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 June 30, 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 August 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>
JUNE 30, DECEMBER 31,
1999 1998
UNAUDITED AUDITED
----------- -----------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents ......................................................... $ 1,765,002 $ 1,514,561
Certificate of deposit-restricted (Note 4) ........................................ 158,000 158,000
Accounts Receivable, less allowance for doubtful accounts of $38,043 on June 30,
1999 and $30,000 on December 31, 1998 ......................................... 928,501 664,172
Interest Receivable ............................................................... 1,678 6,688
Inventories ....................................................................... 1,090,627 1,616,990
Deferred income taxes ............................................................. 150,000 125,000
Prepaid expenses .................................................................. 50,367 50,457
----------- -----------
Total Current assets ........................................................... 4,144,175 4,135,868
Property and Equipment
Office and computer equipment ..................................................... 479,595 446,832
Machinery and equipment ........................................................... 127,391 127,391
Tooling ........................................................................... 524,058 488,225
Leasehold improvements ............................................................ 45,016 45,016
----------- -----------
Total equipment ................................................................... 1,176,060 1,107,464
Less accumulated depreciation ............................................... 748,800 638,161
----------- -----------
Net equipment .............................................................. 427,260 469,303
Other Assets
Patents, net ...................................................................... 165,055 179,340
Total assets ................................................................ $ 4,736,490 $ 4,784,511
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable .................................................................. $ 393,747 $ 658,089
Current maturities of long-term debt .............................................. 22,071 22,071
Customer deposits and other liabilities ........................................... 9,937 6,114
Accrued compensation .............................................................. 41,367 28,358
Purchase commitments, reserves and other .......................................... 147,692 81,303
----------- -----------
Total current liabilities ...................................................... 614,814 795,935
Long-Term Debt, net of current maturities ............................................ 17,495 24,300
Stock holders' Equity
Common stock, $.01 par value; Authorized 20,000,000 shares issued and outstanding,
4,472,562 shares at June 30, 1999 and 4,457,471 shares at December 31, 1998 ..... 44,726 44,574
Additional paid in capital ........................................................ 6,397,692 5,553,553
Accumulated deficit ............................................................... (2,338,237) (2,478,474)
----------- -----------
Total stockholders' equity ..................................................... 4,104,181 3,964,276
----------- -----------
Total liabilities and stockholders' equity .................................. $ 4,736,490 $ 4,784,511
=========== ===========
</TABLE>
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<PAGE>
INTERIM CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales............................................................... $1,879,334 $1,906,266 $3,735,199 $3,115,109
Cost of goods sold .................................................. 1,157,515 1,155,564 2,309,836 1,822,156
---------- ---------- ---------- ----------
Gross profit ........................................................ 721,819 750,912 1,425,363 1,292,953
Selling, general and administrative expenses ........................ 695,554 728,753 1,343,166 1,241,321
---------- ---------- ---------- ----------
Operating Income .................................................... 26,265 22,159 82,197 51,632
Other income (expense)
Interest, net ....................................................... 16,690 20,227 33,041 41,154
Loss on sale of assets .............................................. 0 0 0 0
---------- ---------- ---------- ----------
Total other income (expense) ........................................ 16,690 20,227 33,041 41,154
Income Tax Benefit .................................................. 25,000 25,000 25,000 25,000
---------- ---------- ---------- ----------
Net Income.......................................................... $ 67,955 $ 67,386 $ 140,238 $ 117,786
========== ========== ========== ==========
Basic earnings per common share ..................................... $ 0.02 $ 0.02 $ 0.03 $ 0.03
Weighted average shares outstanding ................................. 4,505,562 3,920,221 4,505,562 3,920,221
Diluted earnings per common share ................................... $ 0.02 $ 0.01 $ 0.03 $ 0.03
Diluted shares outstanding .......................................... 4,589,784 4,627,189 4,589,784 4,627,189
</TABLE>
INTERIM CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
1999 1998
----------- -----------
<S> <C> <C>
Cash Flows From Operations:
Net cash provided by operations ................... $ 344,371 $ (109,312)
Cash Flows From Investing:
Capital expenditures .............................. (93,597) (65,739)
Proceeds from maturities of certificates of deposit 0 17,500
----------- -----------
Net cash from investing ........................... (93,597) (48,239)
Cash Flows From Financing:
Issuance of common stock and warrants ............. 42,000 0
Repurchase of common stock and warrants ........... (42,333) (6,731)
----------- -----------
Net cash from (used for) financing ............. (333) (6,731)
----------- -----------
Net increase (decrease) in cash and cash equivalents .... 250,441 (164,282)
Cash and cash equivalents at beginning of period ........ 1,514,561 1,746,928
----------- -----------
Cash and cash equivalents at end of period .............. $ 1,765,002 $ 1,582,646
=========== ===========
</TABLE>
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<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:
JUNE 30,
1999 1998
--------- ---------
Weighted average common shares outstanding for
Basic earnings per share 4,505,562 3,920,221
Effect of dilutive securities:
Stock Options and Warrants 84,222 706,968
--------- ---------
Shares used in diluted earnings per share 4,589,784 4,627,189
========= =========
NOTE 4. CERTIFICATES OF DEPOSIT
At June 30, 1999, restricted certificates of deposit, served as
collateral for one irrevocable letter of credit.
NOTE 5. INCOME TAXES
During 1998 and the second quarter of 1999, the Company recorded a
net deferred tax asset of $25,000, 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 June 30, 1999 were $1,879,334 compared
to $1,906,266 for the second quarter of 1998, a decrease of 1.5%. This decrease
was primarily due to an inability to fill existing orders due to a shortage in
component parts and weakness in the sales of the healthcare products group.
Sales for the six months ended June 30, 1999 were $3,735,199 vs. $3,115,109, an
increase of 20%. This increase is attributed to an increase in new product
sales, increased private label sales and sales in the Internet and healthcare
divisions, which were added over the past twelve months.
During the first six months of 1999, sales in North and South
America, Europe and Asia/Pacific were 69%, 29% and 2% compared to 74%, 24% and
2% for the same six months in 1998. The increase in European sales is
attributable to the increase in market acceptance of the Company's new products.
The stagnation of 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 Communication Systems, 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 acquisition was approved by shareholders on July
13, 1999 and closed on August 3, 1999.
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 second quarter of 1999
was $721,819 or 38% as compared to $750,912 or 39% for the second 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. For the six months ended June 30, 1999, the gross
margin was $1,425,363 (38%) vs. $1,292,953 (41%) attributable again to the
increase in OEM revenues. 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.
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<PAGE>
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
decreased from $728,753 in the second quarter of 1998 to $695,554 in the second
quarter of 1999. For six months expenses have increased from $1,241,321 to
$1,343,166. This increase is related to the Company's efforts to initiate an
Internet division, invest in new product development and sales and marketing
expenses related to new product launches.
Operating income for the second quarter of 1999 was $26,265
compared to operating income of $22,159 for the same period in 1998. For the six
months ended June 30, 1999 operating income increased from $51,632 to $82,197 or
an increase of 60% primarily a result of increased sales.
Other income and expenses consist of interest income on the
investment of cash and interest expense.
As of June 30, 1999, the Company had an estimated net deferred tax
asset of $150,000, 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 second quarter of 1999 was $67,955 compared to
a net income of $67,386 for the second quarter of 1998. Net income for the six
months ended June 30, 1999 increased from $117,786 in 1998 to $140,238 in 1999
consistent with the increase in sales.
Basic and fully diluted earnings per share for the quarter ended
June 30, 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 4,589,784, respectively
for the quarter ended June 30, 1999. Basic and fully diluted shares considered
outstanding were 3,920,221 and 4,627,189, respectively for the quarter ended
June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operating activities totaled $344,371 for
the six months ended June 30, 1999 compared to cash used for operating
activities of $109,312 for the six months ended June 30, 1999. The approximately
$450,000 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 $93,597 for the six
months of 1999 compared to cash used for investing activities of $65,739 for the
six months of 1998. The cash used in the first half of 1998 and 1999 was for
capital equipment and tooling purchases.
Net cash used for financing activities in the first six months of
1999 was $42,333 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
half of 1999 was proceeds from the issuance of common stock from the exercising
of warrants. Net cash used from financing activities for the first half of 1998
was $6,731 for the purchase of Company warrants.
During the first half of 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. Net cash used for financing was $333.
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
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<PAGE>
Company has repurchased approximately 375,000 shares of the Company's common
stock in private and public transactions and retired all shares repurchased.
Working capital and liquidity, which consists principally of cash,
receivables and inventories, was $3,563,361 at June 30, 1999 and $3,339,933 at
December 31, 1998. The ratio of current assets to current liabilities was 7:1 at
June 30, 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
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<PAGE>
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 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
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: August 16, 1999 By: /s/ James Hansen
----------------- -----------------
James W. Hansen
President, CEO, Treasurer and Chairman
Page 9
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,765,002
<SECURITIES> 158,000
<RECEIVABLES> 928,501
<ALLOWANCES> 38,043
<INVENTORY> 1,090,627
<CURRENT-ASSETS> 4,144,175
<PP&E> 1,176,060
<DEPRECIATION> 748,800
<TOTAL-ASSETS> 4,736,490
<CURRENT-LIABILITIES> 580,814
<BONDS> 0
0
0
<COMMON> 4,505,562
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,736,490
<SALES> 1,879,334
<TOTAL-REVENUES> 1,879,334
<CGS> 1,157,515
<TOTAL-COSTS> 695,554
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 67,955
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,955
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
