U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from __________ to __________
Commission file number 34-0-23-858
VIDEOLABS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 47-1726281
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5960 Golden Hills Drive
Golden Valley, MN 55416
(Address of principal executive offices)
(612) 542-0061
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of May 10, 1998: 3,810,743
Transitional Small Business Disclosure Format (check one): Yes__ No_X_
<PAGE>
PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIDEOLABS, INC.
INTERIM CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
UNAUDITED AUDITED
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ............................................................... $ 1,582,646 $ 1,746,928
Certificate of deposit-restricted (Note 4) .............................................. 258,333 275,833
Interest Receivable ..................................................................... 11,910 9,228
Accounts Receivable, less allowance for doubtful accounts of $41,173 on March 31,
1998 and $35,000 on December 31, 1997 ................................................. 530,746 626,320
Inventories ............................................................................. 1,064,506 1,153,665
Deferred income taxes ................................................................... 100,000 100,000
Prepaid expenses ........................................................................ 43,298 47,209
----------- -----------
Total Current assets .................................................................. 3,591,439 3,959,183
Property and Equipment
Office and computer equipment ........................................................... 398,974 367,874
Machinery and equipment ................................................................. 97,340 97,340
Tooling ................................................................................. 321,833 278,733
Leasehold improvements .................................................................. 45,016 45,016
----------- -----------
Total equipment ......................................................................... 863,163 788,963
Less accumulated depreciation ....................................................... 506,849 468,556
----------- -----------
Net equipment ....................................................................... 356,314 320,407
Total assets ........................................................................ $ 3,947,753 $ 4,279,590
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ........................................................................ $ 211,570 $ 278,204
Current maturities of long-term debt .................................................... 17,396 22,605
Customer deposits and other liabilities ................................................. 7,291 9,080
Accrued compensation .................................................................... 37,263 264,221
Purchase commitments, reserves and other ................................................ 291,103 366,017
----------- -----------
Total current liabilities ............................................................. 564,623 940,127
Long-Term Debt, net of current maturities .................................................. 36,134 36,134
Stock holders' Equity
Common stock, $.01 par value; Authorized 20,000,000 shares issued and outstanding,
3,285,143 shares at March 31, 1998 and 3,215,283 shares at December 31, 1997 ........... 32,851 32,152
Additional paid in capital .............................................................. 5,546,122 5,553,553
Accumulated deficit ..................................................................... (2,231,977) (2,282,376)
----------- -----------
Total stockholders' equity ............................................................ 3,346,996 3,303,329
----------- -----------
Total liabilities and stockholders' equity .......................................... $ 3,947,753 $ 4,279,590
=========== ===========
</TABLE>
<PAGE>
INTERIM CONDENSED STATEMENT OF OPERATIONS
Three Months Ended
------------------
March 31
--------
1998 1997
----------- -----------
Sales.............................................$ 1,208,843 $ 1,599,487
Cost of goods sold ................................ 666,802 945,826
----------- -----------
Gross profit ...................................... 542,041 653,661
Selling, general and administrative expenses ...... 512,569 607,157
----------- -----------
Operating Income (loss) ........................... 29,472 46,504
Other income (expense)
Interest income (expense) ......................... 22,411 10,893
Interest expense .................................. (1,484) 0
Gain or (loss) on sale of assets .................. 0 (11,350)
----------- -----------
Total other income (expense) ...................... 20,927 (457)
Income Tax Benefit ................................ 0 0
----------- -----------
Net Income (loss).................................$ 50,399 $ 46,047
=========== ===========
Basic earnings per common share ................... $ 0.02 $ 0.01
Weighted average shares outstanding (Note 3) ...... 3,285,143 3,134,498
Diluted earnings per common share ................. $ 0.01 $ 0.01
Diluted shares outstanding (Note 3) ............... 4,252,163 3,134,498
INTERIM CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31
--------
1998 1997
----------- -----------
Cash Flows From Operations:
Net cash provided by operations ............... $ (109,312) $ (208,855)
Cash Flows From Investing:
Capital expenditures .......................... (65,739) 11,447
Purchase/Sale of certificate of deposit ....... 17,500 0
Purchase/Sales of U.S. Treasury securities .... 0 0
----------- -----------
Net cash from investing ....................... (48,239) 11,447
Cash Flows From Financing:
Net proceeds from sale of common stock ........ (6,731) 0
Payment of Bridge Notes .................... 0 0
Stock offering costs .......................... 0 0
Net proceeds from sale of bridge notes ........ 0 0
----------- -----------
Net cash from financing ..................... (6,731) 0
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Net increase (decrease) in cash and cash equivalents (164,282) (197,408)
Cash and cash equivalents at beginning of period ... 1,746,928 631,456
----------- -----------
Cash and cash equivalents at end of period ......... $ 1,582,646 $ 434,048
=========== ===========
<PAGE>
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The results of operations for the interim periods shown in this report
are not necessarily indicative of results to be expected for the fiscal year. In
the opinion of management, the information contained herein reflects all
adjustments (consisting only of normally recurring adjustments) necessary to
make the results of operations for the interim periods a fair statement of such
operations.
NOTE 2. INITIAL PUBLIC OFFERING
On May 17, 1994, the Company closed the public offering and sale of
1,500,000 shares of the Company's common stock at a public offering price of
$3.50 per share. After deducting an underwriting discount of $0.35 per share,
this public offering resulted in net proceeds to the Company of $4,275,000.
Bridge notes totaling $750,000, plus accrued interest, were paid at the time of
closing along with a three percent (3%) non-accountable expense allowance of
$157,500 (less $15,000 that was prepaid to the underwriter).
NOTE 3. INCOME (LOSS) PER COMMON SHARE
During the quarter ended March 31, 1998 the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which
established a new method for calculating earnings per share. Basic earnings per
share is computed by dividing net income by the weighted average number of
shares of common stock outstanding during the year. Diluted earnings per common
share is similar to the computation of basic earnings per share, except that the
denominator is increased for the assumed exercise of dilutive options using the
treasury stock method. All amounts presented have been restated to conform to
the new presentation. The components of the earnings per share are as follows:
MARCH 31,
1998 1997
--------- ---------
Weighted average common shares outstanding for
Basic earnings per share 3,285,143 3,134,498
Effect of dilutive securities:
Stock Options and Warrants 967,020 0
--------- ---------
Shares used in diluted earnings per share 4,252,163 3,134,498
========= =========
NOTE 4. BANK LINE OF CREDIT
On March 31, 1998 the Company had a discretionary line of credit with
its bank of the lesser of $500,000 or 75% of eligible accounts receivable (as
defined), with outstanding borrowings due April 10, 1998. The available line of
credit is reduced by outstanding irrevocable letters of credit. The letters of
credit may be drawn upon by major suppliers of the Company. The letters of
credit and the bank line of credit expire April 10, 1998. There were no
borrowings outstanding under this line of credit at March 31, 1998. Advances
under the note are secured by substantially all corporate assets. Interest is
charged at 1.5% over the bank's "index rate". The interest rate at December 31,
1997 was 10%. At March 31, 1998, restricted certificates of deposit serve as
collateral for two irrevocable letters of credit.
<PAGE>
NOTE 5. INCOME TAXES
During 1997, the Company recorded a net deferred tax asset of $100,000,
reflecting the benefit of approximately $1,189,000 of net operating loss
carryforward, reduced by a deferred tax allowance valuation.
NOTE 6. NEWLY ISSUED ACCOUNTING STANDARDS
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" and No. 129 "Disclosure of Information about Capital
Structure" was approved for issuance. In June, Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" was approved for issuance
and will be adopted in fiscal 1998. In July of 1997, Statement of Financial
Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and
Related Information" was approved for issuance. The Company will adopt these
statements for the year ended December 31, 1997. The effect of these Statements
has not been determined, however, the impact on the Company's financial position
and results of operations is not expected to be material.
ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As provided under the Private Securities Reform Act of 1995, the
Company wishes to caution investors of the following factors which could affect
the Company's results of operations and cause such results to differ materially
from those anticipated in forward-looking statements made in this document or
elsewhere by or on behalf of the Company: sales projections, technology changes,
new competitors, reduced current cost for items in inventory, changes in
currency valuations, government regulations and ongoing litigation.
Net revenues for the quarter ended March 31, 1998 were $1,208,843
compared to $1,599,487 for the first quarter of 1997, a decrease of 24 percent.
This decrease is attributed to the decrease of sales into the computer markets.
The Company is focused on professional markets including education,
audio-visual, security and medical markets, while de-emphasizing sales to highly
competitive retail markets where the Company had experienced declines and low
margins. The Company's core business is operating in a profitable mode as new
products have allowed the Company to maintain market share in the education
market.
The Company is actively working on acquisitions and new products that
could return the Company to its former growth profile. On April 6, 1998 the
Company closed on an acquisition of assets and certain intellectual property
rights of Video Dynamics, Inc, a Florida Corporation. Video Dynamics is located
in Sunrise, Florida and will be operating as a division of the Company called
VideoLabs' Healthcare Products Division. The founders of Video Dynamics are now
both employees of the Company and have been leading designers of video capture
solutions for medical professionals, healthcare institutions and other
manufacturers for a combined total of over 50 years. The Company anticipates
that the total revenues of this division will be approximately 20% of the total
combined revenues of the companies in 1998 and should be accretive to earnings
per share in 1999.
Gross margins of the Company are determined by deducting from net
revenues all materials, labor, packaging, manuals and related overhead costs
which are directly attributable to the cost of manufacture and shipment of the
Company's products. Royalty costs and commission costs related to the sales of
products are not included in cost of goods, but are included in selling
expenses. The Company's gross margin on sales during the first quarter of 1998
was $542,040 or 45% as compared to $653,661 or 41% for the first quarter of
1997. This increase in gross margin as a percentage of revenues is mainly
attributable to the reduction of manufacturing overhead costs and the reduction
of direct material costs. The Company has a goal to maintain gross margins in
the 40% range, but there is no assurance that it will be able to do so.
Selling, general and administrative expenses include all costs of the
Company except those related directly to the manufacture of products described
above and other income and expense items below. These
<PAGE>
expenses decreased from $607,157 in the first quarter of 1997 to $512,569 in the
first quarter of 1998. The Company is making progress towards its efforts in
cost control. However, the Company is actively developing new products that will
result in an increase in research and development expenses and sales and
marketing expenses to initiate new product launches.
Operating income for the first quarter of 1998 was $29,472 compared to
an operating income of $46,505 for the same period in 1997. The decrease in
operating income is relative to the decrease in sales for the first quarter of
1998.
The other income and expenses consist of interest income on the
investment of cash and interest expense.
As of March 31, 1998, the Company had a deferred tax asset of $100,000,
reflecting the benefit of approximately $1,189,000 of net operating loss
carryforward, reduced by a deferred tax allowance valuation. If the Company
continues to be profitable, additional tax benefit will be recorded.
Net income for the first quarter of 1998 was $50,399 compared to a net
income of $46,047 for the first quarter of 1997. Management attributes this
increase in profit to the Company's increase in margins and cost control efforts
as discussed above.
Basic and fully diluted earnings per share for the quarter ended March
31, 1998 were computed based on the weighted average number of shares
outstanding, plus the shares that would be outstanding assuming exercise of
options and warrants which are considered to be common stock equivalents, less
the shares assumed to be acquired by the Company using the proceeds from the
assumed exercise of options and warrants based on market prices. Basic and fully
diluted shares considered outstanding were 3,285,143 and 4,252,163, respectively
for the quarter ended March 31, 1998. Basic and fully diluted shares considered
outstanding were 3,134,498 and 3,134,498, respectively for the quarter ended
March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities totaled $109,312 for the quarter
ended March 31, 1998 compared to cash used for operating activities totaling
$208,855 for the quarter ended March 31, 1997. The approximately $100,000
improvement in cash used in operations is due primarily to cash provided by
decreases in inventories and accounts receivable offset by cash payments
decreasing current liabilities.
Net cash used in for investing activities totaled $48,239 for the first
quarter of 1998 compared to cash provided from investing activities of $11,447
for the first quarter of 1997. The cash used in 1998 was for capital equipment
purchases and the cash provided in 1997 was from the sale of computer equipment.
Net cash used from financing activities for the first quarter of 1998
was $6,731 for the purchase of Company warrants from an individual.
In March 1998 and as a subsequent event to the first quarter ending
March 31, 1998 certain warrantholders have exercised a total of 594,691 warrants
at an exercise price of $0.6875. The Company received a total of $408,850 in
proceeds from the exercise of these warrants into the Company's common stock.
Currently the Company has approximately 1.1 million warrants remaining that have
expiration dates extending over the period of July 31, 1998 to January 15, 1999
with potential proceeds of approximately $750,000 (assuming the exercising of
all outstanding warrants).
The board of directors of the Company approved in March of 1997 a stock
buy back of 100,000 shares. In March and April of 1998 the Company redeemed a
total of 91,231 shares of the Company's common stock in private transactions and
retired all 91,231 shares.
<PAGE>
Working capital and liquidity, which consists principally of cash,
receivables and inventories, was $3,026,846 at March 31, 1998 and $3,019,056 at
December 31, 1997. The ratio of current assets to current liabilities was 5:1 at
March 31, 1998 and 4:1 at December 31, 1997. Inventories at March 31, 1998 were
$1,064,506.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On April 6, 1998 the Company closed on an acquisition of assets and
intellectual property rights of Video Dynamics, Inc, a Florida Corporation.
Video Dynamics is located in Sunrise, Florida and will be operating as a
division of the Company called VideoLabs' Healthcare Products Division. The
founders of Video Dynamics are now both employees of the Company. The total
purchase price consisted of a combination of Company stock and cash totaling
$500,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601.
None
(b) Reports on Form 8-K
None
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.
VIDEOLABS, INC.
Date: May 11, 1998 By: /s/ James Hansen
-----------------
James W. Hansen
President, CEO, Treasurer and Chairman
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<NAME> VIDEOLABS, INC.
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,582,646
<SECURITIES> 258,333
<RECEIVABLES> 571,919
<ALLOWANCES> 41,173
<INVENTORY> 1,064,506
<CURRENT-ASSETS> 3,591,439
<PP&E> 863,163
<DEPRECIATION> 506,849
<TOTAL-ASSETS> 3,947,753
<CURRENT-LIABILITIES> 564,623
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0
0
<COMMON> 32,851
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<TOTAL-LIABILITY-AND-EQUITY> 3,947,753
<SALES> 1,208,843
<TOTAL-REVENUES> 1,208,843
<CGS> 666,802
<TOTAL-COSTS> 512,569
<OTHER-EXPENSES> 20,927
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,484
<INCOME-PRETAX> 50,399
<INCOME-TAX> 0
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