1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 0-25882
-----------
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 October
31, 1999 was 13,591,121.
================================================================================
2
VIDEOSERVER, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998..........................3
Condensed Consolidated Statements of Operations
Three and nine months ended September 30, 1999 and 1998...........4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 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.........................................8
PART II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Securities Holders..............11
Item 6 Exhibits and Reports on Form 8-K...................................11
SIGNATURE..........................................................12
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
3
VIDEOSERVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 29,785 $ 23,225
Marketable securities 24,236 27,381
Accounts receivable, net of allowances of $1,511 and $1,534 at
September 30, 1999 and December 31, 1998 7,093 7,778
Inventories 2,991 3,693
Deferred income taxes 3,300 3,300
Other current assets 1,205 1,497
-------- --------
Total current assets 68,610 66,874
Equipment and improvements, net 5,863 6,616
Deferred income taxes 4,000 4,000
Other assets, net 1,925 2,642
-------- --------
Total assets $ 80,398 $ 80,132
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 2,854 $ 3,546
Accrued expenses 9,534 11,396
Deferred revenue 640 1,045
-------- --------
Total current liabilities 13,028 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; 13,591,121 issued
and outstanding at September 30, 1999;
13,382,206 issued and outstanding at December 31, 1998 138 134
Capital in excess of par value 58,300 56,720
Retained earnings 9,017 7,307
Cumulative translation adjustment (85) (16)
-------- --------
Total stockholders' equity 67,370 64,145
-------- --------
Total liabilities and stockholders' equity $ 80,398 $ 80,132
======== ========
See accompanying notes.
3
4
VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------ ----------- ----------- ------------
Revenue:
Product revenue $ 10,368 $ 13,239 $ 40,197 $ 35,429
Service revenue 1,668 1,478 5,233 4,048
------------ ----------- ----------- ------------
Total revenue 12,036 14,717 45,430 39,477
------------ ----------- ----------- ------------
Cost of revenue
Cost of product revenue 3,536 4,422 13,960 12,250
Cost of service revenue 1,174 1,055 3,170 3,115
------------ ----------- ----------- ------------
Total cost of revenue 4,710 5,477 17,130 15,365
------------ ----------- ----------- ------------
Gross profit 7,326 9,240 28,300 24,112
Operating expenses:
Research and development 4,201 3,743 12,174 11,104
Sales and marketing 3,895 3,315 11,269 9,189
General and administrative 1,357 1,304 3,932 3,736
Non-recurring expenses 657
------------ ----------- ----------- ------------
Total operating expenses 9,453 8,362 27,375 24,686
------------ ----------- ----------- ------------
Income (loss) from operations (2,127) 878 925 (574)
Interest income, net 622 569 1,665 1,508
------------ ----------- ----------- ------------
Income (loss) before income taxes (1,505) 1,447 2,590 934
Provision (benefit) for income taxes (512) 405 880 672
------------ ----------- ----------- ------------
Net income (loss) $ (993) $ 1,042 $ 1,710 $ 262
============ =========== =========== ============
Net income (loss) per share:
Basic $ (0.07) $ 0.08 $ .13 $ 0.02
Diluted $ (0.07) $ 0.08 $ .12 $ 0.02
Shares used in computing net income
(loss) per share:
Basic 13,566,000 13,251,000 13,402,000 13,203,000
Diluted 13,566,000 13,538,000 13,763,000 13,500,000
See accompanying notes.
4
5
VIDEOSERVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
----------- --------------
OPERATING ACTIVITIES
Net income $ 1,710 $ 262
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,768 2,769
Purchased technology write off 1,034 --
Changes in operating assets and liabilities:
Accounts receivable 685 138
Inventories 702 311
Other current assets 292 (528)
Accounts payable and accrued expenses (2,554) 1,603
Other current liabilities (405) 721
-------- --------
Net cash provided by operating activities 4,232 5,276
INVESTING ACTIVITIES
Purchases of equipment and improvements (1,965) (3,368)
Proceeds from sale of marketable securities 4,760 --
Purchases of marketable securities (1,615) (6,122)
Increases in other assets (367) (388)
-------- --------
Net cash provided by (used) in investing activities 813 (9,878)
FINANCING ACTIVITIES
Repayment of debt -- (144)
Net proceeds from stock issued under employee stock benefit plans 1,584 1,221
-------- --------
Net cash provided by financing activities 1,584 1,077
Effect of exchange rate on cash and cash equivalents (69) (65)
Increase (decrease) in cash and cash equivalents 6,560 (3,590)
Cash and cash equivalents at beginning of year 23,225 24,866
-------- --------
Cash and cash equivalents at end of period $ 29,785 $ 21,276
======== ========
See accompanying notes.
5
6
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:
SEPTEMBER 30, DECEMBER 31,
(In thousands) 1999 1998
------------- -----------
Raw materials and subassemblies $ 2,038 $ 3,188
Work in process 648 27
Finished goods 305 478
------------- -----------
$ 2,991 $ 3,693
============= ===========
3. NON-RECURRING CHARGES AND CREDITS
In July 1999 the Court of Appeals for the Federal Circuit upheld a Federal
District court's previous ruling in Datapoint's patent infringement case with
PictureTel Corporation, that products sold by PictureTel, including those
manufactured by the Company, do not infringe on any of the Datapoint patents in
the videoconferencing field and that the patent claims asserted against
PictureTel are invalid. In the opinion of management, this decision makes remote
the possibility that the Company would incur any costs associated with these
patent claims. As a result, the Company reversed into cost of product revenue an
accrual of $1,075,000, which had been established in prior periods, for
estimated potential liability associated with this litigation. See Note 10 to
the consolidated financial statements included in the Company's 1998 Annual
Report to Shareholders for further discussion.
In the quarter ended September 30, 1999, the Company experienced a significant
decline in revenue associated with technology purchased as part of the 1997
acquisition of the network access card ("NAC") business unit from Promptus
Communications. Concurrently, the Company introduced products using new network
access technology to replace the products manufactured utilizing the technology
acquired from Promptus Communications. The Company currently estimates the
contribution of the acquired NAC technology to the future operating results of
the Company will be insignificant. As a result, during the quarter ended
September 30, 1999, the Company wrote off, as part of cost of product revenue,
approximately $1,034,000 of related unamortized purchased technology.
6
7
3. NON-RECURRING CHARGES AND CREDITS (CONTINUED)
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 nine months ended September 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 September 30, 1999.
7
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
REVENUE Revenue decreased 18% to $12.0 million in the quarter ended
September 30, 1999 from $14.7 million in the quarter ended September 30, 1998.
Revenue increased 15% to $45.4 million in the nine months ended September 30,
1999 from $39.5 million in the nine months ended September 30, 1998. The
decrease for the current three month period was primarily driven by a decrease
in demand for the Company's ISDN-based products particularly through its major
OEM channels and a reduction in revenue generated from its Network Access Card
products. The Company believes there may be continued softness in demand for its
ISDN-based products in the coming quarters, which may impact overall revenue
growth rates. The increase in revenue for the nine month period ended September
30, 1999 over the same period last year was primarily driven by increased
revenue from Multimedia Conference Server (MCS) products, including software and
hardware upgrades related to new releases of the Company's ISDN products, an
increase in revenue from the Company's Encounter family of Internet Protocol
(IP) based products, and increased service revenues. The increase in revenue for
the nine month period was impacted by a decrease in revenue from ISDN-based
products and Network Access Card products in the quarter ended September 30,
1999
Revenue from international markets, primarily in Europe, accounted for 29%
of revenue for the quarters ended September 30, 1999 and 1998, and 31% and 30%
for the nine months ended September 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 decreased to 60.9% in
the quarter ended September 30, 1999 from 62.8% in the quarter ended September
30, 1998. Gross profit for the three months ended September 30, 1999 was
negatively affected by a $1,034,000 write-off of certain unamortized purchased
technology related to the acquisition of the network access card business unit
from Promptus Communications, Inc. in 1997. Gross profit was positively affected
by the Company's reversal of a $1,075,000 accrual for estimated costs, following
the denial of an appeal in July 1999 in the patent litigation as described in
Note 10 to the consolidated financial statements included in the Company's 1998
Annual Report to Shareholders. The net result of these two unrelated and
non-recurring items was insignificant to the Company's operating results for the
period. See Note 3 to the Company's unaudited condensed consolidated financial
statements for the quarter ended September 30, 1999 for further discussion. The
decrease in gross profit as a percentage of revenue for the quarter ended
September 30, 1999 was a result of the overall revenue decrease and the
associated reduced coverage of fixed manufacturing costs and a lower proportion
of higher-margin products in the revenue mix. For the nine months ended
September 30, 1999 the gross profit rate increased to 62.3% from 61.1% in the
corresponding period of 1998. Gross profit for the nine months ended September
30, 1999 increased primarily as a result of improved service margins. Gross
profit for the nine month period ended September 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.
RESEARCH AND DEVELOPMENT Research and development expenses increased 12%
to $4.2 million in the quarter ended September 30, 1999 from $3.7 million in the
quarter ended September 30, 1998, representing 35% and 25% of revenue for the
periods. For the nine months ended September 30, 1999, research and development
expenses increased 10% to $12.2 million from $11.1 million in the corresponding
period of 1998, representing 27% and 28% 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.
8
9
SALES AND MARKETING Sales and marketing expenses increased 17% to $3.9
million in the quarter ended September 30, 1999 from $3.3 million in the quarter
ended September 30, 1998, representing 32% and 23% of revenue for the periods.
For the nine months ended September 30, 1999, sales and marketing expenses
increased 23% to $11.3 million in 1999 from $9.2 million in the corresponding
period of 1998, representing 25% and 23% of revenue for the periods. The
increase in sales and marketing expenses for the quarter ended September 30,
1999 over the same period of 1998 is primarily attributed to increased marketing
spending associated with the launch of the Company's new strategic initiatives,
including changing its name to Ezenia!. Additionally, spending increases for the
nine month period ended September 30, 1999 are due to an expansion of the
Company's sales and marketing personnel and program resources to extend
distribution for its products. The increased level of marketing spending related
to the Company's new initiatives is expected to continue in Q4 and the first
half of 2000. The Company also expects to continue to commit resources to its
sales and marketing efforts as it addresses broader markets and geographic
territories for its products, including the Asia/Pacific region.
GENERAL AND ADMINISTRATIVE General and administrative expenses increased
4% to $1.4 million in the quarter ended September 30, 1999 from $1.3 million in
the quarter ended September 30, 1998, representing 11% and 9% of revenue for the
periods. For the nine months ended September 30, 1999, general and
administrative expenses increased 5% to $3.9 million from $3.7 million in the
corresponding period of 1998, representing 9% 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 nine month period ended September 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 September 30, 1999.
INTEREST INCOME, NET Interest income, net, increased to $622,000 in the
quarter ended September 30, 1999 from $569,000 in the quarter ended September
30, 1998. Interest income, net, increased to $1,665,000 in the nine months ended
September 30, 1999 from $1,508,000 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 benefit for income taxes in the quarter
ended September 30, 1999 reflected 34% of the quarterly pre-tax loss. The
provision for the nine month period ended September 30, 1999 was also 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 nine months ended September 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. The income tax rate in future
periods may vary based on the Company's profitability levels in the coming
quarters. The Company has an asset recorded for deferred income taxes
representing the estimated future tax benefits associated with expenses recorded
for financial reporting purposes. The realization of this deferred tax asset is
subject to certain variables, including future profitability of the Company. In
the event a valuation reserve is required in order to reflect the deferred tax
asset at its net realizable value, it would be recorded as an additional element
of income tax expense in the Company's financial statements.
9
10
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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company has cash, cash equivalents and
marketable securities of $54 million, including cash generated from operations
of approximately $4.2 million in the nine month period ended September 30, 1999.
The Company regularly invests excess funds in short-term money market funds,
government securities, and commercial paper.
At September 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.
10
11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
On November 4, 1999, a Special Meeting of the Company's stockholders
was held to vote upon a proposal to change the Company's name to
Ezenia! Inc.
Results with respect to the voting on the above proposal were as
follows:
12,256,869 Votes For
----------
210,685 Votes Against
----------
5,351 Abstentions
----------
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 nine-month period ended
September 30, 1999.
11
12
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: November 5, 1999 By: /s/ Gary J. Kraemer
--------------------------------------------
Gary J. Kraemer
Vice President Finance,
Acting Chief Financial Officer
(Principal Financial and Accounting Officer,
Authorized Officer)
12