<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 JUNE 30, 1996
COMMISSION FILE NUMBER 0-25882
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VIDEOSERVER, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-3114212
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
</TABLE>
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 July 29,
1996 was 12,499,898.
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VIDEOSERVER, INC.
<TABLE>
INDEX
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1995 and June 30, 1996 ................................ 3
Condensed Consolidated Statements of Income
Three and six months ended June 30, 1995 and 1996 .................. 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 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 4 Submission of Matters to a Vote of Securities Holders ............... 9
Item 6 Exhibits and Reports on Form 8-K .................................... 9
SIGNATURE ............................................................... 10
</TABLE>
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
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VIDEOSERVER, INC.
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE RELATED DATA)
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $31,679 $31,957
Marketable securities 13,489 15,883
Accounts receivable, net of allowance for doubtful accounts of $650
and $895 at December 31, 1995 and June 30, 1996 4,231 6,069
Inventories 1,598 1,985
Deferred taxes and other current assets 843 2,040
------- -------
Total current assets 51,840 57,934
Equipment and improvements, net 1,921 3,206
Other assets, net 141 134
------- -------
Total assets $53,902 $61,274
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 5,636 $ 8,017
Other current liabilities 1,804 1,620
------- -------
Total current liabilities 7,440 9,637
Long-term debt, less current portion 673 387
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 June 30, 1996;
12,385,731 and 12,499,898 outstanding at December 31, 1995 and
June 30, 1996 125 125
Capital in excess of par value 45,635 46,946
Retained earnings 31 4,179
Treasury stock, 163,038 and 48,871 common shares at December 31,
1995 and June 30, 1996 (2)
------- -------
Total stockholders' equity 45,789 51,250
------- -------
Total liabilities and stockholders' equity $53,902 $61,274
======= =======
</TABLE>
See accompanying notes.
3
<PAGE> 4
VIDEOSERVER, INC.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR SHARE RELATED DATA)
UNAUDITED
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1995 1996 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 6,810 $ 11,270 $ 12,322 $ 20,780
Cost of sales 2,393 3,742 4,407 6,815
---------- ---------- ---------- ----------
Gross profit 4,417 7,528 7,915 13,965
Operating expenses:
Research and development 1,177 1,894 2,329 3,477
Sales and marketing 1,317 2,027 2,424 3,807
General and administrative 789 977 1,408 1,849
---------- ---------- ---------- ----------
Total operating expenses 3,283 4,898 6,161 9,133
---------- ---------- ---------- ----------
Income from operations 1,134 2,630 1,754 4,832
Interest income, net 217 442 296 850
---------- ---------- ---------- ----------
Income before income taxes 1,351 3,072 2,050 5,682
Provision for income taxes 366 829 471 1,534
---------- ---------- ---------- ----------
Net income $ 985 $ 2,243 $ 1,579 $ 4,148
========== ========== ========== ==========
Net income per share: $ 0.08 $ 0.17 $ 0.14 $ 0.31
Shares used in computing net
income per share: 11,759,000 13,338,000 11,126,000 13,216,000
========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE> 5
VIDEOSERVER, INC.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1995 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,579 $ 4,148
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 510 794
Provision for doubtful accounts 181 245
Deferred taxes (1,000)
Changes in operating assets and liabilities:
Accounts receivable (1,058) (2,083)
Inventories (268) (387)
Other current assets 8 (197)
Accounts payable and accrued expenses 914 3,031
Deferred revenue (109) (84)
------- --------
Net cash provided by operating activities 1,757 4,467
INVESTING ACTIVITIES
Purchases of equipment and improvements (820) (2,040)
Proceeds from sale of marketable securities 8,119
Purchases of marketable securities (10,513)
Increases in other assets (19) (32)
------- --------
Net cash used in investing activities (839) (4,466)
FINANCING ACTIVITIES
Proceeds from long-term debt 326
Repayment of long-term debt (300) (386)
Proceeds from issuance of common stock, net of issuance costs 35,509
Redemption of preferred stock (3,611)
Net proceeds from stock issued under employee stock benefit plans 663
Payment of preferred dividends (215)
------- --------
Net cash provided by financing activities 31,709 277
------- --------
Increase in cash and cash equivalents 32,627 278
Cash and cash equivalents at beginning of year 8,195 31,679
------- --------
Cash and cash equivalents at end of period $40,822 $ 31,957
======= ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
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 JUNE 30
(In thousands) 1995 1996
----------- -------
<S> <C> <C>
Raw materials and subassemblies $1,100 $1,421
Work in process 187 299
Finished goods 311 265
------ ------
$1,598 $1,985
====== ======
</TABLE>
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
NET SALES Net sales increased 65% from $6.8 million in the quarter ended
June 30, 1995 to $11.3 million in the quarter ended June 30, 1996, and 69% to
$20.8 million in the six months ended June 30, 1996, from $12.3 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, primarily in Europe, accounted for approximately 23%
and 36% of net sales for the quarters ended June 30, 1995 and 1996, and 24% and
33% for the six months ended June 30, 1995 and 1996.
GROSS PROFIT Gross profit as a percentage of net sales increased from 64.9%
in the quarter ended June 30, 1995 to 66.8% in the quarter ended June 30, 1996.
For the six month period ended June 30, the gross profit rate increased from
64.2% in 1995 to 67.2% in 1996. The increases in 1996 are primarily due to a
greater proportion of higher margin products in the sales mix than in 1995, as
well as overall reductions in product cost resulting from economies of scale in
purchasing and manufacturing. The higher gross profit rates are not likely to
continue; the proportion of quarterly sales to carriers, which generally have
been at higher gross profit rates than sales to OEMs, may be uneven; recently
introduced low end, lower margin products may become a larger proportion of the
sales mix; and increased competition may result in lower selling prices.
RESEARCH AND DEVELOPMENT Research and development expenses increased 61%
from $1.2 million in the quarter ended June 30, 1995 to $1.9 million in the
quarter ended June 30, 1996, representing 17% of net sales in each period. For
the six months ended June 30, 1995 and 1996, research and development expenses
were $2.3 million and $3.5 million, representing 19% and 17% 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 54% from $1.3
million in the quarter ended June 30, 1995 to $2.0 million in the quarter ended
June 30, 1996, representing 19% and 18% of net sales for the periods. For the
six months ended June 30, 1995 and 1996, sales and marketing expenses were $2.4
million and $3.8 million, representing 20% 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 24% from approximately $789,000 in the quarter ended June 30, 1995 to
approximately $977,000 in the quarter ended June 30, 1996, representing 12% and
9% of net sales for the periods. For the six months ended June 30, 1995 and
1996, general and administrative expenses were $1.4 million and $1.8 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
increased costs associated with being a 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.
7
<PAGE> 8
INTEREST INCOME, NET Interest income, net, increased from approximately
$217,000 in the quarter ended June 30, 1995 to approximately $442,000 in the
quarter ended June 30, 1996. For the six months ended June 30, 1995 and 1996,
net interest income was approximately $296,000 and approximately $850,000. 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 27% for the
quarters ended June 30, 1995 and 1996, and 23% and 27% for the six months ended
June 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.
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 June 30, 1996, the Company has cash, cash equivalents and marketable
securities of $47.8 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 $4.5 million in the first six
months of 1996. The Company's primary investing activities in the first six
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 June 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 forseeable future.
8
<PAGE> 9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders.
On May 15, 1996, at the Company's 1996 Annual Meeting of Stockholders,
the Company's stockholders met to consider and vote upon the following
two proposals:
(1) A proposal to elect two Class I directors to hold office for a
three-year term and until their respective successors have been duly
qualified and elected.
(2) A proposal to ratify the appointment of Ernst & Young LLP as
auditors for the Company for the fiscal year ending December 31,
1996.
Results with respect to the voting on each of the above proposals were
as follows:
Proposal 1:
Robert L. Castle
For - 9,930,505 Withhold Authority - 11,373
--- --------- ------------------ ------
Paul J. Ferri
For - 9,929,905 Withhold Authority - 11,973
--- --------- ------------------ ------
Proposal 2:
9,938,533 Votes For
---------
400 Votes Against
---------
2,945 Abstentions
---------
0 Broker Non-Votes
---------
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
June 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: July 29, 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
VIDEOSERVER, INC.
<TABLE>
COMPUTATION OF NET INCOME PER SHARE (1)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 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 10,893,848 12,468,884 10,256,089 12,442,297
Weighted average common equivalent
shares resulting from stock options 778,175 869,430 636,907 773,626
Dilutive effect of common and common
equivalent shares issued subsequent
to April 12, 1994 (2) 86,886 232,586
---------- ---------- ---------- ----------
11,758,909 13,338,314 11,125,582 13,215,923
========== ========== ========== ==========
Net income $ 985,000 $2,243,000 $1,579,000 $4,148,000
Primary net income per share $ 0.08 $ 0.17 $ 0.14 $ 0.31
========== ========== ========== ==========
<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> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 31,957
<SECURITIES> 15,883
<RECEIVABLES> 6,964
<ALLOWANCES> (895)
<INVENTORY> 1,985
<CURRENT-ASSETS> 57,934
<PP&E> 3,206
<DEPRECIATION> 0
<TOTAL-ASSETS> 61,274
<CURRENT-LIABILITIES> 9,637
<BONDS> 387
<COMMON> 125
0
0
<OTHER-SE> 51,125
<TOTAL-LIABILITY-AND-EQUITY> 61,274
<SALES> 20,780
<TOTAL-REVENUES> 20,780
<CGS> 6,815
<TOTAL-COSTS> 6,815
<OTHER-EXPENSES> 9,133
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,682
<INCOME-TAX> 1,534
<INCOME-CONTINUING> 4,148
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,148
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
<FN>
ADDITIONAL CURRENT ASSET DEFERRED TAXES AND OTHER 2,040
OTHER ASSETS, NET 134
INTEREST INCOME, NET 850
</FN>
</TABLE>
