<PAGE>
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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 quarter ended Commission file number 000-18404
March 30, 1996
__________
TRUEVISION, INC.
(Exact name of registrant as specified in its charter)
__________
DELAWARE 77-0161747
(State of Incorporation) (I.R.S. Employer Identification No.)
2500 Walsh Avenue 95051
Santa Clara, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code
(408) 562-4200
Indicate by check mark whether the Registrant (1) has filed 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
__________ __________
Number of shares of Common Stock outstanding as of March 30, 1996: 12,537,214
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<PAGE>
INDEX
TRUEVISION, INC.
Page
PART I - FINANCIAL INFORMATION Number
------
Item 1: Consolidated Interim Financial Statements
Consolidated Interim Balance Sheets -
March 30, 1996 and July 1, 1995 3
Consolidated Interim Statements of Operations -
Three-months ended March 30, 1996 and April 1, 1995, and
nine-months ended March 30, 1996 and April 1, 1995 4
Consolidated Interim Statements of Cash Flows -
Nine-months ended March 30, 1996 and April 1, 1995 5
Notes to Consolidated Interim Financial 6
Statements
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 1: Legal Proceedings 21
Item 6: Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
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PART I - FINANCIAL INFORMATION
TRUEVISION, INC.
CONSOLIDATED INTERIM BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 30, July 1,
1996 1995
- ---------------------------------------------- --------- --------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,607 $ 10,377
Accounts receivable, net 12,560 10,726
Inventory 10,346 10,613
Prepaid expenses and other assets 1,808 4,295
Deferred income taxes 60 60
Income taxes receivable 230 299
--------- --------
Total current assets 32,611 36,370
Property and equipment, net 2,737 2,668
Other assets, net 260 235
Deferred income taxes 1,453 1,453
--------- --------
Total assets $ 37,061 $ 40,726
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,972 $ 1,684
Accounts payable 6,407 9,156
Accrued employee compensation 576 678
Accrued litigation settlement -- 6,600
Other accrued liabilities 1,796 3,837
Current portion of long-term obligations 194 200
--------- --------
Total current liabilities 10,945 22,155
Long-term obligations 296 44
--------- --------
Total liabilities 11,241 22,199
--------- --------
Stockholders' equity:
Preferred stock -- --
Common stock 52,700 47,657
Accumulated deficit (26,701) (28,978)
Cumulative translation adjustment (179) (152)
--------- --------
Total stockholders' equity 25,820 18,527
--------- --------
Total liabilities and stockholders' equity $ 37,061 $ 40,726
--------- --------
--------- --------
</TABLE>
See accompanying notes to Consolidated Interim Financial Statements.
3
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TRUEVISION, INC.
CONSOLIDATED INTERIM STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three-Months Ended Nine-Months Ended
----------------------- ---------------------
March 30, April 1, March 30, April 1,
1996 1995 1996 1995
- ---------------------------------------------- --------- -------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $ 18,825 $ 16,012 $ 54,043 $ 50,034
Cost of sales 11,424 10,479 33,441 41,214
-------- -------- -------- ---------
Gross profit 7,401 5,533 20,602 8,820
-------- -------- -------- ---------
Operating expenses:
Research and development 1,883 1,762 5,394 5,072
Selling, general and administrative 4,251 4,233 12,462 16,542
Restructuring and other costs -- -- -- 3,654
-------- -------- -------- ---------
6,134 5,995 17,856 25,268
-------- -------- -------- ---------
Income (loss) from operations 1,267 (462) 2,746 (16,448)
Interest income 35 6 71 59
Interest expense (86) (70) (213) (154)
Other income (expense), net (129) (7) (258) (45)
Settlement of litigation -- (3,675) -- (3,675)
-------- -------- -------- ---------
Income (loss) before provision for income taxes 1,087 (4,194) 2,346 (20,263)
Provision for income taxes 33 -- 69 --
-------- -------- -------- ---------
Net income (loss) $ 1,054 $ (4,194) $ 2,277 $ (20,263)
-------- --------- -------- ---------
-------- --------- -------- ---------
Net income (loss) per share $ 0.08 $ (0.44) $ 0.17 $ (2.12)
-------- --------- -------- ---------
-------- --------- -------- ---------
Weighted average common shares and equivalents 13,327 9,573 13,449 9,558
-------- --------- -------- ---------
-------- --------- -------- ---------
</TABLE>
See accompanying notes to Consolidated Interim Financial Statements.
4
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TRUEVISION, INC.
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine-Months Ended
-----------------------
March 30, April 1,
1996 1995
- ------------------------------------------------------- --------- ---------
(In thousands)
<S> <C> <C>
OPERATING CASH FLOWS:
Net income (loss) $ 2,277 $ (20,263)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Provision for doubtful accounts 282 393
Depreciation and other amortization 1,371 2,281
Loss on disposal of fixed assets 51 126
Income tax benefit from disqualifying dispositions of
employee stock options 320 --
Deferred income taxes -- 181
Other (27) (153)
Changes in assets and liabilities:
Accounts receivable (2,116) 707
Inventory 267 5,172
Prepaid expenses and other assets 2,487 (3,467)
Income taxes receivable 69 648
Accounts payable (2,749) 1,336
Accrued employee compensation (102) (186)
Accrued litigation settlement (6,600) 6,600
Other accrued liabilities (2,041) 2,050
Accrued restructuring -- 523
-------- ---------
Net cash used in operating activities (6,511) (4,052)
-------- ---------
INVESTING CASH FLOWS:
Acquisitions of property and equipment (888) (369)
Acquisitions of other assets (35) (230)
-------- ---------
Net cash used in investing activities (923) (599)
-------- ---------
FINANCING CASH FLOWS:
Proceeds from line of credit, net 288 924
Repayment of debt obligations (347) (460)
Issuance of common stock, net 4,723 226
-------- ---------
Net cash provided by financing activities 4,664 690
-------- ---------
Net decrease in cash and cash equivalents (2,770) (3,961)
Cash and cash equivalents, beginning of period 10,377 8,254
-------- ---------
Cash and cash equivalents, end of period $ 7,607 $ 4,293
-------- ---------
-------- ---------
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest $ 213 $ 155
Income taxes $ 16 $ 10
Noncash investing and financing activities:
Property and equipment acquired under capital leases $ 593 $ --
</TABLE>
See accompanying notes to Consolidated Interim Financial Statements.
5
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TRUEVISION, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Accounting Policies
BASIS OF PRESENTATION. The consolidated interim financial statements
presented in this Quarterly Report on Form 10-Q are unaudited. However, in
the opinion of management, all adjustments have been made for a fair
statement of the results for the interim periods presented. The consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report to Stockholders for the year ended July 1, 1995.
The results of operations for the three-month and nine-month periods ended
March 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending June 29, 1996.
REPORTING YEAR. Effective as of the third quarter of fiscal 1995, the
Company changed to a fiscal calendar and its reporting year will end on
the Saturday closest to June 30, which is June 29, 1996 for fiscal 1996.
Accordingly, the Company's third quarter of fiscal 1996 ended on March 30,
1996.
NOTE 2 - Inventory
A summary of inventory follows (in thousands):
<TABLE>
<CAPTION>
March 30, July 1,
1996 1995
--------- --------
<S> <C> <C>
Purchased parts and subassemblies $ 5,657 $ 6,812
Work-in-progress 2,080 2,153
Finished goods 2,609 1,648
-------- --------
Total $ 10,346 $ 10,613
-------- --------
-------- --------
</TABLE>
NOTE 3 - Property and Equipment
A summary of property and equipment follows (in thousands):
<TABLE>
<CAPTION>
March 30, July 1,
1996 1995
--------- ---------
<S> <C> <C>
Computer equipment and machinery $ 13,944 $ 12,785
Furniture and fixtures 780 879
Leasehold improvements 413 431
-------- ---------
Subtotal 15,137 14,095
Less: accumulated depreciation (12,400) (11,427)
-------- ---------
Total $ 2,737 $ 2,668
-------- ---------
-------- ---------
</TABLE>
6
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NOTE 4 - Restructuring Charges
A summary of charges for restructuring and other costs along with the
respective remaining reserves follows (in thousands):
<TABLE>
<CAPTION>
Reserve Reserve Original Reserve
balance @ balance @ charge balance @
July 1, payments/ Mar. 30, Sept. 30, payments/ April 1,
1995 other 1996 1994 other 1995
-------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Product discontinuance $ -- $ -- $ -- $ 2,283 $ (1,694) $ 589
Downsizing / integration 383 (383) -- 1,216 (405) 811
Writedown of non-performing
assets/other -- -- -- 155 (126) 29
----- ------- ---- ------- -------- -------
Total $ 383 $ (383) $ -- $ 3,654 $ (2,225) $ 1,429
----- ------- ---- ------- -------- -------
----- ------- ---- ------- -------- -------
</TABLE>
For further discussion regarding the Company's restructuring and other
charges see the Management's Discussion and Analysis section of this report.
NOTE 5 - Stockholders' Equity
On August 8, 1995 the Company issued 650,000 shares of its Common Stock
in a private placement to multiple investors for $6.26 per share; the net
proceeds from the sale were $4.1 million. The proceeds were used primarily
to fund the settlement of the Company's stockholder class action lawsuit.
(See Note 6 for related discussion.)
NOTE 6 - Stockholder Litigation Settlement
In early August 1995, the Company made a payment totaling $3.6 million and the
Company's insurance carrier paid $3 million which the Company had recorded
in prepaid expenses and other assets at July 1, 1995, liquidating the July 1,
1995 $6.6 million stockholder litigation settlement accrual. On August 28,
1995, the federal court approved the settlement agreement.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The text of this document includes forward-looking statements which are
subject to certain risks and uncertainties. Actual results may differ
materially from those described herein, depending on such factors as are
described herein, including without limitation those described under "Certain
Factors That May Affect The Company's Future Results Of Operations."
RESULTS OF OPERATIONS
CURRENT QUARTER COMPARED TO PRIOR QUARTER AND PRIOR YEAR QUARTER
NET SALES. Net sales were $18.8 million for the quarter ended March 30,
1996, an increase of $0.6 million, or 3%, from the quarter ended December
30, 1995, and an increase of $2.8 million, or 18%, from the quarter ended
April 1, 1995. International net sales represented 29% of net sales for
the quarter ended March 30, 1996, compared to 24% for the quarter ended
December 30, 1995, and 29% for the quarter ended April 1, 1995.
The results for the quarter ended March 30, 1996 are comprised of net sales of
$18.8 million from the Truevision product line, an increase of $0.6 million,
or 3%, from the $18.2 million in the quarter ended December 30, 1995, and an
increase of $7.0 million, or 59%, from the $11.8 million in the quarter ended
April 1, 1995. The results for the quarter ended April 1, 1995 also included
$4.2 million of net sales from the RasterOps product line. The Company did not
receive any revenues from the RasterOps product line during the quarter ended
March 30, 1996. The product mix change in terms of net sales dollars was due to
a shift in the Company's product focus during fiscal 1995. During the latter
part of the first quarter of fiscal 1995, the Company began to separate and
analyze its product lines in terms of "Truevision" and "RasterOps" products.
The Truevision product line consists of all video and Original Equipment
Manufacturer (OEM) products, while the RasterOps product line consists of
Macintosh and PC graphics acceleration cards and monitors. At that time, the
Company elected to terminate its entire PC graphics product line, reduce its
dependency upon monitor sales and focus its future on its higher-margin
Truevision (desktop digital video) product line.
The following table compares Truevision and RasterOps product line net sales
for the quarters ended March 30, 1996, December 30, 1995 and April 1, 1995:
<TABLE>
<CAPTION>
Three-Months Ended
---------------------------------------
March 30, Dec. 30, April 1,
1996 1995 1995
- ------------------- --------- -------- --------
(In millions)
<S> <C> <C> <C>
Product Line:
Truevision $ 18.8 $ 18.2 $ 11.8
RasterOps -- -- 4.2
------ ------ ------
Total net sales $ 18.8 $ 18.2 $ 16.0
------ ------ ------
------ ------ ------
</TABLE>
Sales of the Truevision product line to the retail channel during the quarter
ended March 30, 1996 were $9.4 million, or 50%, of net sales, compared to
$7.8 million, or 43%, for the quarter ended December 30, 1995, and $7.2
million, or 45%, for the quarter ended April 1, 1995. The increase in the
retail business was attributable primarily to an increase in units sold of
the TARGA 2000 product family.
8
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Truevision's non-OEM customers generally place orders on an "as-needed" basis
and, as a result, backlog at the beginning of each quarter represents only a
portion of the product sales anticipated in that quarter. Quarterly net sales
and operating results therefore depend on the volume and timing of bookings
received during a quarter, which are difficult to forecast. The absence of
significant backlog also limits the Company's ability to predict appropriate
production and inventory levels, which has had and could have in the future
an adverse effect on operating results. Truevision's results of operations
may fluctuate from quarter to quarter due to these and other factors, such as
announcements by Truevision, its competitors or the manufacturers of the
platforms which Truevision's products are used.
During fiscal 1995, the Company negotiated a three-year OEM agreement with
Avid Technology, Inc. ("Avid") which accounted for 41% of net sales for the
quarter ended March 30, 1996. During the quarters ended December 30, 1995 and
April 1, 1995, Avid accounted for 42% and 13%, respectively, of the Company's
net sales. In the fourth quarter of fiscal 1996, the Company's sales to Avid
are expected to decrease. However, the Company believes it should be able to
offset this loss of revenue through growth in its retail channel. In
addition, the Company's agreement with Avid provides that Avid has the right
to manufacture certain products upon payment of a royalty, rather than
purchasing it from the Company. Avid has informed the Company that it intends
to exercise that right in the near future. This decision will have a negative
impact on the Company's net sales in future periods. However, because of
royalty payments, the gross margins from sales to Avid could increase.
Net sales for the quarter ended March 30, 1996 included $0.5 million of
royalties from a product license agreement and engineering services revenue
from a product design and development agreement. Net sales for the quarter
ended December 30, 1995 included $250 thousand of engineering services
revenue from a product design and development agreement.
GROSS PROFIT. The Company had a gross profit of $7.4 million, or 39.4% of
net sales during the quarter ended March 30, 1996, compared to a gross profit
of $7.0 million, or 38.5% of net sales in the quarter ended December 30,
1995, and a gross profit of $5.5 million, or 34.4% of net sales for the
quarter ended April 1, 1995. The increase in gross profit was mainly due to
inclusion of a higher percentage of video graphics products that carry higher
gross margins than the monitor and Macintosh graphics acceleration products
in net sales for the quarters in fiscal year 1996. The Company also realized
cost reductions in its components costs in the quarter ended March 30, 1996.
There can be no assurance that components costs will decrease further or even
remain at the current level in the future.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
approximately 10% of net sales for the quarters ended March 30, 1996 and
December 30, 1995, and approximately 11% of net sales for the quarter ended
April 1, 1995. In the absence of unusual circumstances or events, the Company
expects that research and development spending as a percentage of net sales
will remain relatively constant through the remainder of fiscal 1996.
The Company believes that continued investment in research and development is
critical to its future growth and competitive position in its market for
broadcast video and color imaging systems and is directly related to timely
development of new and enhanced products. The Company, therefore, may
experience increased
9
<PAGE>
research and development spending in future periods. Because of the inherent
uncertainty of development projects, there can be no assurance that increased
research and development efforts will result in successful product
introductions or enable to maintain or increase sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were approximately 23% of net sales for the quarters
ended March 30, 1996 and December 30, 1995, and approximately 26% for the
quarter ended April 1, 1995. In the absence of unusual circumstances or
events, the Company expects that selling, general and administrative spending
as a percentage of net sales will remain relatively constant through the
remainder of fiscal 1996.
OTHER INCOME (EXPENSE), NET. Other expense for the quarters ended March 30,
1996 and December 30, 1995 is comprised primarily of residual expenses
associated with the RasterOps product line. These expenses are expected to be
completed by the end of the fourth quarter of fiscal 1996.
CURRENT NINE-MONTH PERIOD COMPARED TO PRIOR YEAR NINE-MONTH PERIOD
NET SALES. Net sales were $54.0 million for the nine-month period ended
March 30, 1996, an increase of $4.0 million, or 8%, from the nine-month
period ended April 1, 1995. International net sales represented 25% of net
sales for the nine-month period ended March 30, 1996, compared to 26% for the
nine-month period ended April 1, 1995.
The results for the nine-months ended March 30, 1996 are comprised of net
sales of $53.1 million from the Truevision product line and $0.9 million from
the RasterOps product line. This compares with $31.0 million of Truevision
net sales and $19.0 million of RasterOps net sales in the nine-month period
ended April 1, 1995. The product mix change in terms of net sales dollars was
due to a shift in the Company's product focus during fiscal 1995. During the
latter part of the first quarter of fiscal 1995, the Company began to separate
and analyze its product lines in terms of "Truevision" and "RasterOps"
products as discussed above.
The following table compares Truevision and RasterOps product line net sales
for the nine-months ended March 30, 1996 and April 1, 1995:
<TABLE>
<CAPTION>
Nine-Months Ended
-----------------------
March 30, April 1,
1996 1995
- ------------- -------- --------
(In millions)
<S> <C> <C>
Product Line:
Truevision $ 53.1 $ 31.0
RasterOps 0.9 19.0
------ ------
Total net sales $ 54.0 $ 50.0
------ ------
------ ------
</TABLE>
Sales of the Truevision product line to the retail channel during the
nine-month period ended March 30, 1996 were $23.7 million, or 44% of net
sales, compared to $19.7 million, or 39% for the nine-month period
10
<PAGE>
ended April 1, 1995. The increase in the retail business was attributable
primarily to an increase in units sold of the TARGA 2000 product family.
During fiscal 1995, the Company negotiated a three-year OEM agreement with
Avid which accounted for 42% of net sales for the nine-month period ended
March 30, 1996, compared to 11% for the nine-month period ended April 1,
1995. In the fourth quarter of fiscal 1996, the Company's sales to Avid are
expected to decrease. However, the Company believes it should be able to
offset this loss of revenue through growth in its retail channel. In
addition, the Company's agreement with Avid provides that Avid has the right
to manufacture certain products upon payment of a royalty, rather than
purchasing it from the Company. Avid has informed the Company that it intends
to exercise that right in the near future. This decision will have a negative
impact on the Company's net sales in future periods. However, because of
royalty payments, the gross margins from sales to Avid could increase.
Net sales for the nine-month periods ended March 30, 1996 and April 1, 1995
included $1.0 million and $0.3 million, respectively, of royalties from a
product license agreement and engineering services revenue from a product
design and development agreement.
GROSS PROFIT. The Company had a gross profit of $20.6 million, or 38.1% of
net sales during the nine-month period ended March 30, 1996, compared to a
gross profit of $8.8 million, or 17.6% of net sales for the nine-month
period ended April 1, 1995. In the quarter ended September 30, 1994, the
Company recorded additional inventory reserves of $6.0 million (excluding the
$1.9 million included in restructuring costs) to reduce inventory to its
estimated net realizable values to reflect management's current plans and
market expectations. The Company's gross margins have improved as the Company
shifted its focus to developing, manufacturing and selling more high-margin
desktop video products and at the same time exiting the low-margin monitor
business. The Company also realized cost reductions in its components costs
in the quarter ended March 30, 1996. There can be no assurance that components
costs will decrease further or even remain at the current level in the future.
RESEARCH AND DEVELOPMENT EXPENSES. For the nine-month periods ended March
30, 1996 and April 1, 1995, research and development expenses were
approximately 10% of net sales. In the absence of unusual circumstances or
events, the Company expects that research and development spending as a
percentage of net sales will remain relatively constant through the remainder
of fiscal 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expense decreased $4.0 million, or 24%, to $12.5 million for
the nine-month period ended March 30, 1996, compared to $16.5 million for the
nine-month period ended April 1, 1995. As a percentage of net sales, selling,
general and administrative expense decreased to 23% in the nine-month period
ended March 30, 1996, compared with 33% for the nine-month period ended April
1, 1995. The decrease was primarily due to increased expenses in the
nine-month period ended April 1, 1995 due to: (1) increased reserves for bad
debts attributable to two of the Company's foreign distributors; (2) lease
terminations; and (3) legal fees. Additionally, the Company instituted
ongoing efforts for reducing the Company's overhead costs after the first
quarter of fiscal 1995. In the absence of unusual circumstances or events,
the Company expects that selling, general and administrative spending as a
percentage of net sales will remain relatively constant through the remainder
of fiscal 1996.
11
<PAGE>
OTHER INCOME (EXPENSE), NET. Other expense for the nine-month period ended
March 30, 1996 is comprised primarily of residual expenses associated with
the old RasterOps product line. These expenses are expected to be completed
by the end of the fourth quarter of fiscal 1996.
RESTRUCTURING AND OTHER CHARGES RECORDED IN THE QUARTER ENDED SEPTEMBER 30, 1994
During the quarter ended September 30, 1994, the Company recorded a charge
for restructuring and other costs of $3.7 million. Late in the quarter ended
September 30, 1994, the Company decided to terminate the production of its
entire PC graphics product line which consisted of a variety of graphics
acceleration cards. The Company established a reserve in the amount of $1.9
million to reduce the related inventory to net realizable value, and during
the quarter ended December 31, 1994, adjusted the reserve downward by $1.5
million for sales of related products. The Company believes that the
remaining inventory is adequately reserved. Due to the discontinuance of
these products, the Company recorded additional charges aggregating $383,000
for prepaid royalties no longer having economic value and cancellation
charges on inventory purchase commitments. Also included in the restructuring
charge were costs aggregating $1.2 million associated with downsizing the
Company's worldwide operations, including lease termination for offices
located in California, Indiana, Germany, France, United Kingdom and Japan and
employee severance. These lease terminations reduced facilities and
amortization expenses by $149,000 during the remainder of fiscal 1995. The
reserve for employee severance has been fully utilized. The Company has
completed its restructuring activities and has no remaining restructuring
reserve balance as of March 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of March 30, 1996, the Company had cash and cash equivalents of $7.6
million, an increase of $1.3 million from the $6.3 million at December 30,
1995 and a decrease of $2.8 million from the $10.4 million at July 1, 1995.
Working capital increased to $21.7 million at March 30, 1996 from the $14.2
million at July 1, 1995. During the nine-month period ended March 30, 1996,
net cash used in operating activities was $6.5 million, compared to $4.1
million during the nine-month period ended April 1, 1995. The increase in
cash used in operating activities was due primarily to the Company's
settlement payment of $3.6 million made in August 1995 related to the
stockholder class action lawsuit and an increase of accounts receivable due
to increased revenues.
The Company spent approximately $0.9 million and $0.4 million for new
equipment during the nine-month periods ended March 30, 1996 and April 1,
1995, respectively. Additionally, the Company acquired new equipment under
capital leases totaling $0.6 million in the nine-month period ended March 30,
1996. The Company has no material commitments for the purchase of capital
equipment.
Substantially all of the Company's sales are made directly to OEMs,
distributors, value added resellers (VARs), authorized independent dealers
and retail chains. While the Company intends to continue its policy of
careful inventory and receivables management, it believes that in the future
somewhat greater levels of inventory and receivables relative to sales may be
needed to serve its distribution channels.
12
<PAGE>
The Company satisfied its cash requirements for the nine-month period ended
March 30, 1996 primarily from its beginning balance of $10.4 million, funds
generated from the issuance of the Company's common stock in August 1995 and
proceeds from sale under employee stock purchase plan and stock options
exercised, and cash generated from operations (i.e., net income plus noncash
transactions affecting net income). For the nine-month period ended April 1,
1995, the Company's cash requirements were satisfied primarily from its
beginning balance of $8.3 million and cash generated from operations. The
Company has a bank line of credit agreement allowing it to borrow up to $7
million based upon percentages of eligible accounts receivable. As of March
30, 1996, the Company had borrowings of $2.0 million under the bank line of
credit and guarantees through issuance of letters of credit to suppliers of
$1.3 million.
The Company believes that its current cash and cash generated from operations
together with its existing credit facilities will be sufficient to meet the
Company's cash requirements for at least the next twelve months at its
current level of operations, but may not be sufficient to allow for the most
efficient mode of operation or allow for unrestricted growth.
The Company believes that success in its industry requires substantial
capital in order to maintain the flexibility to take advantage of
opportunities as they may arise. The Company may, from time to time, as
market and business conditions warrant, invest in or acquire complementary
businesses, products or technologies. The Company may effect additional
equity or debt financings to fund such activities. The sale of additional
equity or convertible debt securities could result in additional dilution in
the equity ownership of the Company's stockholders.
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS OF OPERATIONS
SUBSTANTIAL RECENT OPERATING LOSSES
From fiscal 1992 to 1993, the Company's net sales declined by $21.7 million,
or 18%; from fiscal 1993 to 1994, the Company's net sales declined by $20.8
million, or 21%; and from fiscal 1994 to 1995, the Company's net sales declined
by $12.9 million, or 16%. In addition, the Company experienced significant
operating losses during such periods. There can be no assurance that future
net sales will not decline, or that the Company will not experience
significant operating losses in the future. Since inception and as of March
30, 1996, the Company had an accumulated deficit of $26.7 million. The
Company believes that continued investment in its business, particularly
research and development, is critical to its future growth and competitive
position. The Company, therefore, may experience increased operating expenses
both as a total amount and in relation to revenue levels, and in particular,
increased relative levels of research and development expenses in future
periods. There can be no assurance that such research and development and
other efforts will result in successful product introductions or enable the
Company to maintain or increase net sales, and there can be no assurance that
the Company will operate profitably.
SIGNIFICANT VOLATILITY IN OPERATING RESULTS
In the past, the Company has experienced significant fluctuations in its
quarterly operating results, and it anticipates that such fluctuations will
continue and could intensify in the future. Fluctuations in operating results
may result in volatility in the price of the Company's common stock.
Operating results may fluctuate
13
<PAGE>
as a result of many factors, including announcements by the Company, its
competitors or the manufacturers of the platforms with which its products are
used, volume and timing of orders received during the period, the timing of
new product introductions by the Company and its competitors, product line
maturation, the impact of price competition of the Company's average selling
prices, the availability and pricing of components for the Company's
products, changes in product or distribution channel mix and product returns
or price protection charges from customers. Many of these factors are beyond
the Company's control. In addition, due to the short product life cycles that
characterize the Company's markets, the Company's failure to introduce new,
competitive products consistently and in a timely manner would adversely
affect the Company's business, financial condition and results of operations
for one or more product cycles.
The volume and timing of orders received during a quarter are difficult to
forecast. The Company's retail and distribution customers generally place
orders on an "as-needed" basis and, as a result, backlog at the beginning of
each quarter represents only a small percentage of the product sales
anticipated in that quarter for those customers. Quarterly net sales and
operating results therefore depend on the volume and timing of bookings
received during a quarter, which are difficult to forecast. As a result, a
shortfall in sales in any quarter in comparison to expectations may not be
identifiable until the end of the quarter. In addition, in large part due to
delays in receipt of component supplies, release of new products which
introduce manufacturing delays, and the timing of orders received from
certain customers, the Company has in the past recorded a substantial portion
of its net sales in the last weeks of the quarter. Notwithstanding the
difficulty in forecasting future sales, the Company generally must plan
production, order components and undertake its development, sales and
marketing activities and other commitments months in advance. Accordingly,
any shortfall in net sales in a given quarter may disproportionately impact
the Company's business, financial condition and results of operations due to
an inability to adjust expenses or inventory during the quarter to match the
level of sales for the quarter. Excess inventory could also result in cash
flow difficulties as well as expenses associated with inventory write-offs.
RISKS ASSOCIATED WITH MANUFACTURING OPERATIONS
The Company is subject to significant manufacturing risks. A significant part
of the Company's RasterOps product line was monitors that were acquired fully
assembled from the Company's suppliers and that had relatively high unit
prices. Truevision products are primarily complex board level products, which
require significantly more sophisticated manufacturing technologies and
operations. Furthermore, the Company has recently introduced several new,
complex board level products. The manufacture of increasingly complex products
places a substantial strain on the Company's manufacturing operations,
and the Company has in the past experienced delays in product shipments in
connection with these factors. The Company's future operating results will
depend in part on its ability to rapidly and cost-effectively ramp
manufacturing of complex new and existing board products. Any delays or
dislocations in this process could have a material adverse effect on the
Company's business, financial condition and results of operations.
DISCONTINUANCE OF RASTEROPS GRAPHICS PRODUCTS; INCREASING DEPENDENCE ON
TRUEVISION VIDEO GRAPHICS PRODUCTS
In the past, the Company derived a significant majority of its net sales from
sales of the RasterOps color graphics products, including monitors for the
Apple Macintosh computer platform. In the years ended June 30, 1994 and July
1, 1995, sales of the RasterOps product line accounted for $46.1 million, or
58%, of net sales and $21.0 million, or 32%, of net sales, respectively. In
particular, the Company's RasterOps monitor business contributed $30.4
million and $13.7 million to the Company's net sales in fiscal 1994 and
14
<PAGE>
1995, respectively. This shift in contribution resulted in part from a
reduction in demand for RasterOps products due primarily to intensified
competition, particularly late in the first quarter of fiscal 1995, and Apple
Computer Inc.'s ("Apple") integration of graphics acceleration features into
its Macintosh computers. In addition, the RasterOps monitor business was
receiving increased competition with the entry of large competitors such as
Apple and Sony Corporation into the market for computer monitors. As a result
of the increased competition and declining profit margins for the RasterOps
product line, the Company decided to eliminate several RasterOps products
(including its monitor products) and to shift its focus from the RasterOps
product line to the Truevision product line. The accumulated charges
associated with the Company's restructuring aggregated $10.1 million in
fiscal 1995 and 1994. In light of the decline in sales of the RasterOps
product line, the Company's future operating results will substantially
depend on sales of the Truevision product line. There can be no assurance that
the Company will be successful in maintaining or increasing sales of the
Truevision product line.
DEPENDENCE ON EMERGING MARKET
The market for digital desktop video authoring products is an emerging one,
and the size and timing of its development are subject to substantial
uncertainties and are outside the control of the Company. There can be no
assurance of the rate that applications requiring development of new video
content, if any, will develop or of the rate, if at all, at which digital,
open-system, desktop solutions for video authoring will achieve market
acceptance. Additionally, there can be no assurance that third party software
application developers which are necessary to implement the Company's open
systems approach will be successful in developing and bringing to market
applications that will gain market acceptance. If the market for digital
desktop video authoring products were to fail to develop, or were to develop
more slowly that anticipated, the Company's business, financial condition and
results of operations could be materially adversely affected.
RAPID TECHNOLOGICAL CHANGE; NEED FOR MARKET ACCEPTANCE OF DVR ARCHITECTURE
The personal computer and workstation industry and the related computer
imaging market are characterized by intense competition, rapidly changing
technology and evolving industry standards, often resulting in short product
life cycles and rapid price declines. Accordingly, the Company's success is
highly dependent on its ability to develop, introduce to the marketplace in a
timely manner and sell complex new products. In this respect, the Company has
recently introduced and plans to introduce additional new versions of its
15
<PAGE>
TARGA 2000 product for the PCI bus. The Company has in the past experienced
some delays in product introductions due to longer than anticipated
development and the time required to obtain necessary components, as well as
delays in market acceptance. If the Company were to experience similar delays
in the future, with respect to its PCI bus product or otherwise, the
Company's business, financial condition and results of operations could be
materially adversely affected.
The Company's most recent introductions in the Truevision product line,
including the TARGA 2000, are based on the Company's DVR architecture, and it
is expected that any new Truevision products introduced in the foreseeable
future will also be based on the DVR architecture. The DVR architecture is a
new technology that has not yet achieved widespread commercial acceptance,
and there can be no assurance that it will do so in the future. Failure of
the DVR architecture to achieve widespread commercial acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON SOLE AND LIMITED SOURCE SUPPLIERS AND SUBCONTRACTORS
Certain components used in the Company's products are currently available
only from a single source, and others are available from only a limited
number of sources. In particular, the Company's "hub" chips that are the
basis of the most recent generation of Truevision products are available only
from LSI Logic Corporation and are subject to substantial lead times, and
other components (particularly certain ASICs) are also available only from
single sources such as LSI Logic Corporation and Toshiba Corporation. In the
past, the Company has experienced delays in the receipt of certain of its key
components and discontinuations of certain components, which have resulted in
delays in product deliveries. In particular, delays in receipt of certain
components interfered with the Company's ability to ship certain products in
the quarter ended April 1, 1995, and had a material adverse effect on the
Company's results of operations for that quarter. There can be no assurance
that delays in the receipt of key components and product deliveries will not
recur in the future or that these vendors will continue to supply the
Company. The inability to obtain sufficient key components as required, or to
develop alternative sources if and as required in the future, could result in
delays or reductions in product shipments to the Company's customers. Any
such delays or reductions could have a material adverse effect on the
Company's reputation and customer relationships which could, in turn have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, shortages of raw materials or production
capacity constraints at the Company's subcontractors or suppliers could
negatively affect the Company's ability to meet its production obligations
and result in increased prices for components. Any such reduction may result
in delays in shipments of the Company's products or increase the prices of
components, either of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
For the assembly of its products, the Company relies primarily on
subcontractors who use components purchased, tested and kitted by the
Company. The Company has in the past experienced interruptions in these
services and delays in product deliveries, which have in certain cases has a
material adverse effect on the Company's results of operations for particular
periods, and there can be no assurance that such problems will not recur in
the future. The process of qualifying additional subcontractors is a lengthy
one, and the inability of any of the Company's subcontractors to provide the
Company with these services in a timely fashion could have a material adverse
effect on the Company's business, financial condition and results of
operations until such time as alternate sources of such services are
established and the quality of such services reaches an acceptable level.
16
<PAGE>
FUTURE CAPITAL NEEDS UNCERTAIN
The Company's future capital requirements will depend upon many factors,
including the extent and timing of the introduction of the Company's products
in the market, the progress of the Company's research and development, the
Company's operating results and the status of competitive products. The
Company anticipates that its existing capital resources and cash generated
from operations, if any, will be sufficient to meet the Company's cash
requirements for at least the next twelve months at its current level of
operations, but may not be sufficient to allow for the most efficient mode of
operation or allow for unrestricted growth. The Company's actual capital
needs are difficult to predict, however, and there can be no assurance that
the Company will not require additional capital prior to such time. In
particular, it is likely that the Company will seek additional funding during
the next twelve months to finance working capital. There can be no assurance
that additional financing will be available to the Company on acceptable
terms, or at all, when required. Shortages of working capital may cause
delays in the Company's ability to timely obtain adequate supplies of
components or sub-contracted services. The Company has in the past
experienced, and may continue to experience, difficulties and delays in
obtaining certain components and services on a timely basis due to working
capital constraints. Any such difficulties or delays could have a material
adverse effect on the Company's business and results of operations. Moreover,
if additional financing was not available, the Company could be required to
restrict, reduce, or suspend its operations, seek a merger partner or sell
securities on terms that are highly dilutive or otherwise disadvantageous to
the Company's current stockholders. In this respect, the Company elected in
both the fourth quarter of fiscal 1995 and the first quarter of fiscal 1996
to raise capital through private placements of equity securities at prices
less that fair market value on the date of the issuance. If adequate
financing sources are insufficient or not available, the Company's business,
financial condition and results of operations could be materially adversely
affected.
The Company has a line of credit with a commercial bank that includes
financial and other covenants that must be satisfied for borrowings to be
permitted and that limits borrowing to percentages of accounts receivable and
inventories. The more significant financial covenants of the current line of
credit are profitability, tangible net worth and debt to tangible net worth
covenants. The Company has within the last twelve months been in violation of
certain of the covenants, with respect to which waivers had been obtained.
Specifically, the Company was in violation of the quick ratio, tangible net
worth, debt to tangible net worth and profitability covenants as well as a
non financial covenant of its previous line of credit. Since the end of June
1995, the Company has not been in violation of any of its financial
covenants. Although the Company is currently in compliance with the bank
agreement, there can be no assurance that waivers would be granted in the
future if necessary. If the Company were unable to access the line of credit
as required, its business, financial position and results of operations could
be materially adversely affected.
COMPETITION
The Company's markets are intensely competitive, and the Company expects this
competition to continue to increase. The Company has experienced continued
competitive pricing pressures on its product lines, and the Company expects
that these pricing pressures will continue. To the extent that competitive
pressures require price reductions more rapidly than the Company is able to
cut its costs, the Company's gross margins and results of operations will be
adversely affected. Many of the Company's competitors are well established,
have substantial name recognition and have greater financial, technological,
production and
17
<PAGE>
sales and marketing resources than the Company. In addition to products
currently in production by such competitors, the Company expects that
additional competitive products will be developed and that new companies will
enter its market, both of which will continue to increase competition. There
can be no assurance that products or technologies developed by others will
not render the Company's products or technologies noncompetitive or obsolete.
The Company believes that its ability to compete depends on elements both
within and outside its control, including the success and timing of new
product development by the Company and its competitors, product performance
and price, distribution and general economic conditions or by a downturn in
the demand for personal computers or workstations. There can be no assurance
that the Company will be able to compete successfully with respect to these
or other factors, and the Company's results of operations may fluctuate from
quarter to quarter due to these and other factors.
DEPENDENCE ON KEY PERSONNEL; RECENT MANAGEMENT CHANGES
The Company's future success substantially depends on the efforts of certain
of its officers and key technical and other employees, many of whom have only
recently joined the Company. In particular, the Company's Chief Executive
Officer was hired in October 1994, and since that date, the Company has hired
several new executive officers. The loss of any one of these officers or
employees could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company believes that its
future success also substantially depends on its ability to attract, retain
and motivate highly skilled employees, who are in great demand. There can be
no assurance that the Company will be successful in doing so.
SHORT PRODUCT LIFE CYCLES
The market in which the Company operates is increasingly being characterized
by frequent new product introductions, which results in short product life
cycles. The Company must continually monitor industry trends and make
difficult choices in selecting new technologies and features to incorporate
into its products. Each new product cycle presents new opportunities for
current or prospective competitors of the Company to gain market share. If
the Company does not successfully introduce new products on a timely basis
within a given product cycle, the Company's sales will be adversely affected
for that cycle and possibly subsequent cycles. Moreover, because of the
possibility of short product life cycles coupled with long lead times for
many components used in the Company's products, the Company may not be able
to quickly reduce its production or inventory levels in response to
unexpected shortfalls in sales or, conversely, to increase production in
response to unexpected demand.
As is customary for high technology companies, sales of individual products
can often be characterized by steep declines in sales, pricing and margins
toward the end of the respective product's life cycle, the precise timing of
which may be difficult to predict. As new products are planned and
introduced, the Company attempts to monitor closely the inventory of older
products and to phase out their manufacture in a controlled manner.
Nevertheless, the Company has in the past experienced and could in the future
experience unexpected reductions in sales of older generation products as
customers anticipate new products. These reductions have resulted in and
could in the future give rise to additional charges for obsolete or excess
inventory, returns of older generation products by distributors, or
substantial price protection charges. For example, to the extent that the
Company is unsuccessful in managing product transitions, its business and
operating results could be materially adversely affected.
18
<PAGE>
DEPENDENCE ON AVID AND OTHER KEY CUSTOMERS
During the fiscal 1996 quarters ended March 30, 1996, December 30, 1995 and
September 30, 1995, Avid accounted for 41%, 42% and 42%, respectively, of
the Company's net sales. During the quarter and fiscal year ended July 1,
1995, Avid accounted for 29% and 16%, respectively, of the Company's net
sales. The Company's operating results have depended increasingly upon its
ability to obtain orders from, maintain relationships with and provide
support to Avid and other key customers, and this dependence on these key
customers as a group could increase in the future. In addition, Avid or
other key customers could design their own products competitive with those of
the Company. Any cancellation of, or reduction or delay in, orders from Avid
or other customers could have a material adverse effect on the Company's
business and results of operations. In any event, the agreement with Avid
will expire by its terms in calendar 1997. In addition, the Company's
agreement with Avid provides that Avid has the right to manufacture products
upon payment of a royalty, rather than purchasing it from the Company. Avid
has informed the Company that it intends to exercise that right in the near
future. This decision will have a negative impact on the Company's net sales
in future periods. However, because of royalty payments, the gross margins
from sales to Avid could increase.
RELATIONSHIP WITH SYSTEM SOFTWARE VENDORS
The success of the Company's open systems, desktop strategy is substantially
dependent on its ability to maintain product compatibility and informal
relationships with system software vendors such as Microsoft and Apple. If
the Company's relationship with either Microsoft or Apple were to
deteriorate, its business and results operations could be materially
adversely affected.
UNCERTAINTY REGARDING PROPRIETARY RIGHTS
The Company attempts to protect its intellectual property rights through
patents, trademarks, trade secrets and a variety of other measures. There can
be no assurance, however, that such measures will provide adequate protection
for the Company's intellectual property, that the Company's trade secrets or
proprietary technology will not otherwise become known or become
independently developed by competitors or that the Company can otherwise
meaningfully protect its intellectual property rights. There can be no
assurance that any patent owned by the Company will not be invalidated, that
any rights granted thereunder will provide competitive advantages to the
Company or that any of the Company's pending or future patent applications
will be issued with the scope of the claim sought by the Company, if at all.
Furthermore, there can be no assurance that others will not develop similar
products, duplicate the Company's products or design around the patents owned
by the Company or that third parties will not assert intellectual property
infringement claims against the Company. The failure of the Company to
protect its proprietary rights could have a material adverse effect on its
business, financial condition and results of operations.
Litigation may be necessary to protect the Company's intellectual property
rights and trade secrets, to determine the validity of and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion
of management resources and could have a material adverse effect on the
Company's business, financial condition and results of operations. From time
to time in the past the Company has received communications from third
parties alleging that the Company may be in violation of such third parties'
intellectual property rights, and
19
<PAGE>
there can be no assurance that such claims, or claims for indemnification
resulting from infringement claims against others, will not be asserted in
the future. If any such claims or actions are asserted against the Company,
the Company may seek to obtain a license under a third parties' intellectual
property rights. There can be no assurance, however, that a license would be
obtainable on reasonable terms or at all. In addition, should the Company be
required to litigate any such claims, such litigation could be extremely
expensive and time consuming and could materially adversely affect the
Company's business, financial condition and results of operations, regardless
of the outcome of the litigation.
INTEGRATION OF PRODUCT FUNCTIONALITY BY MOTHERBOARD MANUFACTURERS
In general, the Company's products are individual add-in subsystems which
function with computer systems to provide additional functionality.
Historically, as a given functionality becomes technologically stable and
widely accepted by users, the cost of providing the functionality is
typically reduced by means of large scale integration onto semiconductor
chips which are then incorporated onto motherboards. The Company has
experienced such integration and incorporation with respect to its Truevision
branded products and expects that it will continue to occur with respect to
the functionality provided by the Company's products. The Company's success
will remain dependent, in part, on its ability to continue to develop
products which incorporate new and rapidly evolving technologies that
computer makers have not yet fully incorporated into motherboards.
INTERNATIONAL OPERATIONS
For the fiscal years ended June 30, 1994 and July 1, 1995 and the nine-month
period ended March 30, 1996, international sales represented 31%, 30% and
25%, respectively, of the Company's net sales. The Company expects that
international sales will continue to represent a significant portion of total
net sales. Although the Company's sales are denominated in dollars, its
international business may be affected by changes in demand resulting from
fluctuations in exchange rates as well as by risks such as unexpected changes
in regulatory requirements, tariffs and other trade barriers, costs and risks
of localizing products for foreign countries, longer accounts receivable
payment cycles, difficulties in managing international distributors,
potentially adverse tax consequences, repatriation of earnings and the
burdens of complying with a wide variety of foreign laws. In addition, the
laws of certain foreign countries do not protect the Company's intellectual
property rights to the same extent as do the laws of the United States.
VOLATILITY OF STOCK PRICES
The market price of the Company's Common Stock has been volatile and trading
volumes at times have been relatively low. Factors such as variations in the
Company's net sales, operating results and cash flows and announcements
technological innovations or price reductions by the Company, its
competitors, or providers of alternative products could cause the market
price of the Company's Common Stock to fluctuate substantially. In addition,
the stock markets have experienced significant price and volume fluctuations
that particularly have affected technology-based companies and resulted in
changes in the market prices of the stocks of many companies that have not
been directly related to the operating performance of those companies. Such
broad market fluctuations and general economic conditions may adversely
affect the market price of the Company's Common Stock.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(a) Information related to an action in which the Company was involved is
provided in Note 6 to the consolidated interim financial statements included
in this quarterly report, and such information is incorporated herein by
reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K. On April 24, 1996, the Company filed a Report on
Form 8-K for the Product Design and Development Agreement dated March 28,
1996 between the Company and Matsushita Electric Industrial Co. Ltd./Video
Systems Division.
21
<PAGE>
SIGNATURES
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.
Date: May 8, 1996 by: /s/ R. John Curson
--------------------------------------
R. John Curson
Senior Vice President, Chief Financial
Officer and Secretary
(signing as duly authorized signatory
on behalf of the registrant and in his
capacity as principal financial officer
of the registrant.)
22
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