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 September 30, 1998.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from ______________________ to ______________________
Commission file number 0-23858
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 November 9, 1998: 4,352,124
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>
SEPTEMBER 30, DECEMBER 31,
1998 1997
UNAUDITED AUDITED
--------- -------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ........................................................... $ 2,213,396 $ 1,746,928
Certificate of deposit-restricted (Note 4) .......................................... 181,333 275,833
Interest Receivable ................................................................. 2,871 9,228
Accounts Receivable, less allowance for doubtful accounts of $25,901 on September 30,
1998 and $35,000 on December 31, 1997 ............................................. 576,983 626,320
Inventories ......................................................................... 1,144,697 1,153,665
Deferred income taxes ............................................................... 125,000 100,000
Prepaid expenses .................................................................... 49,890 47,209
----------- -----------
Total Current assets .............................................................. 4,294,170 3,959,183
Property and Equipment
Office and computer equipment ....................................................... 437,770 367,874
Machinery and equipment ............................................................. 97,340 97,340
Tooling ............................................................................. 406,406 278,733
Leasehold improvements .............................................................. 45,016 45,016
----------- -----------
Total equipment ..................................................................... 986,532 788,963
Less accumulated depreciation ................................................... 588,989 468,556
----------- -----------
Net property and equipment ..................................................... 397,543 320,407
Intangible Assets
Patents ............................................................................. 200,000 0
Less accumulated amortization ................................................... 13,517 0
----------- -----------
Net patents ..................................................................... 186,483 0
Total assets .................................................................... $ 4,878,196 $ 4,279,590
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable .................................................................... $ 410,898 $ 278,204
Current maturities of long-term debt ................................................ 7,009 22,605
Note payable other .................................................................. 10,000 0
Customer deposits and other liabilities ............................................. 10,068 9,080
Accrued compensation ................................................................ 19,867 264,221
Purchase commitments, reserves and other ............................................ 235,677 366,017
----------- -----------
Total current liabilities ......................................................... 693,519 940,127
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,
4,352,124 shares at September 30, 1998 and 3,215,283 shares at December 31, 1997 . 43,521 32,152
Additional paid in capital .......................................................... 6,380,522 5,553,553
Accumulated deficit ................................................................. (2,275,500) (2,282,376)
----------- -----------
Total stockholders' equity ........................................................ 4,148,543 3,303,329
----------- -----------
Total liabilities and stockholders' equity ...................................... $ 4,878,196 $ 4,279,590
=========== ===========
</TABLE>
Page 2
<PAGE>
INTERIM CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30 September 30
------------- ------------
1998 1997 1998 1997
---- ----- ---- ----
<S> <C> <C> <C> <C>
Sales.............................................. $ 1,475,348 $ 1,770,482 $ 4,590,458 $ 5,408,191
Cost of goods sold ................................ 924,328 1,036,514 2,746,485 3,137,903
----------- ----------- ----------- -----------
Gross profit ...................................... 551,020 733,968 1,843,973 2,270,288
Selling, general and administrative expenses ...... 685,250 502,289 1,926,571 1,784,613
----------- ----------- ----------- -----------
Operating Income (loss) ........................... (134,230) 231,679 (82,598) 485,675
Other income (expense)
Interest, net ..................................... 23,321 22,463 64,474 47,789
Loss on sale of assets ............................ 0 (3,454) 0 (20,820)
----------- ----------- ----------- -----------
Total other income (expense) ...................... 23,321 19,009 64,474 26,969
Income Tax Benefit ................................ 0 35,000 25,000 60,000
----------- ----------- ----------- -----------
Net Income (loss).................................. $ (110,909) $ 285,688 $ 6,876 $ 572,644
=========== =========== =========== ===========
Basic earnings per common share ................... $ (0.03) $ 0.09 $ 0.00 $ 0.18
Weighted average shares outstanding (Note 3) ...... 4,352,124 3,245,283 4,352,124 3,245,283
Diluted earnings per common share ................. $ (0.03) $ 0.08 $ 0.00 $ 0.13
Diluted shares outstanding (Note 3) ............... 4,401,670 3,772,867 4,401,670 4,504,907
</TABLE>
INTERIM CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
-----------------
SEPTEMBER 30
-------------
1998 1997
---- ----
Cash Flows From Operations:
Net cash provided by (used for) operations $ (79,255) $ 388,011
Cash Flows From Investing:
Capital expenditures (387,116) (52,319)
Proceeds from sale of assets 0 0
Purchase/Sale of certificates of deposit, net 94,500 11,667
----------- -----------
Net cash from (used for) investing (292,616) (40,652)
Cash Flows From Financing:
Issuance of common stock and warrants 964,570 75,688
Repurchase of common stock (126,231) (35,625)
----------- -----------
Net cash from (used for) financing 838,339 40,063
Net increase in cash and cash equivalents 466,468 387,422
Cash and cash equivalents at beginning of period 1,746,928 1,458,786
----------- -----------
Cash and cash equivalents at end of period $ 2,213,396 $ 1,846,208
=========== ===========
Page 3
<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 30, 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:
SEPTEMBER 30, 1998 1997 ---- ----
SEPTEMBER 30,
1998 1997
---- ----
Weighted average common shares outstanding for
Basic earnings per share 4,352,124 3,245,283
Effect of dilutive securities:
Stock Options and Warrants 49,546 1,259,624
--------- ---------
Shares used in diluted earnings per share 4,451,216 4,504,907
========= =========
NOTE 4. BANK LINE OF CREDIT
As of April 10, 1998 the Company's line with its bank matured and has
not been renewed. At September 30, 1998, restricted certificates of deposit
serve as collateral for two irrevocable letters of credit.
NOTE 5. INCOME TAXES
During 1997 and the second quarter of 1998, the Company recorded a
net deferred tax asset of $125,000, reflecting the benefit of approximately
$1,189,000 of net operating loss carryforward, reduced by a deferred tax
allowance valuation.
Page 4
<PAGE>
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.
The Company recognizes revenue when it is both realized and earned
typically at the time of shipment. Net revenues for the quarter ended September
30, 1998 were $1,475,348 compared to $1,770,482 for the third quarter of 1997, a
decrease of 17 percent. Net revenues for the nine months ending September 30,
1998 were $4,590,458 compared to $5,408,191 for the same period of 1997, a
decrease of 15 percent. This decrease is attributed to the decrease of sales
into the computer markets and a decline in sales to foreign markets.
During the third quarter ending September 30, 1998, sales in North and
South America, Europe and Asia/Pacific were respectively 77%, 22% and 1%
compared to respectively 71%, 26% and 3% for the same quarter ending September
30, 1997. During the first nine months of 1998 sales in North and South America,
Europe and Asia/Pacific were respectively 75%, 23% and 2% compared to
respectively 65%, 28% and 7% for the same period ending September 30, 1997. The
decrease in European sales is attributable to the increase in competition in the
European market. The decrease in the Asia/Pacific market is attributable to the
depressed Asian economy and the Company's decision to pull sales and marketing
efforts out of the Asia/Pacific market until the economy is more stable.
The Company has been focused on professional markets including
education, audio-visual, security and medical markets, while de-emphasizing
sales to highly competitive retail computer markets where the Company had
experienced sales declines and low margins. The Company has decided to refocus
and return to the computer market with a new digital product in the fourth
quarter of 1998 called FlexCam Digital. The FlexCam Digital will retail for
$195. The Company is cautiously entering back into the computer market on a
limited basis due to a new low cost design necessary to be competitive in the
digital computer market. The Company has also introduced a new Web site located
at www.flexcam.com. The Company's Digital Mall Web site offers a unique
video-based product line and ease of purchase, setting it apart from the other
digital camera online commerce sites. The Digital Mall Web site features
products offered by various manufacturers such as Canon, Kodak, Fuji and Epson.
The Company will sell its own proprietary FlexCam Digital and plan on expanding
its proprietary digital camera line in the future.
The Company has also introduced a new product for the
audio-visual/presentation market called the ProfCam. The ProfCam is an
integrated presentation system that features a sleek, ergonomic gooseneck,
remote or keypad controlling, detachable light panel, LCD screen and Microsoft
Windows compatibility. The ProfCam will retail for $3,995. First shipments of
the ProfCam are scheduled for the fourth quarter of 1998.
Page 5
<PAGE>
The Company is actively working to 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 originally anticipated that the total revenues of this
division would be approximately 20 percent of the total combined revenues of the
companies in 1998. Subsequently, the Company estimates that the total revenues
for the Healthcare Products Division will be less than 20 percent. Total
revenues for the Healthcare Products Division for the quarter ending September
30, 1998 were $154,754 or 11 percent of total quarterly sales for the Company.
Total revenues for the nine month period ending September 30, 1998 were $315,406
or 7 percent of total sales for the Company.
Gross profits 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 profit on sales during the third quarter of 1998
was $551,020 or 37 percent as compared to $733,968 or 42 percent for the third
quarter of 1997. This decrease in gross margin as a percentage of revenues is
mainly attributable to the product mix that the Company sold including sales to
an OEM account with lower gross margins. The Company's gross profit on sales
during the nine month period ending September 30, 1998 were $1,843,973 or 40
percent as compared to $2,270,288 or 42 percent for the same period in 1997. The
Company has a goal to maintain gross margins in the 40 percent 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 expenses increased from
$502,289 in the third quarter of 1997 to $685,250 in the third quarter of 1998.
This increase is attributable to the increase in selling, general and
administrative expenses from the Healthcare Products Division purchased on April
6, 1998 and an increased effort in sales and marketing and research and
development of the new products that were mentioned above. For the first nine
months of 1998 the Company's selling, general and administrative expenses were
$1,926,571 compared to $1,784,613 for the same period for 1997. The Company
continues to make 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 loss for the third quarter of 1998 was $134,230 compared to
operating income of $231,679 for the same period in 1997. The operating loss for
the first nine months of 1998 was $82,598 compared to operating income of
$485,675 for the same period for 1997. The decrease in operating income is
relative to the decrease in sales for the first nine months of 1998, the
decrease in gross margins for the third quarter of 1998 and increased expenses
related to promotions, acquisitions and new product development.
The other income and expenses consist of interest income on the
investment of cash and interest expense.
As of September 30, 1998, the Company had a deferred tax asset of
$125,000, 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 may be recorded.
Net loss for the third quarter of 1998 was $110,909 compared to a net
income of $285,688 for the third quarter of 1997. Management attributes this
decrease in earnings to the Company's decrease in total revenues for the third
quarter of 1998, the decrease in gross profit and the marketing investments as
discussed above. Net income for the first nine months of 1998 was $6,876
compared to $572,644 for the same period for 1997.
Page 6
<PAGE>
Basic and fully diluted earnings per share for the quarter ended
September 30, 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 4,352,124 and 4,401,670, respectively
for the quarter ended September 30, 1998. Basic and fully diluted shares
considered outstanding were 3,245,283 and 3,772,867, respectively for the
quarter ended September 30, 1997. Basic and fully diluted shares considered
outstanding were 4,352,124 and 4,401,670, respectively for the nine month period
ended September 30, 1998. Basic and fully diluted shares considered outstanding
were 3,245,283 and 4,504,907, respectively for the nine month period ended
September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities totaled $79,255 for the nine
months ended September 30, 1998 compared to net cash provided by operating
activities totaling $388,011 for the nine months ended September 30, 1997. The
decrease is due primarily to cash provided by decreases in inventories and
accounts receivable in the first nine months of 1997.
Net cash used for investing activities totaled $292,616 for the nine
month period ending September 30, 1998 compared to cash used from investing
activities of $40,652 for the nine month period ending September 30, 1997. The
cash used for investing in 1998 and 1997 was for capital equipment.
Net cash provided from financing activities for the nine month period
ending September 30, 1998 was $838,339 from the exercising of outstanding
warrants less the repurchase of the Company's common stock.
Prior to the Company's Initial Public Offering, the Company sold units
in private placement transactions consisting of one share of common stock and
one warrant to purchase one share of common stock. The warrants that were
purchased had expiration dates ranging from July 27, 1997 to January 15, 1999.
In the nine month period ending June 30, 1998 and as a subsequent event to the
nine month period certain warrantholders have exercised a total of 1,066,449
warrants at an exercise price of $0.6875. The Company has received a total of
$733,184 in proceeds from the exercise of these warrants into the Company's
common stock. Currently the Company has approximately 390,000 warrants remaining
that have expiration dates extending over the period of November 17, 1998 to
January 15, 1999 with potential proceeds of approximately $268,000 (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 and in May of 1998 a stock buy back of another
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. In July of 1998 the Company redeemed a total of 35,000 shares
of the Company's common stock in a private transaction and retired all 35,000
shares. In November 1998, as a subsequent event the Company's Board of Directors
approved a third stock buy back of up to 1,000,000 shares of the Company's
common stock.
Working capital, which consists principally of cash, receivables and
inventories, was $3,600,651 at September 30, 1998 and $3,019,056 at December 31,
1997. The ratio of current assets to current liabilities was 6:1 at June 30,
1998 and 4:1 at December 31, 1997. Inventories at September 30, 1998 were
$1,144,697. The Company continues to monitor and control inventory levels.
However, with the development and introduction of new products in the fourth
quarter of 1998, the Company's inventory level is anticipated to increase. The
Company believes its liquidity to be adequate for the next 12 months and intends
to use the proceeds from the exercise of warrants as working capital.
Page 7
<PAGE>
YEAR 2000 ISSUES
- ----------------
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
year 2000. The year 2000 issue affects virtually all companies and
organizations.
Management is currently evaluating its reliance on both internal and
external systems with respect to year 2000 issues. At this time, year 2000
issues are not expected to materially affect the Company's financial condition,
results of operations or liquidity.
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
None
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: November 13, 1998 By: /s/ James Hansen
--------------------- -----------------
James W. Hansen
President, CEO, Treasurer and Chairman
Page 8
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,213,396
<SECURITIES> 181,333
<RECEIVABLES> 576,983
<ALLOWANCES> 25,901
<INVENTORY> 1,144,697
<CURRENT-ASSETS> 4,294,170
<PP&E> 986,532
<DEPRECIATION> 588,989
<TOTAL-ASSETS> 4,878,196
<CURRENT-LIABILITIES> 693,519
<BONDS> 0
0
0
<COMMON> 43,521
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,878,196
<SALES> 1,475,348
<TOTAL-REVENUES> 1,475,348
<CGS> 924,328
<TOTAL-COSTS> 685,250
<OTHER-EXPENSES> 23,321
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (110,909)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
