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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, 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
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The number of shares outstanding of the registrant's Common Stock as of August
1, 1997 was 12,944,576.
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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 June 30, 1997 ......................... 3
Condensed Consolidated Statements of Income
Three and six months ended June 30, 1996 and 1997 ........... 4
Condensed Consolidated Statements of Cash Flows
Six months ended June 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 2 Changes in Securities ......................................... 11
Item 4 Submission of Matters to a Vote of Securities Holders ......... 11
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.
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VIDEOSERVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE RELATED DATA)
DECEMBER 31, JUNE 30,
1996 1997
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 27,876 $ 20,538
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 June 30, 1997 7,252 6,383
Inventories 3,653 5,880
Deferred taxes 2,280 2,614
Other current assets 843 796
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Total current assets 68,712 59,065
Equipment and improvements, net 4,180 5,171
Deferred taxes 4,346
Other assets, net 204 2,451
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Total assets $ 73,096 $ 71,033
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 11,721 $ 11,253
Other current liabilities 1,337 1,580
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Total current liabilities 13,058 12,833
Long-term debt, less current portion 167 41
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; 12,898,767
issued and outstanding at
June 30, 1997 126 129
Capital in excess of par value 49,573 53,662
Retained earnings 10,225 4,443
Cumulative translation adjustment (53) (75)
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Total stockholders' equity 59,871 58,159
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Total liabilities and stockholders' equity $ 73,096 $ 71,033
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See accompanying notes.
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VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR SHARE RELATED DATA)
UNAUDITED
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1997 1996 1997
------------ ------------ ------------ ------------
Net sales $ 11,270 $ 11,451 $ 20,780 $ 26,754
Cost of sales 3,742 4,220 6,815 9,179
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Gross profit 7,528 7,231 13,965 17,575
Operating expenses:
Research and development 1,894 3,176 3,477 5,719
Sales and marketing 2,027 2,881 3,807 5,609
General and administrative 977 1,144 1,849 2,215
Purchased research and development 14,000 14,000
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Total operating expenses 4,898 21,201 9,133 27,543
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Income (loss) from operations 2,630 (13,970) 4,832 (9,968)
Interest income, net 442 409 850 934
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Income (loss) before income taxes 3,072 (13,561) 5,682 (9,034)
Provision (benefit) for income taxes 829 (4,882) 1,534 (3,252)
------------ ------------ ------------ ------------
Net income (loss) $ 2,243 ($ 8,679) $ 4,148 ($ 5,782)
============ ============ ============ ============
Net income (loss) per share: $ 0.17 ($ 0.65) $ 0.31 ($ 0.44)
Shares used in computing
net income (loss) per share: 13,338,000 13,268,000 13,216,000 13,240,000
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See accompanying notes.
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VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
SIX MONTHS ENDED JUNE 30,
1996 1997
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OPERATING ACTIVITIES
Net income (loss) $ 4,148 ($ 5,782)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Purchased research and development 14,000
Depreciation and amortization 794 1,298
Provision for doubtful accounts 245 16
Deferred taxes (1,000) (4,680)
Tax benefit related to employee stock plans 180
Changes in operating assets and liabilities:
Accounts receivable (2,083) 2,965
Inventories (387) (1,019)
Other current assets (197) 95
Accounts payable and accrued expenses 3,031 (1,762)
Deferred revenue (84) 403
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Net cash provided by operating activities 4,467 5,714
INVESTING ACTIVITIES
Purchases of equipment and improvements (2,040) (1,507)
Proceeds from sale of marketable securities 8,119 3,954
Purchases of marketable securities (10,513)
Acquisition of NAC business (15,416)
Increases in other assets (32) (221)
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Net cash used in investing activities (4,466) (13,190)
FINANCING ACTIVITIES
Repayment of long-term debt (386) (337)
Net proceeds from stock issued
under employee stock benefit plans 663 497
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Net cash provided by financing activities 277 160
Effect of exchange rate on cash and cash
equivalents (22)
Increase (decrease) in cash and cash 278 (7,338)
equivalents
Cash and cash equivalents at beginning of year 31,679 27,876
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Cash and cash equivalents at end of period $ 31,957 $ 20,538
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Supplemental schedule of non-cash investing activities:
Common stock issued to acquire NAC business,
net of issuance costs $ 3,415
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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. 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 six month periods ended June 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.
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SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1996 JUNE 30, 1997
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(In thousands)
Total revenues $ 24,887 $ 30,381
Net income (loss)
$ (4,808) $ (5,742)
Net income (loss) per share $ (0.36) $ (0.43)
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:
DECEMBER 31, JUNE 30,
(In thousands) 1996 1997
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Raw materials and $2,881 $3,049
subassemblies
Work in process 247 903
Finished goods 525 1,928
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$3,653 $5,880
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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 (loss per share for the quarter and
six months ended June 30, 1997 is expected to increase $.03, to ($0.68) per
share, and $.02 to ($0.46) per share. Reported primary net income per share for
the quarter and six months ended June 30, 1996 is expected to increase $.01, to
$0.18 per share, and $.02 to $0.33 per share.
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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, 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 increased 2% from $11.3 million in the quarter ended
June 30, 1996 to $11.5 million in the quarter ended June 30, 1997, and 29% from
$20.8 million in the six months ended June 30, 1996, $26.8 million in the six
months ended June 30, 1997. In the second quarter of 1997, sales of Multimedia
Conference Server ("MCS") products were somewhat lower than in the second
quarter in 1996, driven by lower demand from PictureTel, currently the
Company's largest customer, the impact of consolidations and reorganizations
among several of the Company's other large OEM customers, and lower demand from
service providers. Sales of network access products associated with the
acquisition of the NAC business offset the lower MCS sales.
A significant factor effecting the demand for VideoServer's products is
the rate of deployment of conferencing endpoints, such as room based
conferencing systems and desktop conferencing terminals, sold by conferencing
OEMs and computer companies. Growth in endpoint development appears to have
recently slowed as end users begin to evaluate new technologies such as
LAN-based products and lower priced ISDN-based endpoints now being introduced
by those vendors. 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 endpoint demand returns to more historical levels.
International sales, primarily in Europe, accounted for approximately 36%
and 40% of net sales for the quarters ended June 30, 1996 and 1997, and 33% and
38% for the six months ended June 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 66.8%
in the quarter ended June 30, 1996 to 63.1% in the quarter ended June 30, 1997.
For the six month period ended June 30, the gross profit rate decreased from
67.2% in 1996 to 65.7% 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 this year as a percentage of net
sales. 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 68%
from $1.9 million in the quarter ended June 30, 1996 to $3.2 million in the
quarter ended June 30, 1997, representing 17% and 28% of net sales in each
period. For the six months ended June 30, 1996 and 1997, research and
development expenses were $3.5 million and $5.7 million, representing 17% and
21% 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 required to
continue to develop and enhance the Company's MKS products. New product
development is currently focused on extending the breadth of network services
supported beyond switched digital services to include local area networks
(LANs), corporate intranets, and the Internet, incorporating the new H.323
industry standards, 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 42% from $2.0
million in the quarter ended June 30, 1996 to $2.9 million in the quarter ended
June 30, 1997, representing 18% and 25% of net sales for the periods. For the
six months ended June 30, 1996 and 1997, sales and marketing expenses
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were $3.8 million and $5.6 million, representing 18% and 21% of net sales for
the periods . The spending increase was due to the addition of sales and
marketing personnel in the US and Europe, and the expansion of field sales
offices. 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.
GENERAL AND ADMINISTRATIVE General and administrative expenses increased
17% from approximately $977,000 in the quarter ended June 30, 1996 to $1.1
million in the quarter ended June 30, 1997, representing 9% and 10% of net sales
for the periods. For the six months ended June 30, 1996 and 1997, general and
administrative expenses were $1.8 million and $2.2 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
$442,000 in the quarter ended June 30, 1996 to approximately $409,000 in the
quarter ended June 30, 1997. The decrease was due primarily to a greater amount
of the Company's cash equivalents and marketable securities which are invested
in tax-exempt U.S. and state government securities, and to the decrease in cash
resulting from the Company's acquisition of the NAC business unit of Promptus on
April 28, 1997. For the six months ended June 30, 1996 and 1997, net interest
income was approximately $850,000 and approximately $934,000.
PROVISION (BENEFIT) FOR INCOME TAXES The provision for income taxes, as
represented by the income tax rate, was 27% and (36%) for the quarters and six
months ended June 30, 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.
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, 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.
In addition to the factors above, the Company has made and intends to make
acquisitions of, or significant investments in, businesses that offer
complementary products, services, and technologies as part of its overall
business strategy. Such acquisitions or investments are 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.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company has cash, cash equivalents and marketable
securities of $43.4 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 $5.7 million in the first six
months of 1997. The Company's primary investing activities in the first six
months of 19961997 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 June 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.
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 2. Changes in Securities
On April 28, 1997, VideoServer Acquisitions Corp., a wholly-owned
subsidiary of the Company, purchased the network access card ("NAC")
business unit of Promptus Communications, Inc. ("Promptus"). 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. In consideration
for the acquired NAC assets, the Company paid to Promptus $14,500,000
in cash and issued to Promptus 223,881 shares of the Company's common
stock par value $.01 per share. The Company believes that the issuance
of such shares qualifies as a transaction by an issuer not involving a
public offering within the meaning of Section 4(2) of the Securities
Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Securities Holders
On May 14, 1997, at the Company's 1997 Annual Meeting of Stockholders,
the Company's stockholders met to consider and vote upon the following
two proposals:
(1) A proposal to elect one class II director 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,
1997.
Results with respect to the voting on each of the above proposals were
as follows:
Proposal 1:
William E. Foster
For - 11,382,605 Withhold Authority - 116,034
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Proposal 2:
11,487,294 Votes For
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5,857 Votes Against
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5,488 Abstentions
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0 Broker Non-Votes
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27: Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed one (1) report on Form 8-K and one (1) report on
Form 8-K/A during the quarter ended June 30, 1997.
(1) Current Report on Form 8-K reporting the acquisition on April 28,
1997 of the network access card ("NAC") business unit of Promptus
Communications, Inc., filed with the Securities and Exchange
Commission on May 13, 1997.
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(2) Amendment to Form 8-K on Form 8-K/A filed with the Securities and
Exchange Commission on July 10, 1997, containing the financial
statements of the acquired network access card ("NAC") business
unit of Promptus Communications, Inc., and pro-forma financial
information including an unaudited pro forma combined balance
sheet assuming the acquisition occurred on December 31, 1996, and
an unaudited pro forma combined statement of operations assuming
the acquisition occurred on January 1, 1996.
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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 1, 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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