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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, 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 incorporation (IRS Employer Identification No.)
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 May 1,
1998 was 13,191,615.
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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, 1997 and March 31, 1998............................3
Condensed Consolidated Statements of Operations
Three months ended March 31, 1997 and 1998......................4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 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 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
herein and in the Company's 1997 Annual Report to Shareholders, in each case in
the section titled "Other factors which may affect future operations" (which
section from the Annual Report 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.
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VIDEOSERVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER-SHARE RELATED DATA)
DECEMBER 31, MARCH 31,
1997 1998
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ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $24,866 $18,598
Marketable securities 21,665 28,565
Accounts receivable, net of allowance for doubtful accounts of
$1,338 at December 31, 1997 and March 31, 1998 7,244 6,391
Inventories 3,882 3,242
Deferred income taxes 2,619 2,619
Other current assets 941 1,269
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Total current assets 61,217 60,684
Equipment and improvements, net 5,142 5,061
Deferred income taxes 4,341 4,341
Other assets, net 2,199 2,130
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Total assets $72,899 $72,216
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $11,677 $11,716
Other current liabilities 1,131 1,134
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Total current liabilities 12,808 12,850
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;
13,187,696 issued and outstanding at March 31, 1998 131 132
Capital in excess of par value 54,584 55,162
Retained earnings 5,493 4,195
Cumulative translation adjustment (117) (123)
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Total stockholders' equity 60,091 59,366
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Total liabilities and stockholders' equity $72,899 $72,216
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See accompanying notes.
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VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER-SHARE RELATED DATA)
UNAUDITED
THREE MONTHS ENDED
MARCH 31,
1997 1998
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Net sales $15,303 $11,753
Cost of sales 4,959 5,004
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Gross profit 10,344 6,749
Operating expenses:
Research and development 2,543 3,791
Sales and marketing 2,728 2,849
General and administrative 1,071 1,215
Non-recurring expenses 657
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Total operating expenses 6,342 8,512
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Income (loss) from operations 4,002 (1,763)
Interest income, net 525 465
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Income (loss) before income taxes 4,527 (1,298)
Provision for income taxes 1,630
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Net income (loss) $ 2,897 $(1,298)
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Net income (loss) per share:
Basic $0.23 $(0.10)
Diluted $0.22 $(0.10)
Shares used in computing net income (loss) per share:
Basic 12,634,000 13,164,000
Diluted 13,351,000 13,164,000
See accompanying notes.
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VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
THREE MONTHS ENDED MARCH 31,
1997 1998
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OPERATING ACTIVITIES
Net income (loss) $ 2,897 $(1,298)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 597 883
Provision for doubtful accounts 16
Changes in operating assets and liabilities:
Accounts receivable (1,043) 853
Inventories 78 640
Other current assets (281) (328)
Accounts payable and accrued expenses (103) 39
Other current liabilities 727 71
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Net cash provided by operating activities 2,888 860
INVESTING ACTIVITIES
Purchases of equipment and improvements (648) (653)
Proceeds from sale of marketable securities 3,954
Purchases of marketable securities (6,900)
Increases in other assets (42) (80)
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Net cash provided by (used in) investing activities 3,264 (7,633)
FINANCING ACTIVITIES
Repayment of long-term debt (146) (68)
Net proceeds from stock issued under employee stock benefit plans 409 579
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Net cash provided by financing activities 263 511
Effect of exchange rate on cash and cash equivalents 8 (6)
Increase (decrease) in cash and cash equivalents 6,423 (6,268)
Cash and cash equivalents at beginning of year 27,876 24,866
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Cash and cash equivalents at end of period $34,299 $18,598
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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 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"), a Rhode Island
corporation, through a wholly-owned subsidiary of the Company. 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 ended March 31, 1998. The following pro
forma information presents the results of operations for the quarter ended March
31, 1997 as if the NAC business unit of Promptus 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.
Three Months Ended
March 31, 1997
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(In thousands, except for per-share related data)
Total revenues $18,297
Net loss ($ 5,630)
Net loss per share ($ 0.44)
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.
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3. INVENTORIES
Inventories consist of:
December 31, March 31,
(In thousands) 1997 1998
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Raw materials and subassemblies $2,673 $2,145
Work in process 761 620
Finished goods 448 477
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$3,882 $3,242
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4. NEWLY ISSUED ACCOUNTING STANDARDS
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 ended March
31, 1997 and 1998, the Company's comprehensive income (loss) was as follows:
March 31, March 31,
1997 1998
(In thousands) --------- --------
Net income (loss) $2,897 $(1,298)
(Increase) decrease in cummulative
translation adjustment 8 (6)
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Comprehensive income (loss) $2,905 $(1,304)
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5. RESTRUCTURING
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
$450,000 reported as a part of cost of goods sold, for writedowns of excess and
obsolete inventory to their net realized values; $193,000 for certain facilities
costs reported as research and development expenses; and $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.
It is expected that a substantial portion of the amounts which require a cash
outlay related to these activities will be paid by December 31, 1998.
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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 month period
ended March 31, 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 period also include the impact of $1.3 million of
one-time charges recorded as a result of restructuring actions undertaken in
March, 1998.
RESULTS OF OPERATIONS
NET SALES Net sales decreased 23% from $15.3 million in the quarter ended
March 31, 1997 to $11.8 million in the quarter ended March 31, 1998. Sales of
Multimedia Conference Server (MCS) products were lower in the first quarter of
1998 than in the same period last year, due to significantly lower demand from
PictureTel, the Company's largest customer during each of those periods, and
lower demand from conferencing service providers. The 1998 period includes sales
of network access products associated with the acquisition of the NAC business
in April, 1997, partially offsetting the decrease in MCS product sales.
A significant factor influencing the demand for VideoServer's products is
the rate of deployment and use of conferencing endpoints, such as room based
conferencing systems and desktop conferencing terminals, sold by conferencing
OEMs and computer equipment and software manufacturers. The Company believes
that growth in the sales of endpoints slowed in 1997 and in the first quarter of
1998, as end users evaluate new technologies such as Internet Protocol (IP)
based products and lower priced ISDN-based endpoints currently being introduced.
This softness in endpoint demand is expected to continue in the near term, and
may affect growth rates for the Company's sales and operating results.
International sales, primarily in Europe, accounted for approximately 36%
and 32% of net sales for the quarters ended March 31, 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
67.6% in the quarter ended March 31, 1997 to 57.4% in the quarter ended March
31, 1998. A significant part of the decrease in 1998 is the result of a one-time
charge to cost of sales in the amount of $450,000, undertaken as a part of the
March 1998 restructuring, to write down certain inventory to its net realizable
value. Other factors contributing to the 1998 decrease are a greater proportion
of lower margin products in the sales mix than in 1997, including network access
cards, and higher fixed costs as a percentage of net sales in the current year.
RESEARCH AND DEVELOPMENT Research and development expenses increased 49%
from $2.5 million in the quarter ended March 31, 1997 to $3.8 million in the
quarter ended March 31, 1998, representing 17% and 32% 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, all of which are governed by the new H.323 industry standards
for voice, video and data collaboration, as well as ATM and frame relay. The
1998 result also includes a one-time charge to research and development for
certain facilities costs in the amount of $193,000, as a part of the
restructuring actions undertaken in March, 1998. The Company expects to continue
to commit substantial resources to research and development in the future.
SALES AND MARKETING Sales and marketing expenses increased 4% from $2.7
million in the quarter ended March 31, 1997 to $2.8 million in the quarter ended
March 31, 1998, representing 18% and 24% of net sales for the periods. The
increase in spending in 1998 is due to an expansion of the Company's sales
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and marketing personnel and program resources to drive a broader distribution
model for its products, offset by the impact of recent turnover in several
senior sales and marketing positions, and lower sales commissions as a result of
lower net sales. The Company expects to increase its sales and marketing
expenses as it addresses newer markets and geographic territories for its
products, including the Asia/Pacific region.
GENERAL AND ADMINISTRATIVE General and administrative expenses increased
13% from $1.1 million in the quarter ended March 31, 1997 to $1.2 million in the
quarter ended March 31, 1998, representing 7% 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 for 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 write down of certain equipment, and other expenses
related to consolidations.
INTEREST INCOME, NET Interest income, net, decreased from approximately
$525,000 in the quarter ended March 31, 1997 to approximately $465,000 in the
quarter ended March 31, 1998. The decrease was due primarily to a higher
proportion of the Company's cash equivalents and marketable securities being
invested in tax-exempt U.S. and state government securities, and to the decrease
in cash available for investment resulting from the Company's acquisition of the
network access card business unit.
PROVISION FOR INCOME TAXES The provision for income taxes, as represented
by the income tax rate, was 36% for the quarter ended March 31, 1997. For 1997,
the effective tax rate was 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. There was no income tax benefit recorded for the loss
before income taxes 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.
In 1994 the Company settled patent infringement litigation brought against
it by Datapoint Corporation (Datapoint) for a cash payment by the Company.
However, patent infringement litigation continued to exist between Datapoint and
two of the Company's largest customers and, in addition, Datapoint has written
inquiry letters to, or attempted to bring legal action against, a significant
number of others in the videoconferencing market, including some customers of
the Company. Datapoint, in effect, asserted that certain Datapoint patents in
the videoconferencing field (the "Datapoint Patents") covered certain aspects of
multipoint conferencing operations involving terminals and multipoint control
units, including MCS's.
In April 1998, a jury in the Federal District Court in Dallas, Texas ruled
in Datapoints patent infringement case with PictureTel Corporation that products
sold by PictureTel, including those manufactured by the Company, did not
infringe on any of the Datapoint Patents, and that the patent claims asserted
against PictureTel were invalid. Datapoint has filed a notice that it will
appeal this decision.
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LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company has cash, cash equivalents and marketable
securities of $47.2 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 approximately $860,000 in
the first three 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 March 31, 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.
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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, 1998.
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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 12, 1998 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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