<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
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, 1997
COMMISSION FILE NUMBER 0-25882
-----------
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 October
24, 1997 was 13,051,882.
================================================================================
<PAGE> 2
VIDEOSERVER, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1996 and September 30, 1997............................3
Condensed Consolidated Statements of Operations
Three and nine months ended September 30, 1996 and 1997.............4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1996 and 1997.......................5
Notes to Condensed Consolidated Financial Statements..................6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................8
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K.....................................11
Signature................................................................13
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 1996 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, 1996). 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
VIDEOSERVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE RELATED DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $27,876 $24,485
Marketable securities 26,808 19,031
Accounts receivable, net of allowance for doubtful accounts
of $1,077 and $1,213 at December 31, 1996 and September 30,
1997 7,252 5,849
Inventories 3,653 5,170
Deferred taxes 2,280 2,614
Other current assets 843 860
------- -------
Total current assets 68,712 58,009
Equipment and improvements, net 4,180 5,065
Deferred taxes 4,346
Other assets, net 204 2,276
------- -------
Total assets $73,096 $69,696
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $11,721 $ 9,426
Other current liabilities 1,337 1,245
------- -------
Total current liabilities 13,058 10,671
Long-term debt, less current portion 167 7
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;
12,620,760 issued and outstanding at December 31, 1996;
12,948,149 issued and outstanding at
September 30, 1997 126 129
Capital in excess of par value 49,573 54,069
Retained earnings 10,225 4,928
Cumulative translation adjustment (53) (108)
------- -------
Total stockholders' equity 59,871 59,018
------- -------
Total liabilities and stockholders' equity $73,096 $69,696
======= =======
</TABLE>
See accompanying notes.
3
<PAGE> 4
VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE RELATED DATA)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 13,046 $ 12,903 $ 33,826 $ 39,657
Cost of sales 4,265 4,942 11,080 14,121
----------- ----------- ----------- -----------
Gross profit 8,781 7,961 22,746 25,536
Operating expenses:
Research and development 1,996 3,594 5,473 9,313
Sales and marketing 2,407 3,220 6,214 8,829
General and administrative 1,043 1,109 2,892 3,324
Purchased research and development 14,000
----------- ----------- ----------- -----------
Total operating expenses 5,446 7,923 14,579 35,466
----------- ----------- ----------- -----------
Income (loss) from operations 3,335 38 8,167 (9,930)
Interest income, net 448 383 1,298 1,317
----------- ----------- ----------- -----------
Income (loss) before income taxes 3,783 421 9,465 (8,613)
Provision (benefit) for income taxes 1,021 (64) 2,555 (3,316)
----------- ----------- ----------- -----------
Net income (loss) $ 2,762 $ 485 $ 6,910 $ (5,297)
=========== =========== =========== ===========
Net income (loss) per share: $ 0.21 $ 0.04 $ 0.52 $ (0.41)
Shares used in computing net income
(loss) per share: 13,296,000 13,295,000 13,242,000 13,009,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
4
<PAGE> 5
VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 6,910 $ (5,297)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Purchased research and development 14,000
Depreciation and amortization 1,207 2,183
Provision for doubtful accounts 317 136
Deferred taxes (1,000) (4,680)
Tax benefit related to employee stock plans 180
Changes in operating assets and liabilities:
Accounts receivable (2,631) 3,379
Inventories (668) (309)
Other current assets (191) 31
Accounts payable and accrued expenses 4,464 (3,589)
Other current liabilities (274) 157
-------- --------
Net cash provided by operating activities 8,134 6,191
INVESTING ACTIVITIES
Purchases of equipment and improvements (2,906) (2,136)
Proceeds from sale of marketable securities 8,119 7,777
Purchases of marketable securities (16,668)
Acquisition of NAC business (15,416)
Increases in other assets (105) (196)
-------- --------
Net cash used in investing activities (11,560) (9,971)
FINANCING ACTIVITIES
Repayment of long-term debt (531) (460)
Net proceeds from stock issued under employee stock benefit plans 1,028 904
-------- --------
Net cash provided by financing activities 497 444
Effect of exchange rate on cash and cash equivalents (55)
Decrease in cash and cash equivalents (2,929) (3,391)
Cash and cash equivalents at beginning of year 31,679 27,876
-------- --------
Cash and cash equivalents at end of period $ 28,750 $ 24,485
======== ========
Supplemental schedule of non-cash investing activities:
Common stock issued to acquire NAC business, net of issuance costs $ 3,415
========
</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 1996 Annual Report to Shareholders and incorporated by reference into
the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
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. BUSINESS COMBINATION
On April 28, 1997, the Company purchased the network access card ("NAC")
business unit of Promptus Communications, Inc. ("Promptus"), a Rhode Island
corporation, through a wholly-owned subsidiary of the Company. The assets
acquired include all tangible and intangible assets of Promptus' NAC business
unit, including fixed assets, inventories, trade receivables, products, and
technology. Liabilities assumed include all third-party trade liabilities and
other accrued obligations pertaining to the acquired NAC assets. The total
purchase price of approximately $18.8 million included $14.5 million of cash
consideration and 223,881 shares of the Company's common stock. The acquisition
was accounted for under the purchase method of accounting.
The purchase price was allocated to the tangible and intangible assets acquired
based upon their estimated fair market values. The intangible assets acquired
were valued using risk adjusted cash flow models under which estimated future
cash flows were discounted taking into account risks related to existing and
future target markets and to the completion of the products expected to be
ultimately marketed by the Company, and assessments of the life expectancy of
the underlying technology. The analysis resulted in an allocation of $2.0
million to purchased software which had reached technological feasibility,
principally represented by the technology comprising the NAC products being sold
by Promptus at the acquisition date. This amount was capitalized and is being
amortized over a five year period. In addition, $14.0 million was allocated to
purchased research and development which had not reached technological
feasibility and had no alternative future use. This amount was charged to
operations at the acquisition date.
Operating results of the NAC business unit have been included in the financial
statements from the acquisition date. The following pro forma information
presents the results of operations for the nine month periods ended September
30, 1996 and 1997, as if the NAC business unit of Promptus had been acquired as
of January 1, 1996 and 1997, including the charge to operations of $14.0 million
related to purchased in-process research and development resulting from the
acquisition, as if expensed on the date acquired.
6
<PAGE> 7
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
------------- -------------
(In thousands, except for share
related data)
<S> <C> <C>
Total revenues $40,116 $43,284
Net loss $(2,243) $(5,257)
Net loss per share $ (0.17) $ (0.40)
</TABLE>
The unaudited pro forma results do not purport to be indicative of the results
which actually would have been obtained had the acquisition been effected on the
dates indicated, or of results which may be achieved in the future.
3. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
(In thousands) 1996 1997
------------ -------------
<S> <C> <C>
Raw materials and subassemblies $2,881 $3,020
Work in process 247 690
Finished goods 525 1,460
------ ------
$3,653 $5,170
====== ======
</TABLE>
4. NEWLY ISSUED ACCOUNTING STANDARD
In February 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which
establishes new methods to compute earnings per share. Among other changes,
under SFAS 128 the dilutive effect of stock options will be excluded from the
calculation of primary earnings per share. The statement is required to be
adopted on December 31, 1997, and all prior periods are to be restated at that
time. Upon adoption, reported primary net income (loss) per share for the
quarter and nine months ended September 30, 1997 of $.04 and ($.41) is expected
to remain unchanged. Reported primary net income per share for the quarter and
nine months ended September 30, 1996 is expected to increase $.01, to $0.22 per
share, and $.03, to $0.55 per share.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company's consolidated financial statements for the three and nine
months ended September 30, 1997 reflect the impact of the acquisition of the
network access card ("NAC") business unit from Promptus Communications on April
28, 1997. Results of operations include those of the NAC business from the date
of acquisition.
RESULTS OF OPERATIONS
NET SALES Net sales decreased 1% from $13.0 million in the quarter ended
September 30, 1996 to $12.9 million in the quarter ended September 30, 1997, and
increased 17% from $33.8 million in the nine months ended September 1996 to
$39.7 million in the nine months ended September 30, 1997. Sales of Multimedia
Conference Server (MCS) products were lower in the third quarter of 1997 than in
the same period last year, primarily driven by significantly lower demand from
PictureTel, the Company's largest customer during each of those periods, and to
a lesser degree by lower demand from conferencing service providers. As a result
of efforts to broaden the Company's distribution channels, sales to an
increasing number of other OEM and reseller customers grew significantly in the
third quarter of 1997 compared with the year earlier period. The 1997 period
also includes sales of network access products associated with the acquisition
of the NAC business in April, 1997.
A significant factor influencing the demand for VideoServer's products is
the rate of deployment and use of conferencing endpoints, such as room based
conferencing systems and desktop conferencing terminals, sold by conferencing
OEMs and computer companies. Growth in the sales of endpoints appears to have
slowed in recent quarters as end users begin to evaluate new technologies such
as LAN-based products and lower priced ISDN-based endpoints now being
introduced. This softness in endpoint demand is expected to continue in the near
term and may effect growth rates for the Company's sales and operating results,
at least until such time as endpoint demand returns to more historical levels.
International sales, primarily in Europe, accounted for approximately 36%
and 29% of net sales for the quarters ended September 30, 1996 and 1997, and 34%
and 35% for the nine months ended September 30, 1996 and 1997. 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 decreased from 67.3%
in the quarter ended September 30, 1996 to 61.7% in the quarter ended September
30, 1997. For the nine months ended September 30, the gross profit rate
decreased from 67.2% in 1996 to 64.4% in 1997. The decreases in 1997 are
primarily due to a greater proportion of lower margin products in the sales mix
than in 1996, including network access cards associated with the NAC business
unit acquisition, and somewhat higher fixed costs as a percentage of net sales
in the current year. Gross profit rates may be lower in future periods, as low
end, lower margin products are expected to 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 80%
from $2.0 million in the quarter ended September 30, 1996 to $3.6 million in the
quarter ended September 30, 1997, representing 15% and 28% of net sales for the
periods. For the nine months ended September 30, 1996 and 1997, research and
development expenses were $5.5 million and $9.3 million, representing 16% and
23% 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. The Company is continuing to
develop and enhance its current MCS products, which incorporate the H.320
industry standard for conferencing over switched digital services, and to extend
its conferencing technologies to more traditional network platforms, in concert
with newly
8
<PAGE> 9
released industry standards. These network platforms include local area networks
(LANs), corporate intranets, and the Internet, governed by the new H.323
industry standards for voice, video and data collaboration, as well as ATM and
frame relay. Spending increases were also the result of the addition of
development efforts associated with the acquired NAC business unit. The Company
expects to continue to commit substantial resources to research and development
in the future.
SALES AND MARKETING Sales and marketing expenses increased 34% from $2.4
million in the quarter ended September 30, 1996 to $3.2 million in the quarter
ended September 30, 1997, representing 18% and 25% of net sales for the periods.
For the nine months ended September 30, 1996 and 1997, sales and marketing
expenses were $6.2 million and $8.8 million, representing 18% and 22% of net
sales for the periods. The Company is expanding its sales and marketing
personnel and program resources to drive a broader distribution model for its
products, including selected value added resellers and dealers, and to support
its future growth. The spending increase was the result of the addition of sales
and marketing personnel in the US and Europe, the expansion of field sales
offices, and an increase in marketing programs.
GENERAL AND ADMINISTRATIVE General and administrative expenses increased 6%
from $1.0 million in the quarter ended September 30, 1996 to $1.1 million in the
quarter ended September 30, 1997, representing 8% and 9% of net sales for the
periods. For the nine months ended September 30, 1996 and 1997, general and
administrative expenses were $2.9 million and $3.3 million, representing 9% and
8% of net sales for the periods. The increase in spending was primarily due to
the addition of finance and administrative personnel, including those to support
the acquired NAC business unit.
INTEREST INCOME, NET Interest income, net, decreased from approximately
$448,000 in the quarter ended September 30, 1996 to approximately $383,000 in
the quarter ended September 30, 1997. The decrease was due primarily to a higher
proportion of the Company's cash equivalents and marketable securities being
invested in tax-exempt U.S. and state government securities, and to the decrease
in cash available for investment resulting from the Company's acquisition of the
NAC business unit. For the nine months ended September 30, 1996 and 1997, net
interest income was $1.3 million.
PROVISION (BENEFIT) FOR INCOME TAXES The provision (benefit) for income
taxes, as represented by the income tax rate, was 27% for both the quarter and
nine months ended September 30, 1996, and was (15%) and (38%) for the quarter
and nine months ended September 30, 1997. The effective tax rate in 1996 was
less than the combined federal and state statutory rate primarily as a result of
the recognition of deferred tax assets previously subject to valuation reserves.
These valuation reserves were eliminated in 1996, when the Company deemed it
more likely than not that sufficient future taxable income would be generated to
realize the full benefit of the deferred tax assets. Income taxes for the nine
months ended September 30, 1997 include tax benefits related to the charge to
operations of $14.0 million for purchased in-process research and development
resulting from the acquisition of the NAC business unit. Excluding this charge
and related benefit, the effective tax rate for 1997 is anticipated to be 32%,
which is lower than the rate expected earlier in the year. This reduction in the
estimated 1997 rate was made in light of the Company's actual operating results
for the quarter and first nine months ended September 30, 1997. For 1997, the
effective tax rate is less than the combined federal and state statutory rate
primarily as a result of interest earned on tax-exempt U.S. and state government
securities, and the generation of Federal and state research and development tax
credits. The income tax benefit recognized in the third quarter of 1997
represents the year to date benefit of this change.
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, protection of proprietary technology, uncertainties regarding
patents, and variability of quarterly results, have been outlined in the
Company's 1996 Annual Report to Shareholders and incorporated by reference into
the Company's Annual Report on Form 10-K for the year ended December 31, 1996.
9
<PAGE> 10
In particular, PictureTel Corporation, currently the Company's largest
customer, has announced its intention to develop products related to the new
H.323 standards which are expected to be competitive with products the Company
currently has under development. Furthermore, in July, 1997, PictureTel
completed its acquisition of MultiLink, Inc., a developer and supplier of
multipoint control units and a current competitor of the Company, in an effort
to accelerate PictureTel's initiatives in this area. The impact of the
acquisition of MultiLink on the Company's relationship with PictureTel, and on
the Company's future sales and operating results, is unclear, but it is likely
that sales of the Company's MCS products to PictureTel, which have decreased
sequentially in each of the most recent four quarters, may continue to decline.
In addition to the factors above, the Company has made, and may continue
to make, acquisitions of, or significant investments in, businesses that offer
complementary products, services, and technologies as part of its overall
business strategy. Any such acquisitions or investments will likely be
accompanied by the risks commonly encountered in acquisitions of businesses,
including, among others, the difficulty of assimilating the operations and
personnel of the acquired businesses, and the potential disruption of the
Company's ongoing business. These factors could have a material adverse effect
on the Company's operations or financial condition.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company has cash, cash equivalents and
marketable securities of $43.5 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 $6.2 million in the first
nine months of 1997. The Company's primary investing activities in the same
period related to the purchase of the NAC business unit of Promptus, as well as
computers and office equipment to support the Company's growth.
At September 30, 1997, 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
1997. 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
as of September 30, 1997.
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.
10
<PAGE> 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27: Financial Data Schedule.
(b) No reports on Form 8-K were filed during the three-month period ended
September 30, 1997.
11
<PAGE> 12
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 24, 1997 By: /s/ Stephen J. Nill
-------------------------------
Stephen J. Nill
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer, Authorized
Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 24,485
<SECURITIES> 19,031
<RECEIVABLES> 7,062
<ALLOWANCES> (1,213)
<INVENTORY> 5,170
<CURRENT-ASSETS> 58,009
<PP&E> 5,065
<DEPRECIATION> 0
<TOTAL-ASSETS> 69,696
<CURRENT-LIABILITIES> 10,671
<BONDS> 7
0
0
<COMMON> 129
<OTHER-SE> 59,018
<TOTAL-LIABILITY-AND-EQUITY> 69,696
<SALES> 39,657
<TOTAL-REVENUES> 39,657
<CGS> 14,121
<TOTAL-COSTS> 14,121
<OTHER-EXPENSES> 35,466
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,613)
<INCOME-TAX> (3,316)
<INCOME-CONTINUING> (5,297)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,297)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> (0.41)
<FN>
ADDITIONAL CURRENT ASSET - DEFERRED TAXES 2,614
ADDITIONAL CURRENT ASSET - OTHER 860
OTHER ASSET - DEFERRED TAXES 4,346
OTHER ASSETS - NET 2,276
INTEREST INCOME, NET 1,317
</TABLE>
