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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, 1998
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)
(781) 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
August 7, 1998 was 13,268,845.
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VIDEOSERVER, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1997 and June 30, 1998.............................. 3
Condensed Consolidated Statements of Operations
Three and six months ended June 30, 1997 and 1998................ 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1997 and 1998.......................... 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 4 Submission of Matters to a Vote of Securities Holders.............. 11
Item 6 Exhibits and Reports on Form 8-K................................... 11
SIGNATURE.......................................................... 12
</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 1997 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, 1997). 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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<TABLE>
<CAPTION>
VIDEOSERVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE RELATED DATA)
(UNAUDITED)
DECEMBER 31, JUNE 30,
1997 1998
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $24,866 $27,093
Marketable securities 21,665 21,489
Accounts receivable, net of allowance for doubtful accounts
of $1,338 and $1,343 at December 31, 1997 and June 30, 1998 7,244 6,635
Inventories 3,882 3,232
Deferred income taxes 2,619 2,619
Other current assets 941 1,263
------- -------
Total current assets 61,217 62,331
Equipment and improvements, net 5,142 4,981
Deferred income taxes 4,341 4,341
Other assets, net 2,199 2,417
------- -------
Total assets $72,899 $74,070
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $11,677 $12,320
Other current liabilities 1,131 1,821
------- -------
Total current liabilities 12,808 14,141
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;
13,122,843 issued and outstanding at December 31, 1997;
13,203,882 issued and outstanding at June 30, 1998 131 132
Capital in excess of par value 54,584 55,216
Retained earnings 5,493 4,713
Cumulative translation adjustment (117) (132)
------- -------
Total stockholders' equity 60,091 59,929
------- -------
Total liabilities and stockholders' equity $72,899 $74,070
======= =======
</TABLE>
See accompanying notes.
3
<PAGE> 4
<TABLE>
<CAPTION>
VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE RELATED DATA)
UNAUDITED
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $11,451 $13,007 $26,754 $24,760
Cost of sales 4,220 4,884 9,179 9,888
------- ------- ------- -------
Gross profit 7,231 8,123 17,575 14,872
Operating expenses:
Research and development 3,176 3,571 5,719 7,362
Sales and marketing 2,881 3,025 5,609 5,874
General and administrative 1,144 1,217 2,215 2,432
Purchased research and development 14,000 14,000
Non-recurring expenses 657
------- ------- ------- -------
Total operating expenses 21,201 7,813 27,543 16,325
------- ------- ------- -------
Income (loss) from operations (13,970) 310 (9,968) (1,453)
Interest income, net 409 474 934 939
------- ------- ------- -------
Income (loss) before income taxes (13,561) 784 (9,034) (514)
Provision (benefit) for income taxes (4,882) 266 (3,252) 266
------- ------- ------- -------
Net income (loss) ($8,679) $ 518 ($5,782) ($780)
======= ======= ======= =======
Net income (loss) per share:
Basic ($0.68) $0.04 ($0.46) ($0.06)
Diluted ($0.68) $0.04 ($0.46) ($0.06)
Shares used in computing net income
(loss) per share:
Basic 12,821,000 13,194,000 12,628,000 13,179,000
Diluted 12,821,000 13,393,000 12,628,000 13,179,000
</TABLE>
See accompanying notes.
4
<PAGE> 5
<TABLE>
<CAPTION>
VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
SIX MONTHS ENDED JUNE 30,
1997 1998
---------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($ 5,782) ($ 780)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Purchased research and development 14,000
Depreciation and amortization 1,298 1,822
Provision for doubtful accounts 16 5
Deferred taxes (4,680)
Tax benefit related to employee stock plans 180
Changes in operating assets and liabilities:
Accounts receivable 2,965 604
Inventories (1,019) 650
Other current assets 95 (322)
Accounts payable and accrued expenses (1,762) 643
Other current liabilities 403 814
-------- -------
Net cash provided by operating activities 5,714 3,436
INVESTING ACTIVITIES
Purchases of equipment and improvements (1,507) (1,361)
Proceeds from sale of marketable securities 3,954 7,076
Purchases of marketable securities (6,900)
Acquisition of business, net (15,416)
Increases in other assets (221) (518)
-------- -------
Net cash used in investing activities (13,190) (1,703)
FINANCING ACTIVITIES
Repayment of long-term debt (337) (124)
Net proceeds from stock issued under employee stock benefit plans 497 633
-------- -------
Net cash provided by financing activities 160 509
Effect of exchange rate on cash and cash equivalents (22) (15)
Increase (decrease) in cash and cash equivalents (7,338) 2,227
Cash and cash equivalents at beginning of year 27,876 24,866
-------- -------
Cash and cash equivalents at end of period $ 20,538 $27,093
======== =======
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
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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 1997 Annual Report to Shareholders and incorporated by reference into
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
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"). The purchase price
of $18.8 million was allocated to the tangible and intangible assets acquired
based upon their estimated fair market values, resulting in an allocation of
$2.8 million to the tangible net assets, and $2.0 million to purchased software
which had reached technological feasibility 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 are included for the full period in
the financial statements for the quarter and six months ended June 30, 1998. The
following pro forma information presents the results of operations for the six
months ended June 30, 1997 as if the NAC business unit had been acquired as of
January 1, 1997, including the charge to operations of $14.0 million related to
purchased in-process research and development, as if expensed on that date.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1997
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(In thousands, except for share related data)
<S> <C>
Total revenues $30,381
Net loss ($5,742)
Net loss per share ($0.43)
</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
date indicated, or of results which may be achieved in the future.
6
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3. INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of:
DECEMBER 31, JUNE 30,
(In thousands) 1997 1998
----------- --------
<C> <C>
Raw materials and subassemblies $2,673 $1,992
Work in process 761 577
Finished goods 448 663
------ ------
$3,882 $3,232
====== ======
</TABLE>
4. NEWLY ISSUED ACCOUNTING STANDARD
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"), and Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effect of stock options.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. For the Company, the difference between the shares
used in computing basic and diluted net income (loss) per share is entirely the
result of dilutive stock options. All net income (loss) per share amounts have
been presented, and where appropriate restated, in accordance with SFAS 128.
SFAS 130 defines and provides rules for the reporting of comprehensive income, a
measure of all changes in stockholders' equity that result from recognized
transactions and other economic events of a period. For the quarters and six
months ended June 30, 1997 and 1998, the Company's comprehensive income (loss)
was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1997 1998 1997 1998
-------- ------- -------- -------
(In thousands)
<S> <C> <C> <C> <C>
Net income (loss) ($8,679) $518 ($5,782) ($780)
(Increase) decrease in cumulative
translation adjustment (30) (9) (22) (15)
------- ---- ------- -----
Comprehensive income (loss) ($8,709) $509 ($5,804) ($795)
======= ==== ======= =====
</TABLE>
5. NON-RECURRING EXPENSES
In March 1998, the Company recorded a charge of $1.3 million associated with a
plan to restructure certain of its operations to increasingly focus on its newer
product offerings, such as IP-based network server products and more compact
network access card modules, while streamlining operations related to certain of
its existing line of server products. The charge included $657,000 reported as
non-recurring expenses, primarily comprising severance costs, lease obligations,
and equipment write-downs, $450,000 reported as a part of cost of sales for
various write-downs of excess and obsolete inventory to their net realizable
values, and $193,000 for certain facilities costs reported as research and
development expenses. Approximately $600,000 of the $1.3 million charge requires
a cash outlay, of which approximately $400,000 had been expended as of June 30,
1998.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company's consolidated financial statements for the three and six
months ended June 30, 1998 reflect the impact of the acquisition of the network
access card ("NAC") business unit from Promptus Communications on April 28,
1997. Results of operations in the six month period also include the impact of
$1.3 million of non-recurring expenses recorded as a result of restructuring
actions undertaken in March, 1998.
RESULTS OF OPERATIONS
NET SALES Net sales increased 14% from $11.5 million in the quarter
ended June 30, 1997 to $13.0 million in the quarter ended June 30, 1998. The
increase was driven primarily by increased sales of Multimedia Conference
Server (MCS) products, due to what the Company believes to be an improved
market generally for conferencing products and to improved reselling efforts
through the Company's major OEM customers. The 1998 second quarter also
includes a full quarter of operating results for the NAC business acquired in
late April, 1997, whereas the 1997 second quarter includes results for only a
portion of the quarter.
Net sales decreased 7% from $26.8 million in the six months ended June,
1997 to $24.8 million in the six months ended June 30, 1998. The decrease was
due primarily to lower demand in the first quarter of 1998 from PictureTel, the
Company's largest customer, and from conferencing service providers.
International sales, primarily in Europe, accounted for approximately 40%
and 32% of net sales for the quarters ended June 30, 1997 and 1998, and 38% and
32% for the six months ended June 30, 1997 and 1998. 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 63.1%
in the quarter ended June 30, 1997 to 62.5% in the quarter ended June 30, 1998.
For the six month period ended June 30, the gross profit rate decreased from
65.7% in 1997 to 60.1% in 1998. The decrease in the second quarter, and for the
six months ended June 30, 1998 was primarily due to a greater proportion of
lower margin products in the sales mix than in 1997, including network access
cards.
RESEARCH AND DEVELOPMENT Research and development expenses increased 12%
from $3.2 million in the quarter ended June 30, 1997 to $3.6 million in the
quarter ended June 30, 1998, representing 28% and 27% of net sales for the
periods. For the six months ended June 30, 1997 and 1998, research and
development expenses increased 29% from $5.7 million in 1997 to $7.4 million in
1998, representing 21% and 30% of net sales for the periods. Spending increases
in 1998 were primarily the result of an increase in engineering staffing to
extend the Company's conferencing technologies to more traditional network
platforms in concert with newly released industry standards. These network
platforms include local area networks (LANs), corporate intranets, and the
Internet, governed by the H.323 industry standards for voice, video and data
collaboration, as well as ATM and frame relay. The six month period in 1998 also
includes a one-time charge to research and development in March, 1998 in the
amount of $193,000, undertaken as a part of the Company's restructuring efforts.
The Company expects to continue to commit substantial resources to research and
development in the future.
SALES AND MARKETING Sales and marketing expenses increased 5% from $2.9
million in the quarter ended June 30, 1997 to $3.0 million in the quarter ended
June 30, 1998, representing 25% and 23% of net sales for the periods. For the
six months ended June 30, 1997 and 1998, sales and marketing expenses increased
5% from $5.6 million in 1997 to $5.9 million in 1998, representing 21% and 24%
of net sales for the periods.
8
<PAGE> 9
The increase in spending in 1998 is due to an expansion of the Company's sales
and marketing personnel and program resources to extend distribution for its
products. The Company expects increases in sales and marketing expenses as it
addresses broader markets and geographic territories for its products, including
the Asia/Pacific region.
GENERAL AND ADMINISTRATIVE General and administrative expenses increased 6%
from $1.1 million in the quarter ended June 30, 1997 to $1.2 million in the
quarter ended June 30, 1998, representing 10% and 9% of net sales for the
periods. For the six months ended June 30, 1997 and 1998, general and
administrative expenses increased 10% from $2.2 million in 1997 to $2.4 million
in 1998, representing 8% and 10% 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 network access card business.
NON-RECURRING EXPENSES In March 1998, the Company adopted a plan to
restructure certain of its operations to increasingly focus on some of its
newer product offerings, such as IP-based network server products and more
compact network access card modules, while streamlining operations related to
certain of its existing product lines. As a result of these actions, the
Company recorded charges of approximately $1,300,000 in the quarter ended March
31, 1998. These one-time charges include $657,000 reported as non-recurring
expenses, comprising estimated severance costs of $384,000 for 38 positions
across all departments of the Company, and $273,000 of estimated lease
obligations (net of estimated sublease income), the writedown of certain
equipment, and other expenses related to consolidations, $450,000 reported as a
part of cost of sales for various write-downs of excess and obsolete inventory
to their net realizable values, and $193,000 for certain facilities costs
reported as research and development expenses. Approximately $600,000 of the
$1.3 million charge requires a cash outlay, of which approximately $400,000 had
been expended as of June 30, 1998.
INTEREST INCOME, NET Interest income, net, increased from approximately
$409,000 in the quarter ended June 30, 1997 to approximately $474,000 in the
quarter ended June 30, 1998. The increase was due primarily to a higher
proportion of the Company's cash equivalents and marketable securities being
invested in taxable securities, and to an increase in cash available for
investment. For the six months ended June 30, 1997 and 1998, net interest income
was approximately $934,000 and $939,000.
PROVISION (BENEFIT) FOR INCOME TAXES The provision (benefit) for income
taxes, as represented by the income tax rate, was 34% for the quarter ended June
30, 1998. 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. For the six months ended June 30, 1998, the income
tax rate was affected by the fact that no income tax benefit was attributed to
the pre-tax loss realized in the quarter ended March 31, 1998.
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 dependence on major customers, growth
in demand for videoconferencing products, risks and uncertainties related to an
evolving market, rapid technological change, competition, the difficulty in
assimilating the operations and personnel of businesses acquired previously or
in the future, variability of quarterly results, protection of proprietary
technology, retention of key employees, and uncertainties regarding patents,
have been outlined in the Company's 1997 Annual Report to Shareholders and
incorporated by reference into the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company has cash, cash equivalents and marketable
securities of $48.6 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 approximately $3.4 million in
the first six months of 1998. The Company's primary investing activities in the
period related to the purchase of computers and office equipment to support the
Company's growth.
At June 30, 1998, the Company has available a bank revolving credit
facility providing for borrowings up to $7.5 million. Borrowings are limited to
a percentage of eligible accounts receivable, and are unsecured. Under this
credit facility, the Company is required to maintain certain financial ratios
and minimum levels of net worth and profitability, and is prohibited from paying
cash dividends without the Bank's consent. No borrowings have been made under
this 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 facility, will be sufficient to
meet the Company's cash requirements for the foreseeable future.
10
<PAGE> 11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
On May 13, 1998, at the Company's 1998 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 II directors to hold office for a
three-year term and until his/her respective successor has 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,
1998.
Results with respect to the voting on each of the above proposals were
as follows:
Proposal 1:
Khoa D. Nguyen
For - 10,709,339 Withhold Authority - 35,673
--- ----------- ------------------- ------
Steven C. Walske
For - 10,707,822 Withhold Authority - 37,190
--- ----------- ------------------- ------
The term of office of Robert Castle, Paul Ferri and William Foster,
the remaining members of the Board of Directors of the Company,
continued after the meeting.
Proposal 2:
10,715,955 Votes For
----------
9,848 Votes Against
----------
19,209 Abstentions
----------
0 Broker Non-Votes
----------
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 six-month period ended
June 30, 1998.
11
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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: August 14, 1998 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> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 27,093
<SECURITIES> 21,489
<RECEIVABLES> 7,978
<ALLOWANCES> (1,343)
<INVENTORY> 3,232
<CURRENT-ASSETS> 62,331
<PP&E> 4,981
<DEPRECIATION> 0
<TOTAL-ASSETS> 74,070
<CURRENT-LIABILITIES> 14,141
<BONDS> 0
0
0
<COMMON> 132
<OTHER-SE> 59,797
<TOTAL-LIABILITY-AND-EQUITY> 74,070
<SALES> 24,760
<TOTAL-REVENUES> 24,760
<CGS> 9,888
<TOTAL-COSTS> 9,888
<OTHER-EXPENSES> 16,325
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (514)
<INCOME-TAX> 266
<INCOME-CONTINUING> (780)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (780)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
<FN>
ADDITIONAL CURRENT ASSET - DEFERRED TAX 2,619
ADDITIONAL CURRENT ASSET - OTHER 1,263
OTHER ASSET - DEFERRED TAXES 4,341
OTHER ASSETS - NET 2,417
INTEREST INCOME 939
</FN>
</TABLE>
