<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
COMMISSION FILE NUMBER 0-25882
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VIDEOSERVER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3114212
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
NORTHWEST PARK, 63 THIRD AVENUE, BURLINGTON, MASSACHUSETTS 01803
(Address of principal executive offices, including Zip Code)
(617) 229-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /x/ No / /
The number of shares outstanding of the registrant's Common Stock as of October
18, 1996 was 12,562,006.
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<PAGE> 2
VIDEOSERVER, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1995 and September 30, 1996......................... 3
Condensed Consolidated Statements of Income
Three and nine months ended September 30, 1995 and 1996.......... 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1995 and 1996................... 5
Notes to Condensed Consolidated Financial Statements.............. 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................... ............ 7
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K.................................. 9
SIGNATURE............................................................. 10
This Report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties, including without limitation those discussed in
the Company's 1995 Annual Report to Shareholders in the section titled "Other
factors which may affect future operations" (which section is incorporated by
reference into the Company's Annual Report on Form 10-K for the year ended
December 31, 1995). Such forward-looking statements speak only as of the date on
which they are made, and the Company cautions readers not to place undue
reliance on such statements.
2
<PAGE> 3
<TABLE>
VIDEOSERVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE RELATED DATA)
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $31,679 $28,750
Marketable securities 13,489 22,038
Accounts receivable, net of allowance for doubtful accounts of
$650 and $967 at December 31 1995 and September 30, 1996 4,231 6,545
Inventories 1,598 2,266
Deferred taxes and other current assets 843 2,034
------- -------
Total current assets 51,840 61,633
Equipment and improvements, net 1,921 3,680
Other assets, net 141 186
------- -------
Total assets $53,902 $65,499
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 5,636 $ 9,450
Other current liabilities 1,804 1,408
------- -------
Total current liabilities 7,440 10,858
Long-term debt, less current portion 673 264
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized,
none issued and outstanding
Common stock, $.01 par value, 40,000,000 shares authorized;
12,548,769 issued at December 31, 1995 and September 30, 1996;
12,385,731 and 12,525,603 outstanding at December 31, 1995 and
September 30, 1996 125 125
Capital in excess of par value 45,635 47,311
Retained earnings 31 6,941
Treasury stock, 163,038 and 23,166 common shares at
December 31, 1995 and September 30, 1996 (2)
------- -------
Total stockholders' equity 45,789 54,377
------- -------
Total liabilities and stockholders' equity $53,902 $65,499
======= =======
</TABLE>
See accompanying notes.
3
<PAGE> 4
<TABLE>
VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
UNAUDITED
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $7,311 $13,046 $19,633 $33,826
Cost of sales 2,567 4,265 6,974 11,080
------ ------- ------- -------
Gross profit 4,744 8,781 12,659 22,746
Operating expenses:
Research and development 1,393 1,996 3,722 5,473
Sales and marketing 1,357 2,407 3,781 6,214
General and administrative 764 1,043 2,172 2,892
------ ------- ------- -------
Total operating expenses 3,514 5,446 9,675 14,579
------ ------- ------- -------
Income from operations 1,230 3,335 2,984 8,167
Interest income, net 458 448 754 1,298
------ ------- ------- -------
Income before income taxes 1,688 3,783 3,738 9,465
Provision for income taxes 388 1,021 859 2,555
------ ------- ------- -------
Net income $1,300 $ 2,762 $ 2,879 $ 6,910
====== ======= ======= =======
Net income per share: $ 0.10 $ 0.21 $ 0.24 $ 0.52
Shares used in computing net
income per share: 13,151,000 13,296,000 11,804,000 13,242,000
========== ========== ========== ==========
See accompanying notes.
</TABLE>
4
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<TABLE>
VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1995 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,879 $ 6,910
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 778 1,207
Provision for doubtful accounts 286 317
Deferred taxes (1,000)
Changes in operating assets and liabilities:
Accounts receivable (1,354) (2,631)
Inventories (712) (668)
Other current assets (42) (191)
Accounts payable and accrued expenses 2,429 4,464
Deferred revenue 458 (274)
------- --------
Net cash provided by operating activities 4,722 8,134
INVESTING ACTIVITIES
Purchases of equipment and improvements (1,109) (2,906)
Proceeds from sale of marketable securities 8,119
Purchases of marketable securities (16,668)
Increases in other assets (19) (105)
------- --------
Net cash used in investing activities (1,128) (11,560)
FINANCING ACTIVITIES
Proceeds from long-term debt 563
Repayment of long-term debt (478) (531)
Proceeds from issuance of common stock, net of issuance costs 35,413
Redemption of preferred stock (3,612)
Net proceeds from stock issued under employee stock benefit plans 117 1,028
Payment of preferred dividends (215)
------- --------
Net cash provided by financing activities 31,788 497
------- --------
Increase (decrease) in cash and cash equivalents 35,382 (2,929)
Cash and cash equivalents at beginning of year 8,195 31,679
------- --------
Cash and cash equivalents at end of period $43,577 $ 28,750
======= ========
</TABLE>
See accompanying notes.
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VIDEOSERVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. In the
opinion of management, these financial statements contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of these interim periods. Certain footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted,
although the Company believes the disclosures in these financial statements
are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the Company's audited
financial statements included in the Company's 1995 Annual Report to
Shareholders and incorporated by reference into the Company's Annual Report
on Form 10-K for the year ended December 31, 1995. The results of operations
for the interim periods shown are not necessarily indicative of the results
for any future interim period or for the entire fiscal year.
2. INVENTORIES
<TABLE>
Inventories consist of:
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
(In thousands) 1995 1996
---- ----
<S> <C> <C>
Raw materials and subassemblies $1,100 $1,558
Work in process 187 246
Finished goods 311 462
------ ------
$1,598 $2,266
====== ======
</TABLE>
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
NET SALES Net sales increased 78% from $7.3 million in the quarter ended
September 30, 1995 to $13.0 million in the quarter ended September 30, 1996, and
72% to $33.8 million in the nine months ended September 30, 1996, from $19.6
million in the comparable period in 1995. These increases were principally due
to an increase in unit shipments of Multimedia Conference Server (MCS) products,
driven by increased market demand and an expanded number of OEM and carrier
customers.
International sales accounted for approximately 18% and 36% of net sales
for the quarters ended September 30, 1995 and 1996, and 22% and 34% for the nine
months ended September 30, 1995 and 1996. The Company expects that international
sales, which are currently denominated in U.S. dollars, will continue to be a
significant portion of the Company's business.
GROSS PROFIT Gross profit as a percentage of net sales increased from 64.9%
in the quarter ended September 30, 1995 to 67.3% in the quarter ended September
30, 1996. For the nine month period ended September 30, the gross profit rate
increased from 64.5% in 1995 to 67.2% in 1996. The increases in 1996 are
primarily due to a reduction in the cost of purchased components and scale
economies in purchasing and manufacturing, as well as a greater proportion of
higher margin products in the sales mix in 1996 compared with 1995. The higher
gross profit rates are not likely to continue; recently introduced low end,
lower margin products may become a larger proportion of the sales mix, increased
competition may result in lower selling prices, and the proportion of sales to
carriers, which generally have been at higher gross profit rates than sales to
OEMs, may be uneven.
RESEARCH AND DEVELOPMENT Research and development expenses increased 43%
from $1.4 million in the quarter ended September 30, 1995 to $2.0 million in the
quarter ended September 30, 1996, representing 19% and 15% of net sales for the
periods. For the nine months ended September 30, 1995 and 1996, research and
development expenses were $3.7 million and $5.5 million, representing 19% and
16% of net sales for the periods. Reported research and development expenses are
net of product development fees, received under development contracts with
certain customers, which are recorded as a reduction of research and development
costs as work is performed pursuant to the related contracts and defined
milestones are achieved. The increase in research and development spending was
primarily due to increased engineering staffing required to continue to develop
and enhance the Company's MCS product line. The Company expects to continue to
commit substantial resources to research and development in the future.
SALES AND MARKETING Sales and marketing expenses increased 77% from $1.4
million in the quarter ended September 30, 1995 to $2.4 million in the quarter
ended September 30, 1996, representing 19% and 18% of net sales for the periods.
For the nine months ended September 30, 1995 and 1996, sales and marketing
expenses were $3.8 million and $6.2 million, representing 19% and 18% of net
sales for the periods. The spending increase was due to the addition of sales
and marketing personnel, increased commissions on higher sales and the expansion
of existing sales offices. Sales personnel were added in the US and Europe to
support an increasing number of OEM distribution partners and carrier
relationships. The Company expects continued increases in sales and marketing
expenses as it addresses a broader market for its products.
GENERAL AND ADMINISTRATIVE General and administrative expenses increased
37% from approximately $764,000 in the quarter ended September 30, 1995 to $1.0
million in the quarter ended September 30, 1996, representing 10% and 8% of net
sales for the periods. For the nine months ended September 30, 1995 and 1996,
general and administrative expenses were $2.2 million and $2.9 million,
representing 11% and 9% of net sales for the periods. The increase in spending
was primarily due to the addition of finance and administrative personnel, and,
for the nine month period, the increased costs associated with being a
7
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public company. Although general and administrative expenses have increased,
they have decreased as a percentage of net sales due to the more rapid growth in
net sales.
INTEREST INCOME, NET Interest income, net, decreased from approximately
$458,000 in the quarter ended September 30, 1995 to approximately $448,000 in
the quarter ended September 30, 1996. The decrease in 1996 is due to a greater
amount of the Company's cash equivalents and marketable securities which are
invested in tax-exempt U.S. and state government securities. For the nine months
ended September 30, 1995 and 1996, net interest income was approximately
$754,000 and $1.3 million. The increase was due primarily to higher cash and
investment balances, resulting from the proceeds received upon the closing of
the Company's initial public offering in June, 1995, and cash generated from
operations.
PROVISION FOR INCOME TAXES The provision for income taxes was 23% and 27%
for the quarters and the nine months ended September 30, 1995 and 1996. The
effective tax rate in 1996 is less than the combined federal and state statutory
rate primarily as a result of the anticipated realization of deferred tax assets
previously subject to valuation reserves. The effective tax rate in 1995
reflected the Company's utilization of net operating loss carryforwards. For
1997, the effective tax rate is expected to more closely approximate the
combined federal and state statutory rate.
OTHER FACTORS WHICH MAY AFFECT FUTURE OPERATIONS There are a number of
business factors which singularly or combined may affect the Company's future
operating results. Some of them, including risks and uncertainties related to an
evolving market, dependence on major customers, rapid technological change,
competition, and uncertainties regarding patents, protection of proprietary
technology and variability of quarterly results, have been outlined in the
Company's 1995 Annual Report to Shareholders and incorporated by reference into
the Company's Annual Report on Form 10-K for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company has cash, cash equivalents and
marketable securities of $50.8 million. The Company regularly invests excess
funds in short-term money market funds, government securities, and commercial
paper.
The Company generated cash from operations of $8.1 million in the first
nine months of 1996, primarily from net income. The Company's primary investing
activities in the first nine months of 1996 related to capital expenditures in
connection with the relocation of its primary facility to a larger leased
facility in May, 1996, as well as computers and office equipment to support the
Company's growth.
At September 30, 1996, the Company has available a bank revolving credit
facility providing for borrowings up to $5.0 million. Borrowings are limited to
a percentage of eligible accounts receivable, and are unsecured. The Company
also has a $2.0 million term credit facility for equipment purchases made during
1996. The Company's equipment is pledged as collateral against the equipment
line of credit under these bank arrangements. Under both credit facilities, the
Company is required to maintain certain financial ratios and minimum levels of
net worth and profitability, and the Company's ability to pay dividends to
stockholders is restricted. No borrowings have been made under either facility.
The Company believes that its existing cash, cash equivalents and
marketable securities, together with cash generated from operations and
borrowings available under the Company's credit facilities, will be sufficient
to meet the Company's cash requirements for the foreseeable future.
8
<PAGE> 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11: Statement of Computation of Net Income per Share herein
included on page 11.
(b) Exhibit 27: Financial Data Schedule.
(c) No reports on Form 8-K were filed during the three-month period ended
September 30, 1996.
9
<PAGE> 10
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIDEOSERVER, INC.
Date: October 18, 1996 By: /s/ Stephen J. Nill
-----------------------
Stephen J. Nill
Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer, Authorized Officer)
10
<PAGE> 1
EXHIBIT 11
<TABLE>
VIDEOSERVER, INC.
COMPUTATION OF NET INCOME PER SHARE (1)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average common and common
equivalent shares:
Weighted average common shares
outstanding during the period 12,354,636 12,513,957 11,003,599 12,466,358
Weighted average common equivalent
shares resulting from stock options 796,797 781,859 696,813 775,609
Dilutive effect of common and common
equivalent shares issued subsequent
to April 12, 1994 (2) 103,740
----------- ----------- ----------- -----------
13,151,433 13,295,816 11,804,152 13,241,967
=========== =========== =========== ===========
Net income $ 1,300,000 $ 2,762,000 $ 2,879,000 $ 6,910,000
Primary net income per share $ 0.10 $ 0.21 $ 0.24 $ 0.52
=========== =========== =========== ===========
<FN>
(1) Fully diluted net income per share has not been separately presented, as the
amounts would not be materially different from primary net income per share.
(2) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, certain common and common equivalent shares issued by the Company during the
twelve months immediately preceding the initial filing of the registration
statement relating to the Company's initial public offering have been included
in the calculation of weighted average shares, using the treasury stock method
and the initial public offering price, as if these shares were outstanding for
all periods prior to the initial public offering.
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 28,750
<SECURITIES> 22,038
<RECEIVABLES> 7,512
<ALLOWANCES> (967)
<INVENTORY> 2,266
<CURRENT-ASSETS> 61,633
<PP&E> 3,680
<DEPRECIATION> 0
<TOTAL-ASSETS> 65,499
<CURRENT-LIABILITIES> 10,858
<BONDS> 264
<COMMON> 125
0
0
<OTHER-SE> 54,252
<TOTAL-LIABILITY-AND-EQUITY> 65,499
<SALES> 33,826
<TOTAL-REVENUES> 33,826
<CGS> 11,080
<TOTAL-COSTS> 11,080
<OTHER-EXPENSES> 14,579
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,465
<INCOME-TAX> 2,555
<INCOME-CONTINUING> 6,910
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,910
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
<FN>
ADDITIONAL CURRENT ASSET DEFERRED TAXES AND
OTHER 2,034
OTHER ASSETS, NET 186
INTEREST INCOME, NET 1,298
</FN>
</TABLE>
