================================================================================
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 June 30, 1998
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 issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Class as of August 10, 1998
----- ---------------------
Common Stock, $.0001 par value 6,770,310
================================================================================
VIEW TECH, INC.
TABLE OF CONTENTS
-----------------
PAGE REFERENCE
--------------
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets
June 30, 1998 (unaudited) and December 31, 1997 1
Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 1998
and 1997 (unaudited) 2
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 (unaudited) 3
Notes to Consolidated Financial Statements (unaudited) 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION
Exhibits and Reports on Form 8-K 15
SIGNATURES 16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIEW TECH, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1998 1997
------------ ------------
CURRENT ASSETS: (Unaudited)
Cash and cash equivalents $ 1,255,133 $ 1,204,690
Accounts receivable (net of reserves of $993,380
and $658,656, respectively) 13,477,896 13,326,667
Inventory 3,316,395 2,532,456
Other current assets 619,342 428,889
----------- -----------
Total Current Assets 18,668,766 17,492,702
PROPERTY AND EQUIPMENT, net 3,726,572 3,423,838
GOODWILL, net 2,575,591 4,198,927
OTHER ASSETS 809,897 696,701
----------- -----------
$25,780,826 $25,812,168
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,149,337 $ 7,168,763
Current portion of long-term debt 631,692 661,290
Accrued payroll and related costs 1,946,584 1,904,506
Deferred revenue 2,032,242 1,087,161
Accrued restructuring costs 2,042,169 --
Other current liabilities 1,293,715 1,371,248
----------- -----------
Total Current Liabilities 16,095,739 12,192,968
----------- -----------
LONG-TERM DEBT 5,178,876 5,342,368
----------- -----------
COMMITMENTS AND CONTINGENCIES
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
6,770,310 and 6,589,571 shares at June 30, 1998
and December 31, 1997, respectively 677 659
Additional paid-in capital 13,907,494 13,653,624
Retained deficit (9,401,960) (5,377,451)
----------- -----------
4,506,211 8,276,832
----------- -----------
$25,780,826 $25,812,168
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
1
VIEW TECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------ ------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues:
Product sales and service revenues $10,290,617 $ 8,108,739 $18,394,567 $14,369,290
Agency commissions 4,768,286 4,117,727 10,079,828 7,869,162
----------- ----------- ----------- -----------
15,058,903 12,226,466 28,474,395 22,238,452
----------- ----------- ----------- -----------
Costs and Expenses:
Costs of goods sold 7,317,857 5,809,980 13,020,699 10,378,189
Sales and marketing expenses 5,402,111 4,695,008 10,971,768 8,661,935
General and administrative expenses 2,062,853 1,494,848 4,043,328 3,325,653
Restructuring and other charges 4,201,013 -- 4,201,013 --
----------- ----------- ----------- -----------
18,983,834 11,999,836 32,236,808 22,365,777
----------- ----------- ----------- -----------
Income (Loss) from Operations (3,924,931) 226,630 (3,762,413) (127,325)
Other Expenses (135,769) (49,273) (258,196) (133,415)
----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes (4,060,700) 177,357 (4,020,609) (260,740)
Provision for Income Taxes -- (465) (3,900) (1,377)
----------- ----------- ----------- -----------
Net Income (Loss) $(4,060,700) $ 176,892 $(4,024,509) $ (262,117)
=========== =========== =========== ===========
Earnings (Loss) Per Share
(Basic and Diluted) $ (0.60) $ 0.03 $ (0.60) $ (0.04)
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
VIEW TECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
----------------------------
1998 1997
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,024,509) $ (262,117)
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation and amortization 795,158 560,963
Provision for bad debts 334,724 (52,821)
Non cash charges related to restructuring 1,491,392 --
Changes in assets and liabilities:
Accounts receivable (485,953) (446,836)
Inventory (901,681) (228,771)
Other assets (336,522) 168,623
Accounts payable 980,574 (1,209,353)
Accrued merger costs -- (1,160,494)
Accrued restructuring charges 2,272,402 --
Other accrued liabilities 909,626 381,794
----------- -----------
Net cash provided (used) by operating activities 1,035,211 (2,249,012)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITY:
Purchase of property and equipment (577,969) (458,329)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under lines of credit (444,551) 677,773
Repayments of capital lease and other debt obligations (216,136) (239,998)
Issuance of common stock, net 253,888 2,784,526
----------- -----------
Net cash provided (used) by financing activities (406,799) 3,222,301
----------- -----------
NET INCREASE IN CASH 50,443 514,960
CASH, beginning of period 1,204,690 365,139
----------- -----------
CASH, end of period $ 1,255,133 $ 880,099
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Operating activities reflect:
Interest paid $ 294,417 $ 151,605
=========== ===========
Income taxes paid $ 96,175 $ 2,800
=========== ===========
Schedule of non-cash investing and financing activities:
Equipment acquired under capital lease obligations $ 237,364 $ 50,395
=========== ===========
Equipment transferred from inventory $ 117,742 $ --
=========== ===========
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., a Delaware corporation ("View Tech"), commenced operations in
July 1992 as a California corporation. Since its initial public offering of
common stock in June 1995, View Tech has grown rapidly through internal
expansion and through acquisitions. In July and August 1996, View Tech acquired
the net assets of VistaTel International, Inc., a Florida corporation
headquartered in Boca Raton, Florida and GroupNet, Inc., a Massachusetts
corporation located in Boston, Massachusetts, respectively, both of which were
engaged in the marketing and installation of video communication equipment. In
November 1996, View Tech merged with USTeleCenters, Inc., a Massachusetts
corporation ("UST" and together with View Tech, the "Company") and the Company
reincorporated in Delaware. In November 1997, the Company, through its wholly-
owned subsidiary, acquired the net assets of Vermont Telecommunications Network
Services, Inc., a Vermont corporation headquartered in Burlington, Vermont,
which sells, manages and supports telecommunication network solutions as an
agent for Bell Atlantic. The Company currently has 24 offices nationwide.
The Company, 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, VTEL Corporation, PolyCom, Inc., Madge
Networks, Ascend Communications, VideoServer, Inc., and Northern Telecom and
markets network services through agency agreements with Bell Atlantic,
BellSouth, GTE, Southwestern Bell, Sprint and UUNET Technologies.
The information for the six months ended June 30, 1998 and 1997 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.
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 year ended December 31, 1997.
NOTE 2 - ACQUISITIONS
- ----------------------
In November 1997, the Company through its wholly-owned subsidiary, acquired
the net assets of Vermont Telecommunications Network Services, Inc. ("NSI"), a
Vermont corporation headquartered in Burlington, Vermont, which sells, manages
and supports telecommunication network solutions as an agent for Bell Atlantic.
Following is summarized pro forma operating results assuming that the Company
had acquired NSI on January 1, 1997.
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
------------------ -----------------
Revenues $12,811,844 $23,409,208
Income (loss) before income taxes 292,497 (30,460)
Net income (loss) 292,032 (31,837)
Net income (loss) per share Basic 0.05 (0.01)
Net income (loss) per share - Diluted 0.04 (0.01)
The summarized pro forma operating results include the historical operating
results for NSI for the three months and six months ended June 30, 1997. The
summarized pro forma information may not be indicative of the results of
operations that would have occurred if the acquisition had been concluded on
January 1, 1997 or which may be achieved in the future.
4
VIEW TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3 - EARNINGS (LOSS) PER SHARE
- ----------------------------------
Earnings (loss) per share - basic is computed on the basis of the weighted
average number of shares of common stock outstanding and earnings per share -
diluted is based on the weighted average number of shares outstanding including
the dilutive effect of common stock equivalents using the treasury stock method.
Earnings (Loss) Per Share:
- --------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Weighted average shares outstanding 6,757,407 6,381,744 6,702,216 6,285,898
Effect of dilutive options and warrants -- 320,791 -- --
--------- --------- --------- ---------
Weighted average shares outstanding
including dilutive effect of securities 6,757,407 6,702,535 6,702,216 6,285,898
========= ========= ========= =========
Options and warrants to purchase 2,364,568, 2,314,163, 2,541,141 and
2,566,492 weighted average shares of common stock were outstanding during the
three month and six month periods ended June 30, 1998 and 1997, respectively,
but were not included in the computation of diluted EPS because the options'
exercise price was either greater than the average market price of the common
stock or the Company reported a net operating loss and their effect would have
been antidilutive. On June 15, 1998, a total of 529,053 Public Warrants expired
under their terms.
NOTE 4 - LINES OF CREDIT
- ------------------------
The Company entered into a $15 million Credit Agreement (the "Agreement")
with Imperial Bank, effective November 21, 1997. The Agreement provides for a
maximum credit line of up to $15 million for a term of five (5) years. Amounts
outstanding under the Agreement are collateralized by certain assets of the
Company. Funds available under the Agreement will vary from time to time
depending on many variables including, without limitation, the amount of
Eligible Trade Accounts Receivable and Eligible Inventory of the Company, as
such terms are defined in the Agreement. The interest charged on outstanding
amounts vary between the Prime Rate, plus the Prime Rate Margin, or between the
Eurodollar Rate, plus the Eurodollar Rate Margin, depending upon the Company's
Leverage Ratio, as defined in the Agreement. At June 30, 1998, the interest
rate on this facility was 9.0%. The Agreement requires the Company to comply
with various financial and operating loan covenants. As of June 30, 1998 the
Company was in compliance with these covenants or had received waivers with
respect thereto. Under certain conditions, the Agreement allows the Company to
prepay principal amounts outstanding without penalty.
The Agreement provides for three separate loan commitments consisting of
(i) a Facility A Commitment up to $7 million; (ii) a Facility B Commitment up to
$5 million and (iii) a Facility C Commitment up to $3 million. Amounts drawn
under the Facility A Commitment are due and payable no later than November 21,
2002. Amounts drawn under the Facility B Commitment are subject to mandatory
repayments in sixteen (16) equal quarterly installments commencing on March 31,
1999. Amounts outstanding under the Facility C Commitment are subject to
mandatory repayments in twelve (12) equal quarterly installments commencing on
March 31, 2000. All amounts outstanding under each such Facility are
5
due and payable no later than November 21, 2002. At June 30, 1998, the total
outstanding principal balance due under these facilities was $4,461,306.
NOTE 5 - RESTRUCTURING AND OTHER CHARGES
- ---------------------------------------
On April 22, 1998, the Company announced that it would implement a plan
(the "Plan") in the second quarter of 1998, to restructure the Company's
operations designed to reduce costs and improve profitability. The
implementation of the Plan resulted in a one time charge of $4,201,013. Included
in this charge against second quarter results are costs related to an impairment
write-down of goodwill relating to previous acquisitions and the closing of
unprofitable operations.
The following are the significant components of the charge for restructuring:
Impairment write-down of goodwill relating to previous acquisitions........................ $1,464,843
Provision for costs in closing unprofitable operations, employee severance,
benefits and related costs................................................................. 2,736,170
----------
$4,201,013
==========
The total cash impact of the restructuring will amount to $2,709,621 of
which $2,272,402 is still to be paid as of June 30, 1998. Included in the
accompanying balance sheet at June 30, 1998 is $2,042,169 of current liabilities
and $230,233 of long-term liabilities related to the restructuring charge. The
Company anticipates that the balance of the restructuring cost will be paid by
October 31, 1999.
6
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 Form 10-Q. Except for historical information contained herein, the
statements in this 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 that may be necessary to meet its future capital needs; the
uncertainties related to restructuring; 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 or Bell Atlantic, disruption in supply, failure of
PictureTel or Bell Atlantic to remain competitive in product quality, function
or price or a determination by PictureTel or Bell Atlantic 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 Form 10-Q.
GENERAL
View Tech, Inc. ("View Tech") commenced operations in July 1992 as a
California corporation. Since its initial public offering of common stock in
June 1995, View Tech has grown rapidly through internal expansion and through
acquisitions. In July and August 1996, View Tech acquired the net assets of
VistaTel International, Inc., a Florida corporation headquartered in Boca Raton,
Florida and GroupNet, Inc., a Massachusetts corporation located in Boston,
Massachusetts, respectively, both of which were engaged in the marketing and
installation of video communication equipment. In November 1996, View Tech
merged with USTeleCenters, Inc., a Massachusetts corporation ("UST" and together
with View Tech, the "Company") and the Company reincorporated in Delaware. In
November 1997, the Company through its wholly-owned subsidiary, acquired the net
assets of Vermont Telecommunications Network Services, Inc., a Vermont
corporation headquartered in Burlington, Vermont, which sells, manages and
supports telecommunication network solutions as an agent for Bell Atlantic. The
Company currently has 24 offices nationwide.
The Company 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, VTEL Corporation, PolyCom, Inc., Madge
Networks, Ascend Communications, VideoServer, Inc., and Northern Telecom and
markets network services through agency agreements with Bell Atlantic,
BellSouth, GTE, Southwestern Bell, Sprint and UUNET Technologies. The
consolidated financial statements include the accounts of View Tech and UST.
All significant intercompany balances and transactions have been eliminated in
consolidation.
7
The Company intends to continue its expansion activities in calendar 1998
primarily through internal expansion. Although management anticipates that the
revenues generated by its existing offices, as well as additional offices from
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 such costs
exceed such revenues, the Company's business, financial condition and results of
operations will be adversely effected.
In the second quarter of 1998, the Company implemented a restructuring plan
(the "Plan") designed to reduce costs and improve profitability. The
implementation of the Plan resulted in a one time charge of $4.201 million.
Included in this charge against second quarter results are costs related to an
impairment write-down of goodwill relating to previous acquisitions and the
closing of unprofitable operations. There can be no assurance that the Company
will fully achieve the benefits of restructuring.
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 Six Months Ended
June 30, June 30,
-------------------- -------------------
1998 1997 1998 1997
-------- --------- ------- ---------
Revenues:
Product sales and service revenues......................... 68.3% 66.3% 64.6% 64.6%
Agency commissions......................................... 31.7 33.7 35.4 35.4
------ ----- ------ -----
100.0 100.0 100.0 100.0
====== ===== ====== =====
Costs and Expenses:
Costs of goods sold........................................ 48.6 47.5 45.7 46.6
Sales and marketing expenses............................... 35.9 38.4 38.5 39.0
General and administrative expenses........................ 13.7 12.2 14.2 15.0
Restructuring and other costs.............................. 27.9 0.0 14.8 0.0
------ ----- ------ -----
126.1 98.1 113.2 100.6
------ ----- ------ -----
Income (Loss) from Operations............................... (26.1) 1.9 (13.2) (0.6)
Other Expense............................................... (0.9) (0.4) (0.9) (0.6)
------ ----- ------ -----
Income (Loss) Before Provision for Income Taxes............. (27.0) 1.5 (14.1) (1.2)
Provision for Income Taxes.................................. 0.0 0.0 0.0 0.0
------ ----- ------ -----
Net (Loss) Income........................................... (27.0)% 1.5% (14.1)% (1.2)%
====== ===== ====== =====
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
REVENUES
Total revenues for the three months ended June 30, 1998 increased by $2.832
million or 23.2% to $15.059 million from $12.226 million in 1997.
Product Sales and Services
Product sales and service revenues increased by $2.182 million or 26.9% to
$10.291 million in 1998 from $8.109 million in 1997. This increase in revenues
was primarily related to the Company's nationwide expansion of its
videoconferencing business throughout calendar year 1997.
8
Agency Commissions
Agency commissions for 1998 increased by $650,559 or 15.8% to $4.768
million from $4.118 million in 1997. The increase in agency commissions was
primarily due to the benefit from agency commissions of $758,606 generated by
its recently acquired wholly-owned subsidiary, Vermont Telecommunications
Network Services, Inc., ("NSI").
COSTS AND EXPENSES
Costs of goods sold for 1998 increased by $1.508 million or 26.0% to $7.318
million from $5.810 million in 1997. Costs of goods sold as a percentage of
revenues increased to 48.6% in 1998 from 47.5% in 1997. 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.
Sales and marketing expenses for 1998 increased by $707,104 or 15.1% to
$5.402 million from $4.695 million in 1997. Sales and marketing expenses as a
percentage of revenues decreased to 35.9% in 1998 from 38.4% in 1997. The dollar
increase was primarily due to compensation and related expenses associated with
the revenues generated from NSI. Substantially all operating expenses incurred
by NSI were related to sales and marketing. The percentage decrease was
attributable to the Company's product sales and service revenues growing at a
faster rate than sales and marketing expenses associated with such revenues.
General and administrative expenses for 1998 increased by $568,004 or 38.0%
to $2.063 million from $1.495 million in 1997. General and administrative
expenses as a percentage of total revenues increased to 13.7% in 1998 from 12.2%
in 1997. The increase was primarily due to a general increase in such expenses
as a result of the expansion of the Company's videoconferencing business.
In the second quarter of 1998, the Company implemented a restructuring
plan (the "Plan") designed to reduce costs and improve profitability. The
implementation of the Plan resulted in a one time charge of $4.201 million.
Included in this charge against second quarter results are costs related to an
impairment write-down of goodwill relating to previous acquisitions and the
closing of unprofitable operations. There can be no assurance that the Company
will fully achieve the benefits of restructuring.
Income (loss) from operations decreased $4.152 million to a loss of
$(3.925) million in 1998 from income of $226,630 in 1997. The decrease in income
from operations for 1998 was primarily related to the restructuring write-offs
which included closing of unprofitable operations and an impairment write-down
of goodwill. Income (loss) from operations as a percentage of revenues decreased
to (26.1)% for 1998, compared to 1.9% for 1997.
Other expense increased $86,496 to $135,769 in 1998 from $49,273 in 1997.
The increase was primarily due to an increase in interest expense related to the
Company's credit facilities and capital lease obligations.
Provision for income tax expense was zero in 1998, compared to a tax
provision of $465 for 1997. The decrease relates to the operating loss created
by the restructuring charges incurred in 1998.
Net income (loss) decreased $4.238 million to a loss of $(4.061) million in
1998 from net income of $176,892 for 1997. Net income (loss) as a percentage of
revenues decreased to (27.0)% for 1998 compared to 1.5% for 1997. Net income
(loss) per share decreased to $(0.60) for 1998 compared to net income of $.03
per share for 1997. The weighted average number of shares outstanding increased
to 6,757,407 for 1998 from 6,381,744 in 1997. The weighted average number of
shares outstanding assuming dilution increased to 6,757,407 in 1998 from
6,702,535 in 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES
Total revenues for the six months ended June 30, 1998 increased by $6.236
million or 28.0% to $28.474 million from $22.238 million in 1997.
9
Product Sales and Services
Product sales and service revenues increased by $4.025 million or 28.0% to
$18.395 million in 1998 from $14.369 million in 1997. This increase in revenues
was primarily related to the Company's nationwide expansion of its
videoconferencing business throughout calendar year 1997.
Agency Commissions
Agency commissions for 1998 increased by $2.211 million or 28.1% to $10.080
million from $7.869 million in 1997. The increase in agency commissions was due
primarily to the Company growing its sales force and benefiting from agency
commissions generated by its recently acquired wholly-owned subsidiary, NSI.
COSTS AND EXPENSES
Costs of goods sold for 1998 increased by $2.643 million or 25.5% to
$13.021 million from $10.378 million in 1997. Costs of goods sold as a
percentage of revenues decreased to 45.7% in 1998 from 46.6% in 1997. 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. The percentage decrease is
primarily related to an increase in service revenues related to the Company's
videoconferencing business. Service revenues generally provide a higher profit
margin than equipment revenues.
Sales and marketing expenses for 1998 increased by $2.310 million or 26.7%
to $10.972 million from $8.662 million in 1997. Sales and marketing expenses as
a percentage of revenues decreased to 38.5% in 1998 from 39.0% in 1997. The
dollar increase was primarily due to higher sales volume which resulted in
higher compensation and related expenses for the Company's sales force. The
percentage decrease was attributable to the Company's product sales and service
revenues growing at a faster rate than sales and marketing expenses associated
with such revenues.
General and administrative expenses for 1998 increased by $717,675 or 21.6%
to $4.043 million from $3.326 million in 1997. General and administrative
expenses as a percentage of total revenues decreased to 14.2% in 1998 from 15.0%
in 1997. The increase was primarily due to a general increase in such expenses
as a result of the expansion of the Company's videoconferencing business.
In the second quarter of 1998, the Company implemented a restructuring plan
(the "Plan") designed to reduce costs and improve profitability. The
implementation of the Plan resulted in a one time charge of $4.201 million.
Included in this charge against second quarter results are costs related to an
impairment write-down of goodwill relating to previous acquisitions and the
closing of unprofitable operations. There can be no assurance that the Company
will fully achieve the benefits of restructuring.
Loss from operations increased $3.635 million to a loss of $3.762 million
in 1998 from a loss of $127,325 in 1997. This loss from operations for 1998
related to the Company's restructuring efforts in the second quarter which
included non-recurring write-offs relating to the closure of unprofitable
operations and an impairment write-down for goodwill. Loss from operations as a
percentage of revenues decreased to 13.2% for 1998, compared to 0.6% for 1997.
Other expense increased $124,781 to $258,196 in 1998 from $133,415 in 1997.
The increase was primarily due to an increase in interest expense related to the
Company's credit facilities and capital lease obligations.
Provision for income tax expense increased $2,523 to a provision of $3,900
in 1998 compared to a provision of $1,377 for 1997. The increase was primarily
attributable to state tax provisions.
Net loss increased $3.762 million to a loss of $4.025 million in 1998 from
a loss of $262,117 for 1997. Net loss as a percentage of revenues increased to
14.1% for 1998 compared to 1.2% for 1997. Net loss increased to $0.60 for 1998
compared to $0.04 for 1997. The weighted average number of shares outstanding
for both basic and diluted earnings per share increased to 6,702,216 for 1998
from 6,285,898 in 1997.
10
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.
Net cash provided by operating activities for the six months ended June 30,
1998 was $1.035 million, primarily generated by non-cash charges related to
restructuring of $1.491 million and increases in accounts payable, accrued
restructuring charges, and other accrued liabilities of $980,574, $2.272 million
and $909,626, respectively, offset by an increase in inventory of $901,681 and a
decrease in accounts receivable of $485,953.
Net cash used by investing activities for the six months ended June 30,
1998 was $577,969, primarily relating to the purchase of office furniture and
computer equipment.
Net cash used by financing activities for the six months ended June 30,
1998 was $406,799, related to net repayments under the Company's line of credit
of $444,551, repayments under capital lease obligations of $216,136, offset by
the issuance of common stock of $253,888.
The Company entered into a $15 million Credit Agreement (the"Agreement")
with Imperial Bank, effective November 21, 1997. The Agreement provides for a
maximum credit line of up to $15 million for a term of five (5) years. Amounts
outstanding under the Agreement are collateralized by certain assets of the
Company. Funds available under the Agreement will vary from time to time
depending on many variables including, without limitation, the amount of
Eligible Trade Accounts Receivable and Eligible Inventory of the Company, as
such terms are defined in the Agreement. The interest charged on outstanding
amounts vary between the Prime Rate, plus the Prime Rate Margin, or between the
Eurodollar Rate, plus the Eurodollar Rate Margin, depending upon the Company's
Leverage Ratio, as defined in the Agreement. At June 30, 1998, the interest rate
on this Facility was 9.0%. The Agreement requires the Company to comply with
various financial and operating loan covenants. As of June 30, 1998 the Company
was in compliance with these covenants or had received waivers with respect
thereto. Under certain conditions, the Agreement allows the Company to prepay
principal amounts outstanding without penalty.
The Agreement provides for three separate loan commitments consisting of
(i) a Facility A Commitment up to $7 million; (ii) a Facility B Commitment up to
$5 million and (iii) a Facility C Commitment up to $3 million. Amounts drawn
under the Facility A Commitment are due and payable no later than November 21,
2002. Amounts drawn under the Facility B Commitment are subject to mandatory
repayments in sixteen (16) equal quarterly installments commencing on March 31,
1999. Amounts outstanding under the Facility C Commitment are subject to
mandatory repayments in twelve (12) equal quarterly installments commencing on
March 31, 2000. All amounts outstanding under each such Facility are due and
payable no later than November 21, 2002. At June 30, 1998, the total outstanding
principal balance due under these facilities was $4,461,306.
RISK FACTORS
FUTURE FINANCING REQUIREMENTS
The Company may require additional working capital in order to operate its
business efficiently and to implement its internal expansion. The Company may
seek 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. There can be no assurance, however, that the Company will
be able to raise any additional funds that may be necessary to meet its 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 and could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL
The Company depends to a considerable degree on the continued services of
certain of its executive officers, including Paul C. O'Brien, its chairman,
William J. Shea, its chief executive officer, and Franklin A. Reece III, its
president, as well as on a number of key personnel. Any further changes in
current management, including but not limited to the loss of
11
Messrs. O'Brien, Shea or Reece could have a material adverse affect on the
Company. There can be no assurance that Mr. Shea's recent appointment will not
precipitate further changes in the Company's management. Any such further
changes in the Company's executive management, the loss of other key management
or technical personnel or the failure to attract and retain such personnel could
have a material adverse effect on the Company's business, financial condition
and results of operations.
LIMITED HISTORY OF PROFITABLE OPERATIONS; SIGNIFICANT FLUCTUATIONS IN OPERATING
RESULTS AND NON-RECURRING ITEMS; FUTURE RESULTS OF OPERATIONS
View Tech and UST have operated since 1992 and 1987, respectively. Since
November 29, 1996, the Company has operated on a combined basis. The Company
reported a net loss of $4,060,700 and $4,024,509 for the three and six months
ended June 30, 1998, respectively, which included one-time restructuring charges
of $4,201,013. Although the Company achieved operating profitablity before one-
time restructuring charges, in the future, the Company 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 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, the Company'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 the Company will achieve
revenue growth or will be profitable on a quarterly or annual basis in the
future.
The Company strives to improve its return on assets and its operations and
as such, it will continuously review its internal operations and other policies
and procedures, including but not limited to those relating to revenue
generation, adequacy of reserves and realizability of assets. Any resulting
adjustments could have a material adverse affect on the Company's results of
operations.
DEPENDENCE ON SUPPLIERS, INCLUDING PICTURETEL, BELL ATLANTIC AND GTE
For the six months ended June 30, 1998, approximately 30% and 34% of the
Company's consolidated revenues were attributable to the sale of equipment
manufactured by PictureTel Corporation and to the sale of network products and
services provided by Bell Atlantic 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 on the one hand, Bell Atlantic
and GTE on the other, 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.
COMPETITION
The video communications industry is highly competitive. The Company
competes with manufacturers of video communications equipment, which include
PictureTel, VTEL Corporation, Computer Telephone and Lucent Technologies, and
their networks of dealers and distributors, telecommunications carriers and
other large corporations, as well as other independent distributors. Other
telecommunications carriers and other corporations that have entered the video
communications market include, AT&T, MCI, some of the Regional Bell Operating
Companies ("RBOCs"), Minnesota Mining & Manufacturing Corporation, Intel
Corporation, Microsoft, Inc., Sony Corporation and British Telecom. Many of
these organizations have substantially greater financial and other resources
than the Company, furnish many of the same products and services provided by the
Company and have established relationships with major corporate customers that
have policies of purchasing directly from them. Management believes that as the
demand for video communications
12
systems continues to increase, additional competitors, many of which will have
greater resources than the Company, will enter the video communications market.
A specific manufacturer's network of dealers and distributors typically
involves discreet territories that are defined geographically, in terms of
vertical market, or by application (e.g., project management or government
procurement). The current agreement with PictureTel authorizes the Company to
distribute PictureTel products in the following states: Alabama, Arizona,
Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia,
Louisiana, Maine, Massachusetts, Mississippi, Montana, New Hampshire, New
Jersey, New Mexico, New York, Oklahoma, Tennessee, Texas, Utah, Vermont and
Wyoming. Because the agreement is non-exclusive, however, the Company is subject
to competition within these territories by other PictureTel dealers, whose
customers elsewhere may have branch facilities in these territories, and by
PictureTel itself, which directly markets its products to certain large national
corporate accounts. The agreement expires on August 1, 2000 and can be
terminated without cause upon 60 days' written notice by PictureTel. There
can be no assurance that the agreement will not be terminated, or that it will
be renewed by PictureTel, which has no other affiliation with the Company and is
a competitor of the Company. While there are suppliers of video communications
equipment other than PictureTel, termination of the Company's relationship with
PictureTel could have a material adverse effect on the Company.
The Company believes that customer purchase decisions are influenced by
several factors, including cost of equipment and services, video communication
system features, connectivity and compatibility, a system's capacity for
expansion and upgrade, ease of use and services provided by a vendor. Management
believes its comprehensive knowledge of the operations of the industries it has
targeted, the quality of the equipment the Company sells, the quality and depth
of its services, its nationwide presence and ability to provide its customers
with all of the equipment and services necessary to ensure the successful
implementation and utilization of its video communications systems enable the
Company to compete successfully in the industry.
The telecommunications industry is also highly competitive. The Company
competes with many other companies in the telecommunications business which have
substantially greater financial and other resources than the Company, selling
both the same and similar services. The Company's competitors in the sale of
network services include RBOCs such as Bell South, Bell Atlantic, Southwestern
Bell and GTE, long distance carriers such as AT&T Corporation, MCI
Communications Corporation and SPRINT Corporation, other long distance and
communications companies such as Qwest Communications International Inc. and IXC
Communications Inc., by-pass companies and other agents. There can be no
assurance that the Company will be able to compete successfully against such
companies.
YEAR 2000 DISCLOSURE
The Company is aware of the issues that many computer systems will face as
the millennium (year 2000) approaches. The Company, however, believes that its
own internal software and hardware is year 2000 compliant. The Company believes
that any year 2000 problems encountered by procurement agencies, hospitals and
other customers and vendors are not likely to have a material adverse effect on
the Company's operations. The Company anticipates no other year 2000 problems
which are reasonably likely to have a material adverse effect on the Company's
operations. There can be no assurance, however, that such problems will not
arise.
RAPIDLY CHANGING TECHNOLOGY AND OBSOLESCENCE
The market for communications products and services is characterized by
rapidly changing technology, evolving industry standards and the frequent
introduction of new products and services. The Company's future performance will
depend in significant part upon its ability to respond effectively to these
developments. New products and services are generally characterized by improved
quality and function and are frequently offered at lower prices than the
products and services they are intended to replace. The introduction of products
embodying new technologies and the emergence of new industry standards can
render the Company's existing products and services obsolete, unmarketable or
noncompetitive. The Company's ability to implement its growth strategies and
remain competitive will depend upon its ability to successfully (i) maintain and
develop relationships with manufacturers of new and enhanced products that
include new technology, (ii) achieve levels of quality, functionality and price
acceptability to the market, (iii) maintain a high level of expertise relating
to new products and the latest in communications systems technology, (iv)
continue to market quality telecommunications services on behalf of its RBOC and
other exchange service carriers and (v) continue to design, sell, manage and
support competitive telecommunications solutions for its customers. There can be
no assurance, however, that the Company will be able to implement its growth
strategies or remain competitive.
13
UNASCERTAINABLE RISKS DUE TO RESTRUCTURING
The Company has implemented a restructuring plan that has resulted in a
charge against the second quarter results attributable to an impairment write-
down of goodwill relating to previous acquisitions and the closing of
unprofitable operations. The purpose of the restructuring was to reduce the
Company's costs and improve its profitability. However, there can be no
assurance that the Company will fully achieve the anticipated benefits of the
restructuring.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders, held on June 3, 1998, the
stockholders approved several proposals as follows:
1. Proposal to elect two Class II Directors to the Board of Directors to serve
as directors until the Company's annual meeting of stockholders in the year
2001, and until their successors are elected and qualified. Management's
nominees for election at the Annual Meeting as Class II directors were
William J. Shea and David F. Millet.
Name For Withheld
---- --- --------
William J. Shea 5,433,569 48,475
David F. Millet 5,430,244 51,800
2. Proposal to approve the amendment to the 1997 Non-Employee Director Stock
Option Plan to increase the shares of Common Stock of the Company reserved
for issuance under the Plan by 100,000 shares to a total of 150,000 shares.
For 5,166,985
Against 259,844
Abstain 55,215
---------
Total 5,482,044
=========
3. Proposal to ratify the selection of Arthur Andersen LLP as the Company's
ending December 31, 1998. independent accountants for the year
For 5,456,219
Against 19,875
Abstain 5,950
---------
Total 5,482,044
=========
14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FROM 8-K
(a) Exhibits
10.1 Severance and Consulting Agreement by and between, View
Tech, Inc. and Robert G. Hatfield, dated April 17, 1998
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
15
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: August 13, 1998 By: \s\ David A. Kaplan
------------------------
David A. Kaplan
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16