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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, 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 November 4, 1998
----- ----------------------
Common Stock, $.0001 par value 6,895,610
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VIEW TECH, INC.
TABLE OF CONTENTS
-----------------
Page Reference
--------------
PART I FINANCIAL INFORMATION
Consolidated Balance Sheets
September 30, 1998 (unaudited) and December 31, 1997 1
Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 1998
and 1997 (unaudited) 2
Consolidated Statements of Cash Flows
Nine Months Ended September 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 14
SIGNATURES 15
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIEW TECH, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
1998 1997
-------------- ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 802,536 $ 1,204,690
Accounts receivable (net of reserves of $724,637
and $658,656, respectively) 13,718,807 13,326,667
Inventory 4,012,588 2,532,456
Other current assets 496,761 428,889
----------- -----------
Total current assets 19,030,692 17,492,702
PROPERTY AND EQUIPMENT, Net 3,630,672 3,423,838
GOODWILL, net 2,333,856 4,198,927
OTHER ASSETS 760,667 696,701
----------- -----------
$25,755,887 $25,812,168
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,961,336 $ 7,168,763
Current portion of long-term debt 688,323 661,290
Accrued payroll and related costs 1,962,891 1,904,506
Deferred revenue 2,055,104 1,087,161
Accrued restructuring costs 1,463,662 --
Other current liabilities 903,526 1,371,248
----------- -----------
Total Current Liabilities 16,034,842 12,192,968
----------- -----------
LONG-TERM DEBT 4,563,644 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
6,893,609 and 6,589,571 shares at September 30, 1998
and December 31, 1997, respectively 689 659
Additional paid-in capital 14,061,174 13,653,624
Accumulated deficit (8,904,462) (5,377,451)
----------- -----------
5,157,401 8,276,832
----------- -----------
$25,755,887 $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 Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1998 1997 1998 1997
-------------------------- -------------------------
Revenues:
Product sales and service
revenues $11,093,151 $ 9,108,062 $29,523,733 $23,499,101
Agency commissions 3,724,310 3,929,021 13,804,138 11,798,183
----------- ----------- ----------- -----------
14,817,461 13,037,083 43,327,871 35,297,284
----------- ----------- ----------- -----------
Costs and Expenses:
Costs of goods sold 7,600,287 6,581,193 20,620,986 16,901,135
Sales and marketing expenses 4,741,564 4,349,621 15,713,332 12,785,328
General and administrative
expenses 1,854,646 1,634,854 5,897,974 5,244,982
Restructuring and other
charges -- -- 4,201,013 --
----------- ----------- ----------- -----------
14,196,497 12,565,668 46,433,305 34,931,445
----------- ----------- ----------- -----------
Income (Loss) from Operations 620,964 471,415 (3,105,434) 365,839
Interest expense (123,465) (104,406) (417,676) (259,570)
----------- ----------- ----------- -----------
Income (Loss) Before Income
Taxes 497,499 367,009 (3,523,110) 106,269
Provision for Income Taxes - (3,135) (3,900) (4,512)
----------- ----------- ----------- -----------
Net Income (Loss) $ 497,499 $ 363,874 $(3,527,010) $ 101,757
=========== =========== =========== ===========
Earnings (Loss) Per Share
(Basic) $ 0.07 $ 0.06 $ (0.52) $ 0.02
========== =========== =========== ===========
Earnings (Loss) Per Share
(Diluted) $ 0.07 $ 0.05 $(0.52) $ 0.02
========== =========== =========== ===========
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,
---------------------------------
1998 1997
---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $(3,527,010) $ 101,757
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation and amortization 1,178,511 825,108
Provision for bad debts 65,981 (47,623)
Non-cash charges related to restructuring 1,491,392 --
Changes in assets and liabilities:
Accounts receivable (458,121) (2,010,909)
Inventory (1,597,874) (220,512)
Other assets (183,290) 196,464
Accounts payable 1,792,573 (229,933)
Accrued merger costs -- (1,160,494)
Accrued restructuring charges 1,474,120 --
Accrued payroll and related costs 58,385 121,577
Deferred revenue 967,943 612,085
Other accrued liabilities (267,723) 176,291
----------- -----------
Net cash provided (used) by operating activities 994,887 (1,636,189)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITY:
Purchase of property and equipment (805,108) (871,347)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under lines of credit (670,528) 1,391,068
Repayments of capital lease and other debt obligations (328,985) (591,953)
Issuance of common stock, net 407,580 2,798,276
----------- -----------
Net cash provided (used) by financing activities (591,933) 3,597,391
----------- -----------
NET INCREASE (DECREASE) IN CASH (402,154) 1,089,855
CASH, beginning of period 1,204,690 365,139
----------- -----------
CASH, end of period $ 802,536 $ 1,454,994
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Operating activities reflect:
Interest paid $ 457,001 $ 266,242
=========== ===========
Income taxes paid $ 96,175 $ 2,800
=========== ===========
Schedule of non-cash investing and financing activities:
Equipment acquired under capital lease obligations $ 237,364 $ 123,378
=========== ===========
Equipment transferred from inventory $ 117,742 $ --
=========== ===========
Goodwill reserve write-off $ 200,000 $ --
=========== ===========
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 through internal expansion and
acquisitions. 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, ("NSI") which sells, manages and supports
telecommunication network solutions as an agent for Bell Atlantic. The Company
currently has 28 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.,
Intel, 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.
The information for the nine months ended September 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 Nine Months Ended
September 30, 1997 September 30, 1997
------------------ ------------------
Revenues $13,604,872 $37,014,080
Income before income taxes 441,040 410,580
Net income 437,905 406,068
Net income per share Basic 0.07 0.06
Net income per share - Diluted 0.06 0.06
The summarized pro forma operating results include the historical operating
results for NSI for the three months and nine months ended September 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.
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 during the period.
Earnings per share - diluted is based on the weighted average number of shares
outstanding during the period including the dilutive effect of common stock
equivalents using the treasury stock method.
Weighted Average Shares Outstanding Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -------------------------
1998 1997 1998 1997
----------------------------- -------------------------
Weighted average shares outstanding 6,833,329 6,387,188 6,746,100 6,323,135
Effect of dilutive options and warrants 135,574 460,535 -- 378,189
--------- --------- --------- ---------
Weighted average shares outstanding
including dilutive effect of securities 6,968,904 6,847,723 6,746,100 6,701,324
========= ========= ========= =========
Options and warrants to purchase 2,113,314, 2,254,664, 2,294,153 and
2,237,610 weighted average shares of common stock were outstanding during the
three month and nine month periods ended September 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.
NOTE 4 - LINES OF CREDIT
- ------------------------
The Company entered into a $15 million Credit Agreement (the "Agreement")
with Imperial Bank and BankBoston, N.A., 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 September 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 September
30, 1998 the Company was in compliance with these covenants. 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 September 30, 1998, the total
outstanding principal balance due under these facilities was $4,235,329.
In connection with the Agreement the Company issued Common Stock Purchase
Warrants for the purchase of 80,000 shares of the Company's common stock by the
lenders at a purchase price of $7.08 per share. In July 1998, the warrants
were re-priced at $4.50 per share.
5
NOTE 5 - RESTRUCTURING AND OTHER CHARGES
- ----------------------------------------
On April 22, 1998, the Company announced a plan (the "Plan") to restructure the
Company's operations in the second quarter of 1998 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 amounted to $2,709,621, of which
$1,474,120 remains to be paid as of September 30, 1998. Included in the
accompanying balance sheet at September 30, 1998 is $1,463,662 of current
liabilities and $10,458 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.
NOTE 6 - SUBSEQUENT EVENT
- -------------------------
The Company has received a notice from Nasdaq informing it that its common
stock is subject to delisting from the Nasdaq National Market due to the fact
that is does not meet the applicable listing requirements stipulating $4,000,000
in net tangible assets. Nasdaq has notified the Company that Nasdaq scheduled a
hearing before a panel for November 13, 1998 to consider this matter. The
Company has been advised that, should the hearing panel decide to delist the
common stock, the common stock will cease to trade on the Nasdaq National Market
pending further appeals, if any. As of September 30, 1998, the Company's net
tangible assets were $2,823,545. The Company is committed to the continued
listing of its stock on the Nasdaq National Market, and therefore it is raising
up to an additional $1,200,000 of capital through a private placement of its
common stock to a limited group of accredited investors. The Company believes
that it will be successful in raising such capital, and that Nasdaq will
continue to list its common stock for trading, however, this decision is not
within the control of the Company and no assurance can be given that Nasdaq will
not delist the common stock from the Nasdaq National Market.
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 through internal expansion and through
acquisitions. 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, ("NSI") which sells, manages and supports
telecommunication network solutions as an agent for Bell Atlantic. The Company
currently has 28 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.,
Intel, 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.
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 $4.2 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.
7
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,
-------------------- ---------------
1998 1997 1998 1997
--------- -------- ------- -----
Revenues:
Product sales and service
revenues.............................. 74.9% 69.9% 68.1% 66.6%
Agency commissions..................... 25.1 30.1 31.9 33.4
----- ----- ----- -----
100.0 100.0 100.0 100.0
===== ===== ===== =====
Costs and Expenses:
Costs of goods sold.................... 51.3 50.5 47.6 47.9
Sales and marketing expenses........... 32.0 33.4 36.3 36.2
General and administrative
expenses.............................. 12.5 12.5 13.6 14.9
Restructuring and other
costs................................. 0.0 0.0 9.7 0.0
----- ----- ----- -----
95.8 96.4 107.2 99.0
----- ----- ----- -----
Income (Loss) from Operations........... 4.2 3.6 (7.2) 1.0
Interest Expense........................ (0.8) (0.8) (0.9) (0.7)
----- ----- ----- -----
Income (Loss) Before
Provision for Income Taxes............. 3.4 2.8 (8.1) 0.3
Provision for Income Taxes.............. 0.0 0.0 0.0 0.0
----- ----- ----- -----
Net (Loss) Income....................... 3.4% 2.8% (8.1)% 0.3%
===== ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES
Total revenues for the three months ended September 30, 1998 increased by
$1.780 million or 14% to $14.817 million compared to $13.037 million in 1997.
Product Sales and Service Revenues
Product sales and service revenues increased by $1.985 million or 22% to
$11.093 million in 1998 compared to $9.108 million in 1997. This increase in
revenues was primarily related to expansion of the Company's videoconferencing
business.
Agency Commissions
Agency commissions for 1998 decreased by $204,711 or (5%) to $3.724 million
compared to $3.929 million in 1997. The decrease in agency commissions was
primarily due to the closure of one of the Company's offices and changes in
compensation rates and product offers from one of the Company's significant
service providers.
COSTS AND EXPENSES
Costs of goods sold for 1998 increased by $1.019 million or 15% to $7.6
million compared to $6.581 million in 1997. Costs of goods sold as a percentage
of revenues increased to 51% in 1998 from 50% in 1997. The dollar increase in
costs of goods sold is primarily related to the increase in product sales. The
percentage increase is primarily related to the higher product revenue mix.
Sales and marketing expenses for 1998 increased by $391,943 or 9% to $4.742
million from $4.350 million in 1997. Sales and marketing expenses as a
percentage of revenues decreased to 32% in 1998 from 33% in 1997. The dollar
increase was primarily due to the compensation and related expenses associated
with the revenues generated by NSI. The
8
percentage decrease was attributable to the Company's product sales and service
revenues growing at a faster rate than the associated sales and marketing
expenses.
General and administrative expenses for 1998 increased by $219,792 or 13% to
$1.855 million from $1.635 million in 1997. General and administrative expenses
as a percentage of total revenues remained constant at 13%. The dollar increase
resulted from a general increase in such expenses as a result of the growth of
the Company's videoconferencing business.
Income from operations increased $149,549 or 32% to income of $620,964 in 1998
from income of $471,415 in 1997. The increase in income from operations for
1998 was primarily related to the overall increase in sales and improved
profitability relating to the Company's restructuring which included cost-
savings from closing of unprofitable operations.
Interest expense increased $19,059 to $123,465 in 1998 from $104,406 in 1997
due to additional borrowings related to the Company's credit facilities and
capital lease obligations.
There was no provision for income tax expense in 1998, compared to a tax
provision of $3,135 for 1997. The decrease relates to the operating loss
created by the restructuring charges recorded in the second quarter of 1998.
Net income increased $133,625 or 37% to income of $497,499 in 1998 from net
income of $363,874 for 1997. Net income as a percentage of revenues increased
to 3.4% for 1998 compared to 2.8% for 1997. Net income per share increased to
$0.07, or 17%, for 1998 compared to net income of $0.06 per share for 1997. Net
income per share, assuming dilution, increased to $0.07, or 40%, for 1998
compared to net income of $0.05 per share for 1997. The weighted average number
of shares outstanding increased to 6,833,329 for 1998 from 6,387,188 in 1997.
The weighted average number of shares outstanding assuming dilution increased to
6,968,904 in 1998 from 6,847,723 in 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
REVENUES
Total revenues for the nine months ended September 30, 1998 increased by
$8.031 million or 23% to $43.328 million from $35.297 million in 1997.
Product Sales and Service Revenues
Product sales and service revenues increased by $6.025 million or 26% to
$29.524 million in 1998 from $23.499 million in 1997. This increase in revenues
was primarily related to the Company's nationwide growth of its
videoconferencing business.
Agency Commissions
Agency commissions for 1998 increased by $2.006 million, or 17%, to $13.804
million from $11.798 million in 1997. The increase in agency commissions was
due primarily to the Company benefiting from agency commissions generated by its
wholly-owned subsidiary, NSI, acquired in the fourth quarter of 1997.
COSTS AND EXPENSES
Costs of goods sold for 1998 increased by $3.720 million or 22% to $20.621
million from $16.901 million in 1997. Costs of goods sold as a percentage of
revenues decreased to 47.6% in 1998 from 47.9% 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 $2.928 million or 23% to
$15.713 million from $12.785 million in 1997. Sales and marketing expenses as a
percentage of revenues increased to 36.3% in 1998 from 36.2% in 1997. The
9
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 increase was attributable to the mix of product and service revenues
versus agency commissions.
General and administrative expenses for 1998 increased by $652,992 or 12% to
$5.898 million from $5.245 million in 1997. General and administrative expenses
as a percentage of total revenues decreased to 13.6% in 1998 from 14.8% in 1997.
The dollar increase resulted from a general increase in such expenses as a
result of the growth of the Company's videoconferencing business. The
percentage decrease is due to synergies achieved as part of the integration and
restructuring efforts.
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.
Income (loss) from operations decreased to a loss of $(3.105) million
compared to income of $365,839 in 1997. This loss in income related to the
Company's restructuring efforts in the second quarter. Income (loss) from
operations as a percentage of revenues decreased to (7.2)% for 1998, compared to
1.04% for 1997.
Interest expense increased $158,106 to $417,676 in 1998 from $259,570 in 1997.
The increase was primarily due to additional borrowings related to the Company's
credit facilities and capital lease obligations.
Provision for income tax expense decreased $612 to a provision of $3,900 in
1998 compared to a provision of $4,512 for 1997. The decrease was primarily
attributable to state tax provisions.
Net income (loss) decreased $3.629 million to a loss of $(3.527) million in
1998 from income of $101,757 for 1997. Net income as a percentage of revenues
decreased to (8.14)% for 1998 compared to 0.3% for 1997. Net income (loss) per
share decreased to $(0.52) for 1998 compared to $0.02 for 1997. Net income
(loss) per share, assuming dilution, decreased to $(0.52) for 1998 compared to
$0.02 for 1997. The weighted average number of shares outstanding for both
basic and diluted earnings per share increased to 6,746,100 and 6,746,100 for
1998 from 6,323,135 and 6,701,324 in 1997, 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.
Net cash provided by operating activities for the nine months ended September
30, 1998 was $.995 million, primarily generated by non-cash charges related to
restructuring of $1.491 million and increases in accounts payable, accrued
restructuring charges, and deferred revenue of $1.793 million, $1.474 million
and $.967 million, respectively, offset by an increase in inventory of $1.598
million and an increase in accounts receivable of $.458 million.
Net cash used by investing activities for the nine months ended September 30,
1998 was $805,108, primarily relating to the purchase of office furniture and
computer equipment.
Net cash used by financing activities for the nine months ended September 30,
1998 was $591,933, related to net repayments under the Company's line of credit
of $670,528, repayments under capital lease obligations of $328,985, offset by
the issuance of common stock of $407,580.
The Company entered into a $15 million Credit Agreement (the"Agreement") with
Imperial Bank and BankBoston, N.A., 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
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Eurodollar Rate, plus the Eurodollar Rate Margin, depending upon the Company's
Leverage Ratio, as defined in the Agreement. At September 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 September 30,
1998 the Company was in compliance with these covenants. 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 September 30, 1998, the total
outstanding principal balance due under these facilities was $4,235,329
RISK FACTORS
VIEW TECH MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET
Nasdaq has notified the Company that it does not meet the applicable listing
requirements because it does not have $4,000,000 in net tangible assets and,
therefore, is subject to delisting from the Nasdaq National Market. The Company
believes that delisting of its common stock from the Nasdaq National Market
could have a material adverse effect on the liquidity of the common stock and
consequently on market capitalization of the Company. The Company is committed
to the continued listing of its stock on the Nasdaq National Market, and
therefore it is raising up to an additional $1,200,000 of capital through a
private placement of its common stock to a limited group of accredited
investors. The Company believes that it will be successful in raising such
capital and that Nasdaq will continue to list its common stock for trading,
however, this decision is not within the control of the Company and no assurance
can be given that Nasdaq will not delist the Common Stock from the Nasdaq
National Market.
DEPENDENCE UPON KEY PERSONNEL
The Company depends to a considerable degree on the continued services of
certain of its executive officers, including William J. Shea, its chief
executive officer, Franklin A. Reece III, its president and Ali Inanilan, its
chief financial and administrative officer, as well as on a number of key
personnel. Any further changes in current management, including but not limited
to the loss of Messrs. Shea, Reece or Inanilan could have a material adverse
affect on the Company. The loss of 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 net income (loss) of $497,499 and $(3,527,010), including restructuring
costs, for the three months and nine months ended September 30, 1998,
respectively. Although the Company achieved operating profitability, 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.
DEPENDENCE ON SUPPLIERS, INCLUDING PICTURETEL, BELL ATLANTIC AND GTE
For the nine months ended September 30, 1998, approximately 31% of the
Company's consolidated revenues were attributable to the sale of equipment
manufactured by PictureTel Corporation and an additional 31% of consolidated
revenues to the sale of network products and services provided by Bell Atlantic
and GTE. 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
11
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. In October 1998, Bell Atlantic announced a decrease in the commission
rates paid to the Company effective January 1, 1999.
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 systems continues to increase, additional
competitors, many of which may have greater resources than the Company, may
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, 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.
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YEAR 2000 DISCLOSURE
As the year 2000 approaches, it is generally anticipated that certain
computers, software and other equipment utilizing microprocessors may be unable
to recognize or properly process dates after the year 1999 without software
modifications. The Company is reviewing all internal systems, outside services,
and the products it sells for their Year 2000 compliance. The Company has
determined that some internal systems are not Year 2000 compliant. The Company
expects these systems to be compliant no later than March 31, 1999. The costs to
upgrade these systems and become fully Year 2000 compliant is not expected to
exceed $50,000. The Company has evaluated its products and believes that most of
the products it is currently shipping are Year 2000 compliant. The Company plans
to upgrade any products that are not Year 2000 compliant through its suppliers,
and anticipates completion of this process during 1999. Based on its review of
all systems and products to date, the Company does not expect the costs related
to the Year 2000 problem will have a material effect on its financial condition.
The ability of its suppliers and customers to correct potential Year 2000
problems, however, are beyond the Company's control. The Company's operations
and financial results could be adversely affected to the extent that the costs
to become fully compliant differ materially from its present estimates. The
Company is conducting interviews with suppliers to determine the extent of their
Year 2000 readiness. The Company is developing a contingency plan in the event
third party systems are not Year 2000 compliant.
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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FROM 8-K
(a) Exhibits
2.1 Amendment No. 2 dated as of May 1, 1998, to the Credit
Agreement, dated as of November 21, 1997, among
USTeleCenters, Inc., a Delaware corporation, (the
borrower), View Tech, Inc., a Delaware corporation (the
parent company), and Imperial Bank and BankBoston, N.A.
(the banks).
2.2 Amendment No. 3 dated as of August 14, 1998, to the
Credit Agreement, dated as of November 21, 1997, among
USTeleCenters, Inc., a Delaware corporation, (the
borrower), View Tech, Inc., a Delaware corporation (the
parent company), and Imperial Bank and BankBoston, N.A.
(the banks).
2.3 Amendment No. 4 dated as of October 27, 1998, to the
Credit Agreement, dated as of November 21, 1997, among
USTeleCenters, Inc., a Delaware corporation, (the
borrower), View Tech, Inc., a Delaware corporation (the
parent company), and Imperial Bank and BankBoston, N.A.
(the banks).
10.1 Amendment No. 1, Exhibit A, dated as of October 14,
1998, to the Common Stock Purchase Warrant, dated as of
November 21, 1997, for the purchase of common stock of
View Tech, Inc., a Delaware corporation, by Imperial
bank.
10.2 Amendment No. 1, Exhibit B, dated as of October 14, 1998,
to the Common Stock Purchase Warrant, dated as of
November 21, 1997, for the purchase of common stock of
View Tech, Inc., a Delaware corporation, by BankBoston,
N.A.
10.3 Separation Agreement, effective August 31, 1998, by and
between View Tech, Inc., a Delaware corporation, and
David A. Kaplan, the former Chief Financial Officer.
10.4 General Release between, David A. Kaplan, former Chief
Financial Officer and View Tech, Inc., a Delaware
corporation.
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 09, 1998 By: \s\ Ali Inanilan
------------------------
Ali Inanilan
Chief Financial and Administrative
Officer
(Principal Financial and
Accounting Officer)
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