-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sap13GNZwAtRGZnMkGAiTPr82iCzETdhp7TqquzBhGzKhjRdFu2VUTM/pPIBQscQ T4zjsId8h7p7bJTCDOIiZg== 0000950135-98-000091.txt : 19980114 0000950135-98-000091.hdr.sgml : 19980114 ACCESSION NUMBER: 0000950135-98-000091 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970329 FILED AS OF DATE: 19980113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PICTURETEL CORP CENTRAL INDEX KEY: 0000755095 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 042835972 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-09434 FILM NUMBER: 98505354 BUSINESS ADDRESS: STREET 1: 100 MINUTEMAN RD CITY: ANDOVER STATE: MA ZIP: 01810 BUSINESS PHONE: 5087625000 MAIL ADDRESS: STREET 1: 222 ROSEWOOD DR CITY: DANVERS STATE: MA ZIP: 01923 FORMER COMPANY: FORMER CONFORMED NAME: PICTEL CORP DATE OF NAME CHANGE: 19870505 10-Q/A 1 PICTURTEL CORPORATION 1 FORM 10-Q/A SECURITIES AND EXCHANGE COMMISSION ---------------------------------- Washington, D.C. 20549 Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDED) For the quarterly period ended MARCH 29, 1997 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ---------- For the Quarter ended MARCH 29, 1997 Commission File Number 1-9434 -------------- PICTURETEL CORPORATION (Exact name of Registrant as specified in its charter) Delaware 04-2835972 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 Minuteman Road, Andover, MA. 01810 - -------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number: 978-292-5000 - ------------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 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 practical date. As of May 6, 1997, there were issued and outstanding 34,155,994 shares of common stock of the registrant. 2 PICTURETEL CORPORATION FORM 10-Q INDEX NOTE: This Form 10-Q/A for the quarter ended March 29, 1997 is being filed, together with Form 10-K/A for the year ended December 31, 1996 and Form 10-Q/A for the second quarter ended June 29, 1997 to reflect the restatements of the Company's financial statements for the third and fourth quarters of 1996 and the first and second quarters of 1997. The items set forth below are amended: PART I Items 1 and 2. PART II Item 1. Other items are not amended and are not included in this filing. PART I. CONSOLIDATED FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Consolidated Balance Sheets March 29, 1997 and December 31, 1996.......................................................................3 Consolidated Statements of Income Three months ended March 29, 1997 and March 30, 1996.......................................................4 Consolidated Statements of Cash Flows Three months ended March 29, 1997 and March 30, 1996.......................................................5 Notes to Consolidated Financial Statements...................................................................6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................9-11 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................................................................12 Item 6. Exhibits and Reports on Form 8-K..............................................................................13 Signatures............................................................................................................14
2 3 PICTURETEL CORPORATION Consolidated Balance Sheets ($000's)
March 29, December 31, 1997 1996 (Restated) (Restated) ASSETS Current assets: Cash and cash equivalents $ 37,303 $ 63,333 Marketable securities 54,489 38,918 Accounts receivable less allowance for doubtful accounts of $3,241 and $3,178 135,229 143,237 Inventories, net (Note 3) 66,995 51,538 Deferred taxes, net 6,152 6,462 Other current assets 15,541 5,781 --------- --------- Total current assets 315,709 309,269 Marketable securities -- 9,118 Deferred taxes, net 5,088 3,945 Property and equipment, net 47,435 47,747 Capitalized software costs, net 9,529 9,110 Other assets 7,091 7,065 --------- --------- Total assets $ 384,852 $ 386,254 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings (Note 6) $ 3,522 $ 519 Accounts payable 47,809 54,293 Accrued compensation and benefits 8,379 8,906 Accrued expenses 25,532 20,538 Current portion of capital lease obligations 3,095 3,423 Deferred revenue 20,153 19,527 --------- --------- Total current liabilities 108,490 107,206 Long-term borrowings (Note 6) 4,558 9,242 Capital lease obligations 4,019 4,960 Stockholders' equity: Preference stock, $.01 par value; 15,000,000 shares authorized; none issued -- -- Common stock, $.01 par value; 80,000,000 shares authorized; 37,731,447 and 37,499,111 shares issued and outstanding at March 29, 1997 and December 31, 1996, respectively 377 375 Additional paid-in capital 201,738 199,756 Retained earnings 66,834 64,429 Cumulative translation adjustment (1,677) (602) Unrealized gain on marketable securities, net 513 888 --------- --------- Total stockholders' equity 267,785 264,846 --------- --------- Total liabilities and stockholders' equity $ 384,852 $ 386,254 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 3 4 PICTURETEL CORPORATION Consolidated Statements of Income ($000's except per share amounts)
Three Months Ended ------------------ March 29, March 30, 1997 1996 (Restated) Revenues $121,935 $108,055 Cost of sales 63,198 55,084 -------- -------- Gross margin 58,737 52,971 Operating expenses: Selling, general and administrative 36,265 29,628 Research and development 20,934 14,879 -------- -------- Total operating expenses 57,199 44,507 -------- -------- Income from operations 1,538 8,464 Interest income, net 891 1,077 Other income, net 404 566 -------- -------- Income before taxes 2,833 10,107 Provision for income taxes 822 3,164 -------- -------- Net income $ 2,011 $ 6,943 ======== ======== Net income per common and common equivalent share: $ 0.05 $ 0.17 ======== ======== Weighted average common and common equivalent shares outstanding: 39,178 39,693 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 4 5 PICTURETEL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS ($000's)
Three Months Ended March 29, March 30, 1997 1996 -------- -------- (Restated) Cash flows from operating activities: Net income .......................................................... $ 2,011 $ 6,943 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization .................................... 6,809 4,832 Deferred taxes, net .............................................. (833) 152 Other non-cash items ............................................. -- (195) Changes in operating assets and liabilities: Accounts receivable .............................................. 8,008 (4,716) Inventories ...................................................... (15,457) (169) Other assets ..................................................... (9,441) (4,838) Accounts payable ................................................. (6,484) 4,845 Accrued compensation and benefits and accrued expenses ........... 3,082 5,872 Income taxes, net ................................................ 1,385 242 Deferred revenue ................................................. 626 (3,309) -------- -------- Net cash provided by (used in) operating activities .................... (10,294) 9,659 Cash flows from investing activities: Purchase of marketable securities .................................... (10,253) (11,321) Proceeds from marketable securities .................................. 3,425 9,770 Additions to property and equipment .................................. (5,076) (10,464) Capitalized software costs ........................................... (1,840) (1,576) Purchase of other assets ............................................. (345) -- -------- -------- Net cash used in investing activities .................................. (14,089) (13,591) Cash flows from financing activities: Change in short-term borrowings ..................................... 3,003 684 Payments on long-term borrowings .................................... (4,684) (2,535) Principal payments under capital lease obligations .................. (1,269) (721) Proceeds from exercise of stock options ............................. 397 3,558 Proceeds from stock purchase plan ................................... 1,587 883 -------- -------- Net cash provided by (used in) financing activities .................... (966) 1,869 Adjustment to conform fiscal year of Multilink ......................... 394 -- Effect of exchange rate changes on cash ................................ (1,075) 204 -------- -------- Net decrease in cash and cash equivalents .............................. (26,030) (1,859) Cash and cash equivalents at beginning of period ....................... 63,333 39,587 -------- -------- Cash and cash equivalents at end of period ............................ $ 37,303 $ 37,728 ======== ======== Supplemental cash flow information: Interest paid ....................................................... $ 290 $ 158 Income taxes paid ................................................... $ 890 $ 584
The accompanying notes are an integral part of the consolidated financial statements. 5 6 PICTURETEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. MANAGEMENT'S REPRESENTATION As permitted by the rules of the Securities and Exchange Commission applicable to Quarterly Reports on Form 10-Q, these notes are condensed and do not contain all the disclosures required by generally accepted accounting principles. Reference should be made to the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, as filed with the Securities and Exchange Commission on March 28, 1997, as amended by Form 10-K/A to reflect the restatement of the financial results for the year ended December 31, 1996 (See Note 2 to Notes to Consolidated Financial Statements). In the opinion of the management of PictureTel Corporation, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal, recurring adjustments, except as discussed in Notes 2, 4 and 5 to Notes to Consolidated Financial Statements) necessary to present fairly the Company's financial position at March 29, 1997 and the results of operations and changes in cash flows for the three months ended March 29, 1997. The results disclosed in the Consolidated Balance Sheets at March 29,1997 and the Consolidated Statements of Operations and Consolidated Statements of Cash Flows for the three months ended March 29, 1997 are not necessarily indicative of the results to be expected for the full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. As a result of lower demand for the Company's products and the resulting ongoing evaluation of the business and future spending levels, the financial statements include significant estimates of the net realizable value of accounts receivable, inventory and capitalized software as well as the future tax benefit of deferred tax assets and the amount of certain contingent liabilities. Actual results could differ from those estimates. The financial statements and footnotes included in this Form 10-Q/A have been restated to reflect the restatement of financial results and pooling of interests described in Notes 2 and 4 to Notes to Consolidated Financial Statements. 2. RESTATEMENT OF FINANCIAL STATEMENTS On September 19, 1997, after the Company's reexamination (with assistance from its outside auditors) of leasing and other indirect channel transactions, the Company announced that it would reverse revenue related to certain of these transactions and, as a result, the Company intended to restate its financial statements for the third and fourth quarters of 1996 and the first quarter of 1997. On November 13, 1997, after completion of its reexamination, the Company announced that it would also restate the second quarter of 1997. The restatements were required to reverse product sales recorded which contained rights of return, contingent liabilities, payment contingencies, payment uncertainties or product sales for which delivery did not occur at the end of the period. The restatements were also required to record such product sales in the period in which the rights of return lapsed, contingencies or uncertainties were resolved, or delivery was completed. Certain transactions which were reversed have not been re-recorded as revenues in later periods. The financial statements and related notes to consolidated financial statements set forth in this Form 10-Q/A reflect all such restatements. A summary of the impact of such restatements for the three months ended March 29, 1997 is as follows:
Three Months Ended March 29, 1997 Previously As Reported Restated ($000's) Revenues $123,618 $121,935 Gross margin 59,267 58,737 Income before taxes 3,764 2,833 Income tax expense 1,270 822 Net income 2,494 2,011 Net income per common and common equivalent share $ 0.06 $ 0.05
6 7
March 29, 1997 Previously As Reported Restated ($000's) Total assets $388,911 $384,852 Total liabilities $116,480 $117,067 Total stockholders' equity $272,431 $267,785
3. INVENTORIES Inventories consist of the following (in thousands):
March 29, December 31, 1997 1996 ---- ---- (Restated) (Restated) Purchased Parts $ 8,118 $ 6,409 Work in Process 2,859 2,018 Finished Goods 56,018 43,111 ------- ------- $66,995 $51,538 ======= =======
4. ACQUISITION OF MULTILINK, INC. On July 22, 1997, the Company acquired all of the common stock of MultiLink, Inc. (MultiLink) in a transaction accounted for as a pooling of interests. MultiLink develops, manufactures and markets software and hardware that enable users at two or more sites to participate in face-to-face meetings. The Company issued 3,578,026 shares of common stock in exchange for 6,389,332 shares of MultiLink common stock at a ratio of one share of MultiLink common stock to 0.56 shares of the Company's common stock. The accompanying consolidated financial statements for all periods prior to the acquisition have been restated to include the results of operations, financial position and cash flows of MultiLink. The revenues, net income, and earnings per share for the Company, prior to restatement for the pooling of interests, would have been $116,539,000, $2,697,000 and $0.07 for the three months ended March 29, 1997. The following information presents certain income statement data of the separate companies for periods prior to the acquisition which for these purposes has been assumed to have occurred on June 29, 1997:
Three Months Ended March 29, 1997 1996 ($000's) Revenues: PictureTel $116,539 $105,001 MultiLink 5,396 3,054 Net income (loss): PictureTel $ 2,697 $ 7,469 MultiLink (686) (526)
In conjunction with the acquisition, MultiLink's fiscal year end has been changed from September 30 to December 31 to conform to the Company's fiscal year end. As a result, the financial statements for the three months ended March 29, 1996 and 1997 include the results of operations and financial position of MultiLink for the three months ended December 31, 1995 and the three months ended March 31, 1997, respectively. Accordingly, MultiLink's results of operations and financial position for the quarter ended December 31, 1996 excluded from the financial statements are as follows (in 000's): Revenues $6,613 Total cost of sales and operating expenses $5,918 Net income $ 394
The net income of $394,000 for the quarter ended December 31, 1996 has been credited directly to retained earnings. 7 8 There were no intercompany transactions between MultiLink and the Company during the periods presented. Costs associated with the acquisition of $2,561,000 have been charged to operations in the three and nine month periods ended September 28, 1997, subsequent to the period covered by this filing. These costs principally relate to investment banking, accounting and legal advisory fees and severance expense. 5. LITIGATION A. Datapoint Litigation In December 1993, PictureTel was sued by Datapoint Corporation in the United States District Court for the Northern District of Texas. Datapoint alleges that certain of the Company's products infringe patent rights allegedly owned by Datapoint. Datapoint has been joined as plaintiff by John Frassanito and David Monroe, two individuals who claim to have rights to Datapoint's patents. The plaintiffs seek approximately $100 million to $190 million in damages for alleged past infringement and an injunction against alleged future infringement. The Company believes that it has meritorious defenses to the allegations of the complaint and is vigorously defending against the lawsuit. The case had been scheduled for trial on October 6, 1997; however, the trial was delayed by the Court until early 1998. In the event the Company is found to be infringing a valid patent or patents, the Company could be required to pay damages for past infringement and cease the sale of products incorporating the infringing feature (or be required to obtain a license and pay royalties with respect to such patents). There can be no assurance that the Company will prevail. The Company believes that an adverse outcome of the lawsuit would have a material adverse effect on the business or the financial position, results of operations and cash flows of the Company. B. Class Action Litigation Since September 23, 1997, seven class action shareholders' complaints have been filed against the Company, Norman E. Gaut, Chairman of the Board and Chief Executive Officer, and Les Strauss, the former Vice President and Chief Financial Officer, in the United States District Court for the District of Massachusetts. The plaintiffs, who brought these actions on behalf of themselves and others similarly situated, are: (1) Faith Egli, Civil Action No. 97-12135-DPW; (2) Jerome H. Lipman, IRA, Civil Action No. 97-12238-DPW; (3) Daniel Frucher, Civil Action No. 97-12310-DPW; (4) Edmond J. Proulx and James Harris, Civil Action No. 97-12345-DPW; (5) Marvin Barab and Thomas J. Curley, Civil Action No. 97-12338-DPW; (6) Mark Szen and Nancy Szen, Civil Action No. 97-12439-DPW; and (7) Michael D. Kugler, Civil Action No. 97-12537 PBS. The Complaints were filed following the Company's announcement on September 19, 1997 that it would restate its financial results for the first quarter of fiscal 1997 and the last two quarters of fiscal 1996. The Complaints allege that the defendants violated Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5, promulgated thereunder, during the period from October 17, 1996 through September 18 or 19, 1997, inclusive, through the alleged preparation and dissemination of materially false and misleading financial statements which artificially inflated the prices of PictureTel common stock. Each Complaint seeks to recover an unspecified amount of damages, including attorneys' and experts' fees and expenses. The Company is currently investigating the allegations in the Complaints and will respond to the allegations in a timely fashion when responses become due. No discovery has occurred and the Company expresses no opinion as to the likely outcome. 6. DEBT The Company has an unsecured revolving credit agreement with a borrowing limit of $40,000,000 and approximately $4,400,000 available under local foreign guaranteed lines of credit to certain of its foreign subsidiaries. The Company's borrowings consist primarily of letters of credit pledged against future facility lease obligations. At March 29, 1997, there was $8,080,000 in borrowings and $18,243,000 in standby letters of credit outstanding under the revolving credit agreement and $299,000 outstanding under the foreign lines of credit. The agreement contains certain financial covenants, including the maintenance of certain ratios. As a result of net losses incurred in the second and third quarters of 1997 (subsequent to the period covered by this filing), the Company is not in compliance with the debt covenants associated with its borrowings as of December 10, 1997. The Company has obtained a waiver of the covenant violation. The covenant violation will result in the need for the Company to obtain a waiver for at least each of the next four fiscal quarters. There can be no assurance that the Company will obtain such a waiver. 8 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage of revenues for certain items in the Company's Statement of Income for each period:
Three Months Ended March 29, March 30, 1997 1996 ---------- ---------- (Restated) Revenues 100% 100% Cost of sales 51.8 51.0 Gross margin 48.2 49.0 Selling, general and administrative 29.7 27.4 Research and development 17.2 13.8 Total operating expenses 46.9 41.2 Income from operations 1.3 7.8 Interest income, net 0.7 1.0 Other income, net 0.3 0.6 Income before taxes 2.3 9.4 Provision for income taxes 0.7 3.0 Net income 1.6 6.4
FORWARD-LOOKING STATEMENTS This document includes projections and other forward-looking statements about the Company's revenues, earnings, and other measures of economic performance. Actual results could differ materially from projections, forecasts and other forward-looking statements due to many factors such as competitive pressures, changes in technology and the difficulty of forecasting in overseas markets and indirect channels. Additional information concerning risks that could cause actual results to differ are contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 as amended by Form 10-K/A for the year ended December 31, 1996 and its registration statement on Form S-4 in connection with the MultiLink acquisition, each as filed with the SEC. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. BUSINESS DEVELOPMENTS On September 19, 1997, after the Company's reexamination (with assistance from its outside auditors) of leasing and other indirect channel transactions, the Company announced that it would reverse revenue related to certain of these transactions and, as a result, the Company intended to restate its financial statements for the third and fourth quarters of 1996 and the first quarter of 1997. On November 13, 1997, after completion of its reexamination, the Company announced that it would also restate the second quarter of 1997. The restatements were required to reverse product sales recorded which contained rights of return, contingent liabilities, payment contingencies, payment uncertainties, or product sales for which delivery did not occur at the end of the period. The restatements were also required to record such product sales in the period in which the rights of return lapsed, contingencies or uncertainties were resolved, or delivery was completed, if at all. Certain transactions which were reversed have not been re-recorded as revenues in later periods. The Company acquired all of the common stock of Multilink, Inc. (Multilink) in a transaction accounted for as a pooling of interests on July 22, 1997. The Company issued 3,578.026 shares of common stock in exchange for 6,389.332 shares of Multilink common stock at a ratio of one share of Multilink common stock to 0.56 shares of the Company's common stock. The accompanying consolidated financial statements for all periods prior to the acquisition have been restated to include the results of operations, financial position and cash flows of MultiLink. 9 10 RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 29, 1997 COMPARED TO THREE MONTHS ENDED MARCH 30, 1996 REVENUES. The Company's revenues increased $13,880,000, or 13%, in the three month period ended March 29, 1997 compared to the comparable period in 1996. The increase in revenue was primarily a result of increased videoconferencing system unit shipments. This growth was partially offset by a reduction in the average selling price of videoconferencing systems resulting from a shift towards lower priced models, especially in the group systems, as well as a shift in distribution channel mix with approximately 78% of product revenue now coming from the indirect channels compared with 74% for the comparable period in 1996. Videoconferencing system sales accounted for approximately 79% of the Company's revenues for both the three month period ended March 29, 1997 and the comparable period in 1996. Sales of group and desktop videoconferencing products accounted for 70% and 9%, respectively, of revenues for the three month period ended March 29, 1997, compared with 64% and 19%, respectively, for the comparable period in 1996. Personal desktop product revenue declined during the three month period ended March 29, 1997 from the comparable period in 1996 due to the unexpected slowdown in the desktop videoconferencing market, as well as a shift in sales from the higher margin products to the lower margin products. In addition, sales of bridge products accounted for approximately 12% and 11% of the Company's revenues for the three month period ended March 29, 1997 and the comparable period in 1996, respectively. The balance of the revenues for the three month period ended March 29, 1997 and the comparable period in 1996 were primarily from maintenance services, licensing/development agreements and the sales of stand-alone codecs and video modems. The Company's revenues were lower than expected for the three month period ended March 29, 1997 due to lower than expected volume in desktop videoconferencing unit sales and a change in the mix of group system sales, with the lower margin compact systems selling rather than the larger group systems, which have a higher margin. The Company's revenues from sales to foreign markets were approximately $57,909,000 for the three month period ended March 29, 1997 compared to approximately $50,610,000 for the comparable period in 1996 representing 47% of total revenues for both years. The Company expects that international revenues will continue to account for a significant portion of total revenues. GROSS MARGIN. The Company's gross margin increased $5,766,000 or 11%, in the three month period ended March 29, 1997 compared to the comparable period in 1996. Gross margin as a percentage of revenues was 48% for the three month period ended March 29, 1997 compared to 49% for the comparable period in 1996. Gross margin as a percentage of revenues decreased as a result of a change in the mix of group systems sales, a reduction in the average selling price of videoconferencing systems and the increased percentage of volume through the indirect channels. The latter two trends are expected to continue and may impact future gross margins. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased $6,637,000 or 22% from the comparable period in 1996 and increased as a percentage of revenues to 30% from 27%. The dollar increase in spending resulted primarily from the worldwide marketing focus associated with expanding indirect channels and from new product launches, as well as increased commission expense. In addition, the Company has provided additional sales, general and administrative personnel in order to support the Company's overall growth. The Company will monitor expenses in relation to revenue and will take action to reduce the ratio of expenses to revenue for the remainder of the year. RESEARCH AND DEVELOPMENT. Research and development expenses increased $6,055,000, or 41% for the three month period ended March 29, 1997 from the comparable period in 1996 and were 17% and 14%, respectively, for the three month period ended March 29, 1997 and the comparable period in 1996. Research and development expenditures, prior to the capitalization of software costs, were $22,774,000 for the three month period ended March 29, 1997 and $16,455,000 for the comparable period in 1996 or 19% and 15% of revenues, respectively. The dollar increase in expenditures primarily reflects the Company's continuing investment in new product and software development for existing and future videoconferencing products. The Company will monitor expenses in relation to revenue and will take action to reduce the ratio of expenses to revenue for the remainder of the year. The Company capitalized software costs of $1,840,000 for the three month period ended March 29, 1997 and $1,576,000 for the comparable period in 1996 representing 9% and 11% of aggregate research and development expenditures, respectively. OPERATING INCOME. Operating income decreased 82% from $8,464,000 or 8% of revenue to $1,538,000 or 1% of revenue as a result of the foregoing factors. 10 11 NET INTEREST INCOME. Net interest income decreased to $891,000 for the three month period ended March 29, 1997 from $1,077,000 for the comparable period in 1996. The decrease was primarily the result of lower average marketable securities portfolio balances and the shift to short-term maturities which have lower yields. OTHER INCOME, NET. Other income, net of $404,000 for the three month period ended March 29, 1997 consists primarily of net gains on foreign currency transactions and net gains on sales of securities. Other income, net of $566,000 for the comparable period in 1996 consists primarily of net gains on sales of securities. INCOME TAXES. The Company's effective tax rate for the three month period ended March 29, 1997 and the comparable period in 1996 was 29% and 31%, respectively. The rate for the three month period ended March 29, 1997 was equal to the federal statutory rate primarily due to the benefits of the research and development credits and the Company's foreign sales corporation offset by state and foreign taxes. LIQUIDITY AND CAPITAL RESOURCES At March 29, 1997 the Company had $37,303,000 in cash and cash equivalents and $54,489,000 in short-term marketable securities. During the three month period ended March 29, 1997 the Company used $10,294,000 in cash from operating activities. The primary use of cash during the three month period ended March 29, 1997 was to fund the net growth in inventory. The increase in inventory resulted from an unexpected revenue shortfall for the three month period ended March 29, 1997. The Company has available for borrowing up to $40,000,000 under its revolving credit agreement and approximately $4,400,000 available under local foreign guaranteed lines of credit to certain of its foreign subsidiaries. At March 29, 1997 there was $8,080,000 in debt and $18,243,000 in standby letters of credit outstanding under the revolving credit agreement and $299,000 outstanding under the foreign lines of credit. At March 29, 1997, the Company had $7,114,000 outstanding under various leasing lines. (See Note 6 of "Notes to Consolidated Financial Statements") The Company believes that funds from operations, equipment lease financing, available borrowings under its various credit agreements and existing cash, cash equivalents and marketable securities will be sufficient to meet the Company's foreseeable operating and capital requirements. NEWLY ISSUED ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued Statement No. 128 ("SFAS 128"), "Earnings per Share," which is effective for fiscal years ending after December 15, 1997, including interim periods. SFAS 128 requires the presentation of basic and diluted earnings per share (EPS). Basic EPS, which replaces primary EPS, excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dulution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS under the existing rules. SFAS 128 requires restatement of all prior-period earnings per share data presented after the effective date. The Company will adopt SFAS 128 in 1997 and has not yet determined the impact of adoption. 11 12 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS (a) Datapoint Litigation In December 1993, PictureTel was sued by Datapoint Corporation in the United States District Court for the Northern District of Texas. Datapoint alleges that certain of the Company's products infringe patent rights allegedly owned by Datapoint. Datapoint has been joined as plaintiff by John Frassanito and David Monroe, two individuals who claim to have rights to Datapoint's patents. The plaintiffs seek approximately $100 million to $190 million in damages for alleged past infringement and an injunction against alleged future infringement. The Company believes that it has meritorious defenses to the allegations of the complaint and is vigorously defending against the lawsuit. The case had been scheduled for trial on October 6, 1997; however, the trial was delayed by the Court until early 1998. In the event the Company is found to be infringing a valid patent or patents, the Company could be required to pay damages for past infringement and cease the sale of products incorporating the infringing feature (or be required to obtain a license and pay royalties with respect to such patents). There can be no assurance that the Company will prevail. The Company believes that an adverse outcome of the lawsuit would have a material adverse effect on the business or the financial position, results of operations and cash flows of the Company. (b) Class Action Litigation Since September 23, 1997, seven class action shareholders' complaints have been filed against the Company, Norman E. Gaut, Chairman of the Board and Chief Executive Officer, and Les Strauss, the former Vice President and Chief Financial Officer, in the United States District Court for the District of Massachusetts. The plaintiffs, who brought these actions on behalf of themselves and others similarly situated, are: (1) Faith Egli, Civil Action No. 97-12135-DPW; (2) Jerome H. Lipman, IRA, Civil Action No. 97-12238-DPW; (3) Daniel Frucher, Civil Action No. 97-12310-DPW; (4) Edmond J. Proulx and James Harris, Civil Action No. 97-12345-DPW; (5) Marvin Barab and Thomas J. Curley, Civil Action No. 97-12338-DPW; (6) Mark Szen and Nancy Szen, Civil Action No. 97-12439-DPW; and (7) Michael D. Kugler, Civil Action No. 97-12537 PBS. The Complaints were filed following the Company's announcement on September 19, 1997 that it would restate its financial results for the first quarter of fiscal 1997 and the last two quarters of fiscal 1996. The Complaints allege that the defendants violated Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5, promulgated thereunder, during the period from October 17, 1996 through September 18 or 19, 1997, inclusive, through the alleged preparation and dissemination of materially false and misleading financial statements which artificially inflated the prices of PictureTel common stock. Each Complaint seeks to recover an unspecified amount of damages, including attorneys' and experts' fees and expenses. The Company is currently investigating the allegations in the Complaints and will respond to the allegations in a timely fashion when responses become due. No discovery has occurred and the Company expresses no opinion as to the likely outcome. 12 13 SIGNATURE Pursuant to the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q/A to be signed on its behalf by the undersigned thereunto duly authorized. PICTURETEL CORPORATION /s/ Richard B. Goldman ------------------------------------------------------ Richard B. Goldman Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) January 12, 1998. 13 -----END PRIVACY-ENHANCED MESSAGE-----