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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, 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 July 31,
1999 was 13,581,240.
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VIDEOSERVER, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998.................................................................3
Condensed Consolidated Statements of Operations
Three and six months ended June 30, 1999 and 1998...................................................4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 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 4 Submission of Matters to a Vote of Securities Holders................................................10
Item 6 Exhibits and Reports on Form 8-K.....................................................................10
SIGNATURE..................................................................................................11
</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 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>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $31,321 $23,225
Marketable securities 22,621 27,381
Accounts receivable, net of allowances of $1,531 and $1,534 at June
30, 1999 and December 31, 1998 9,814 7,778
Inventories 2,392 3,693
Deferred income taxes 3,300 3,300
Other current assets 1,313 1,497
------- -------
Total current assets 70,761 66,874
Equipment and improvements, net 5,948 6,616
Deferred income taxes 4,000 4,000
Other assets, net 2,891 2,642
------- -------
Total assets $83,600 $80,132
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,934 $ 3,546
Accrued expenses 11,763 11,396
Deferred revenue 1,011 1,045
------- -------
Total current liabilities 15,708 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; 13,524,064 issued
and outstanding at June 30, 1999;
13,382,206 issued and outstanding at December 31, 1998 137 134
Capital in excess of par value 57,805 56,720
Retained earnings 10,010 7,307
Cumulative translation adjustment (60) (16)
------- -------
Total stockholders' equity 67,892 64,145
------- -------
Total liabilities and stockholders' equity $83,600 $80,132
======= =======
</TABLE>
See accompanying notes.
3
<PAGE> 4
VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Product revenue $15,009 $11,721 $29,829 $22,190
Service revenue 1,823 1,286 3,565 2,570
------- ------- ------- -------
Total revenue 16,832 13,007 33,394 24,760
------- ------- ------- -------
Cost of revenue
Cost of product revenue 5,261 3,873 10,424 7,828
Cost of service revenue 1,013 1,011 1,996 2,060
------- ------- ------- -------
Total cost of revenue 6,274 4,884 12,420 9,888
------- ------- ------- -------
Gross profit 10,558 8,123 20,974 14,872
Operating expenses:
Research and development 4,174 3,571 7,973 7,362
Sales and marketing 3,543 3,025 7,374 5,874
General and administrative 1,264 1,217 2,575 2,432
Non-recurring expenses 657
------- ------- ------- -------
Total operating expenses 8,981 7,813 17,922 16,325
------- ------- ------- -------
Income (loss) from operations 1,577 310 3,052 (1,453)
Interest income, net 500 474 1,043 939
------- ------- ------- -------
Income (loss) before income taxes 2,077 784 4,095 (514)
Provision for income taxes 706 266 1,392 266
------- ------- ------- -------
Net income (loss) $ 1,371 $ 518 $ 2,703 $ (780)
======= ======= ======= =======
Net income (loss) per share:
Basic $0.10 $0.04 $0.20 $(0.06)
Diluted $0.10 $0.04 $0.20 $(0.06)
Shares used in computing net income
(loss) per share:
Basic 13,501,000 13,194,000 13,394,000 13,179,000
Diluted 13,933,000 13,393,000 13,849,000 13,179,000
</TABLE>
See accompanying notes.
4
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VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,703 $ (780)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,776 1,822
Changes in operating assets and liabilities:
Accounts receivable (2,036) 609
Inventories 1,301 650
Other current assets 184 (322)
Accounts payable and accrued expenses (245) 643
Other current liabilities (34) 814
------- -------
Net cash provided by operating activities 3,649 3,436
INVESTING ACTIVITIES
Purchases of equipment and improvements (1,189) (1,361)
Proceeds from sale of marketable securities 4,760 7,076
Purchases of marketable securities (6,900)
Increases in other assets (168) (518)
------- -------
Net cash used in investing activities 3,403 (1,703)
FINANCING ACTIVITIES
Repayment of long-term debt (124)
Net proceeds from stock issued under employee stock benefit plans 1,088 633
------- -------
Net cash provided by financing activities 1,088 509
Effect of exchange rate on cash and cash equivalents (44) (15)
Increase in cash and cash equivalents 8,096 2,227
Cash and cash equivalents at beginning of year 23,225 24,866
------- -------
Cash and cash equivalents at end of period $31,321 $27,093
======= =======
</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:
JUNE 30, DECEMBER 31,
(In thousands) 1999 1998
-------- ------------
Raw materials and subassemblies $ 1,719 $ 3,188
Work in process 348 27
Finished goods 325 478
-------- -------
$ 2,392 $ 3,693
======== =======
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 six months ended June 30, 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, all of which was paid
as of June 30, 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 six month period ended June 30,
1998 includes the impact of $1,300,000 of non-recurring expenses recorded as a
result of restructuring actions undertaken in March, 1998.
RESULTS OF OPERATIONS
REVENUE Revenue increased 29% to $16.8 million in the quarter ended June
30, 1999 from $13 million in the quarter ended June 30, 1998. Revenue increased
35% to $33.4 million in the six months ended June 30, 1999 from $24.8 million in
the six months ended June 30, 1998. The increases for both the three and six
month periods were 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, an increase in revenue
from the Company's Encounter family of Internet Protocol (IP) based products,
and increased service revenues.
Revenue from international markets, primarily in Europe, accounted for
approximately 30% and 32% of revenue for the quarters ended June 30, 1999 and
1998, and 31% and 32% for the six months ended June 30, 1999 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 revenue increased to 62.7% in
the quarter ended June 30, 1999 from 62.5% in the quarter ended June 30, 1998.
For the six month period ended June 30, 1999 the gross profit rate increased to
62.8% from 60.1% in the corresponding period of 1998. Gross profit for the six
month period ended June 30, 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 and six months ended June 30, 1999 were
primarily attributed to improved service margins. This margin improvement was
partially offset by an increase in the proportion of lower margin products in
the revenue mix of the quarter ended June 30, 1999.
RESEARCH AND DEVELOPMENT Research and development expenses increased 17% to
$4.2 million in the quarter ended June 30, 1999 from $3.6 million in the quarter
ended June 30, 1998, representing 25% and 27% of revenue for the periods. For
the six months ended June 30, 1999, research and development expenses increased
8% to $8 million from $7.4 million in the corresponding period of 1998,
representing 24% and 30% of revenue for the periods. Spending increases in 1999
were attributed to the Company's continuing development and enhancement of its
ISDN, ATM, and IP based products and the extension of 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 17% to $3.5
million in the quarter ended June 30, 1999 from $3.0 million in the quarter
ended June 30, 1998, representing 21% and 23% of revenue for the periods. For
the six months ended June 30, 1999, sales and marketing expenses increased 26%
to $7.4 million in 1999 from $5.9 million in the corresponding of 1998,
representing 22% and 24% of revenue for the periods. The increase in spending in
1999 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.
7
<PAGE> 8
GENERAL AND ADMINISTRATIVE General and administrative expenses increased 4%
to $1.3 million in the quarter ended June 30, 1999 from $1.2 million in the
quarter ended June 30, 1998, representing 8% and 9% of revenue for the periods.
For the six months ended June 30, 1999, general and administrative expenses
increased 6% to $2.6 million from $2.4 million in the corresponding period of
1998, representing 8% and 10% of revenue for the periods. The increased spending
is primarily attributed to expenditures and associated depreciation related to
the Company's new corporate-wide financial accounting, manufacturing, and sales
and distribution system.
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 six month period ended June 30, 1998. These
one-time charges include $657,000 reported as non-recurring restructuring
expenses primarily covering estimated severance costs, $450,000 reported as a
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, all of which was paid as of June 30, 1999.
INTEREST INCOME, NET Interest income, net, increased to $500,000 in the
quarter ended June 30, 1999 from $474,000 in the quarter ended June 30, 1998.
Interest income, net, increased to $1,043,000 in the six months ended June 30,
1999 from $939,000 for the same period in 1998. The increases are attributed to
an increase in the amount of cash available for investment.
PROVISION FOR INCOME TAXES The provision for income taxes in the quarter
and six month periods ended June 30, 1999 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. For the
six months ended June 30, 1998, the income tax rate reflects the non-recognition
of tax benefits attributed to the pre-tax loss incurred 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, 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.
In April 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 in March 1999. In June 1999 Accord Telecommunications, Inc. filed a
counterclaim charging the Company with unfair trade practices under the Lanham
Act. The company believes that these claims are without legal merit, and intends
to defend them vigorously. 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.
In July 1999 the United States District Court for the Federal Circuit
upheld the Federal District court's April 1998 verdict that the Datapoint
patents in the videoconferencing field are invalid. See Note 10 to the
consolidated financial statements included in the Company's 1998 Annual Report
for further discussion. The Company is presently assessing the impact, if any,
this matter will have on its business.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company has cash, cash equivalents and marketable
securities of $53.9 million, including cash generated from operations of
approximately $3.6 million in the six month period ended June 30, 1999. The
Company regularly invests excess funds in short-term money market funds,
government securities, and commercial paper.
At June 30, 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.
9
<PAGE> 10
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
On May 12, 1999, at the Company's 1999 Annual Meeting of Stockholders,
the Company's stockholders met to consider and vote upon the following
three proposals:
(1) A proposal to elect two Class I 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 approve an amendment to the Employee Stock Purchase
Plan, increasing the number of shares available for purchase by
300,000.
(3) A proposal to ratify the appointment of Ernst & Young LLP as
auditors for the Company for the fiscal year ending December 31,
1999.
Results with respect to the voting on each of the above proposals were
as follows:
Proposal 1:
Robert L. Castle
For - 11,413,636 Withhold Authority - 27,207
--- --------------- ------------------ --------------
Paul J. Ferri
For - 11,417,018 Withhold Authority - 23,825
--- --------------- ------------------ --------------
The terms of office of Khoa D. Nguyen, Steven C. Walske, and
William Foster, the remaining members of the Board of Directors
of the Company, continued after the meeting.
Proposal 2:
8,151,544 Votes For
-----------------------
2,820,854 Votes Against
-----------------------
468,445 Abstentions
-----------------------
Proposal 3:
11,428,607 Votes For
--------------------
6,506 Votes Against
--------------------
5,730 Abstentions
--------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10: Amendment No. 1 to Amended and Restated 1994 Non-Employee
Director Stock Option Plan
(b) Exhibit 27: Financial Data Schedule.
(c) No reports on Form 8-K were filed during the six-month period ended
June 30, 1999.
10
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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 13, 1999 By: /s/ Stephen J. Nill
--------------------------------
Stephen J. Nill
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer, Authorized
Officer)
11
<PAGE> 1
Exhibit 10
VIDEOSERVER, INC.
AMENDMENT NO. 1
TO
AMENDED AND RESTATED
1994 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
--------------------------------------------
This Amendment (this "Amendment") to the Amended and Restated 1994 Non-Employee
Director Stock Option Plan (the "Plan") of VideoServer Inc., a Delaware
corporation (the "Company"), is being adopted by the Board of Directors of the
Company as of the date set forth above and shall be effective as of such date.
1. Amendment of Article IV of the Plan. Article IV of the Plan is hereby
amended by renumbering Section A(iii) thereof as "Section A(iv)", and
by adding a new Section A(iii) to read in its entirety as follows:
"Notwithstanding and in addition to the annual automatic grant of
Options pursuant to Section A(ii) of this Article IV, effective as of
the date of adoption of this Amendment, each person who is a Director
on such date shall receive from the Company a fully-vested Option to
purchase 7,000 Shares."
2. Ratification, Etc. Except to the extent amended by this Amendment, all
of the terms, provisions and conditions set forth in the Plan are
hereby ratified and confirmed and remain in full force and effect. The
Plan and this Amendment shall be read and construed together as a
single instrument.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 31,321
<SECURITIES> 22,621
<RECEIVABLES> 11,345
<ALLOWANCES> (1,531)
<INVENTORY> 2,392
<CURRENT-ASSETS> 70,761
<PP&E> 5,948
<DEPRECIATION> 0
<TOTAL-ASSETS> 83,600
<CURRENT-LIABILITIES> 15,708
<BONDS> 0
0
0
<COMMON> 137
<OTHER-SE> 67,755
<TOTAL-LIABILITY-AND-EQUITY> 83,600
<SALES> 33,394
<TOTAL-REVENUES> 33,394
<CGS> 12,420
<TOTAL-COSTS> 12,420
<OTHER-EXPENSES> 17,922
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,095
<INCOME-TAX> 1,392
<INCOME-CONTINUING> 2,703
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,703
<EPS-BASIC> .20
<EPS-DILUTED> .20
<FN>
ADDITIONAL CURRENT ASSET - DEFERRED TAX 3,300
ADDITIONAL CURRENT ASSET - OTHER 1,313
OTHER ASSET - DEFERRED TAXES 4,000
OTHER ASSETS - NET 2,891
INTEREST INCOME 1,043
</FN>
</TABLE>
