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, 1999
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 13, 1999
----- ---------------------
Common Stock, $.0001 par value 7,827,160
TABLE OF CONTENTS
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Page Reference
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PART I FINANCIAL INFORMATION
Balance Sheets
June 30, 1999 (unaudited) and December 31, 1998 1
Statements of Operations
Three Months and Six Months Ended June 30, 1999 and 1998 (unaudited) 2
Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 (unaudited) 3
Notes to Financial Statements (unaudited) 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION 15
SIGNATURES 18
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VIEW TECH, INC.
BALANCE SHEETS
ASSETS
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash $ 307,829 $ 302,279
Accounts receivable (net of reserves of $225,000
and $219,659, respectively) 11,535,955 10,594,863
Inventory 3,847,893 4,223,390
Other current assets 1,023,825 509,797
Net assets of discontinued operations 4,257,493 4,455,351
----------- -----------
Total Current Assets 20,972,995 20,085,680
PROPERTY AND EQUIPMENT, net 2,368,699 1,948,662
OTHER ASSETS 806,555 588,227
----------- -----------
$24,148,249 $22,622,569
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,964,078 $ 6,644,930
Current portion of long-term debt 5,944,407 130,794
Accrued payroll and related costs 1,027,691 956,982
Deferred revenue 3,228,150 1,940,579
Accrued restructuring costs 353,966 1,026,496
Other current liabilities 854,147 454,974
----------- -----------
Total Current Liabilities 17,372,439 11,154,755
----------- -----------
LONG-TERM DEBT 113,117 4,397,299
----------- -----------
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
7,827,160 and 7,722,277 shares, respectively 782 772
Additional paid-in capital 15,402,176 15,261,591
Accumulated deficit (8,740,265) (8,191,848)
----------- -----------
Total Stockholders' Equity 6,662,693 7,070,515
----------- -----------
$24,148,249 $22,622,569
=========== ===========
See accompanying notes to financial statements.
1
VIEW TECH, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- ---------------------------
1999 1998 1999 1998
----------- ------------ ------------ ------------
Revenues:
Equipment $6,672,844 $ 7,484,923 $12,776,402 $12,815,043
Service 2,746,263 2,113,387 5,561,915 4,323,334
---------- ----------- ----------- -----------
9,419,107 9,598,310 18,338,317 17,138,377
---------- ----------- ----------- -----------
Cost of Goods Sold:
Equipment 4,572,117 5,400,516 8,885,103 9,170,457
Service 1,457,871 1,025,978 2,801,769 2,002,408
---------- ----------- ----------- -----------
6,029,988 6,426,494 11,686,872 11,172,865
---------- ----------- ----------- -----------
Gross Margin 3,389,119 3,171,816 6,651,445 5,965,512
---------- ----------- ----------- -----------
Sales and Marketing 2,375,000 1,941,379 4,507,000 3,632,753
General and Administrative 1,274,000 1,526,139 2,438,000 2,993,765
Restructuring -- 3,303,998 -- 3,303,998
---------- ----------- ----------- -----------
Loss from Operations (259,881) (3,599,700) (293,555) (3,965,004)
Net Interest Expense (77,000) (63,000) (114,004) (126,000)
---------- ----------- ----------- -----------
Loss from Continuing Operations (336,881) (3,662,700) (407,559) (4,091,004)
Discontinued Operations 43,000 (398,000) (140,858) 66,495
---------- ----------- ----------- -----------
Net Loss $ (293,881) $(4,060,700) $ (548,417) $(4,024,509)
========== =========== =========== ===========
Loss from Continuing Operations Per Share
Basic and diluted $(0.04) $ (0.54) $ (0.05) $ (0.61)
========== =========== =========== ===========
Income (Loss) from Discontinued Operations Per Share
Basic $ -- $ (0.06) $ (0.02) $ 0.01
========== =========== =========== ===========
Diluted $ -- $ (0.06) $ (0.02) $ 0.01
========== =========== =========== ===========
Net Loss Per Share
Basic and diluted $(0.04) $ (0.60) $ (0.07) $ (0.60)
========== =========== =========== ===========
Weighted Average Shares Outstanding
Basic 7,827,160 6,757,407 7,796,348 6,702,216
========== =========== =========== ===========
Diluted 7,875,885 6,757,407 7,796,348 7,057,961
========== =========== =========== ===========
See accompanying notes to financial statements.
2
VIEW TECH, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30
-------------------------------
1999 1998
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (548,417) $(4,024,509)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization 298,237 336,227
Non-cash charges relating to restructuring -- 1,491,392
Provision for bad debts 60,000 119,000
Changes in assets and liabilities:
Accounts receivable (1,001,092) (608,809)
Inventory 375,497 (876,257)
Other assets (732,356) (129,475)
Accounts payable (680,852) 1,056,672
Accrued restructuring costs (672,530) 2,167,665
Accrued payroll and related costs 70,709 (274,582)
Deferred revenue 1,287,571 951,413
Other accrued liabilities 399,172 (53,325)
----------- -----------
Net cash provided (used) by operating activities (1,144,061) 155,412
----------- -----------
NET CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS 197,858 (90,277)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (718,273) (366,040)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under lines of credit 1,584,479 --
Repayments of capital lease and other debt obligations (55,048) (46,464)
Issuance of common stock, net 140,595 253,888
----------- -----------
Net cash provided by financing activities 1,670,026 207,424
----------- -----------
NET INCREASE (DECREASE) IN CASH 5,550 (93,481)
CASH, beginning of period 302,279 1,028,424
----------- -----------
CASH, end of period $ 307,829 934,943
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Operating activities reflect:
Interest paid $ 235,127 294,417
=========== ===========
Taxes paid $ 53,286 96,175
=========== ===========
Equipment acquired under capital leases $ -- 120,914
=========== ===========
Equipment transferred from inventory $ -- $ 117,742
=========== ===========
See accompanying notes to financial statements.
3
VIEW TECH, INC.
NOTES TO 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 33 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(R), Madge Networks, Lucent Technologies, VideoServer, Inc., and Northern
Telecom and markets network services through agency agreements with Bell
Atlantic, Bell South, GTE, Sprint and UUNET Technologies.
On May 7, 1999, the Company executed a letter of intent to sell the assets
of UST and NSI, subject to the completion of due diligence and funding, and
accordingly these operations are classified as discontinued in the accompanying
financial statements.
The information for the three months and the six months ended June 30, 1999
and 1998 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. 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, 1998.
NOTE 2 - DISCONTINUED OPERATIONS
- ---------------------------------
The Company has entered into a letter of intent to dispose of the assets of
UST and NSI. The Company anticipates the transaction to close by the end of the
third quarter of 1999. The balance sheets, statements of operations, and
statements of cash flows have been restated to show the net effect of the
discontinuance of the network business. The assets of UST and NSI consist
primarily of accounts receivable, property, plant and equipment and goodwill.
The Company does not anticipate a loss on the disposal. Operating results of
UST and NSI are shown separately in the accompanying statements of operations.
Net sales of UST and NSI were $3,530,009 and $5,466,495 for the quarters ended
June 30, 1999 and 1998. These amounts are not included in net sales in the
accompanying statements of operations. Assets and liabilities to be disposed of
consists of the following:
June 30, December 31,
1999 1998
------------ -------------
Accounts receivable $ 2,924,811 $ 3,497,000
Other current assets 279,337 571,000
Property and equipment 1,347,167 1,600,000
Goodwill 2,210,064 2,300,000
Other Assets 97,271 100,351
Current liabilities (2,495,573) (3,380,000)
Long term liabilities (105,584) (233,000)
----------- -----------
Total $ 4,257,493 $ 4,455,351
=========== ===========
4
Results of operations of UST and NSI are as follows:
Three Months Ended Six Months Ended
June 30 June 30
--------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ---------- -----------
Sales $ 3,530,009 $ 5,466,495 $6,586,684 $11,370,836
Costs and Expenses 3,428,972 5,784,026 6,613,960 11,136,129
----------- ----------- ---------- -----------
Operating Income (Loss) 101,037 (317,531) (27,276) 234,707
Interest Expense 58,037 80,469 113,582 168,212
----------- ----------- ---------- -----------
Net Income (Loss) $ 43,000 $ (398,000) $ (140,858) $ 66,495
=========== =========== ========== ===========
NOTE 3 - EARNINGS (LOSS) PER SHARE
- ----------------------------------
Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share is computed by dividing net income (loss) by
the diluted weighted average number of common and potentially dilutive shares
outstanding during the period. The weighted average number of potentially
dilutive shares has been determined in accordance with the treasury stock
method.
The reconciliation of basic and diluted shares outstanding is as follows:
Three Months Ended Six Months Ended
June 30 June 30
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Weighted average shares outstanding 7,827,160 6,757,407 7,796,348 6,702,216
Effect of dilutive options and warrants 48,725 -- -- 355,745
--------- --------- --------- ---------
Weighted average shares outstanding
including dilutive effect of securities 7,875,885 6,757,407 7,796,348 7,057,961
========= ========= ========= =========
Options and warrants to purchase 2,336,661, 2,354,388, 2,364,568 and
2,314,163 shares of Common Stock were outstanding during the three-month and
six-month periods ended June 30, 1999 and 1998, 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
- ------------------------
View Tech, Inc. and its wholly-owned subsidiary, UST, entered into a $15
million Credit Agreement (the "Agreement") with Imperial Bank and BankBoston
effective November 21, 1997. The Agreement provides for three separate loan
commitments consisting of (i) a Facility A Commitment of up to $7 million for
working capital purposes; (ii) a Facility B Commitment of up to $5 million,
which expired on December 1, 1998; and (iii) a Facility C Commitment of up to $3
million for merger/acquisition activities. Amounts under the Agreement are
collateralized by the assets of the Company. Funds available under the
Agreement 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. At June
30, 1999, the funds available under the Agreement were approximately $6,400,000.
The interest charged on outstanding amounts vary between the Prime Rate, plus
the Prime Margin, or between the Eurodollar Rate, plus the Eurodollar Rate
Margin, depending on the Company's Leverage Ratio as defined in the Agreement.
At June 30, 1999, the interest rate on this Facility was 8.25%. At June 30,
1999, amounts utilized under the Facility was $5,813,613.
On August 5, 1999, the Company received a Notice of Event of Default and
Notice of Reservations of Rights from the lenders. Under the terms of the
notice, the Banks granted limited forbearance to provide the Company with the
opportunity to submit a plan for repayment to the bank. The reason for the
default Notice was that the Banks no longer wished to continue providing waivers
on various financial covenants that have been provided since 1998. The Facility
A Commitment has been reduced to a maximum of $6,500,000 and is subject to
further reductions. The Facility C Commitment has been terminated. The Banks
have
5
advised that they expect the monies owed on the Facility A Commitment to be re-
paid by December 1999. The Company has been actively pursuing alternative
financing arrangements and believes that it will be able to obtain acceptable
alternative financing in the timeframe provided. The outstanding balance on
Facility A is classified as a current liability at June 30, 1999.
In connection with the Agreement, the Company issued the lending Banks
Common Stock Purchase Warrants for the purchase of 80,000 shares of the
Company's Common Stock. The warrants are exercisable until November 21, 2004.
In accordance with an amendment to the Agreement, on October 14, 1998 the
Company adjusted the purchase price of the warrants to $4.50 per share. The
Company determined the valuation of these warrants using the Black-Scholes
option pricing model was not material.
NOTE 5 - RESTRUCTURING AND OTHER COSTS
- --------------------------------------
During 1998, the Company recorded a restructuring and asset impairment
charge of $4.2 million. The significant components of the restructuring charge
are as follows:
Impairment write-down of goodwill related to previous acquisitions... $1,465,000
Employee termination costs........................................... 1,793,000
Facility exit costs.................................................. 157,000
Write-down of Plant, Property and Equipment.......................... 27,000
Travel related expenses.............................................. 140,000
Consulting expenses.................................................. 322,000
Other costs.......................................................... 297,013
----------
$4,201,013
==========
The impairment write-down of goodwill relates to the Company's determination
that there was no future expected cash flows from two acquisitions which
represented $1,465,000 of goodwill. The employee termination costs relate to
approximately 33 employees and officers of the Company. The Company closed one
of its outside network sales offices. The Company also terminated its internet
service provider reseller agreement. In connection with these decisions, the
Company recorded employee termination and Facility exit related expenses, and a
write-down of the leasehold improvements. In addition, the Company's decision
to eliminate duplicative corporate overhead functions resulted in employee
termination and travel related expenses. The Company utilized the services of
consultants in connection with the plan of restructuring.
The total expected cash impact of the restructuring amounts to $2,709,621 of
which $353,966 is reflected in the accompanying financial statements at June 30,
1999. The Company anticipates the balance of the restructuring costs will be
expended by February 29, 2000.
The following table summarizes the activity against the restructuring
charge:
Restructuring Charge .............................. $ 4,201,013
Cash Paid ...................................... (2,352,862)
Non-Cash Expenses .............................. (1,494,185)
----------
Balance, June 30, 1999 ............................ $ 353,966
==========
NOTE 6 - INVESTMENTS
- --------------------
During the quarter ended March 31, 1999, the Company made an investment in
Concept Five Technologies, Inc., an information technology services company.
The investment is carried at cost and is included in Other Assets on the
accompanying balance sheet.
NOTE 7 - RELATED PARTY TRANSACTION
- ----------------------------------
In May 1999, the Company made a loan of approximately $82,000 to the
Company's chief operating officer secured by a note bearing interest at the
Company's base borrowing rate. The purpose of the loan was to assist the
officer in his move from Massachusetts to the Company's California headquarters.
The balance outstanding on the note at June 30, 1999 was approximately $18,000
which was subsequently repaid in full in July 1999.
6
NOTE 8 - COMMITMENTS
- --------------------
During the quarter ended June 30, 1999, the Company did not enter into any
material new operating lease agreements.
7
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
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 and continuing operating and capital needs; the Company's limited history
of profitable operations and significant fluctuations in operating results which
may continue due to cash flow, 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; the failure to complete
the sale of USTeleCenters, Inc. and Network Services Inc. to Cortel USA, LLC;
the loss of personnel and/or further management changes in the video business
which may materially impact performance and operations; 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
The Company commenced operations in July 1992 as a California corporation.
Since its initial public offering of Common Stock in June 1995, the Company has
grown through internal expansion and acquisitions. In November 1996, concurrent
with a merger (the "Merger") of USTeleCenters, Inc., a Massachusetts corporation
("USTCenters"), with and into View Tech Acquisition, Inc., a Delaware
corporation and a wholly-owned subsidiary of the Company ("VTAI"), the Company
reincorporated in Delaware. Following the Merger, VTAI changed its name to
USTeleCenters, Inc. ("UST"). In November 1997, the Company 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 33 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(R), Madge Networks, Lucent Technologies, VideoServer, Inc., and Northern
Telecom and markets network services through agency agreements with Bell
Atlantic, Bell South, GTE, Sprint and UUNET Technologies.
On May 7, 1999, the Company executed a letter of intent to sell the assets
of UST and NSI, subject to the completion of due diligence and funding, and
accordingly these operations are classified as discontinued in the accompanying
financial statements.
8
Results of Operations
The following table sets forth, for the periods indicated, information
derived from the Company's financial statements expressed as a percentage of the
Company's revenues:
Three Months Ended Six Months Ended
June 30 June 30
--------------------- --------------------------
1999 1998 1999 1998
------ ----------- ----------- -----------
(Unaudited)
Revenues:
Equipment 70.8 % 78.0 % 69.7 % 74.8 %
Service 29.2 22.0 30.3 25.2
----- ------ ----- ------
100.0 100.0 100.0 100.0
----- ------ ----- ------
Cost of Goods Sold:
Equipment 48.5 56.3 48.4 53.5
Service 15.5 10.7 15.3 11.7
----- ------ ----- ------
64.0 67.0 63.7 65.2
----- ------ ----- ------
Gross Margin 36.0 33.0 36.3 34.8
----- ------ ----- ------
Sales and Marketing 25.2 20.2 24.6 21.2
General and Administrative 13.6 15.9 13.3 17.5
Restructuring -- 34.4 -- 19.3
----- ------ ----- ------
Loss from Operations (2.8) (37.5) (1.6) (23.2)
Net Interest Expense (0.8) (0.7) (0.6) (0.7)
----- ------ ----- ------
Loss from Continuing Operations (3.6) (38.2) (2.2) (23.9)
Discontinued Operations 0.5 (4.1) (0.8) 0.4
----- ------ ----- ------
Net Loss (3.1)% (42.3)% (3.0)% (23.5)%
===== ====== ===== ======
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Total revenues for the three months ended June 30, 1999 decreased by $0.2
million or 2% to $9.4 million from $9.6 million in the comparable period for
1998. Equipment revenues decreased by $0.8 million or 11% to $6.7 million in the
three months ended June 30, 1999 from $7.5 million in the comparable period in
1998. The decrease in equipment revenues was primarily related to the Company's
efforts to more effectively manage its assets and correspondingly resulted in
increased equipment sales backlog. Service revenues for the three months ended
June 30, 1999 increased by $0.6 million or 30% to $2.7 million from $2.1 million
in the comparable period for 1998. The increase in service revenues was due
primarily to the growth in the installed customer base and bridging services.
Gross margin for the three months ended June 30, 1999 increased by $0.2
million to $3.4 million from $3.2 million in the comparable period of 1998.
Gross margin as a percentage of revenues increased by 3% from 33% in the three
months ended June 30, 1998 to 36% in the comparable period for 1999. The margin
improvement is due to a favorable equipment product mix and the favorable mix of
higher margin service revenue.
Sales and marketing expenses for the three months ended June 30, 1999
increased by $0.4 million or 22% to $2.4 million from $2.0 million in the
comparable period for 1998. Sales and marketing expenses as a percentage of
revenues increased to 25% in 1999 from 20% in the comparable period for 1998.
The increase was primarily due to the opening of new sales offices and hiring of
additional sales and sales engineering personnel.
General and administrative expenses for the three months ended June 30,
1999 decreased by $0.2 million or 17% to $1.3 million from $1.5 million in the
comparable period for 1998. General and administrative expenses as a percentage
of total revenues decreased to 14% in the three months ended June 30, 1999 from
16% in the comparable period for 1998. The decrease in general and
administrative expenses was primarily due to the synergies achieved as a result
of the Company's restructuring in 1998.
9
Operating loss decreased $3.3 million to a loss of $(0.3) million in the
three months ended June 30, 1999 from a loss of $(3.6) million in the comparable
period for 1998. The decrease in loss from operations for the three months ended
June 30, 1999 is primarily related to the restructuring charge in the comparable
period for 1998.
Interest expense increased $14,000 from $63,000 in the three months ended
June 30, 1998 to $77,000 in the comparable period for 1999. The increase was
primarily due to higher borrowings on the line of credit.
Income from discontinued operations increased by $0.4 million from a loss
of $(0.4) million in the three months ended June 30, 1998 to income of $0.04
million in the comparable period for 1999. The increase was primarily due to
the restructuring charge in 1998.
Net loss decreased $3.8 million to a loss of $(0.3) million in the three
months ended June 30, 1999 from $(4.1) million for the comparable period for
1998. Net loss as a percentage of revenues decreased to (3.1)% for the three
months ended June 30, 1999 compared to (42.3)% for the comparable period for
1998.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Total revenues for the six months ended June 30, 1999 increased by $1.2
million or 7% to $18.3 million from $17.1 million in the comparable period for
1998. Equipment revenues remained constant at $12.8 million in 1999. The
relatively flat equipment revenues reflect the Company's efforts to more
effectively manage its assets and correspondingly build an equipment backlog.
Service revenues for the six months ended June 30, 1999 increased by $1.2
million or 29% to $5.5 million from $4.3 million in the comparable period for
1998. The increase in service revenues was due primarily to the growth in the
installed customer base and bridging services.
Gross margin for the six months ended June 30, 1999 increased by $0.7
million from $6.0 million in the comparable period for 1998 to $6.7 million in
1999. Gross margin as a percentage of revenues increased by 1.5% due to a
favorable equipment product mix and the overall increase in the mix of higher
margin service revenues.
Sales and marketing expenses for the six months ended June 30, 1999
increased by $0.9 million or 24% to $4.5 million from $3.6 million in the
comparable period for 1998. Sales and marketing expenses as a percentage of
revenues increased to 25% in the six months ended June 30, 1999 from 21% in the
comparable period for 1998. The dollar increase was primarily due to costs
associated with the opening of new sales offices and the hiring of new sales and
sales engineering personnel.
General and administrative expenses for the six months ended June 30, 1999
decreased by $0.6 million or 19% to $2.4 million from $3.0 million in the
comparable period for 1998. General and administrative expenses as a percentage
of total revenues decreased to 13.3% in the six months ended June 30, 1999 from
17.5% in the comparable period for 1998. The decrease in general and
administrative expenses was primarily due to the synergies achieved as a result
of the Company's restructuring in 1998.
Operating loss decreased $3.7 million to a loss of $(0.3) million in the
six months ended June 30, 1999 from a loss of $(4.0) million in the comparable
period for 1998. The decrease in loss from operations for the six months ended
June 30, 1999 is primarily related the restructuring charge in 1998.
Interest expense decreased $12,000 from $126,000 in the six months ended
June 30, 1998 to $114,000 in the comparable period for 1999. The decrease was
primarily due to more stringent cash flow management.
Income (loss) from discontinued operations decreased by $0.2 million from
income of $0.1 million in the six months ended June 30, 1998 to a loss of $(0.1)
million in the comparable period for 1999. The decrease was primarily due to
commission rate cuts by the Regional Bell Operating Companies (RBOC's).
Net loss decreased $3.5 million to a loss of $(0.5) million in the six
months ended June 30, 1999 from a loss of $(4.0) million for the comparable
period for 1998. Net loss as a percentage of revenues decreased to (3.0)% for
1999 compared to (23.5)% for 1998.
10
Liquidity and Capital Resources
The Company has financed its recent operations and expansion activities
with the proceeds from private placements of equity securities, bank debt, and
vendor credit arrangements. On November 10, 1998, the Company completed an
offering of $1,200,000 of Common Stock.
In November 1997, the Company entered into a $15 million Credit Agreement
(the "Agreement") which provides for a maximum credit line of up to $15 million
for a term of five (5) years with Imperial Bank and BankBoston. The Agreement
is summarized in Note 4-Lines of Credit, above. Amounts outstanding under the
agreement are collateralized by the assets of the Company. Funds available
under the agreement vary periodically 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, 1999, the interest rate on this Facility was 8.25%. The
Agreement requires the Company to comply with various financial and operating
loan covenants. Under certain conditions, the Agreement allows the Company to
prepay principal amounts outstanding without penalty. At June 30, 1999,
approximately $6.4 million was available under the Agreement of which $5,813,613
million was outstanding.
On August 5, 1999, the Company received notification of the Banks' intent
to terminate the line of credit. Under the terms of the notice, the Company is
obligated to complete repayment of the principal balance outstanding by December
1999. See discussion in Note 4-Lines of Credit, noted above.
Net cash used by operating activities for the three months ended June 30,
1999 was $1.1 million, primarily caused by an increase in accounts receivable of
$1.0 million, a decrease in accounts payable of $0.7 million, and a decrease in
accrued restructuring of $0.7 million, partially offset by an increase in
deferred revenue of $1.3 million.
Net cash used by investing activities for the three months ended June 30,
1999 was $0.7 million, relating to the purchase of office furniture, computer
and bridging equipment.
Net cash provided by financing activities for the three months ended June
30, 1999 was $1.7 million, primarily relating to net borrowings under the
Company's line of credit of $1.6 million and issuance of common stock of $0.1
million.
The Company believes that its available funds are not sufficient to meet
the funding and working capital requirements for its continuing operations
unless new funding alternatives are in place when the Line of Credit Agreement
is actually terminated. Depending upon any further limitations of borrowing
capacity under the current Line of Credit Agreement with the Banks, the
Company's current cash flow may deteriorate, affecting both operations and
performance (See Note 4-Lines of Credit). Management is actively working to
complete new refinancing agreements. The Company plans to meet its funding needs
with borrowings, operating and capital leases, factoring of the accounts
receivable and more efficient cash flows from operations. To the extent that
such funds are insufficient to finance the Company's future planned activities,
the Company may have to raise funds through the issuance of additional equity or
debt securities. There can be no assurance that additional financing will be
available on acceptable terms.
RISK FACTORS
Future Financing Requirements
The Company will require additional funds to implement its continued
operations, expansion and improve its infrastructure in order to efficiently
operate its business. The Company is currently in the process of raising
additional funds in the form of leasing facilities, credit facilities and debt
financing, or other forms of financing. There can be no assurance that such
funding facilities or financing will occur or that sufficient funds will be
raised. In July 1999, the Company announced that it had hired H.C. Wainwright
as its investment banker. Through H.C. Wainwright, the Company is open to
seeking capital investments and funding to meet its future needs. The failure to
raise sufficient, or any, funding, on terms acceptable to the Company, could
adversely affect the Company's business, financial condition and results of
operations.
11
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, and Ali Inanilan, its chief operating officer, as well as on
a number of other key personnel. Any further changes in current management,
including but not limited to the loss of Messrs. Shea 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.
Subsequent to the May 1999 first quarter Form 10-Q filing, the vice
president, technical service and his successor have both resigned. The Company
has hired a new vice president, technical service who is starting August
16, 1999. The service department has not been materially affected by these
changes nor has the Company considered the aforesaid departures to be a loss of
"key personnel". The Company has also had departures in other areas of the
Company, largely from its Camarillo corporate headquarters and Irvine, CA sales
office. Again, replacements have been, and are being, hired. These departures
have not had, and are not, expected to have, a material effect on operations or
performance.
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 $293,881 and $548,417, respectively, for the three months
and six months ended June 30, 1999. 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, further commission rate cuts by Bell
Atlantic and GTE, 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 six months ended June 30, 1999, approximately 25% of the Company's
revenues were attributable to the sale of equipment manufactured by PictureTel
Corporation. The segment being discontinued is dependent upon revenues from the
sale of network products and services provided by Bell Atlantic and GTE. For the
next quarter ending September 30, 1999, any 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, could 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, 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 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.
12
A specific manufacturer's network of dealers and distributors typically
involves discrete 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, 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.
Failure to Complete the Sale of USTeleCenters, Inc. and Network Services, Inc.
The Company expects Cortel USA, LLC ("Cortel") to complete the purchase of
USTeleCenters, Inc. and Network Services, Inc. ("the subsidiaries") by the end
of September 1999. The purchase is contingent upon Cortel receiving sufficient
financing and its successful completion of the due diligence process. Failure to
meet these contingencies in a timely fashion, however, will result in the
Company's inability to complete the sale to Cortel by the end of the third
quarter of 1999, and may result in the failure to complete the sale at all.
The failure to complete the sale may have a material adverse impact on the
Company for many reasons, including, but not limited to: delaying, hindering or
disrupting the Company's plans; potential loss of employees of the subsidiaries
who seek alternative employment; the need to seek alternative methods of
disposing of the subsidiaries, which may have a material adverse affect on
quarterly or annual earnings, including potential restructuring costs which may
be associated with one or more alternatives; and, possible negative impact in
the relationship between the Company and Bell Atlantic and/or GTE, which could
be reflected in further commission reductions, cancellation of contracts or
supplies, or other economic or financial considerations.
13
Year 2000 Update
The Company has been engaged in its Year 2000 readiness effort for the last
year and has assembled an internal team to ensure that its objectives are
achieved. This team has identified the Company's internal information systems,
suppliers, business partners, and auxiliary (non-IT) systems that are to be
evaluated with reference to the status of Year 2000 compliance. The initial
phases of research and risk assessment were completed on March 31, 1999. Please
see the Company's Form 10-K filed on or about March 31, 1999 and the Company's
Form 10-Q filed on or about May 17, 1999 for earlier discussions "Risk Factors-
Year 2000" Compliance project status.
Two of our eight mission critical internal information systems have been
deemed not compliant. In addition, one other system is still being evaluated for
readiness compliance. One of the two systems not compliant has been successfully
upgraded and the other is being written internally (USTeleCenters subsidiary).
Completion is not expected until early in the fourth quarter of 1999.
Testing of applications has begun in the Video unit. The two mission
critical applications currently undergoing testing are the new order management
system and the customer service system. Final testing is expected to be
completed by September 30, 1999.
Besides applications, the other two significant cost categories include
PC/Server hardware and telecommunications systems. The breakdown for costs yet
to be incurred are as follows: Video - hardware $40,000, telecom $8,000; UST -
hardware $123,000, telecom $37,000, application development $28,000. This
estimate totals $236,000.
The vast majority of hardware redemption is relegated to low-end
workstations. This work is expected to be completed by September 30, 1999 for
the Video unit. For UST/NSI, the hardware upgrades/replacements that are
remaining are not expected to begin until late September or October 1999. The
Company expects to timely complete its UST and NSI compliance for Year 2000.
The Company also maintains an on-going relationship with our main suppliers
or product manufacturers in relation to both their Year 2000 readiness and the
compliance of their product/service offerings. Further, the Company's Customer
Service continues to handle client requests for upgrades, repairs, and/or
replacements as they 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, and (iii) maintain a high level of expertise
relating to new products and the latest in communications systems technology.
Control by Executive Officers and Directors
As of June 30, 1999, the Company's officers and directors beneficially
owned approximately 34% (assuming all options held by executive officers and
directors are exercised) of the outstanding Common Stock of the Company. If the
executive officers and directors act collectively, assuming they continue to own
all their shares, there is a substantial likelihood that such holders will be
able to elect all of the directors of the Company and to determine the outcome
of all corporate actions requiring the approval of the holders of the majority
of shares, such as mergers and acquisitions.
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PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.
As stated in (1) Item 1, Note 4-Lines of Credit, and (2) Item 2, in the
section entitled, Liquidity & Capital Resources, the Company disclosed that it
received a Notice of Default and Reservation of Rights from its Banks that
currently hold the Company's Line of Credit Agreement.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) May 25, 1999 Annual Meeting, Westlake, CA;
(b) Franklin A. Reece, III was re-elected to the Board of Directors as
a Class 1 Director. His term is until the annual meeting of
stockholders in 2002. There were no other nominations besides Mr.
Reece.
(c) There were four matters voted upon at the annual meeting of
stockholders:
1. The re-election of Franklin A. Reece as a Class 1 Director.
Votes in favor: 6,720,969. Votes withheld: 36,286.
2. Proposal to approve an amendment to the Employee Stock Purchase
Plan to increase the shares of Common Stock of the Company
reserved for issuance under the Plan by 400,000 to a total of
500,000 shares. Votes in favor: 3,513,378. Votes against:
445,546. Votes to abstain: 7,900. Broker non-votes: 2,790,431.
3. Proposal to approve an amendment to the 1997 Stock Incentive
Plan to convert any unissued stock options, as well as any
options returned unexercised, from the 1995 Stock Option Plan
to the 1997 Stock Incentive Plan, and ultimately, terminate the
1995 Plan. Votes in favor: 6,426,994. Votes against: 321,161.
Votes to abstain: 9,100. Broker non-votes: Zero.
4. To ratify the selection of Arthur Andersen LLP as the Company's
independent accountants for the year ending December 31, 1999.
Votes in favor: 6,736,955. Votes against: 11,576. Votes to
abstain: 8,724.
(d) Not applicable.
Item 5. Other Information.
As noted in Item 3 above, the Company received a Notice of Default from
its Banks concerning the Company's Line of Credit Agreement. The Company is
taking active steps to replace the Line of Credit Agreement before the December
1999 date of termination of the Line of Credit Agreement.
Item 6. Exhibits
(a) Exhibits
27.1 Financial Data Schedule
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VIEW TECH, INC.
Date: August 13, 1999 By: /s/ Christopher Zigmont
-------------------------
Christopher Zigmont
Chief Financial Officer
16