REFERENCE
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PART I FINANCIAL INFORMATION
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 1
Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 1997 and 1996 2
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996 3
Notes to Consolidated Financial Statements 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II OTHER INFORMATION
Exhibits and Reports on Form 8-K 13
SIGNATURES 14
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIEW TECH, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1997 1996
------------- -------------
CURRENT ASSETS: (Unaudited)
Cash and cash equivalents $ 1,456,544 $ 365,139
Accounts receivable (net allowance for doubtful
accounts of $432,151 and $479,774, respectively) 12,668,364 10,609,832
Inventory 2,283,540 2,063,028
Other current assets 437,213 737,980
----------- -----------
Total Current Assets 16,845,661 13,775,979
PROPERTY AND EQUIPMENT, net 2,907,949 2,798,476
EXCESS OF COST OVER NET ASSETS ACQUIRED, net 1,548,606 1,632,370
OTHER ASSETS 438,617 313,783
----------- -----------
$21,740,833 $18,520,608
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,452,954 $ 7,682,887
Short-term bank debt-lines of credit 3,220,496 1,829,428
Current portion of capital lease obligations 487,497 450,669
Other current liabilities 2,795,858 2,198,485
Accrued merger costs -- 1,160,494
----------- -----------
Total Current Liabilities 13,956,805 13,321,963
----------- -----------
LONG-TERM LIABILITIES 465,271 779,920
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.0001, authorized
5,000,000 shares, none issued or outstanding -- --
Common stock, par value $.0001, authorized
20,000,000 shares, issued and outstanding
6,393,744 and 5,666,814 shares at September
30, 1997 and December 31, 1996, respectively 639 567
Additional paid-in capital 12,732,439 9,934,236
Retained deficit (5,414,321) (5,516,078)
----------- -----------
7,318,757 4,418,725
----------- -----------
$21,740,833 $18,520,608
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
1
VIEW TECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ----------- ----------- -----------
Revenues:
Product sales and
service revenues $ 9,065,231 $ 6,655,573 $23,434,521 $18,145,865
Agency commissions 3,929,021 3,362,911 11,798,183 8,942,269
----------- ---------- ----------- -----------
12,994,252 10,018,484 35,232,704 27,088,134
----------- ---------- ----------- -----------
Costs and Expenses:
Costs of goods sold 6,581,193 4,993,891 16,901,135 13,129,403
Sales and marketing
expenses 4,349,621 3,307,927 12,785,328 9,670,331
General and
administrative
expenses 1,634,854 1,247,997 5,244,982 3,434,587
----------- ---------- ----------- -----------
12,565,668 9,549,815 34,931,445 26,234,321
----------- ---------- ----------- -----------
Income from Operations 428,584 468,669 301,259 853,813
Other Expense (61,575) (67,332) (194,990) (555,239)
----------- ---------- ----------- -----------
Income Before Provision for
Income Taxes 367,009 401,337 106,269 298,574
Provision (Benefit) for
Income Taxes 3,135 13,964 4,512 (118,666)
----------- ---------- ----------- -----------
Net Income $ 363,874 $ 387,373 $ 101,757 $ 417,240
=========== ========== =========== ===========
Earnings Per Share $ 0.06 $ 0.06 $ 0.02 $ 0.08
=========== ========== =========== ===========
Weighted Average
Shares Outstanding 6,387,188 6,288,305 6,323,135 5,923,887
=========== ========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
VIEW TECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
-------------------------------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 101,757 $ 417,240
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 825,107 712,236
Provision for bad debts (47,623) (84,200)
Changes in assets and liabilities:
Accounts receivable (2,010,909) (2,946,899)
Inventory (220,512) (279,231)
Other assets 171,631 (317,234)
Accounts payable (285,719) 2,458,004
Accrued merger costs (1,160,494) --
Other accrued liabilities 597,373 (728,777)
----------- -----------
Net cash used by operating activities (2,029,389) (768,861)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITY:
Purchase of property and equipment (723,136) (494,119)
Acquisitions of VistaTel and GroupNet -- (149,313)
----------- -----------
Net cash used in investing activities (723,136) (643,432)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under lines of credit 1,391,068 286,749
Repayments of capital lease and other debt obligations (345,413) (1,071,589)
Common stock subscibed for private placement offering, net -- 1,390,102
Issuance of common, net 2,798,275 15,135
----------- -----------
Net cash provided by financing activities 3,843,930 620,397
----------- -----------
NET INCREASE (DECREASE) IN CASH 1,091,405 (791,896)
CASH AND CASH EQUIVALENTS, beginning of period 365,139 1,949,761
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,456,544 $ 1,157,865
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Operating activities reflect:
Interest paid $ 266,242 $ 365,088
=========== ===========
Income taxes paid $ 7,640 $ 7,497
=========== ===========
Equipment acquired under capital lease obligations $ 123,378 $ 64,953
=========== ===========
Acquisition of VistaTel and GroupNet through the
issuance of common stock and note payable $ -- $ 1,516,011
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
VIEW TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
- ----------------
View Tech, Inc., ("View Tech" or the "Company") along with its wholly-
owned subsidiary, USTeleCenters, Inc. ("UST"), is a leading, single- source
provider of voice, video and data equipment, network services and bundled
telecommunications solutions for business customers nationwide. The Company has
equipment distribution partnerships with PictureTel Corporation, Ascend
Communications and Northern Telecom, and markets network services through agency
agreements with Bell Atlantic (which now includes NYNEX), GTE, Southwestern Bell
and Sprint. The consolidated financial statements include the accounts of View
Tech and UST. All significant intercompany balances and transactions have been
eliminated in consolidation.
In November 1996, View Tech completed its merger (the "Merger") with UST
which was accounted for as a pooling of interest. Accordingly, the Company's
financial statements have been restated for all periods prior to the Merger to
include the results of operations, financial position and cash flows of UST.
The information for the nine months ended September 30, 1997 and 1996
has not been audited by independent accountants, but includes all adjustments
(consisting of normal recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of the results for such periods.
The Company has reclassified certain balance sheet and statement of
operations items for prior periods in order to conform to the current periods'
presentation.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the rules of the Securities and
Exchange Commission, although the Company believes that the disclosures included
in these financial statements are adequate to make the information not
misleading. The financial statements presented herein should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the transition period from July 1,
1996 to December 31, 1996.
NOTE 2 - BASIS OF PRESENTATION
- -------------------------------
A reconciliation of consolidated total revenues and net income to
amounts applicable to the separate pooled companies prior to the Merger
(effective, November 29, 1996) is as follows:
Three Nine
Months Ended Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
Total revenues:
View Tech...................... $ 5,364,952 $14,045,749
UST............................ 4,653,532 13,042,385
----------- -----------
$10,018,484 $27,088,134
=========== ===========
Net income (loss):
View Tech...................... $ (74,343) $ (470,344)
UST............................ 461,716 887,584
----------- -----------
$ 387,373 $ 417,240
=========== ===========
Net income (loss) per share
(fully-diluted basis):
View Tech...................... $ (0.01) $ (0.07)
UST............................ 0.07 0.15
----------- -----------
$ 0.06 $ 0.08
=========== ===========
4
VIEW TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 3 - NET INCOME PER SHARE
- -----------------------------
Net income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period,
including common stock options and common stock purchase warrants when dilutive.
Net income per share for the three months and nine months ended September 30,
1997 does not include common stock options and warrants because the effect of
such inclusion would be to increase net income per share.
NOTE 4 - LINES OF CREDIT
- ------------------------
The Company maintains a $1,750,000 credit facility (the "Note") to
assist in meeting its working capital needs, if required. The Note expired on
October 1, 1997, although the Company is in the process of extending the Note to
December 31, 1997. The Note provides for a borrowing base of up to $1,750,000
with interest payable monthly at the prime rate (8.5% at September 30, 1997)
plus 1.0% per year. The borrowing base is determined based on 60% of eligible
accounts receivable, as defined. The Company had outstanding borrowings of
$700,000 under the Note as of September 30, 1997. Funds available under the
Note are reduced by certain outstanding standby letters of credit issued on
behalf of the Company. In addition to the $700,000 outstanding under the Note,
the Company had, as of September 30, 1997, five outstanding standby letters of
credits totaling $274,000. Of the five letters of credit, four are issued in
favor of one leasing company in connection with certain capital lease
transactions relating to the purchase of computer equipment and furniture, and
one is issued to a surety company in connection with its issuance of a
performance bond on behalf of the Company. The letter of credit holders may draw
against the letters of credit if the Company fails to make timely payments or
meet certain other conditions. As a result of issuing the five standby letters
of credit and amounts borrowed, the credit line available under the Note, as of
September 30, 1997, has been reduced to $776,000.
The Company's wholly-owned subsidiary, UST, maintains a revolving credit
agreement with a bank. The agreement, pursuant to the terms of a forbearance
agreement, as amended, allows the subsidiary to borrow up to the lesser of the
financial borrowing base, as defined, or $3,500,000. The bank has a security
interest in the subsidiary's assets and the Company is guaranteeing the
repayment of amounts borrowed under the line. In addition, the subsidiary has
agreed, among other things, to maintain certain financial covenants and ratios,
as defined. As of September 30, 1997, UST was in compliance with the covenants
and ratios or had received waivers under the forbearance agreement. Interest on
the outstanding balance is payable monthly at the bank's base rate (8.5% at
September 30, 1997) plus 1.0%. The revolving line of credit and forbearance
agreement have been extended to December 31, 1997.
In addition, UST had maintained a lease line-of-credit agreement with a
bank which is being repaid in monthly installments as part of the forbearance
agreement. At September 30, 1997, there was approximately $595,000 outstanding
under this facility. UST is required to maintain certain restrictive covenants,
including profitability and liquidity covenants. Amounts outstanding bear
interest at rates ranging from 5.6% to 8.3%. As of September 30, 1997, UST was
in compliance with the covenants or had received waivers under the forbearance
agreement. This credit facility has been extended to December 31, 1997.
The Company is in the process of combining its banking relationships
with another financial institution and increasing the amount of its combined
credit facilities to provide for borrowings of up to $15 million. Although the
Company has a signed commitment letter from the prospective lender, there can be
no assurance that the facility will be issued for the amount requested or at
all. In the event that the Company is unable to consolidate its banking
relationships and increase its credit facilities, it will seek to renegotiate
and extend its existing credit facilities with its current lenders. However,
there can be no assurance that the Company will be able to renegotiate such
credit facilities on acceptable terms or at all.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Company's consolidated financial statements and the notes thereto appearing
elsewhere in this Quarterly Report on Form 10-Q. Except for historical
information contained herein, the statements in this Quarterly Report on Form
10-Q are forward-looking statements (including without limitation, statements
indicating that the Company "expects," "estimates," "anticipates," or "believes"
and all other statements concerning future financial results, product offerings
or other events that have not yet occurred), that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995,
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. Forward-looking statements involve
known factors, risks and uncertainties which may cause the Company's actual
results in future periods to differ materially from forecasted results. Those
factors, risks and uncertainties include, but are not limited to: the Company's
ability to raise additional funds and to consolidate and/or extend its credit
facilities that may be necessary to meet its future capital needs; the Company's
limited history of profitable operations and significant fluctuations in
operating results which may continue due to delays in product enhancements and
new product introductions by its suppliers; the termination of or change of the
Company's business relationships with PictureTel, Bell Atlantic (which now
includes NYNEX), or GTE; disruption in supply, failure of PictureTel, Bell
Atlantic or GTE to remain competitive in product quality, function or price or a
determination by PictureTel, Bell Atlantic or GTE to reduce reliance on
independent providers such as the Company; and the introduction of new rules
and regulations by the federal government and/or certain states pertaining to
the Company's telecommunications business that could lead to additional
competition from entities with greater financial and managerial resources.
Additional information on these and other risk factors are included under "Risk
Factors" and elsewhere in this Quarterly Report on Form 10-Q.
GENERAL
View Tech ("View Tech" or the "Company"), commenced operations in July
1992. Since its initial public offering of common stock in June 1995, the
Company has grown rapidly through internal expansion and through acquisitions.
In November 1996, the Company acquired USTeleCenters, Inc., a Massachusetts
corporation headquartered in Boston, Massachusetts ("USTeleCenters"), in a
merger transaction (the "Merger"), which was accounted for as a pooling-of-
interests for financial reporting purposes and pursuant to which USTeleCenters
merged into USTeleCenters, Inc., a Delaware corporation and a wholly-owned
subsidiary of the Company ("UST"). At the time of the Merger, the Company
operated out of 15 offices covering 24 states and employed 75 people. The Merger
resulted in the addition of three offices and 225 additional employees.
The Company markets and installs video communications systems and
provides continuing services relating to installed systems. In addition, as a
result of the Merger, the Company designs, sells, manages and supports
telecommunications systems solutions for small and medium-sized businesses
throughout the United States. In addition, the Company develops and manages
sales and customer service programs on an outsourced basis for (i) certain
Regional Bell Operating Companies ("RBOCs"), (ii) other telecommunications
service providers and (iii) equipment manufacturers under agency and value-added
reseller ("VAR") agreements. In New England and New York, the Company also
provides systems integration and on-going account management consulting for
middle market customers. On behalf of its RBOC clients, the Company sells high
speed data services, Internet access, Centrex network services, local and long
distance services, voice mail and other "enhanced" services, discount calling
plans and toll-free services such as remote-call-forwarding.
The Company intends to continue its expansion activities through both
internal expansion and strategic acquisitions, although there can be no
assurance that the Company will be able to do so. Although management
anticipates that the revenues generated by its existing offices, as well as the
offices acquired through acquisition or expansion, will exceed its operating
costs for the next twelve months, there can be no assurance that such results
will be achieved. To the extent that such costs exceed such revenues, the
Company's business, financial condition and results of operations will be
adversely affected.
6
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from the Company's consolidated financial statements expressed as a
percentage of the Company's revenues:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Product sales and service revenues............ 69.8% 66.4% 66.5% 67.0%
Agency commissions............................ 30.2 33.6 33.5 33.0
----- ----- ----- -----
100.0 100.0 100.0 100.0
===== ===== ===== =====
Costs and Expenses:
Costs of goods sold........................... 50.6 49.8 48.0 48.5
Sales and marketing expenses.................. 33.5 33.0 36.3 35.7
General and administrative expenses........... 12.6 12.5 14.8 12.7
----- ----- ----- -----
96.7 95.3 99.1 96.9
----- ----- ----- -----
Income from Operations................................ 3.3 4.7 .9 3.1
Other Expense......................................... (.5) (.7) (.6) (2.0)
----- ----- ----- -----
Income Before Provision for Income Taxes.............. 2.8 4.0 .3 1.1
Provision (Benefit) for Income Taxes.................. .0 .1 .0 (.4)
----- ----- ----- -----
Net Income............................................ 2.8% 3.9% .3% 1.5%
===== ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
REVENUES
Total revenues for the three months ended September 30, 1997 increased
by $2.976 million or 29.7% to $12.994 million from $10.018 million in 1996.
Product Sales and Services
Product sales and services revenues increased by $2.410 million or 36.2%
to $9.065 million in 1997 from $6.656 million in 1996. This increase in product
sales and services for 1997 was primarily related to the Company's previous
nationwide expansion of its videoconferencing business throughout calendar year
1996.
Agency Commissions
Agency commissions for 1997 increased by $566,110 or 16.8% to $3.929
million from $3.363 million in 1996. This increase in agency commissions was due
to the Company increasing its sales force during the past several quarters to
meet increased demand for its product offerings on behalf of its RBOC and
exchange carrier clients.
7
COSTS AND EXPENSES
Costs of goods sold for 1997 increased by $1.587 million or 31.8% to
$6.581 million from $4.994 million in 1996. Costs of goods sold as a percentage
of total revenues increased to 50.6% in 1997 from 49.8% in 1996. The increase in
costs of goods sold is primarily related to the increase in product sales and
service revenues and to an increase in technical service costs related to the
Company's videoconferencing business. Costs of goods sold as a percentage of
revenues increased due to the fact that such costs grew at a greater rate than
overall revenues.
Sales and marketing expenses for 1997 increased by $1.042 million or
31.5% to $4.350 million from $3.308 million in 1996. Sales and marketing
expenses as a percentage of revenues increased to 33.5% in 1997 from 33.0% in
1996. The dollar increase in selling and marketing expenses was primarily due
to the increase in compensation costs and related expenses of $894,777. During
the past several quarters the Company's expansion activities focused primarily
on increasing sales representatives and support personnel as well as opening new
sales offices. These efforts have significantly contributed to the increase in
sales and marketing expenses. Sales and marketing expenses as a percentage of
revenues increased due to the fact that selling expenses grew at a greater rate
than overall revenues.
General and administrative expenses for 1997 increased by $386,857 or
31.0% to $1.635 million from $1.248 million in 1996. General and administrative
expenses as a percentage of total revenues increased to 12.6% in 1997 from 12.5%
in 1996. The increase in general and administrative expenses was primarily due
to the increase in administrative salaries and related costs of $290,116.
General and administrative expenses as a percentage of revenues increased
slightly due to the fact that such expenses grew at a greater rate than
revenues.
Income from operations decreased $40,085 to $428,584 in 1997 from income
of $468,669 in 1996. Income from operations as a percentage of revenues
decreased to 3.3% for 1997, compared to 4.7% for 1996. This dollar and
percentage decrease in income from operations for 1997 related to the overall
change in total revenues, coupled with the increases in compensation costs and
related expenses discussed above.
Other expense decreased $5,757 to $61,575 in 1997 from $67,332 in 1996.
This decrease was primarily due to the fact that the net interest expense
increased by $33,404, offset by an increase in other income of $39,161 in 1997,
compared to 1996, respectively.
Provision for income tax expense decreased by $10,829 to a provision of
$3,135 in 1997, compared to a provision of $13,964 for 1996. The tax provision
for the quarter ended September 30, 1997 was offset by the utilization of net
operating loss carryforwards.
Net income decreased $23,499 to $363,874 in 1997 from net income of
$387,373 for 1996. Net income as a percentage of revenues decreased to 2.8% for
1997, compared to 3.9% for 1996. Net income per share for 1997 and 1996
remained unchanged at $0.06 per share. The weighted average number of shares
outstanding was 6,387,188 for 1997 and 6,288,305 in 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
REVENUES
Total revenues for the nine months ended September 30, 1997 increased by
$8.145 million or 30.1% to $35.233 million, compared to $27.088 million in 1996.
Product Sales and Services
Product sales and service revenues increased by $5.289 or 29.1% to
$23.435 million in 1997 from $18.146 million in 1996. This increase in product
sales and services for 1997 was primarily related to the Company's previous
nationwide expansion of its videoconferencing business throughout calendar year
1996.
8
Agency Commissions
Agency commissions for 1997 increased by $2.856 million or 31.9% to
$11.798 million, compared to $8.942 million in 1996. The increase in agency
commissions was due to the Company increasing its sales force during the past
several quarters to meet increased demand for its product offerings on behalf of
its RBOC and exchange carrier clients.
COSTS AND EXPENSES
Costs of goods sold for 1997 increased by $3.772 million or 28.7% to
$16.901 million from $13.129 million in 1996. Costs of goods sold as a
percentage of total revenues decreased to 48.0% in 1997 from 48.5% in 1996. The
dollar increase in costs of goods sold is primarily related to the increase in
product sales and service revenues and to an increase in technical service costs
related to the Company's videoconferencing business. Costs of goods sold as a
percentage of revenues decreased due to the fact that such costs grew at a
slower rate than overall revenues.
Sales and marketing expenses for 1997 increased by $3.115 million or
32.2% to $12.785 million from $9.670 million in 1996. Sales and marketing
expenses as a percentage of revenues increased to 36.3% in 1997 from 35.7% in
1996. The dollar increase in selling and marketing expenses was primarily due
to the increase in compensation costs and related expenses of $2.530 million.
During the past several quarters, the Company's expansion activities focused
primarily on increasing sales representatives and support personnel as well as
opening new sales offices. These efforts have significantly contributed to the
increase in sales and marketing expenses. Sales and marketing expenses as a
percentage of revenues increased due to the fact that selling expenses grew at a
greater rate than overall revenues.
General and administrative expenses for 1997 increased by $1.810 million
or 52.7% to $5.245 million from $3.435 million in 1996. General and
administrative expenses as a percentage of total revenues increased to 14.8% in
1997 from 12.7% in 1996. The dollar increase in general and administrative
expenses was primarily due to increases in administrative salaries and related
costs of $1.024 million, professional fees of $286,257 and an overall increase
in other general office expenses as a result of the expansion of the Company's
videoconferencing and agency business. General and administrative expenses as a
percentage of revenues increased due to the fact that such expenses grew at a
greater rate than revenues.
Income from operations decreased $552,554 to $301,259 in 1997 from
$853,813 in 1996. This decrease in income from operations for 1997 related to
the changes in revenues and operating expenses discussed above. Income from
operations as a percentage of revenues decreased to .9% for 1997, compared to
3.1% for 1996.
Other expense decreased $360,249 to $194,990 in 1997 from $555,239 in
1996. This decrease was primarily due to the fact that the Company wrote-off a
note receivable from Power Data Services, Inc. ("PDS") for $265,000 in
connection with the termination of the PDS acquisition in May of 1996 and no
similar write-off was taken in 1997.
Provision for income tax expense increased $123,178 to a provision of
$4,512 in 1997, compared to a tax benefit of $118,666 for 1996. This increase in
the tax provision was related to the recognition of a deferred tax benefit in
1996, created by the Company's previous pre-tax losses. The Company did not
recognize a similar benefit for the nine months ended September 30, 1997.
Net income decreased $315,483 to $101,757 in 1997, compared to net
income of $417,240 for 1996. Net income as a percentage of revenues decreased
to .3% for 1997, compared to 1.5% for 1996. Net income per share decreased to
$0.02 for 1997, compared to $0.08 for 1996. The weighted average number of
shares outstanding for 1997 and 1996 was 6,323,135 and 5,923,887, respectively .
LIQUIDITY AND CAPITAL RESOURCES
Over the past two years, View Tech has financed its operations and
expansion activities with the proceeds from its initial public offering
completed in June 1995, private placements of equity securities, bank debt and
vendor credit arrangements.
9
Net cash used for operating activities for the nine months ended
September 30, 1997 (the "Period") was $2.029 million. The primary uses of cash
in 1997 was an increase in accounts receivable of $2.011 million and decreases
in accrued merger costs of $1.160 million, offset by an increase in other
accrued liabilities of $597,373 and depreciation and amortization of $825,107.
Net cash used for investing activities for the Period was $723,136
relating to the purchase of office furniture and computer equipment.
Net cash provided by financing activities for the Period was $3.844
million, relating to net proceeds of $2.798 million from the sale of common
stock by the Company, and additional net borrowings under lines of credit of
$1.391 million, offset by the repayment of $345,413 in other debt obligations.
The Company maintains a $1,750,000 credit facility (the "Note") to
assist in meeting its working capital needs, if required. The Note expired on
October 1, 1997, although the Company is in the process of extending the Note to
December 31, 1997. The Note provides for a borrowing base of up to $1,750,000
with interest payable monthly at the prime rate (8.5% at September 30, 1997)
plus 1.0%. The borrowing base is determined based on 60% of eligible
accounts receivable, as defined. The Company had outstanding borrowings of
$700,000 under the Note as of September 30, 1997. Funds available under the
Note are reduced by certain outstanding standby letters of credit issued on
behalf of the Company. In addition to the $700,000 outstanding under the Note,
the Company had, as of September 30, 1997, five outstanding standby letters of
credits totaling $274,000. Of the five letters of credit, four are issued in
favor of one leasing company in connection with certain capital lease
transactions relating to the purchase of computer equipment and furniture, and
one is issued to a surety company in connection with its issuance of a
performance bond on behalf of the Company. The letter of credit holders may draw
against the letters of credit if the Company fails to make timely payments or
meet certain other conditions. As a result of issuing the five standby letters
of credit and amounts borrowed, the credit line available under the Note, as of
September 30, 1997, has been reduced to $776,000.
The Company's wholly-owned subsidiary, UST, maintains a revolving credit
agreement with a bank. The agreement, pursuant to the terms of a forbearance
agreement, as amended, allows the subsidiary to borrow up to the lesser of the
financial borrowing base, as defined, or $3,500,000. The bank has a security
interest in the subsidiary's assets and the Company is guaranteeing the
repayment of amounts borrowed under the line. In addition, the subsidiary has
agreed, among other things, to maintain certain financial covenants and ratios,
as defined. As of September 30, 1997, UST was in compliance with the covenants
and ratios or had received waivers under the forbearance agreement. Interest on
the outstanding balance is payable monthly at the bank's base rate (8.5% at
September 30, 1997) plus 1.0%. The revolving line of credit and forbearance
agreement have been extended to December 31, 1997.
In addition, UST had maintained a lease line-of-credit agreement with a
bank which is being repaid in monthly installments as part of the forbearance
agreement. At September 30, 1997, there was approximately $595,000 outstanding
under this facility. UST is required to maintain certain restrictive covenants,
including profitability and liquidity covenants. Amounts outstanding bear
interest at rates ranging from 5.6% to 8.3%. As of September 30, 1997, UST was
in compliance with the covenants or had received waivers under the forbearance
agreement. This credit facility has been extended to December 31, 1997.
The Company is in the process of combining its banking relationships
with another financial institution and increasing the amount of its combined
credit facilities to provide for borrowings of up to $15 million. Although the
Company has a signed commitment letter from the prospective lender, there can be
no assurance that the facility will be issued for the amount requested or at
all. In the event that the Company is unable to consolidate its banking
relationships and increase its credit facilities, it will seek to renegotiate
and extend its existing credit facilities with its current lenders. However,
there can be no assurance that the Company will be able to renegotiate such
credit facilities on acceptable terms or at all.
UST's lines of credit are due on December 31, 1997. UST is currently
subject to a forbearance agreement which enables the lender to foreclose on the
collateral underlying the debt if UST's financial condition falls below certain
minimum standards. The forbearance agreement, as amended, was originally entered
into on June 14, 1995. Based on UST's relationship with the lender, management
anticipates that the lender will refinance the lines of credit or extend the
date on which the lines of credit must be paid. However, if the lender does not
refinance such lines of credit and the Company has not raised additional equity
and/or arranged for alternative bank financing, the Company will not have
10
sufficient cash to repay the lender when the debt comes due. There can be no
assurance that the Company will be able to renegotiate the lines of credit with
the lender, and if the lender requires payment in December 1997, there can be no
assurance that the Company will be able to raise the additional funds necessary
to meet the Company's operating needs and capital requirements or that such
funds, if available, can be obtained on terms acceptable to the Company. The
failure to refinance the lines of credit, raise additional capital or obtain
additional bank financing will have a material adverse effect on the Company's
business, financial condition and results of operations. To the extent that the
Company raises additional capital by issuing equity securities, ownership
dilution to current stockholders of the Company will result.
The Company will require additional working capital to efficiently
operate its business, to continue to implement its growth strategy and to
provide adequately for its working capital needs. In this regard, the Company
will continue to seek private equity or debt financing to satisfy its capital
needs. However, exclusive of the cash required to repay the UST debt
obligations on December 31, 1997 and to fund additional expansion activities,
the Company believes that its existing cash balances, combined with its
anticipated operating cash flow and borrowings under existing credit facilities
will be adequate to meet the Company's on-going cash needs for the next twelve
months.
RISK FACTORS
FUTURE FINANCING REQUIREMENTS
The Company will require additional working capital in order to operate
its business efficiently and to implement its internal expansion and acquisition
strategy. The Company is in the process of combining its banking relationships
with another financial institution and increasing the amount of its credit
facilities. However, there can be no assurance that it will be able to do so.
In the event that the Company is unable to consolidate its banking
relationships, it will seek to extend its current credit facilities with its
existing lenders. However, there can be no assurance that the Company will be
able to extend such credit facilities on acceptable terms or at all. In
addition, the Company plans to raise additional capital to meet such needs in
either the form of a private placement of its securities and/or traditional bank
financing, or a combination of both. In connection with the private placement of
its securities, the Company sold to one investor, Telcom Holdings, LLC, an
aggregate of $2,860,000 of common stock on three separate closings occurring in
January and March 1997. There can be no assurance, however, that the Company
will be able to raise any additional funds that may be necessary to meet the
Company's future capital needs or that such additional funds, if available, can
be obtained on terms acceptable to the Company. The failure to raise additional
capital, on terms acceptable to the Company, when and if needed, could force the
Company to alter its business strategy, including but not limited to, its
acquisition strategy, in the future.
UNASCERTAINABLE RISKS DUE TO RAPID EXPANSION AND FUTURE ACQUISITIONS
Management anticipates that the Company will continue to grow not only
through internal expansion, but also through acquisitions of other entities.
Since July 1992, View Tech, by virtue of its expansion activity, has grown from
two employees in one location to 324 employees in 16 locations at September 30,
1997. In the past fifteen months, View Tech has acquired three businesses,
including USTeleCenters. By virtue of rapid internal growth and external growth
through acquisitions, the Company will be subject to the uncertainties and risks
associated with any expanding business. In light of the potential significance
of these changes and the absence of a long history of combined operations of
View Tech with another entity, it is possible that the Company will encounter
difficulties, such as integration of operations, inefficiencies due to
duplicative functions, management and administrative differences and
overlapping, competing or incompatible areas of business and operations, that
cannot presently be ascertained. There can be no assurance that the Company will
fully achieve the anticipated benefits of its recent or future acquisitions.
LIMITED HISTORY OF PROFITABLE OPERATIONS; SIGNIFICANT FLUCTUATIONS IN OPERATING
RESULTS; FUTURE RESULTS OF OPERATIONS UNCERTAIN
View Tech and USTeleCenters have operated since 1992 and 1987,
respectively. On a combined basis, the Company reported net income for the three
months and nine months ended September 30, 1997, and has operated as a combined
entity since November 29, 1996. Although the Company achieved profitability and
reported net income of $424,056 for fiscal 1996, it reported a net loss of
$3,017,218 and $1,876,810 for the six months ended December 31, 1996 and the
fiscal year ended June 30, 1995. In the future, View Tech may continue to
experience significant fluctuations in operating results as a result of a number
of factors, including, without limitations, delays in product enhancements and
new product
11
introductions by its suppliers, market acceptance of new products and services
and reduction in demand for existing products and services as a result of
introductions of new products and services by its competitors or by competitors
of its suppliers. In addition, View Tech's operating results may vary
significantly depending on the mix of products and services comprising its
revenues in any period. There can be no assurance that View Tech will achieve
revenue growth or will be profitable on a quarterly or annual basis in the
future.
DEPENDENCE ON SUPPLIERS, INCLUDING PICTURETEL, BELL ATLANTIC AND GTE
For the nine months ended September 30, 1997, approximately 40% and 35%
of the Company's consolidated revenues were attributable to the sale of
equipment manufactured by PictureTel and to the sale of network products and
services provided by Bell Atlantic (which now includes NYNEX), and GTE,
respectively. Termination of or change of the Company's business relationships
with PictureTel, Bell Atlantic or GTE; disruption in supply, failure of
PictureTel, Bell Atlantic or GTE to remain competitive in product quality,
function or price or a determination by PictureTel, Bell Atlantic or GTE to
reduce reliance on independent providers such as the Company, among other
things, would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company is a party to
agreements with PictureTel, Bell Atlantic and GTE that authorize the Company to
serve as a non-exclusive dealer and sales agent, respectively, in certain
geographic territories. The PictureTel, Bell Atlantic and GTE agreements can be
terminated without cause upon written notice by the suppliers, subject to
certain notification requirements. There can be no assurance that these
agreements will not be terminated, or that they will be renewed on terms
acceptable to the Company. These suppliers have no affiliation with the Company
and are competitors of the Company.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FROM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VIEW TECH, INC.
Date: November 13, 1997 By: /s/ William M. McKay
------------------------------
William M. McKay
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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