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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 MARCH 31, 1999
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 April
30, 1999 was 13,486,163
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VIDEOSERVER, INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998............................3
Condensed Consolidated Statements of Operations
Three months ended March 31, 1999 and 1998.......................4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998.......................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 1998 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, 1998). 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.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $29,008 $23,225
Marketable securities 23,345 27,381
Accounts receivable, net of allowances of $1,534 at March 31, 1999
and December 31, 1998 9,063 7,778
Inventories 2,609 3,693
Deferred income taxes 3,300 3,300
Other current assets 1,576 1,497
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Total current assets 68,901 66,874
Equipment and improvements, net of accumulated depreciation 5,754 6,616
Deferred income taxes 4,000 4,000
Other assets, net 3,061 2,642
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Total assets $81,716 $80,132
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,262 $ 3,546
Accrued expenses 11,054 11,396
Deferred revenue 1,272 1,045
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Total current liabilities 15,588 15,987
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;
13,462,940 issued and outstanding at March 31, 1999;
13,382,206 issued and outstanding at December 31, 1998 135 134
Capital in excess of par value 57,386 56,720
Retained earnings 8,639 7,307
Cumulative translation adjustment (32) (16)
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Total stockholders' equity 66,128 64,145
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Total liabilities and stockholders' equity $81,716 $80,132
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</TABLE>
See accompanying notes.
3
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VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
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<S> <C> <C>
Revenue:
Product revenue $ 14,820 $ 10,469
Service revenue 1,742 1,284
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Total revenue 16,562 $ 11,753
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Cost of revenue:
Cost of product revenue 5,163 3,955
Cost of service revenue 983 1,049
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Total cost of revenue 6,146 5,004
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Gross profit 10,416 6,749
Operating expenses:
Research and development 3,799 3,791
Sales and marketing 3,831 2,849
General and administrative 1,311 1,215
Non-recurring expenses -- 657
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Total operating expenses 8,941 8,512
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Income (loss) from operations 1,475 (1,763)
Interest income, net 543 465
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Income (loss) before income taxes 2,018 (1,298)
Provision for income taxes 686 --
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Net income (loss) $ 1,332 $ (1,298)
=========== ===========
Net income (loss) per share:
Basic $ 0.10 $ (0.10)
Diluted $ 0.10 $ (0.10)
Shares used in computing net income (loss) per share:
Basic 13,434,000 13,164,000
Diluted 13,913,000 13,164,000
</TABLE>
See accompanying notes.
4
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VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,332 $(1,298)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 895 883
Changes in operating assets and liabilities:
Accounts receivable (1,285) 853
Inventories 1,084 640
Other current assets (79) (328)
Accounts payable and accrued expenses (626) 39
Other current liabilities 227 71
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Net cash provided by operating activities 1,548 860
INVESTING ACTIVITIES
Purchases of equipment and improvements (246) (653)
Proceeds from sale of marketable securities 4,036 --
Purchases of marketable securities -- (6,900)
Increases in other assets (206) (80)
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Net cash provided by (used in) investing activities 3,584 (7,633)
FINANCING ACTIVITIES
Repayment of long term debt -- (68)
Net proceeds from stock issued under employee stock benefit plans 667 579
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Net cash provided by financing activities 667 511
Effect of exchange rate on cash and cash equivalents (16) (6)
Increase (decrease) in cash and cash equivalents 5,783 (6,268)
Cash and cash equivalents at beginning of year 23,225 24,866
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Cash and cash equivalents at end of period $29,008 $18,598
======= =======
</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 1998 Annual Report to Shareholders and incorporated by reference into
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
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
Inventories consist of:
MARCH 31, DECEMBER 31,
(In thousands) 1999 1998
--------- ------------
Raw materials and subassemblies $2,000 $3,188
Work in process 274 27
Finished goods 335 478
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$2,609 $3,693
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3. NON-RECURRING EXPENSES
In March 1998, the Company adopted a plan to restructure certain of its
operations to increasingly focus and streamline its product offerings. 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 included
$657,000 reported as non-recurring restructuring expenses primarily covering
estimated severance costs, $450,000 reported as cost of revenue for various
write-downs of excess and obsolete inventory, and $193,000 for certain
facilities costs reported as research and development expenses. Approximately
$650,000 of the $1,300,000 charge required a cash outlay, substantially all of
which had been paid as of March 31, 1999.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company's results of operations for the three month period ended March
31, 1998 includes the impact of $1.3 million of non-recurring expenses recorded
as a result of restructuring actions undertaken in March, 1998.
RESULTS OF OPERATIONS
REVENUE Revenue increased 41% to $16.6 million in the quarter ended March
31, 1999 from $11.8 million in the quarter ended March 31, 1998. The increase
was primarily driven by increased revenue from Multimedia Conference Server
(MCS) products, including software and hardware upgrades related to new releases
of the company's ISDN products, and increased revenue from the Company's
Encounter family of Internet Protocol (IP) based products. Revenue from the
Company's Original Equipment Manufacturer (OEM) partners was supplemented by
increased sales to service providers and resellers, as the Company expands its
global presence and builds channels for its IP based products.
Revenue from international markets, primarily in Europe, accounted for
approximately 32% of revenue for the quarters ended March 31, 1999 and 1998. The
Company expects that revenue from international markets, which is 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 revenue was 62.9% in the
quarter ended March 31, 1999 as compared with 57.4% in the quarter ended March
31, 1998. Gross profit for the quarter ended March 31, 1998 was reduced by a
one-time charge to cost of sales in the amount of $450,000, undertaken as part
of the March 1998 restructuring, to write down certain inventory to its net
realizable value. Margin improvements in the quarter ended March 31, 1999 were
primarily attributed to an increase in the proportion of high-end higher margin
products in the revenue mix, improved coverage of fixed manufacturing costs due
to overall volume increases, and improved service margins. Gross profit rates
may be affected in future periods due to changes in the proportion of low-end,
lower margin products in the revenue mix and increased competition.
RESEARCH AND DEVELOPMENT Research and development expenses of $3.8 million
were approximately the same in both the quarter ended March 31, 1999 and March
31, 1998, representing 23% and 32% of revenue for the respective periods. The
Company continues to develop and enhance its ISDN, ATM, and Internet Protocol
(IP) based products and to extend its multimedia networking technologies to
emerging markets. 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% to $3.8
million in the quarter ended March 31, 1999 from $2.8 million in the quarter
ended March 31, 1998, representing 23% and 24% of revenue for the respective
periods. The increased spending was primarily due to the addition of sales and
marketing personnel, increased sales commissions, and the expansion of field
sales offices, particularly in the European and Asia Pacific markets. The
Company expects continued increases in sales and marketing expenses as it
broadens its channels of distribution and extends its reach into new geographic
territories.
GENERAL AND ADMINISTRATIVE General and administrative expenses increased
8% to $1.3 million in the quarter ended March 31, 1999 from $1.2 million in the
quarter ended March 31, 1998, representing 8% and 10% of revenue for the
respective periods. The increased spending is primarily attributed to
expenditures related to the Company's new corporate-wide financial accounting,
manufacturing, and sales and distribution system.
7
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NON-RECURRING EXPENSES In March 1998, the Company adopted a plan to
restructure certain of its operations to increasingly focus and streamline its
product offerings. 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 included $657,000 reported as non-recurring restructuring expenses
primarily covering estimated severance costs, $450,000 reported as cost of sales
for various write-downs of excess and obsolete inventory, and $193,000 for
certain facilities costs reported as research and development expenses.
Approximately $650,000 of the $1,300,000 charge required a cash outlay,
substantially all of which was paid as of March 31, 1999.
INTEREST INCOME, NET Interest income, net, increased to approximately
$543,000 in the quarter ended March 31, 1999, from approximately $465,000 in the
quarter ended March 31, 1998. The increase was due to an increase in the amount
of cash available for investment.
PROVISION (BENEFIT) FOR INCOME TAXES The provision for income taxes in the
current quarter was at a 34% rate. Tax benefits, primarily related to research
and development tax credits and interest earned on tax exempt securities, were
offset by state and foreign income taxes. In the quarter ending March 31, 1998,
the Company did not recognize tax benefits associated with the loss incurred in
that period.
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, market
growth and the risks and uncertainties related to an evolving market, rapid
technological change, competition, variability of quarterly results, protection
of proprietary technology, retention of key employees, uncertainties regarding
patents, and the impact of the Year 2000 issue have been outlined in the
Company's 1998 Annual Report to Shareholders, incorporated by reference into the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
On April 5, 1999, the Company amended its patent infringement suit against
Accord Telecommunications, Inc., originally filed in November 1998, to include a
claim that Accord infringes on a patent for video image playback issued to
VideoServer on March 23, 1999. Additional information regarding this suit can be
found in the Management's Discussion and Analysis section of the Company's 1998
Annual Report to Shareholders.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company has cash, cash equivalents and marketable
securities of $52.4 million, including cash generated from operations in the
quarter ended March 31, 1999 of approximately $1.5 million. The Company
regularly invests excess funds in short-term money market funds, government
securities, and commercial paper.
At March 31, 1999, 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.
8
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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
March 31, 1999.
9
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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: May 13, 1999 By: /s/ Stephen J. Nill
--------------------------------------------
Stephen J. Nill
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer,
Authorized Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 29,008
<SECURITIES> 23,345
<RECEIVABLES> 10,597
<ALLOWANCES> (1,534)
<INVENTORY> 2,609
<CURRENT-ASSETS> 68,901
<PP&E> 5,754
<DEPRECIATION> 0
<TOTAL-ASSETS> 81,716
<CURRENT-LIABILITIES> 15,588
<BONDS> 0
0
0
<COMMON> 135
<OTHER-SE> 65,993
<TOTAL-LIABILITY-AND-EQUITY> 81,716
<SALES> 16,562
<TOTAL-REVENUES> 16,562
<CGS> 6,146
<TOTAL-COSTS> 6,146
<OTHER-EXPENSES> 8,941
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,018
<INCOME-TAX> 686
<INCOME-CONTINUING> 1,332
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,332
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
<FN>
ADDITIONAL CURRENT ASSET - DEFERRED TAX 3,300
ADDITIONAL CURRENT ASSET - OTHER 1,576
OTHER ASSET - DEFERRED TAXES 4,000
OTHER ASSET - NET 3,061
INTEREST INCOME 543
</TABLE>
