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, 1999.
[ ] 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 May 6, 1999: 4,505,562
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,
1999 1998
UNAUDITED AUDITED
------------ ------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents ............................................................ $ 1,536,532 $ 1,514,561
Certificate of deposit-restricted (Note 4) ........................................... 158,000 158,000
Accounts Receivable, less allowance for doubtful accounts of $36,233 on March 31,
1999 and $30,000 on December 31, 1998 ............................................. 731,771 664,172
Interest Receivable .................................................................. 8,959 6,688
Inventories .......................................................................... 1,252,275 1,616,990
Deferred income taxes ................................................................ 125,000 125,000
Prepaid expenses ..................................................................... 36,120 50,457
------------ ------------
Total Current assets ............................................................... 3,848,657 4,135,868
Property and Equipment
Office and computer equipment ........................................................ 448,416 446,832
Machinery and equipment .............................................................. 127,391 127,391
Tooling .............................................................................. 516,958 488,225
Leasehold improvements ............................................................... 45,016 45,016
------------ ------------
Total equipment ...................................................................... 1,137,781 1,107,464
Less accumulated depreciation .................................................... 693,593 638,161
------------ ------------
Net equipment ................................................................... 444,188 469,303
Other Assets
Patents, net ......................................................................... 172,198 179,340
Total assets ..................................................................... $ 4,465,043 $ 4,784,511
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ..................................................................... $ 216,174 $ 658,089
Current maturities of long-term debt ................................................. 22,071 22,071
Customer deposits and other liabilities .............................................. 12,263 6,114
Accrued compensation ................................................................. 24,816 28,358
Purchase commitments, reserves and other ............................................. 127,501 81,303
------------ ------------
Total current liabilities .......................................................... 402,825 795,935
Long-Term Debt, net of current maturities ............................................... 20,112 24,300
Stock holders' Equity
Common stock, $.01 par value; Authorized 20,000,000 shares issued and outstanding,
4,505,562 shares at March 31, 1999 and 4,457,471 shares at December 31, 1998 ....... 44,776 44,574
Additional paid in capital ........................................................... 6,403,521 5,553,553
Accumulated deficit .................................................................. (2,406,191) (2,478,474)
------------ ------------
Total stockholders' equity ......................................................... 4,042,106 3,964,276
------------ ------------
Total liabilities and stockholders' equity ....................................... $ 4,465,043 $ 4,784,511
============ ============
</TABLE>
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<PAGE>
INTERIM CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31
--------
1999 1998
---- ----
<S> <C> <C>
Sales............................................................ $ 1,855,865 $ 1,208,843
Cost of goods sold .............................................. 1,152,322 666,802
------------ ------------
Gross profit .................................................... 703,543 542,041
Selling, general and administrative expenses .................... 647,612 512,569
------------ ------------
Operating Income ................................................ 55,931 29,472
Other income (expense)
Interest income ................................................. 17,039 22,411
Interest expense ................................................ (781) (1,484)
Gain or (loss) on sale of assets ................................ 94 0
------------ ------------
Total other income (expense) .................................... 16,352 20,927
Income Tax Benefit .............................................. 0 0
------------ ------------
Net Income....................................................... $ 72,283 $ 50,399
============ ============
Basic earnings per common share ................................. $ 0.02 $ 0.02
Weighted average shares outstanding (Note 3) .................... 4,505,562 3,285,143
Diluted earnings per common share ............................... $ 0.02 $ 0.01
Diluted shares outstanding (Note 3) ............................. 4,553,465 4,252,163
</TABLE>
INTERIM CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------
1999 1998
------------ ------------
<S> <C> <C>
Cash Flows From Operations:
Net cash provided by operations ............................ $ 46,742 $ (109,312)
Cash Flows From Investing:
Capital expenditures ....................................... (30,318) (65,739)
Proceeds from maturities of certificates of deposit ........ 0 17,500
------------ ------------
Net cash from investing .................................... (30,318) (48,239)
Cash Flows From Financing:
Issuance of common stock and warrants ...................... 42,000 0
Repurchase of common stock and warrants .................... (36,454) (6,731)
------------ ------------
Net cash from (used for) financing ....................... 5,546 (6,731)
------------ ------------
Net increase (decrease) in cash and cash equivalents ............ 21,970 (164,282)
Cash and cash equivalents at beginning of period ................ 1,514,561 1,746,928
------------ ------------
Cash and cash equivalents at end of period ...................... $ 1,536,531 $ 1,582,646
============ ============
</TABLE>
FOOTNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Page 3
<PAGE>
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,
1999 1998
---- ----
Weighted average common shares outstanding for
Basic earnings per share 4,505,562 3,285,143
Effect of dilutive securities:
Stock Options and Warrants 47,903 967,020
--------- ---------
Shares used in diluted earnings per share 4,553,465 4,252,163
========= =========
NOTE 4. CERTIFICATES OF DEPOSIT
At March 31, 1999, restricted certificates of deposit, served as
collateral for one irrevocable letter of credit.
NOTE 5. INCOME TAXES
During 1997 and 1998, the Company recorded a net deferred tax asset of
$125,000, reflecting the benefit of approximately $1,758,000 of net operating
loss carryforward, reduced by a deferred tax allowance valuation.
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<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.
Sales for the quarter ended March 31, 1999 were $1,855,865 compared to
$1,208,843 for the first quarter of 1998, an increase of 54 percent. This
increase is attributed to an increase in new product sales and new private label
sales and sales in the Internet Division and Healthcare Division, which were
non-existent in the first quarter of 1998.
During the first quarter ending March 31, 1999, sales in North and
South America, Europe and Asia/Pacific were 77%, 21% and 2% compared to 64%, 32%
and 4% for the same quarter in 1998. The decrease in European sales is
attributable to the increase in competition in the European market. The decrease
in the Asia/Pacific sales 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 is actively working on acquisitions and new product
development. The Company announced on April 27, 1999 that it had signed a letter
of intent to acquire Acoustic Communications, Inc. located in Plymouth,
Minnesota. Acoustic Communication Systems, Inc. is the leading independent
provider of collaboration solutions involving data and video conferencing in the
Midwest and one of the largest value added resellers of Picturetel and Polycom
communication equipment in the country. Acoustic is also a manufacturer of
several peripheral devices (carts, speakers, furniture, microphones, etc.) for
video based solutions and recently launched an E-commerce site,
www.meetingroomtools.com. The Company anticipates a late June 1999 closing.
Gross margins of the Company are determined by deducting from sales 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 1999 was $703,543 or
38% as compared to $542,041 or 45% for the first quarter of 1998. This decrease
in gross margin as a percentage of revenues is mainly attributable to the
increased sales to lower-margin Original Equipment Manufacturer (OEM) customers.
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 expenses increased from
$512,569 in the first quarter of 1998 to $647,612 in the first quarter of 1999.
The Company attributes this increase to the direct expenses related the
Healthcare division, which was non-existent in the first quarter of 1998. The
Company continues its efforts in cost control. However, the Company is actively
Page 5
<PAGE>
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 1999 was $55,931 compared to
operating income of $29,472 for the same period in 1998. The increase in
operating income is a result of the increase in sales, which more than offset
the increase in operating expenses for the first quarter of 1999 as discussed
above.
Other income and expenses consist of interest income on the investment
of cash and interest expense.
As of March 31, 1999, the Company had an estimated net deferred tax
asset of $125,000, reflecting the benefit of approximately $1,758,000 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 income for the first quarter of 1999 was $72,283 compared to a net
income of $50,399 for the first quarter of 1998. Management attributes this
increase in profit to the Company's increase in sales.
Basic and fully diluted earnings per share for the quarter ended March
31, 1999 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 4,505,562 and 4,553,465, respectively
for the quarter ended March 31, 1999. Basic and fully diluted shares considered
outstanding were 3,285,143 and 4,252,163, respectively for the quarter ended
March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operating activities totaled $46,742 for the
quarter ended March 31, 1999 compared to cash used for operating activities of
$109,312 for the quarter ended March 31, 1998. The approximately $150,000
improvement in cash from operations is due primarily to cash provided by
decreases in inventories and an increase in net income.
Net cash used for investing activities totaled $30,318 for the first
quarter of 1999 compared to cash used for investing activities of $48,239 for
the first quarter of 1998. The cash used in the first quarter of 1998 and 1999
was for capital equipment purchases.
Net cash used for financing activities in the first quarter of 1999 was
$36,454 for the purchase of Company common stock as part of the Company's stock
buy back plan. The cash provided from financing in the first quarter of 1999 was
proceeds from the issuance of common stock from the exercising of warrants. Net
cash used from financing activities for the first quarter of 1998 was $6,731 for
the purchase of Company warrants.
During the quarter ending March 31, 1999 certain warrantholders have
exercised a total of 61,090 warrants at an exercise price of $0.6875. The
Company received a total of $42,000 in proceeds from the exercise of these
warrants into the Company's common stock.
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 November 1998, 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.
The Company has repurchased approximately 360,000 shares of the Company's common
stock in private and public transactions and retired all shares repurchased.
Page 6
<PAGE>
Working capital and liquidity, which consists principally of cash,
receivables and inventories, was $3,445,832 at March 31, 1999 and $3.339.933 at
December 31, 1998. The ratio of current assets to current liabilities was 10:1
at March 31, 1999 and 5:1 at December 31, 1998.
YEAR 2000 ISSUES
The Company is currently in the process of assessing Year 2000 issues
relative to its business. The following information outlines the current status
of the Company's understanding and plans regarding the Year 2000 problem.
COMPANY'S STATE OF READINESS
The Company uses a widely used PC based information system to process
financial transactions and generate financial information. The Company also uses
various other PC based software packages to support its business. These systems
are linked by a network at the Company's headquarters in Golden Valley,
Minnesota. No significant information systems are located outside the Company's
headquarters, other than individual stand alone PC software packages used by
sales personnel. The Company's product lines do not perform any calculations or
manipulations of dates, and hence do not have year 2000 compliance issues. While
the Company is in the process of assessing Year 2000 issues relative to its
vendors, products and related components used in the product, the Company knows
that its products do not utilize time or dates to operate.
The Company has established the following phases for becoming ready for
the Year 2000:
Awareness Phase - The Company has researched the Year 2000 issue and is
communicating both internally and with outside parties including its independent
auditors, its bank, key suppliers and certain customers. The Company is aware of
the potential issues surrounding the Year 2000 problem and will continue
communicating the issues at hand.
Assessment Phase - This phase includes establishing a Year 2000 team
and investigating how Year 2000 issues may impact the Company, both in terms of
the specific aspects of the business which could be affected, and the
consequences to the Company if it is not prepared. The Company has completed the
internal systems assessment phase and has identified the systems that the
Company believes to be critical to the continued operations of the Company. The
Company will continue to assess the impact of year 2000 readiness from its
suppliers and customers over the next 3 months.
Renovation Phase - The renovation phase covers all Company actions to
correct systems which are not Year 2000 compliant, or develop alternate systems
in all areas which are determined to have a significant impact on the Company if
not corrected. The Company has updated its internal accounting system, local
area network and other non-critical systems to be year 2000 compliant.
Validation Phase - This phase will include all Company activities
performed to test any new or alternate systems for conducting its business, and
taking corrective actions in situations where new systems do not properly handle
year 2000 problems.
Implementation Phase - In this phase, the Company has begun utilizing
all newly developed systems which are installed to correct Year 2000 problems as
they relate to the Company.
The Company has relationships with key suppliers to support its
business. While the Company believes alternate vendors could be utilized to
provide comparable products and services currently provided by its key vendors,
the Company currently relies on its relationships with its key vendors to
conduct its business, and changes in sources of key products and services could
have a material impact on the Company. The Company is
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<PAGE>
currently in the process of assessing the impact of these third party risks, and
is expecting to complete this process by July 31, 1999.
COSTS TO ADDRESS COMPANY'S YEAR 2000 ISSUES
To date, the costs of assessing the year 2000 problem have been
insignificant, and based on its assessment so far, the Company does not believe
remediation costs will be material to the Company's financial condition or
operating results.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
A worst case scenario relative to the Year 2000 issue would be that the
Company needs to replace both its information technology and non-information
technology systems, and develop alternate sources of supply for its critical
components, third party software, and third party manufacturing. Because of its
current size, the Company believes replacement of its current information
systems would not result in costs material to the Company's financial condition
or results of operations. In the event the Company was forced to develop
alternate sources of supply in any key areas, significant costs could result,
but amounts have not yet been estimated. The Company expects to analyze these
uncertainties as part of its Year 2000 assessment phase, and develop a plan of
action to minimize the uncertainties and mitigate the potential costs involved,
should the worst case scenario occur.
CONTINGENCY PLANS
The Company does not currently have a contingency plan to handle the
worst case scenario above, but expects to develop one as part of its assessment
phase to be completed by July 31, 1999.
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
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<PAGE>
ITEM 5. OTHER INFORMATION
On April 27, 1999 the Company announced that VideoLabs, Inc. signed a
letter of intent to acquire Acoustic Communication Systems, Inc. This purchase
requires shareholder approval. The Company has postponed its Annual Meeting that
was scheduled for May 19, 1999 until late June. New proxy materials detailing
this action and a new meeting date will be mailed to shareholders of record in
late May.
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 12, 1999 By: /s/ James Hansen
---------------------- -----------------
James W. Hansen
President, CEO, Treasurer and Chairman
Page 9
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000892020
<NAME> VIDEOLABS, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,536,532
<SECURITIES> 158,000
<RECEIVABLES> 731,771
<ALLOWANCES> 36,233
<INVENTORY> 1,252,275
<CURRENT-ASSETS> 3,848,657
<PP&E> 1,137,781
<DEPRECIATION> 693,593
<TOTAL-ASSETS> 4,465,043
<CURRENT-LIABILITIES> 402,825
<BONDS> 0
0
0
<COMMON> 44,776
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,465,043
<SALES> 1,855,865
<TOTAL-REVENUES> 1,855,865
<CGS> 1,152,322
<TOTAL-COSTS> 647,612
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 781
<INCOME-PRETAX> 72,283
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,283
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
