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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, 1997
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 incorporation (IRS Employer Identification No.)
or organization)
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 April
30, 1997 was 12,872,159.
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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
December 31, 1996 and March 31, 1997.........................................................3
Condensed Consolidated Statements of Income
Three months ended March 31, 1996 and 1997...................................................4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 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...........................................................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 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), and in the section below in this document under the same
title. 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.
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VIDEOSERVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE RELATED DATA)
DECEMBER 31, MARCH 31,
1996 1997
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(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $27,876 $34,299
Marketable securities 26,808 22,854
Accounts receivable, net of allowance for doubtful accounts of
$1,077 and $1,093 at December 31, 1996 and March 31, 1997 7,252 8,279
Inventories 3,653 3,575
Deferred taxes 2,280 2,280
Other current assets 843 1,124
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Total current assets 68,712 72,411
Equipment and improvements, net 4,180 4,267
Other assets, net 204 210
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Total assets $73,096 $76,888
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $11,721 $11,618
Other current liabilities 1,337 1,986
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Total current liabilities 13,058 13,604
Long-term debt, less current portion 167 99
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;
12,642,326 issued and outstanding at March 31, 1997 126 126
Capital in excess of par value 49,573 49,982
Retained earnings 10,225 13,122
Cumulative translation adjustment (53) (45)
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Total stockholders' equity 59,871 63,185
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Total liabilities and stockholders' equity $73,096 $76,888
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See accompanying notes.
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VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
UNAUDITED
THREE MONTHS ENDED
MARCH 31,
1996 1997
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Net sales $ 9,510 $ 15,303
Cost of sales 3,073 4,959
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Gross profit 6,437 10,344
Operating expenses:
Research and development 1,583 2,543
Sales and marketing 1,780 2,728
General and administrative 872 1,071
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Total operating expenses 4,235 6,342
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Income from operations 2,202 4,002
Interest income, net 408 525
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Income before income taxes 2,610 4,527
Provision for income taxes 705 1,630
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Net income $ 1,905 $ 2,897
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Net income per share: $ 0.15 $ 0.22
Shares used in computing net income per share: 13,122,000 13,351,000
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See accompanying notes.
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VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
THREE MONTHS ENDED MARCH 31,
1996 1997
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OPERATING ACTIVITIES
Net income $ 1,905 $ 2,897
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 343 597
Provision for doubtful accounts 183 16
Changes in operating assets and liabilities:
Accounts receivable (1,106) (1,043)
Inventories 73 78
Other current assets (123) (281)
Accounts payable and accrued expenses 962 (103)
Deferred revenue 16 727
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Net cash provided by operating activities 2,253 2,888
INVESTING ACTIVITIES
Purchases of equipment and improvements (774) (648)
Proceeds from sale of marketable securities 8,119 3,954
Increases in other assets (41) (42)
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Net cash provided by investing activities 7,304 3,264
FINANCING ACTIVITIES
Repayment of long-term debt (213) (146)
Net proceeds from issuance of stock under employee benefit plans 459 409
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Net cash provided by financing activities 246 263
Effect of exchange rate on cash and cash equivalents 8
Increase in cash and cash equivalents 9,803 6,423
Cash and cash equivalents at beginning of year 31,679 27,876
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Cash and cash equivalents at end of period $ 41,482 $ 34,299
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See accompanying notes.
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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 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. INVENTORIES
Inventories consist of:
DECEMBER 31, MARCH 31,
(In thousands) 1996 1997
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Raw materials and subassemblies $2,881 $3,021
Work in process 247 130
Finished goods 525 424
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$3,653 $3,575
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3. 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 earnings per share for the quarter ended
March 31, 1997 are expected to increase $.01, to $.23 per share. The effect on
other primary and fully diluted earnings per share amounts for the quarters
ended March 31, 1996 and 1997 is expected to be immaterial.
4. SUBSEQUENT EVENT
On April 28, 1997, the Company acquired certain assets comprising the network
access card business unit of Promptus Communications, Inc. The total purchase
price of approximately $18 million consisted of approximately $14.5 million in
cash and 223,881 shares of the Company's common stock. The acquisition will be
accounted for using the purchase method. The Company expects to record a charge
to earnings in the quarter ended June 30, 1997 of approximately $12-14 million
for the portion of the purchase price related to acquired in-process research
and development.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
NET SALES Net sales increased 61% from $9.5 million in the first quarter of
1996 to $15.3 million in the first quarter of 1997, due to an increase in unit
shipments of Multimedia Conference Server (MCS) products, driven primarily by
increased market demand and an expanding number of OEM and carrier customers.
International sales accounted for approximately 28% and 36% of net sales
for the quarters ended March 31, 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 of 67.7% in the
first quarter of 1996 and 67.6% in the first quarter of 1997 was relatively
unchanged. Gross profit rates are likely to be lower in future periods; low end,
lower margin products may become a larger proportion of the sales mix, increased
competition may result in lower selling prices, and the proportion of sales to
carriers, which generally have been at higher gross profit rates than sales to
OEMs, may be uneven.
RESEARCH AND DEVELOPMENT Research and development expenses increased 61%
from $1.6 million in the first quarter of 1996 to $2.5 million in the first
quarter of 1997, representing 17% of net sales in each quarter. Reported
research and development expenses are net of product development fees, received
under development contracts with certain customers. These fees 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 overall increase in
research and development spending was primarily due to increased engineering
staffing required to continue to develop and enhance the Company's MCS product
line. The Company expects to continue to commit substantial resources to
research and development in the future.
SALES AND MARKETING Sales and marketing expenses increased 53% from $1.8
million in the first quarter of 1996 to $2.7 million in the first quarter of
1997, representing 19% and 18% of net sales. The spending increase was due to
the addition of sales and marketing personnel, increased commissions on higher
sales and the expansion of sales offices. Sales personnel were added in the US
and Europe to support an increasing number of OEM distribution partners and
carrier relationships. The Company expects continued increases in sales and
marketing expenses as it addresses a broader market for its products.
GENERAL AND ADMINISTRATIVE General and administrative expenses increased
23% from approximately $872,000 in the first quarter of 1996 to $1.1 million in
the first quarter of 1997, representing 9% and 7% of net sales. The increase in
spending was primarily due to the addition of finance and administrative
personnel. Although general and administrative expenses have increased, they
have decreased as a percentage of net sales due to the more rapid growth in net
sales.
INTEREST INCOME, NET Interest income, net, increased from approximately
$408,000 in the first quarter of 1996 to approximately $525,000 in the first
quarter of 1997. The increase was due primarily to higher cash balances
resulting from cash generated from operations, as well as a change in the mix of
investments between taxable and tax-exempt securities.
PROVISION FOR INCOME TAXES The provision for income taxes, as represented
by the income tax rate, was 27% and 36% for the quarters ended March 31, 1996
and 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. For 1997, the effective tax rate more closely
approximates the combined federal and state statutory rate.
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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.
In particular, PictureTel Corporation, currently the Company's largest
customer, has announced its intention to develop products related to the new
H.323 standards for conferencing over local area networks, corporate intranets
and the Internet, which are expected to be competitive with products the Company
currently has under development. Furthermore, in April, 1997, PictureTel
announced that it had signed a definitive agreement to acquire MultiLink, Inc.,
a developer and supplier of multipoint control units and a current competitor of
the Company, in an effort to accelerate their 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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company has cash, cash equivalents and marketable
securities of $57.2 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 $2.9 million in the first
quarter of 1997, primarily from net income. The Company's primary investing
activities in the first quarter of 1997 related to the purchase of computers and
office equipment to support the Company's growth.
At March 31, 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.
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.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11: Statement of Computation of Net Income per Share
herein included on page 11.
(b) Exhibit 27: Financial Data Schedule.
(c) No reports on Form 8-K were filed during the three-month period
ended March 31, 1997.
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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 2, 1997 By: /s/ Stephen J. Nill
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Stephen J. Nill
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer,
Authorized Officer)
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