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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
JUNE 27, 1998 000-18404
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TRUEVISION, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 77-0161747
(State of Incorporation) (I.R.S. Employer Identification No.)
2500 WALSH AVENUE,
SANTA CLARA, CALIFORNIA 95051
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (408) 562-4200
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
(TITLE OF CLASS)
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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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( X )
Aggregate market value of the Common Stock held by non-affiliates of the
Registrant based on the closing price of such stock on September 4, 1998:
$11,275,345
Number of shares of Common Stock outstanding as of September 4, 1998:
13,104,398
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DOCUMENT INCORPORATED BY REFERENCE
The following document is incorporated by reference in those Parts of this
Annual Report on Form 10-K, as are set forth below, but only to the extent
specifically stated in such Parts hereof:
(1) Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on October 21, 1998, referred to herein as the "Proxy Statement," are
incorporated as provided above in Part III.
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PART I
This Annual Report on Form 10-K contains 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" and
elsewhere in this Form 10-K.
ITEM 1. BUSINESS
Truevision, Inc. ("Truevision" or the "Company") designs, develops,
manufactures and markets professional quality digital video products for
Windows- and Macintosh-compatible computers and operating systems.
BACKGROUND
The digital video industry is a diverse market encompassing such broad
applications as the production of commercials for broadcast on television, post
production of other broadcast video content, animation, corporate videos, film,
internet broadcast, medical imaging and many other applications where video
needs to be captured, manipulated and/or edited prior to its final use.
Developments over the past several years have enabled personal computer users in
the broadcast, video production, animation, web design, film, medical and
industrial video industries to create, develop, view and use applications
employing a combination of data formats, including full motion video, digital
audio, still photographs, animation, graphics and text. In the past, these types
of applications were primarily confined to expensive analog equipment that were
not economical for many applications.
STRATEGY
In the past, digital video production systems were significantly slower than
analog video production systems, and the picture quality was inadequate for many
high-end applications. Those digital video production systems that were of
sufficient speed and quality were offered by closed system providers that
offered customers a complete turnkey system that was not easily extensible with
third-party hardware and software. The Company believes that recent improvements
in digital video technology are permitting the introduction of open system
products with increased speed and higher picture quality. Open system solutions
are based upon different portions of the complete system being provided by
different vendors. Distributors, dealers and sophisticated customers can
integrate various pieces of hardware and software to create a complete system
usually at a fraction of the cost of those provided by closed system vendors.
The migration from closed turnkey systems to open system configurations is
similar in nature to what occurred in the desktop publishing market in the
1980's. That migration led to a rapid expansion of the desktop publishing
market, as the reduced cost of hardware and software allowed more users to enter
the market for such products. As the speed and quality of industry standard open
system building blocks in the form of hardware and software for the processing,
storage and manipulation of digital video continue to improve, the Company
believes that there are emerging market opportunities to transition users of
analog video production systems to digital video systems and to extend its
product line to entry level video prosumer and corporate communicators.
Truevision's strategy is to work closely with computer, third-party software and
storage vendors to take advantage of this emerging opportunity. Through the
Company's array of open system digital video products, it is able to deliver a
wide range of solutions at various price points to meet the needs of video
editing professionals, corporate communicators and consumers.
Due primarily to the pressures that are inherent in the open systems
approach, Truevision anticipates that personal computer users will continue to
demand increasing performance and a wider variety of features from their
computer peripherals at decreasing costs. Through its in-house circuit design
capabilities, Truevision continues to emphasize the development of new
proprietary high-performance VLSI chips, which reduce on-board space and power
requirements, lower manufacturing costs and create product differentiation.
Truevision products are driven primarily by Truevision's proprietary
software, portions of which reside as firmware on its circuit boards and
portions of which are provided on floppy disks or CD-ROM's.
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Truevision's strategy is to continue extensive in-house software development to
provide greater functionality to its hardware, to facilitate development of
application software and to expand the number of computer platforms with which
its products can be integrated.
Truevision will continue to work closely with other industry leaders to
improve their product offerings to end-user customers. The Company's primary
original equipment manufacturers ("OEMs"), such as Acuson Corporation, Avid
Technology, Inc. ("Avid"), Cognex, Matsushita Electric Industrial Co. Ltd.
("Matsushita"), Montage Group Ltd., Pinnacle Systems, Inc., Scitex Digital
Video, Inc. ("Scitex") and Sony Corporation ("Sony"), continue to incorporate
the Company's multimedia and video technology into some of their products.
PRODUCTS
Truevision's products are primarily add-in boards for Windows- and
Macintosh-compatible computers and operating systems that convert analog or
digital video input and compress it for subsequent processing by the Company's
products. The products then permit users to edit and manipulate the digital
video, combine it with graphics, animation and other information, and ultimately
display the resulting output. The products are used primarily by video
professionals to replace or supplement traditional stand-alone or dedicated
analog video editing systems, by corporate communicators for training and web
applications, and by entry-level video prosumers and enthusiasts for event and
personal videography.
Most of the Company's products are based on an integrated digital production
engine that provides professional quality capture, playback and non-linear
editing capabilities. The Company's products are designed for both Windows- and
Macintosh-compatible computers and operating systems. Product configurations
include single boards, boards bundled with third party software applications,
and boards integrated into complete workstations that include third party
hardware and software.
The major Truevision products and product lines consist of the following:
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PRODUCT FAMILY PRODUCT DESCRIPTION MARKET SEGMENT SERVED
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TARGA BOARDS:
TARGA-Registered The top of the TARGA product line, the "X" products Animation
Trademark-2000 DTX provide quality high-end non-linear editing Off-line video production
TARGA-Registered capabilities. TARGA 2000 DTX provides single-stream On-air broadcast
Trademark-2000 RTX architecture, leading data rates, visually lossless Post-production video
TARGA-Registered component image quality, and on-board alpha channel. Special effects authoring
Trademark-2000 SDX TARGA 2000 RTX has all the capabilities of the DTX in Internet broadcast
MADRAS-TM- a dual-stream mode for real-time video editing. RTX
comes with a breakout box for professional
connections to component color and balanced audio.
TARGA 2000 SDX with MADRAS breakout box is designed
to work with serial digital video and audio in an
analog environment. TARGA 2000 SDX supports D1, 3 and
5, Digital Betacam, DVCPRO, DVCAM and Digital-S
equipment. The MADRAS transcoder is also available in
a configuration that provides Firewire and analog
connectivity for the Avid Media Composer and Xpress
systems.
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PRODUCT FAMILY PRODUCT DESCRIPTION MARKET SEGMENT SERVED
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TARGA-Registered TARGA DV2000 DTX and TARGA DV2000 RTX provide the
Trademark-DV2000 DTX same performance as their counterparts above, but are
TARGA-Registered designed for direct digital input output between the
Trademark-DV2000 RTX board and newer DV (Firewire) devices such as
camcorders, eliminating the need for signal
conversion.
TARGA-Registered The TARGA 2000 RTX3D and TARGA 2000 SDX3D combine the
Trademark-2000 RTX3D real-time, dual-stream TARGA engine architecture with
TARGA-Registered Scitex Digital Video's Abekas 3D DVE effects
Trademark-2000 SDX3D technology to provide the first real-time broadcast
quality 3D effects solution for Windows NT systems.
TARGA-Registered The mid-range TARGA 2000/PRO builds on the basic 3D modeling
Trademark-2000 capabilities of the TARGA 1000. Additional features Animation
TARGA-Registered include integrated NTSC or PAL video monitor and up Corporate video
Trademark-2000 PRO to 21-inch graphics display, multi-component format Educational video
support for digital and analog equipment, seamless Off-line video production
integration with most video equipment and formats,
and "genlock" for integrating professional video
suites. TARGA 2000/PRO offers professional quality
3:1 compression and compatibility with top
professional software applications.
TARGA-Registered TARGA 1000 is an introductory level product designed Corporate video
Trademark-1000 for the "pro-sumer" market. The TARGA 1000 provides Event videographers
users with capture and play-back of full motion, full Internet video
resolution digital video (including composite, Off-line video production
S-Video and component formats), and supports CD and Multimedia authoring
DAT-quality audio. Video enthusiasts
BRAVADO BOARDS:
BRAVADO-Registered BRAVADO is a low cost, PCI bus, video capture and
Trademark-2000 compression board designed to meet the needs of
BRAVADO-Registered professionals and consumers with limited budgets to
Trademark-DV2000 capture and edit audio (using a third party audio
card) and video at S-Video quality. It is sold
bundled with either the Adobe Premiere or the Ulead
Media Studio Pro video editing software providing the
user with a complete video system solution.
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PRODUCT FAMILY PRODUCT DESCRIPTION MARKET SEGMENT SERVED
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BRAVADO DV2000 is bundled with the Adobe Premiere
video editing software and provide a complete
end-to-end all digital solution. It allows direct
input and output between the board and newer DV
(Firewire) devices such as camcorders. Event
videographers Internet video Off-line video
production
READY-TO-EDIT-TM-
WORKSTATIONS:
Ready-to-Edit-TM- The Ready-to-Edit workstation is a fully- configured, Corporate video producers
Ready-to-Edit-TM- Real-Time non-linear editing workstation. Based on the TARGA Industrial video producers
1000 video board, it integrates an IBM Intellistation Internet video producers
computer system and either the Adobe Premiere or the Off-line video producers
Avid MCXpress for Windows video editing software. All
components are fully integrated and tested prior to
delivery to the customer.
The Ready-to-Edit Real-Time workstation is based on Animation
the TARGA 2000 RTX's real-time, dual-stream Off-line video production
architecture, which is integrated with an IBM On-air broadcast
Intellistation computer system and the Avid MCXpress Post-production video
for Windows video editing software. All components Special effects authoring
are fully integrated and tested prior to delivery to Internet broadcast
the customer.
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In addition to these products, Truevision manufactures and sells a number of
specially designed OEM products for individual applications.
The TARGA product line is based on the Company's proprietary
DVR-TM-architecture. The DVR architecture consists of a chipset that provides
for (i) analog video input in various video formats, (ii) an analog to digital
converter to render the video in digitized form, (iii) digital video
compression, (iv) on-board memory to speed processing of the video, and (v) a
proprietary central hub to control the entire process and to provide for
processing of various operations upon multiple digital video streams. The
architecture is modular, to permit the Company more easily to incorporate
advances in technologies as they occur, and to permit end users to upgrade their
systems more economically and easily. In this respect, the Company has recently
developed and continues to develop versions of its TARGA 2000 board for the PCI
bus, that enhances processing speed and quality of video output.
MARKETING AND SALES
Truevision's products are sold to end users directly through an internal
telemarketing group, from the corporate web site, and through dealers and other
authorized resellers, (regional, national and international) distributors, mail
order catalogs, OEMs, and value added resellers ("VARs"). Selling prices are
generally based on a discount from the Company's published suggested retail
price list and can include from time to time sales performance incentive funds,
and dealer and end user rebates. Truevision grants limited rights of return
based on negotiations with individual customers, and generally such rights are
based on volume purchases. Sales returns from non-distributors, which are
expected to be minimal, are reserved for at the time of sale based on historical
sales return rates. In addition, in the normal course of
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business, Truevision also will have warranty returns for product failure.
Truevision warrants its products for one year. Warranty returns are reserved for
at the time of sale based on historical warranty return rates, which have not
been significant since Truevision's inception. There can be no assurance that
the Company will not experience significant sales or warranty returns in the
future.
The majority of Truevision's domestic sales are not made directly to the
entity that will use the product. The field sales force, consisting of Company
sales office personnel, is responsible for selling Truevision's products to
chains, distributors, mail order catalogs, resellers and VARs, and provides
marketing training and technical support. Domestic sales for "X" series products
(TARGA 2000 DTX, RTX and SDX) are made predominantly through a national network
of Signature VARs. Truevision Signature VARs are authorized resellers who sell
to end users within a defined geographic territory. In general, Signature VARs
are authorized to sell one or more of the leading software applications driven
by Truevision products, such as Avid's McXpress NT or Discreet Logic's EDIT.
Signature VARs also provide their customers with marketing support, system
configuration and installation for Truevision products.
Truevision generates substantially all of its international sales through a
network of distributors, OEMs and VARs located in Europe, the Pacific Rim and
South America, as well as in other areas of the world. The sales force consists
of manufacturers' representative firms and Company sales personnel. Total
international net sales represented approximately 31.2%, 29.4% and 25.2% of the
Company's net sales for fiscal 1998, 1997 and 1996, respectively.
Truevision operates on an international basis with virtually all
transactions denominated in U.S. dollars. International operations are subject
to risks common to export activities, including governmental regulations and
trade barriers. For a more complete discussion, see "Certain Factors That May
Affect the Company's Future Results of Operations--International Operations."
Truevision's international sales relate to the sale of products that are not
required to be licensed by the Office of Export Administration of the U.S.
Department of Commerce, although there can be no assurance that the Company will
not be required to obtain export licenses in the future.
Truevision's customers (other than OEM customers) generally do not place
scheduled orders in advance and, as a result, backlog at the beginning of a
quarter generally represents only a small percentage of product sales
anticipated in that quarter. Quarterly revenues and operating results therefore
depend on the volume and timing of bookings received by the Company and sales
made by distributors during the quarter, which are difficult to forecast.
Truevision's results of operations may fluctuate from quarter to quarter due to
changes in backlog and to other factors such as announcements by Truevision, its
competitors or the manufacturers of platforms with which Truevision's products
are used. For a more complete discussion, see "Certain Factors That May Affect
the Company's Future Results of Operations-- Significant Volatility in Operating
Results."
MANUFACTURING
Truevision's manufacturing operations consist primarily of management
control and quality assurance of products manufactured by contract manufacturers
on a turnkey basis. The contractor is responsible for the majority of the
material sourcing, manufacturing, test and packaging, and only finished goods in
final packaging ready for shipment are received by Truevision. Substantially all
of Truevision's parts are procured from outside suppliers. For the assembly of
its products, Truevision relies primarily on two turnkey manufacturers.
Truevision has developed a comprehensive quality assurance program with its
contract manufacturers, and each product undergoes thorough quality inspection
and testing at the final assembly stage.
The vast majority of the components used in Truevision's products are
available from multiple sources. However, as is common in the electronics
industry, Truevision has in the past paid premium prices to obtain certain of
these multiple source components that were in short supply, and there can be no
assurance that shortages will not occur in the future. Such shortages may
significantly increase the cost, or
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delay the shipment, of Truevision's products. Some components, particularly
certain application specific integrated circuits (ASICs), used in Truevision's
products are available only from sole suppliers such as Applied Micro Circuits
Corporation, LSI Logic Corporation ("LSI"), Lucent Technologies ("Lucent"),
Toshiba America Electronic Components, Inc. ("Toshiba") and Zoran Corporation,
among others. Truevision expects these vendors to continue to supply its
requirements for these items, although there can be no assurance that they will
do so. At the present time world demand for these types of components and
various memory chips continues to grow at a pace that varies greatly and is hard
to predict, which at times creates supplier capacity shortages. This and other
factors can cause lead times to be lengthened, making it more difficult for
Truevision and its subcontractors to meet changes in customer demand or
engineering specifications in a timely manner. Truevision and its subcontractors
purchase these components pursuant to purchase orders placed from time to time
in the ordinary course of business and have no guaranteed supply arrangements
with suppliers. There can be no assurance that shortfalls will not occur. An
extended supply interruption for any of the components currently obtained from a
single source could have an adverse impact on Truevision's business, financial
condition and results of operations. For a more complete discussion, see
"Certain Factors That May Affect the Company's Future Results of
Operations--Dependence on Sole and Limited Source Suppliers and Subcontractors."
TECHNOLOGY AND PRODUCT DEVELOPMENT
In order to maintain its competitive position in existing and emerging
markets, Truevision believes that it must continue to introduce products that
offer high performance solutions to its customers. Truevision has traditionally
supported both the Windows- and Macintosh-compatible computer and operating
systems market-places with digital video products. This is expected to continue
to be the case in the coming year and is facilitated by the almost universal
adoption of the PCI expansion bus by both Windows and Macintosh-compatible
computer and operating systems vendors. Although many of the hardware
differences between the two platforms are disappearing, there are still
important software differences, and Truevision expects to continue to maintain
qualified software engineering staffs for both Windows and Macintosh-compatible
computer and operating systems for the forseeable future.
Truevision continues its focus on the development of hardware and software
solutions for users who wish to integrate real-time video, stereo sound and
photo realistic color with their applications. Products like the TARGA 2000 line
of professional-quality multimedia/desktop video editing products have been
instrumental in the continual transformation of personal computers into
high-performance multimedia and video production workstations.
In-house proprietary ASICs continue to be the cornerstone of Truevision
efforts to develop state-of-the-art imaging solutions. Many of these ASICs serve
as building blocks for multiple products, thereby reducing design time and
enhancing Truevision's ability to develop products faster.
As part of its technology development efforts, Truevision has formed several
OEM partnerships and software development partnerships with industry leaders in
the video production marketplace. Truevision recently completed a funded
development program with Matsushita to develop a version of the TARGA 2000 that
incorporates a compression chipset based on the emerging DV, DVC PRO and DVC PRO
50 compression industry standards. In addition, as a part of its open systems
strategy, Truevision has developed relationships with software vendors such
Adobe Systems Incorporated, Avid, Discreet Logic, in:sync corporation, Kinetix
(the multimedia business unit of Autodesk, Inc.), Scitex, and others to provide
end users with a vast array of digital video editing and animation software
applications to enhance users' productivity.
Truevision believes that the competitive nature of the computer industry,
including development of third party software applications, along with the rapid
pace of technological change, requires that it continue to introduce innovative
products on a timely basis. Truevision's product development efforts focus
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on expanding its digital video expertise, maximizing product cost efficiencies
and broadening its product mix to address the needs of emerging markets.
Expenditures for research and development in fiscal 1998, 1997 and 1996 were
approximately $5.0 million, $6.9 million, and $7.2 million, respectively. During
those periods, Truevision did not capitalize any software development costs, as
no significant costs were incurred after technological feasibility was
established.
COMPETITION
The markets for Truevision products are extremely competitive, and
Truevision expects the competition to continue to increase. Avid, Digital
Processing Systems, Inc., Fast Multimedia, Inc., Matrox Inc., Media 100 Inc.,
Pinnacle Systems, Inc. and Radius Inc. are its principal competitors.
Many of Truevision's current and prospective competitors have significantly
greater financial, technical, manufacturing and marketing resources than
Truevision, and may produce additional products competitive with those of
Truevision. There can be no assurance that Truevision could compete effectively
with such products. Truevision 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 Truevision and its competitors, product
performance and price, distribution and customer support. There can be no
assurance that Truevision will be able to compete successfully with respect to
these factors. Moreover, to the extent that competitive pressures require price
reductions more rapidly than Truevision is able to cut its costs, profitability
may be adversely affected. Truevision expects gross margins to continue to be
affected by price pressures in fiscal 1999. For a more complete discussion, see
"Certain Factors That May Affect the Company's Future Results of
Operations--Competition."
PATENTS AND TRADEMARKS
On October 1, 1996, Truevision was granted U.S. patent No. 5,561,472 for
"Real Time Video Converter Having Relocatable and Resizable Windows." This
technology is used in Truevision video-in-a-window products and incorporates
such special effects as scaling and clipping. On February 22, 1994, Truevision
was granted U.S. patent No. 5,289,565 for "Method and Apparatus for CYMK-RGB
RAMDAC" and on June 28, 1994, Truevision was granted U.S. patent No. 5,325,195
for "Video Normalizer for a Display Monitor." On July 5, 1994, Truevision was
granted U.S. patent No. 5,327,243 for "Real Time Video Converter." In addition,
Truevision also has one patent application pending in the United States.
Truevision also has eleven patent applications based on the inventions covered
by its U.S. applications pending in several foreign jurisdictions, including the
European Economic Community, several individual European countries, Canada and
Japan, four of which applications have been allowed but not yet issued. One
patent, the invention covered by the "Method and Apparatus for CYMK-RGB RAMDAC"
patent identified above, has been granted to Truevision in Canada.
Truevision attempts to protect its trade secrets and other intellectual
property through agreements with customers and suppliers, proprietary
information agreements with employees and consultants, and other security
measures. While Truevision's ability to compete may be affected by its ability
to protect its intellectual property, Truevision believes that, because of the
rapid pace of technological change in the industry, its technical expertise and
ability to innovate on a timely basis will be at least as important in
maintaining its competitive position as its efforts to rigorously protect its
intellectual property. Although Truevision continues to implement protective
measures and intends to defend its intellectual property rights, there can be no
assurance that these measures will be successful. For a more complete
discussion, see "Certain Factors That May Affect the Company's Future Results of
Operations--Uncertainty Regarding Proprietary Rights."
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EMPLOYEES
At June 27, 1998, Truevision had 115 employees, of whom 34 were engaged in
research and development, 30 in procurement and quality control, and 51 in
sales, general and administration. Truevision's future success will depend, in
part, on its ability to continue to retain, motivate and attract highly
qualified technical, marketing and management personnel, who are in great
demand. Truevision's employees are not represented by any collective bargaining
organization, and Truevision has never experienced a work stoppage. Truevision
believes that its employee relations are good. For a more complete discussion,
see "Certain Factors That May Affect the Company's Future Results of
Operations-- Dependence on Key Personnel."
CERTAIN FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS OF OPERATIONS
LIQUIDITY AND 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, absent future
substantial operating losses, 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 anticipated fiscal 1999
level of operations, but may not be sufficient to allow for unrestricted growth
and unanticipated business declines. 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. In particular, the Company may seek
additional funding during the next twelve months to finance working capital. In
the event the Company experiences further significant operating losses, the
Company believes that it will require further capital infusions or other sources
of cash. 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 obtain in a timely
manner adequate supplies of components or subcontracted 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, financial condition and
results of operations. Moreover, if additional financing is 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 than the market price of the Common Stock 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.
At June 27, 1998, the Company had a line of credit with a commercial bank
that included financial and other covenants to be satisfied for borrowings to be
permitted and that limited such borrowings to percentages of accounts receivable
and inventory. The primary financial covenant of the line of credit was a
tangible net worth covenant. The Company was in compliance with all of the
covenants at June 27, 1998 although, the Company has in the past been in
violation of certain of the covenants. In each instance, a waiver of such
violations was obtained from the bank. There can be no assurance that waivers
would be granted in the future if necessary. The Company's credit agreement
effective at June 27, 1998 expired on September 19, 1998, however, the Company
has received a written commitment for a new one year revolving line of credit
agreement allowing the Company to borrow up to $7 million based upon percentages
of eligible accounts receivable and inventory. The primary financial covenants
of the new line of credit relate to quick ratio, tangible net worth, debt to
tangible net worth and profitability. 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.
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SUBSTANTIAL DECLINE IN SALES AND HISTORICAL OPERATING LOSSES. From fiscal
1992 to 1995, the Company's net sales declined by $21.7 million, or 18%, $20.8
million, or 21%, and $12.9 million, or 16%, sequentially. After increasing $5.2
million, or 7.9%, from fiscal 1995 to 1996, the Company's net sales declined by
$27.9 million, or 39.0%, from fiscal 1996 to 1997 and by $6.8 million, or 15.6%,
from fiscal 1997 to 1998. In addition, the Company experienced significant
cumulative operating losses through fiscal 1997. There can be no assurance that
net sales will not decline further in the future, or that the Company will not
experience significant operating losses in the future. As of June 27, 1998, the
Company had an accumulated deficit of $43.8 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 sustain profitability.
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 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 channels as well as general and market economic
conditions. 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. Furthermore,
in fiscal 1997, the Company adopted a deferred revenue recognition policy with
respect to sales made through distributors.
The volume and timing of recognition of revenue from distributors and orders
received from other direct customers during a quarter are difficult to forecast.
Truevision's customers (other than some OEM customers) generally do not place
scheduled orders in advance and, as a result, backlog at the beginning of each
quarter represents only a small percentage of the product sales anticipated in
that quarter. Quarterly net sales and operating results therefore depend on the
volume and timing of bookings received by the Company and sales made by
distributors 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.
DEPENDENCE ON KEY CUSTOMERS. The Company's operating results have depended
upon its ability to obtain orders from, maintain relationships with and provide
support to key customers. In addition, these key customers could design their
own products competitive with those of the Company. Any cancellation of, or
reduction or delay in, orders from these key customers could have a material
adverse effect on the Company's business, financial condition and results of
operations. During fiscal 1995, the Company
9
<PAGE>
entered into a significant three-year OEM agreement with Avid under which Avid
agreed to make minimum aggregate purchases of certain products during the
calendar years 1995 through 1997. The agreement between the Company and Avid
also provided that Avid had the right to manufacture certain Truevision products
rather than purchasing them from the Company subject to the payment of
royalties. In the fourth quarter of fiscal 1996, Avid exercised that right with
respect to the current products of the Company that are used by Avid and a fully
paid license fee for Avid to manufacture the current products used by Avid was
negotiated. As a result, the Company did not in fiscal 1998 nor 1997, and does
not in the future, expect to receive any further revenues or royalties resulting
from Avid's manufacture and use of such products. The Company has no further
obligations to Avid. In fiscal 1998, 1997 and 1996, Avid accounted for 2.6%,
1.2% and 35.9%, respectively, of the Company's net sales.
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 and are subject to
substantial lead times, and other components (particularly certain ASICs) are
also available only from single sources such as LSI, Lucent, Matsushita, Sony
and Toshiba. 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. 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.
In August 1997, the Company entered into an agreement with a major supplier
to purchase $1.6 million of a certain component during fiscal 1998 and 1999. The
component is used in the majority of the Company's products and is currently
available only from this supplier. The supplier is discontinuing the component
and the purchase commitment represents the Company's anticipated usage
requirements for the next three years. The inability to obtain sufficient
quantities of this key component as required, or to develop an alternative
component, could result in delays or reductions in product shipments to the
Company's customers. However, the Company's future generation products, which
are expected to be released within the next two years, will not require this
component. At June 27, 1998, the Company has purchased approximately $0.7
million under this agreement.
For the assembly of its products, the Company relies primarily on two
contract manufacturers who purchase components, manufacture products, conduct
all testing and deliver fully packaged finished products. The Company has in the
past experienced interruptions in these services and delays in product
deliveries, which have in certain cases had 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 contract manufacturers is a lengthy one, and the inability
of any of the Company's contract manufacturers 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.
10
<PAGE>
RISKS ASSOCIATED WITH MANUFACTURING OPERATIONS. Truevision products are
primarily complex, board-level products, which require 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
contract 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.
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 than 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 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 time
and 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 versions of 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.
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 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
11
<PAGE>
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. The Company's future success substantially
depends on the efforts of certain of its officers and key technical and other
employees. 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 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, financial condition and operating results could be materially
adversely affected.
DEPENDENCE ON SOFTWARE DEVELOPERS. The Company's open system strategy
places greater reliance by the Company on the development efforts of software
developers such as Adobe, Avid, Discreet Logic, in:sync, Kinetix (Autodesk),
Scitex, and others. Other than its ability to provide development assistance and
marketing and other support, the Company has little or no control regarding the
timing of introductions of these developers' software applications or their
feature sets. To enable the Company to compete successfully with providers of
complete systems such as Avid, Media 100 and Scitex, among others, it is
imperative that independent software applications of sufficient quality are
available at a competitive price, both of which are out of the Company's ability
to control. The Company believes that market pressures will force application
vendors to offer a wider variety of feature sets and performance at ever
decreasing prices; however, there can be no assurance that this would ever
happen or that it would happen in a timely enough manner to avoid having a
material adverse impact on the Company's net sales and results of operations.
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 Apple and Microsoft. If the Company's relationship with either
Microsoft or Apple were to deteriorate, its business and results of operations
could be materially adversely affected.
12
<PAGE>
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 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 that 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 experienced such integration and incorporation with
respect to its RasterOps branded products, which it discontinued, and expects
that integration and incorporation will continue to occur with respect to the
functionality provided by the Truevision 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 fiscal 1998, 1997 and 1996, international
sales represented 31.2%, 29.4% and 25.2%, respectively, of the Company's net
sales. The Company expects that international sales will continue to represent a
significant portion of net sales, although they may fluctuate from period to
period. 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.
13
<PAGE>
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 of 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 have particularly affected technology-based companies and
resulted in changes in the market prices of the stocks of many companies. Such
broad market fluctuations and general economic conditions may adversely affect
the market price of the Company's Common Stock.
YEAR 2000 COMPLIANCE. Like many other companies, the Year 2000 computer
issues create certain risks for Truevision. If the Company's internal management
information systems or products sold to customers do not correctly recognize and
process date information beyond the Year 1999, there could be an adverse impact
on the Company's operations. Based on currently available information, the
Company does not believe that the Year 2000 issues related to internal systems
or products sold to customers will have a material adverse impact on its
financial condition or overall trends in results of operations; however, it is
still uncertain to what extent the Company may be affected by such matters. In
addition, customers may delay purchase decisions because of uncertainty about
Year 2000 issues. There also can be no assurance that the failure to ensure Year
2000 compliance by a supplier or another third party would not have a material
adverse effect on the Company.
ITEM 2. PROPERTY
Truevision's principal facilities are located in Santa Clara, California and
Indianapolis, Indiana, and consist of approximately 50,000 and 20,000 square
feet, respectively, of office space leased pursuant to agreements that expire in
2001 and 2003, respectively. This space is used for product development,
manufacturing, sales, marketing and administration. Truevision believes its
existing facilities are adequate to meet current and foreseeable requirements
and that suitable additional or alternative space will be available as needed on
commercially reasonably terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain legal proceedings arising in the ordinary
course of business, none of which is expected to have a material impact on the
financial condition or business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Special Meeting of Stockholders held on April 10, 1998,
pursuant to the Notice of Special Meeting of Stockholders and Proxy Statement
dated March 4, 1998, the following matter was submitted to the Company's
stockholders. Set forth after the matter presented are the number of votes for,
the number of votes against, the number of abstentions, and the number of broker
non-votes, respectively:
(1) the approval of the Company's 1997 Equity Incentive Plan (8,879,276:
788,099: 50,117: 0).
14
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE CURRENT TITLE AND POSITION
- ----------------------------- --- ---------------------------------------------------------
<S> <C> <C>
Louis J. Doctor.............. 40 President and Chief Executive Officer
R. John Curson............... 55 Senior Vice President, Chief Financial Officer and
Secretary
Carl C. Calabria............. 39 Senior Vice President, Engineering
</TABLE>
All executive officers serve at the pleasure of the Board of Directors.
There are no family relationships among the directors or executive officers of
the Company.
Mr. Louis J. Doctor has been President and Chief Executive Officer since he
joined the Company in October 1994. Prior to joining the Company and since May
1994 he was President of the Arbor Group, which offered corporate clients a full
range of strategic services in the technology arena. He also held positions of
Executive Vice President and Vice President of Business Development at SuperMac
Technology, Inc. from June 1991 to April 1994. In March 1981, Mr. Doctor
co-founded Raster Technologies, an industry pioneer in high-end graphics and
imaging systems, and served as its President until January of 1989.
Mr. R. John Curson has been Senior Vice President, Chief Financial Officer
and Secretary since he joined the Company in November 1993. Prior to joining the
Company he served as Chief Financial Officer at LH Research, Inc. from December
1992 to December 1993. Additionally, Mr. Curson has held positions such as Chief
Financial Officer for Martec Corporation and Chief Financial Officer for Dysan
International. He also held Vice President of Finance positions at Xidex
Corporation and Dataproducts Corporation.
Mr. Carl C. Calabria has been Senior Vice President, Engineering since July
1994. From July 1990 through June 1994 he served as Executive Vice President,
Engineering of Truevision, Inc., which was merged with the Company in August
1992. From September 1987 until July 1990, he served as Co-President and
Director of Engineering of Truevision Inc., and from September 1987 until
December 1991, he served as a Director of Truevision, Inc. In June 1984, Mr.
Calabria co-founded the AT&T EPI Center and served as Senior Design Engineer
until 1986 when he was appointed Manager of Research and Development.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
COMMON STOCK MARKET PRICE:
<TABLE>
<CAPTION>
JUNE 27, MARCH 28, DECEMBER 27, SEPTEMBER 27,
QUARTER ENDED FISCAL 1998 1998 1998 1997 1997
- -------------------------------------------------------------- ----------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
High.......................................................... $2 1/2 $2 15/16 $4 7/8 $4
Low........................................................... $1 1/4 $2 $2 $1 11/16
</TABLE>
<TABLE>
<CAPTION>
JUNE 28, MARCH 29, DECEMBER 28, SEPTEMBER 28,
QUARTER ENDED FISCAL 1997 1997 1997 1996 1996
- ------------------------------------------------------------- --------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
High......................................................... $2 13/16 $3 13/16 $4 3/8 $7 7/8
Low.......................................................... $1 5/8 $2 7/16 $2 9/16 $4 3/8
</TABLE>
The table above sets forth for the quarters indicated the high and low sales
prices for the common stock as reported on the NASDAQ National Market. As of
September 4, 1998, the Company had approximately 260 stockholders of record. The
price for the common stock as of the close of business on September 4, 1998 was
$1 1/8.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
JUNE JUNE
27, 29, JUNE 30,
YEAR ENDED 1998 JUNE 28, 1997 1996 JULY 1, 1995 1994
- --------------------------------------------- ------- ------------- -- ------------ ------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO
DATA)
OPERATIONS
Net sales.................................... $36,789 $ 43,620 $71,536 $ 66,318 $ 79,175
Restructuring and other costs................ $ -- $ 1,680(A) $-- $ 3,654(B) $ 6,694(C)
Litigation settlement expense................ $ -- $ -- $-- $ 3,675(D) $ --
Income (loss) before income taxes and
cumulative effect of accounting change..... $ 1,386 $ (13,419) $3,736 $ (20,231) $ (20,865)
Cumulative effect of accounting change....... $ -- $ (4,858)(E) $-- $ -- $ --
Net income (loss)............................ $ 1,344 $ (19,787) $3,626 $ (20,231) $ (20,865)
Basic net income (loss) per share............ $ 0.10 $ (1.56) $0.29 $ (2.12) $ (2.20)
Diluted net income (loss) per share.......... $ 0.10 $ (1.56) $0.27 $ (2.12) $ (2.20)
Basic average common shares and
equivalents................................ 12,893 12,694 12,403 9,565 9,466
Diluted average common shares and
equivalents................................ 13,246 12,694 13,535 9,565 9,466
FINANCIAL POSITION
Total assets................................. $18,054 $ 20,488 $39,928 $ 40,726 $ 44,701
Long-term obligations........................ $ 44 $ 86 $151 $ 44 $ 247
Stockholders' equity......................... $ 9,889 $ 7,876 $27,103 $ 18,527 $ 30,231
Working capital.............................. $ 8,100 $ 5,027 $22,419 $ 14,215 $ 23,671
Current ratio................................ 2.0 1.4 2.8 1.6 2.7
</TABLE>
(A) During the quarter ended June 28, 1997, the Company recorded a charge for
restructuring and other costs of $1,680,000. For a more complete discussion,
see Note 5 to the Consolidated Financial Statements.
16
<PAGE>
(B) During the quarter ended September 30, 1994, the Company recorded a charge
for restructuring and other costs of $3,654,000. This charge included
inventory write-offs of a discontinued product line and the costs of
downsizing international operations.
(C) During the quarter ended September 30, 1993, the Company recorded a charge
for restructuring and litigation of $6,694,000. This charge included costs
of downsizing and integrating operations, write-down of certain assets as a
result of the discontinuance of certain product lines and write-off of other
impaired assets.
(D) In fiscal 1995, the Company accrued $3,675,000 for settlement of a
stockholder class action lawsuit. This amount, together with $3,000,000 of
insurance proceeds, were paid in fiscal 1996.
(E) During the quarter ended September 28, 1996, the Company recorded a charge
of $4,858,000 for the cumulative effect of changing its method of accounting
for revenue recognition for shipments to distributors. For a more complete
discussion, see Note 4 to the Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section contains forward-looking statements which are subject to
certain risks and uncertainties. Future events and financial results may differ
materially from those described herein, depending on such factors as are
described herein, including without limitation those described under Item 1,
"Certain Factors That May Affect the Company's Future Results of Operations."
The following discussion should be read in conjunction with the selected
financial data and the Consolidated Financial Statements and notes thereto.
RESULTS OF OPERATIONS. The following tables set forth items in the
Consolidated Statement of Operations as a percentage of net sales for each of
the three fiscal years in the period ended June 27, 1998, and the year-to-year
percentage change (where applicable) in the dollar amounts of certain items in
fiscal 1998 and 1997 (in thousands, except per share and ratio data):
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 29,
PERCENTAGE OF NET SALES 1998 1997 1996
- --------------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................................................................ 100.0% 100.0% 100.0%
Cost of sales.................................................................... 56.0 69.7 60.6
----- ----- -----
Gross profit..................................................................... 44.0 30.3 39.4
Operating expenses:
Research and development....................................................... 13.5 15.8 10.1
Selling, general and administrative............................................ 26.4 39.9 23.4
Restructuring and other costs.................................................. -- 3.9 --
----- ----- -----
Income (loss) from operations.................................................... 4.1 (29.3) 5.9
Interest and other expense, net.................................................. (0.3) (1.5) (0.7)
----- ----- -----
Income (loss) before provision for income taxes and cumulative effect of change
in accounting principle........................................................ 3.8 (30.8) 5.2
Provision for income taxes....................................................... 0.1 3.5 0.1
----- ----- -----
Income (loss) before cumulative effect of change in accounting principle......... 3.7 (34.3) 5.1
Cumulative effect of change in accounting principle.............................. -- (11.1) --
----- ----- -----
Net income (loss)................................................................ 3.7% (45.4)% 5.1%
----- ----- -----
----- ----- -----
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
1998 CHANGE 1997 CHANGE 1996
--------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales................................................. $ 36,789 (16)% $ 43,620 (39)% $ 71,536
Gross profit.............................................. $ 16,192 23% $ 13,208 (53)% $ 28,213
Operating expenses........................................ $ 14,705 (43)% $ 25,978 8% $ 24,008
Net income (loss)......................................... $ 1,344 N/A $ (19,787) N/A $ 3,626
Basic net income (loss) per share......................... $ 0.10 N/A $ (1.56) N/A $ 0.29
Diluted net income (loss) per share....................... $ 0.10 N/A $ (1.56) N/A $ 0.27
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
The following table sets forth net sales and gross profit for fiscal 1998
and 1997 (in millions):
<TABLE>
<CAPTION>
YEAR ENDED
------------------------
JUNE 27, JUNE 28,
1998 1997
----------- -----------
<S> <C> <C>
NET SALES:
Retail/Distribution..................................................... $ 26.2 $ 32.3
OEM..................................................................... 10.6 11.3
----- -----
Total net sales....................................................... $ 36.8 $ 43.6
----- -----
----- -----
GROSS PROFIT.............................................................. $ 16.2 $ 13.2
----- -----
----- -----
</TABLE>
NET SALES. Net sales were $36.8 million for fiscal 1998, a decrease of $6.8
million, or 15.7%, from fiscal 1997. International net sales represented 31.2%
of net sales for fiscal 1998, compared to 29.4% for fiscal 1997.
Net sales to the retail/distribution channel were $26.2 million during
fiscal 1998, a decrease of $6.1 million, or 18.9%, from fiscal 1997. The
decrease in net sales is due primarily to the discontinuance of the BRAVADO 1000
product, with net sales in fiscal 1997 of $5.9 million, as compared with $0.3
million in fiscal 1998. The Company anticipates that the introduction of new
products during fiscal 1998 will have a positive effect on net sales for fiscal
1999.
In January 1998, the Company began selling completely configured video
production workstations directly to end-users, and in June 1998 through its
dealer network, based on Avid's popular MCXpress NT non-linear editing software,
its own award winning TARGA products and IBM's newest IntelliStation M Pro
computer system. Net sales of workstations for fiscal 1998 were $0.7 million.
In early April 1998, the Company announced four new members of its
award-winning TARGA video card family: TARGA 2000 DDR, the first single-slot,
uncompressed, serial digital capture and output solution; TARGA 2000 RTX3D and
SDX3D, the first non-linear editing solution with a fully integrated broadcast
3D DVE; and the TARGA DV2000 RTX, the first real-time, dual-stream DV card fully
supporting the consumer DV, DVCAM and DVCPRO formats. These products are
expected to ship in fiscal 1999.
In late April 1998, the Company began shipping its new BRAVADO 2000 for
Windows. BRAVADO 2000 is the next-generation video editing solution of the
BRAVADO 1000 designed to help first time non-linear video users create
professional quality content quickly and easily. Net sales of BRAVADO 2000 for
fiscal 1998 were $0.4 million.
The volume and timing of recognition of revenue from distributors and orders
received from other direct customers are difficult to forecast. Truevision's
non-OEM customers generally do not place scheduled orders in advance and, as a
result, backlog at the beginning of the year represents only a portion of the
product sales anticipated in that year. Net sales and operating results
therefore depend on the volume and timing of bookings received by the Company
and sales made by distributors during the period,
18
<PAGE>
which are difficult to forecast. The absence of backlog has limited 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 platforms with which Truevision's products are used.
OEM net sales were $10.6 million for fiscal 1998, a decrease of $0.7
million, or 6.2%, from fiscal 1997. OEM net sales for fiscal 1998 and 1997
included $1.5 million and $0.8 million, respectively, of engineering services
revenue from product design and development agreements. In January 1998, the
Company signed a letter of agreement with the Video Systems Division of
Matsushita to design and develop enhancements to the DVCPRO-based TARGA 2000 RTX
product line, including incorporation of Matsushita's advanced DV technology.
OEM net sales for fiscal 1998 included revenue of $1.0 million pursuant to this
agreement.
GROSS PROFIT. The Company had a gross profit of $16.2 million, or 44.0% of
net sales, for fiscal 1998 compared to gross profit of $13.2 million, or 30.3%
of net sales, during fiscal 1997. The Company's gross margins increased in
fiscal 1998 due to the Company's focus on higher margin products, results of
restructured operations and better inventory management. Additionally, the
Company recorded costs in fiscal 1997 related to absorption of period expenses
over a lower sales base and inventory valuation adjustments. The gross profit
for fiscal 1998 and 1997 included revenue from license fees and engineering
services for the periods.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$5.0 million, or 13.5% of net sales, for fiscal 1998, compared to $6.9 million,
or 15.8% of net sales, for fiscal 1997. Research and development expenses for
fiscal 1998 decreased $1.9 million, or 27.9%, primarily due to reduced expense
levels from the implementation of the Company's restructuring plan (see "Special
Charges-- Fiscal 1997" below).
The Company believes that continued investment in research and development
is critical to its future growth and its competitive position in the video
products market and is directly related to timely development of new and
enhanced products. The Company, therefore, may incur increased 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
Truevision to maintain or increase sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $9.7 million, or 26.4% of net sales, for fiscal
1998, compared to $17.4 million, or 39.9% of net sales, for fiscal 1997.
Selling, general and administrative expenses for fiscal 1998 decreased $7.7
million, or 44.1%, primarily due to reduced expense levels from the
implementation of the Company's restructuring plan (see "Special Charges--Fiscal
1997" below), which also included a reduction in the Company's sales and
marketing promotions in fiscal 1998. Although the Company has reduced its sales
and marketing promotions in fiscal 1998 and believes that it is sufficient for
the current sales level, there can be no assurance that the current or increased
sales and marketing promotions will enable the Company to maintain or increase
its current level of sales.
OTHER EXPENSE, NET. Other expense, net, for fiscal 1998 of $0.2 million is
comprised primarily of interest expense, net of interest income, and charges not
related to operations.
INCOME TAXES. In the fourth quarter of fiscal 1997, the Company recorded a
provision for income taxes of $1.5 million to fully reserve for deferred tax
assets because management determined at that time that the future realization of
these deferred tax assets was uncertain. At June 27, 1998, the Company had gross
deferred tax assets of $21.2 million relating primarily to net operating loss
carryforwards. These deferred tax assets have been fully reserved due to the
uncertainty of future realization of the net operating loss carryforwards. A
provision for income taxes of $42,000 was recorded for fiscal 1998, which
represented federal and state alternative minimum taxes.
19
<PAGE>
FISCAL 1997 COMPARED TO FISCAL 1996
On September 27, 1996, the Company announced a change in its method of
accounting for recognizing distributor revenue. As a result, the quarter ended
September 28, 1996 included a $4.9 million, or $0.38 per share, charge for the
cumulative effect of the change in accounting. For a more complete discussion,
see "Accounting Change" below. The following table sets forth net sales and
gross profit for fiscal 1997 and 1996. Note, the net sales and gross profit for
fiscal 1996 is on a pro forma basis assuming the new method had been applied
retroactively (in millions):
<TABLE>
<CAPTION>
YEAR ENDED
------------------------
JUNE 28, JUNE 29,
1997 1996
----------- -----------
<S> <C> <C>
NET SALES:
Retail/Distribution..................................................... $ 32.3 $ 30.6*
OEM..................................................................... 11.3 35.3
----- -----
Total net sales....................................................... $ 43.6 $ 65.9
----- -----
----- -----
GROSS PROFIT.............................................................. $ 13.2 $ 25.6
----- -----
----- -----
</TABLE>
* As compared to net sales of $36.2 for fiscal 1996 under the previous
accounting method.
NET SALES. Net sales were $43.6 million for fiscal 1997, a pro forma
decrease of $22.3 million, or 33.8%, from fiscal 1996. International net sales
represented 29.4% of net sales for fiscal 1997, compared to a pro forma 23.1%
for fiscal 1996. The decrease in total net sales from fiscal 1996 was primarily
due to a reduction in sales to Avid as discussed below.
Net sales to the retail/distribution channel were $32.3 million during
fiscal 1997, a pro forma increase of $1.7 million, or 5.6%, from fiscal 1996.
Sales to the retail/distribution channel for fiscal 1997 increased primarily due
to the addition of the TARGA 2000 RTX and Bravado product lines but sales were
still adversely impacted during the first half of fiscal 1997 by delays in the
availability of third party software applications. During the second quarter of
fiscal 1997, the Company's software development partners made progress toward
the completion of new applications for the Company's high-end TARGA 2000 RTX.
Two such applications were released in January 1997.
OEM net sales were $11.3 million for fiscal 1997, a decrease of $24.0
million, or 68.0%, from fiscal 1996. The decrease in OEM business in fiscal 1997
was primarily due to a reduction in sales to Avid as discussed below.
During fiscal 1995, the Company entered into a three-year OEM agreement with
Avid under which Avid had agreed to make minimum aggregate purchases of certain
products of $40 million during calendar years 1995 through 1997. In the fourth
quarter of fiscal 1996, Avid and the Company negotiated a fully paid license fee
in the amount of $1.45 million allowing Avid to manufacture certain products
used by Avid, rather than purchase them from the Company. The Company did not in
fiscal 1997 and does not in the future expect to receive any revenues or
royalties resulting from Avid's manufacture and use of such products. The
Company has no further obligations to Avid. For fiscal 1997 and 1996, Avid
accounted for 1.2% and pro forma 39.0%, respectively, of the Company's net
sales.
OEM net sales for fiscal 1997 and 1996 included $0.8 million and $2.4
million, respectively, of revenues from license fees under product license
agreements (including the $1.45 million Avid product license buyout in fiscal
1996 discussed above) and engineering services revenue from a product design and
development agreement.
GROSS PROFIT. The Company had a gross profit of $13.2 million, or 30.3% of
net sales, for fiscal 1997 compared to pro forma gross profit of $25.6 million,
or 38.8% of net sales, during fiscal 1996. The Company's gross margins decreased
in fiscal 1997 primarily due to absorption of period costs (i.e., other cost of
sales) over a lower sales base, inventory valuation adjustments, and lower
revenue from license fees
20
<PAGE>
and engineering services. The gross profit for fiscal 1997 and 1996 included
revenue from license fees and engineering services for the periods. The revenue
from license fees and engineering services for fiscal 1997 approximated the
related costs.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$6.9 million for fiscal 1997, compared to $7.2 million for fiscal 1996. As a
percentage of net sales, research and development expenses were 15.8% for fiscal
1997, compared to a pro forma 11.0% for fiscal 1996. The decrease of $0.3
million in fiscal 1997 was primarily due to a shift in resources to support
engineering revenue as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $17.4 million for fiscal 1997, compared to $16.8
million for fiscal 1996. As a percentage of net sales, selling, general and
administrative expenses were 39.9% for fiscal 1997, compared to a pro forma
25.4% for fiscal 1996. The increase of $0.6 million in fiscal 1997 was primarily
due to start-up costs associated with launching the new signature VAR sales
channel, which is being used to market the TARGA 2000 product line.
OTHER EXPENSE, NET. Other expense, net, for fiscal 1997 was comprised
primarily of charges associated with the discontinuance of the initial
development of a separate computer system product line and residual expenses
associated with the RasterOps product line. Other expense, net, for fiscal 1996
was comprised primarily of residual expenses associated with the RasterOps
product line.
INCOME TAXES. In the fourth quarter of fiscal 1997, the Company recorded a
provision for income taxes of $1.5 million to fully reserve for deferred tax
assets because management determined at that time that the future realization of
these deferred tax assets was uncertain. At June 28, 1997, the Company had gross
deferred tax assets of $22.5 million relating primarily to net operating loss
carryforwards. These deferred tax assets have been fully reserved due to the
uncertainty of future realization of the net operating loss carryforwards. A
provision for income taxes of $110,000 was recorded for fiscal 1996, which
represents federal and state alternative minimum taxes.
SPECIAL CHARGES
SPECIAL CHARGES--FISCAL 1997. During the quarter ended June 28, 1997, the
Company recorded a charge for restructuring and other costs of $1.7 million.
This charge primarily consisted of costs associated with downsizing facilities
and reduction in headcount. Also, as a result of the Company's decision to close
its European offices, the restructuring charge included costs associated with
lease terminations and write-off of fixed assets for the sales offices located
in France and the United Kingdom, and the write-off of the cumulative
translation adjustment.
ACCOUNTING CHANGE
In the quarter ended September 28, 1996, the Company changed its accounting
method for recognizing distributor revenue, whereby the Company defers
recognizing revenue, and does not relieve inventory on shipments to
distributors, until shipment by the distributor. Previously, the Company
recognized revenue, after recording appropriate reserves for sales returns from
distributors and allowances granted to them, at the time of shipment to the
distributor. Distributor agreements allow certain rights of return and price
protection on products held by distributors. Cash received in advance of
recognizing distributor revenue is recorded as advances on inventory held by
distributors. The Company believes that deferral of distributor sales and
related gross margins until the product is shipped by the distributors results
in a more meaningful measurement of operations and is a preferable method of
accounting for distributor revenue.
The cumulative effect on prior years of changing the accounting method was
$4.9 million, or $0.38 per share. This amount was reflected in the quarter ended
September 28, 1996. The estimated pro forma
21
<PAGE>
amounts for the year ended June 29, 1996 assuming the new method of accounting
had been applied retroactively would be net sales of $65.9 million and net
income of $1.0 million, or $0.08 per share.
LIQUIDITY AND CAPITAL RESOURCES
At June 27, 1998, the Company had cash and cash equivalents of $5.0 million,
an increase of $0.5 million from the $4.5 million at June 28, 1997. The increase
in cash and cash equivalents during fiscal 1998 was as a result of $3.9 million
provided by operations and $0.7 million from the proceeds of stock issuance
under employee stock option and purchase programs. This increase was partially
offset by the repayment of $3.7 million in borrowings under the line of credit
in the first quarter of fiscal 1998. Working capital totaled $8.1 million at
June 27, 1998, an increase of $3.1 million from $5.0 million at June 28, 1997.
The increase in working capital during fiscal 1998 reflected the Company's
profitability and improved balance sheet.
Net cash provided by operations was $3.9 million during fiscal 1998 compared
to $0.7 million used in fiscal 1997. During fiscal 1998, the Company generated
cash flow from operations primarily due to net income of $1.3 million, a
reduction in inventory of $3.2 million, an increase in accounts payable of $1.8
million, the non-cash effect from depreciation and amortization of $1.4 million,
and a decrease in accounts receivable of $0.6 million. These factors were
partially offset by an increase in prepaid expenses and other assets of $2.2
million, payments of $1.1 million related to the Company's restructuring plan
(see "Special Charges--Fiscal 1997" above), a decrease in advances on inventory
held by distributors of $0.6 million, and a decrease in other accrued
liabilities of $0.6 million.
The Company's products are sold to end users through dealers and other
authorized resellers, (regional, national and international) distributors, mail
order catalogs, OEMs and VARs. In fiscal 1998, distributor revenue accounted for
$12.4 million, or 34% of the Company's net sales. 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.
Net cash used in investing activities was $0.3 million during fiscal 1998,
compared to $1.3 million during fiscal 1997. The Company spent approximately
$0.4 million and $1.4 million for new equipment during fiscal 1998 and 1997,
respectively. At June 27, 1998, the Company had no material commitments for the
purchase of capital equipment.
Net cash used by financing activities was $3.2 million during fiscal 1998,
compared to $0.4 million provided during fiscal 1997. In the first quarter of
fiscal 1998, the Company repaid $3.7 million in borrowings under the line of
credit.
At June 27, 1998, the Company had a line of credit with a commercial bank
that included financial and other covenants to be satisfied for borrowings to be
permitted and that limited such borrowings to percentages of accounts receivable
and inventory. The primary financial covenant of the line of credit was a
tangible net worth covenant. The Company was in compliance with all of the
covenants at June 27, 1998, although, the Company has in the past been in
violation of certain of the covenants. In each instance, a waiver of such
violations was obtained from the bank. There were no borrowings outstanding
under the line at June 27, 1998. The Company's credit agreement effective at
June 27, 1998 expired on September 19, 1998, however, the Company has received a
written commitment for a new one year revolving line of credit agreement
allowing the Company to borrow up to $7 million based upon percentages of
eligible accounts receivable and inventory. The primary financial covenants of
the new line of credit relate to quick ratio, tangible net worth, debt to
tangible net worth and profitability. 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.
22
<PAGE>
The Company's cumulative operating losses in prior years resulted in the
need to address the Company's liquidity position. Truevision's plans included
cost reductions (see "Special Charges--Fiscal 1997" above), and the introduction
of new products during fiscal 1998. Management has also developed production,
sales and financing plans that they believe will result in continued improved
performance in fiscal 1999. Management believes that these plans, when coupled
with available credit facilities as discussed above, will enable the Company to
continue as a going concern at least through June 26, 1999.
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 require additional equity or debt financing to
fund such activities. However, there can be no assurance that the Company will
be able to obtain these funds on terms and conditions acceptable to the Company.
In addition, the sale of additional equity or convertible debt securities could
result in additional dilution in the equity ownership of the Company's
stockholders.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 (SFAS No. 128), "Earnings per Share."
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997. SFAS No. 128 replaces the presentation of primary
earnings per share (EPS) with a presentation of "basic" EPS. Basic EPS is
calculated by dividing the income or loss available to common stockholders by
the weighted average number of common shares outstanding for the period, without
consideration for common stock equivalents. "Fully diluted" EPS is replaced by
"diluted" EPS and is computed similarly to fully diluted EPS under the
provisions of Accounting Principles Board Opinion No. 15 "Earnings per Share".
Basic EPS and diluted EPS for the year ended June 27, 1998, calculated in
accordance with SFAS No. 128, are the same as net income per common share
computed using the prior rules.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive
Income." SFAS No. 130 establishes standards of reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 is effective for financial statements issued
for periods beginning after December 15, 1997. Adoption of SFAS No. 130 is not
anticipated to have a material impact on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires public
companies to disclose certain operating and financial information by business
segment in their annual and interim financial statements. SFAS No. 131 is
effective for financial statements issued for periods beginning after December
15, 1997. The business segment disclosures of the Company determined in
accordance with SFAS No. 131 are the same as those determined using the prior
rules and, therefore, adoption of SFAS No. 131 is not anticipated to have a
material impact on the Company's financial statements.
IMPACT OF CURRENCY AND INFLATION
The Company purchases materials and services primarily in U.S. dollars and
sales are primarily in U.S. dollars. Accordingly, the Company has not been
subject to significant currency fluctuations. There can be no assurance that
this trend will continue in the future. The impact of inflation has not been
material on the Company's operations or liquidity to date.
23
<PAGE>
IMPACT OF YEAR 2000
Like many other companies, Year 2000 computer issues create certain risks
for Truevision. If the Company's internal management information systems do not
correctly recognize and process date information beyond the Year 1999, there
could be an adverse impact on the Company's operations. To address these Year
2000 issues with its internal systems, the Company has initiated a program to
evaluate its internal systems. Assessment and remediation are proceeding in
parallel and the Company currently plans to have changes to these information
systems completed and tested by January 1999. These activities are intended to
encompass all major categories of internal systems used by the Company,
including manufacturing, sales and financial systems. An initial assessment
indicates that certain internal systems should be upgraded or replaced as part
of a solution to the Year 2000 problem. Certain of the costs related to upgrades
of such hardware and software systems are covered by ongoing maintenance
agreements. Additional costs of purchasing, installing, modifying and testing
the internal systems are not expected to exceed $250,000.
To assist customers in evaluating their Year 2000 issues, the Company has
completed a program to assess the capability of its current products to handle
the Year 2000. The Company believes that all current products shipping, which
run under Microsoft Windows NT, Windows 95/98 or Apple Macintosh OS, are "Year
2000 Compliant." Testing of older products, which are no longer shipping, will
not be performed. The Company is also working with key suppliers of products and
services to determine that their operations and products are Year 2000 Compliant
or to monitor their progress toward Year 2000 compliance, as appropriate. In
addition, the Company has begun internal discussions concerning contingency
planning to address potential problem areas with internal systems and with
suppliers and other third parties. It is expected that assessment, remediation
and contingency planning activities will be on-going throughout calendar year
1998 and 1999 with the goal of appropriately resolving all material internal
systems and third party issues.
Except as implied in any limited product warranty, the Company does not
believe it is legally responsible for costs incurred by customers related to
ensuring Year 2000 compliance. Nevertheless, the Company is incurring various
costs to provide customer support and customer satisfaction services regarding
Year 2000 issues and it is anticipated that these expenditures will continue
through calendar year 1999 and thereafter. As used by Truevision, "Year 2000
Compliant" means that when used properly and in conformity with the product
information provided by the Company, and when used with "Year 2000 Compliant"
computer systems, the product will accurately store, display, process, provide,
and/or receive data from, into, and between the twentieth and twenty-first
centuries, including leap year calculations, provided that all other technology
used in combination with the Truevision product properly exchanges date data
with the Truevision product. There can be no assurance that (i) third party
technologies used in combination with Truevision products will be Year 2000
Compliant and (ii) Truevision products will not be adversely affected when used
with such third party technologies, nor can the Company represent that any
modifications to its products made by a party other than Truevision will be Year
2000 Compliant. The costs incurred to date related to these programs have not
been material. The cost which will be incurred by the Company regarding the
testing of current products for Year 2000 compliance, and answering and
responding to customer requests related to Year 2000 issues, including both
incremental spending and redeployed resources, is currently not expected to
exceed $100,000. The total cost estimate does not include potential costs
related to any customer or other claims or the cost of internal software and
hardware replaced in the normal course of business. In some instances, the
installation schedule of new software and hardware in the normal course of
business is being accelerated to also afford a solution to Year 2000 compliance
issues. The total cost estimate is based on the current assessment of the
projects and is subject to change as the project progress. Based on currently
available information, the Company does not believe that the Year 2000 matters
discussed above related to internal systems or products sold to customers will
have a material adverse impact on the its financial condition or overall trends
in results of operations; however, it is still uncertain to what extent the
Company may be affected by such matters. In addition, customers may delay
purchase decisions because of uncertainty about Year 2000 issues. There also can
be no assurance that the failure to ensure Year 2000 compliance by a supplier or
another third party would not have a material adverse effect on the Company.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
A. CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... 26
Consolidated Balance Sheets--June 27, 1998 and June 28, 1997............................................... 27
Consolidated Statements of Operations--Three years ended June 27, 1998..................................... 28
Consolidated Statements of Stockholders' Equity--Three years ended June 27, 1998........................... 29
Consolidated Statements of Cash Flows--Three years ended June 27, 1998..................................... 30
Notes to Consolidated Financial Statements................................................................. 31
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of Truevision for the three years
ended June 27, 1998 is filed as part of this Annual Report on Form 10-K and
should be read in conjunction with the Consolidated Financial Statements of
Truevision.
<TABLE>
<CAPTION>
SCHEDULE PAGE
- ----------------------------------------------------------------------------------------------------------- -----
<S> <C>
II--Valuation and Qualifying Accounts...................................................................... 50
</TABLE>
Schedules not listed above have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the consolidated financial statements and notes thereto.
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Truevision, Inc.
In our opinion, the Consolidated Financial Statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Truevision, Inc. and its subsidiaries at June 27, 1998 and June 28,
1997, and the results of their operations and their cash flows for each of the
three years in the period ended June 27, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 4 to the Consolidated Financial Statements, during the
year ended June 28, 1997, the Company changed its method of recognizing revenue.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
August 13, 1998
26
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1998 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 4,973 $ 4,549
Accounts receivable, less allowance for doubtful accounts
of $141 and $338 (Note 4)............................................................. 3,911 4,630
Inventory (Note 2)...................................................................... 4,551 7,746
Prepaid expenses and other assets....................................................... 2,754 555
Income taxes receivable................................................................. 32 73
---------- ----------
Total current assets................................................................ 16,221 17,553
Property and equipment, net (Note 3)...................................................... 1,721 2,757
Other assets.............................................................................. 112 178
---------- ----------
Total assets........................................................................ $ 18,054 $ 20,488
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 6)................................................................. $ -- $ 3,738
Accounts payable........................................................................ 4,285 2,475
Accrued employee compensation........................................................... 1,334 1,492
Accrued restructuring and other costs (Note 5).......................................... 403 1,531
Advances on inventory held by distributors (Note 4)..................................... 49 644
Other accrued liabilities............................................................... 2,004 2,581
Current portion of long-term obligations (Note 10)...................................... 46 65
---------- ----------
Total current liabilities........................................................... 8,121 12,526
Long-term obligations (Note 10)........................................................... 44 86
---------- ----------
Total liabilities................................................................... 8,165 12,612
---------- ----------
Commitments and contingencies (Note 10)
Stockholders' equity (Note 8):
Preferred Stock, no par value: 2,000,000 shares authorized; none issued or
outstanding........................................................................... -- --
Common Stock, $0.001 par value: 25,000,000 shares authorized; 13,038,000 and 12,728,000
shares issued and outstanding......................................................... 53,684 53,015
Accumulated deficit..................................................................... (43,795) (45,139)
---------- ----------
Total stockholders' equity................................................................ 9,889 7,876
---------- ----------
Total liabilities and stockholders' equity.......................................... $ 18,054 $ 20,488
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
27
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
--------- ---------- ---------
<S> <C> <C> <C>
Net sales (Note 4).............................................................. $ 36,789 $ 43,620 $ 71,536
Cost of sales................................................................... 20,597 30,412 43,323
--------- ---------- ---------
Gross profit.................................................................... 16,192 13,208 28,213
--------- ---------- ---------
--------- ---------- ---------
Operating expenses:
Research and development...................................................... 4,976 6,899 7,247
Selling, general and administrative........................................... 9,729 17,399 16,761
Restructuring and other costs (Note 5)........................................ -- 1,680 --
--------- ---------- ---------
Total operating expenses...................................................... 14,705 25,978 24,008
--------- ---------- ---------
Income (loss) from operations................................................... 1,487 (12,770) 4,205
Other expense, net.............................................................. (25) (471) (324)
Interest expense................................................................ (208) (297) (229)
Interest income................................................................. 132 119 84
--------- ---------- ---------
Income (loss) before provision for income taxes and cumulative effect of change
in accounting principle....................................................... 1,386 (13,419) 3,736
Provision for income taxes (Note 7)............................................. 42 1,510 110
--------- ---------- ---------
Income (loss) before cumulative effect of change in accounting principle........ 1,344 (14,929) 3,626
Cumulative effect of change in accounting principle (Note 4).................... -- (4,858) --
--------- ---------- ---------
Net income (loss)............................................................... $ 1,344 $ (19,787) $ 3,626
--------- ---------- ---------
--------- ---------- ---------
Basic earnings per share:
Income (loss) before cumulative effect of change in accounting principle...... $ 0.10 $ (1.18) $ 0.29
Cumulative effect of change in accounting principle........................... $ -- $ (0.38) $ --
Net income (loss) per share................................................... $ 0.10 $ (1.56) $ 0.29
Diluted earnings per share:
Income (loss) before cumulative effect of change in accounting principle...... $ 0.10 $ (1.18) $ 0.27
Cumulative effect of change in accounting principle........................... $ -- $ (0.38) $ --
Net income (loss) per share................................................... $ 0.10 $ (1.56) $ 0.27
Weighted average common share and equivalents:
Basic......................................................................... 12,893 12,694 12,403
Diluted....................................................................... 13,246 12,694 13,535
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
28
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED JUNE 27, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE TOTAL
-------------------- ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT DEFICIT ADJUSTMENT EQUITY
--------- --------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JULY 1, 1995.......................... 11,587 $ 47,657 $ (28,978) $ (152) $ 18,527
Issuance of Common Stock to investors, net........ 650 3,504 -- -- 3,504
Exercise of Common Stock options.................. 329 1,283 -- -- 1,283
Issuance of Common Stock in connection with
Employee Stock Purchase Plan.................... 63 236 -- -- 236
Currency translation adjustment................... -- -- -- (73) (73)
Net income........................................ -- -- 3,626 -- 3,626
--------- --------- ------------ ----- ------------
BALANCES AT JUNE 29, 1996......................... 12,629 52,680 (25,352) (225) 27,103
Exercise of Common Stock options.................. 25 68 -- -- 68
Issuance of Common Stock in connection with
Employee Stock Purchase Plan.................... 74 267 -- -- 267
Currency translation adjustment................... -- -- -- 225 225
Net loss.......................................... -- -- (19,787) -- (19,787)
--------- --------- ------------ ----- ------------
BALANCES AT JUNE 28, 1997......................... 12,728 53,015 (45,139) -- 7,876
Exercise of Common Stock options.................. 211 493 -- -- 493
Issuance of Common Stock in connection with
Employee Stock Purchase Plan.................... 99 176 -- -- 176
Currency translation adjustment................... -- -- -- -- --
Net income........................................ -- -- 1,344 -- 1,344
--------- --------- ------------ ----- ------------
BALANCES AT JUNE 27, 1998......................... 13,038 $ 53,684 $ (43,795) $ -- $ 9,889
--------- --------- ------------ ----- ------------
--------- --------- ------------ ----- ------------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
29
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
--------- ---------- ---------
<S> <C> <C> <C>
OPERATING CASH FLOWS:
Net income (loss)............................................................... $ 1,344 $ (19,787) $ 3,626
Adjustments to reconcile net income (loss) to net cash provided (used) in
operating activities:
Cumulative effect of change in accounting principle........................... -- 4,858 --
Provision for doubtful accounts............................................... 100 182 402
Depreciation and amortization................................................. 1,431 2,382 1,755
Loss on disposal of fixed assets.............................................. 39 92 108
Deferred income taxes......................................................... -- 1,513 --
Other......................................................................... -- 225 (73)
Changes in assets and liabilities:
Accounts receivable........................................................... 619 2,530 (7,089)
Inventory..................................................................... 3,166 6,724 555
Prepaid expenses and other assets............................................. (2,195) 707 2,633
Income taxes receivable....................................................... 41 157 69
Accounts payable.............................................................. 1,810 (3,813) (2,868)
Accrued employee compensation................................................. (158) 951 (137)
Accrued restructuring and other costs......................................... (1,128) 1,531 --
Advances on inventory held by distributors.................................... (595) 644 --
Other accrued liabilities..................................................... (577) 416 (1,671)
Accrued litigation settlement................................................. -- -- (6,600)
--------- ---------- ---------
Net cash provided (used) in operating activities................................ 3,897 (688) (9,290)
--------- ---------- ---------
INVESTING CASH FLOWS:
Acquisitions of property and equipment.......................................... (316) (1,007) (1,268)
Acquisitions of other assets.................................................... -- (250) (30)
--------- ---------- ---------
Net cash used in investing activities........................................... (316) (1,257) (1,298)
--------- ---------- ---------
FINANCING CASH FLOWS:
Borrowings (payments) on line of credit, net.................................... (3,738) 301 1,753
Payments on debt obligations.................................................... (88) (243) (464)
Issuance of common stock, net................................................... 669 335 5,023
--------- ---------- ---------
Net cash provided (used) by financing activities................................ (3,157) 393 6,312
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents............................ 424 (1,552) (4,276)
Cash and cash equivalents, beginning of year.................................... 4,549 6,101 10,377
--------- ---------- ---------
Cash and cash equivalents, end of year.......................................... $ 4,973 $ 4,549 $ 6,101
--------- ---------- ---------
--------- ---------- ---------
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year:
Interest...................................................................... $ 223 $ 297 $ 229
Income taxes.................................................................. $ 3 $ 82 $ 17
Noncash investing and financing activities:
Property and equipment acquired under capital leases.......................... $ 27 $ -- $ 613
Property and equipment transferred from inventory............................. $ 29 $ 370 $ 431
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Truevision designs, develops, manufactures and markets professional quality
digital video products for Windows and Macintosh compatible computers and
operating systems. The Company's products are sold throughout the United States
as well as internationally, primarily in Europe and the Pacific Rim.
Truevision's principal facilities are located in Santa Clara, California and
Indianapolis, Indiana, and the Company maintains its headquarters in Santa
Clara, California.
BASIS OF PRESENTATION
The consolidated financial statements of the Company include the financial
statements of Truevision and its wholly-owned subsidiaries, after elimination of
the intercompany accounts and transactions. The Company's fiscal calendar and
its operating year ends on the Saturday closest to June 30.
LIQUIDITY AND FUTURE CAPITAL NEEDS.
The Company's cumulative operating losses in prior years, combined with
declining revenues, result in uncertainty about the Company's future viability.
Truevision has implemented various actions and plans to improve liquidity
including cost reductions (during the quarter ended June 28, 1997, the Company
recorded a charge for restructuring of $1,680,000, see Note 5--Restructuring and
Other Costs). The implementation of these production, sales and financing plans,
and the introduction of new products resulted in profitability for fiscal 1998.
Management believes that these plans, when coupled with recently renewed credit
facilities (see Note 6--Line of Credit), will enable Truevision to continue as a
going concern at least through June 26, 1999.
MANAGEMENT'S USE OF ESTIMATES AND ASSUMPTIONS
The Company's preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORY
Inventory is stated at the lower of cost or market; cost is determined on a
first-in, first-out basis, and includes materials, labor and overhead.
TRANSFER TO CONTRACT MANUFACTURER
In connection with outsourcing manufacturing activities, the company
transferred $1.5 million of component parts inventories to one of its contract
manufacturers. Revenue was not recognized upon the transfer of component parts
inventory to the contractor; the amount receivable for the transferred inventory
is included in prepaid and other assets in the balance sheet. The company
maintains a security interest in the inventory and has agreed to reimburse the
contractor for parts which become obsolete.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Based on the Company's projected usage of the inventory, the Company expects to
receive payment for substantially all of the inventory by June 30, 1999.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method based upon the shorter of the estimated
useful lives of the assets, generally three to five years, or the lease term of
the respective assets, if applicable.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method
in accordance with Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes."
REVENUE RECOGNITION
Revenue from product sales to dealers, OEMs, VARs and end users is
recognized upon shipment, provided no significant obligations remain and
collectibility is probable. The Company grants limited rights of return based on
negotiations with individual customers, and generally such rights are based on
volume purchases. Reserves for sales returns and warranty obligations are based
on historical information and other related factors, and are provided at the
time revenue is recognized. Revenue from shipments to distributors is not
recognized until the product is shipped by the distributors. Revenues from
license fees under product license agreements is recognized when earned. Revenue
from nonrecurring engineering services is recognized using the percentage of
completion method based on costs incurred to date as a percentage of total
estimated costs at completion.
RESEARCH AND DEVELOPMENT EXPENSES
The Company charges research and development expenditures to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs after
technological feasibility has been established. Based upon the Company's product
development process, technological feasibility of software is established upon
the completion of beta testing. Development costs incurred by the Company
following completion of beta testing and prior to commercial release have been
insignificant, and to date all software development costs have been expensed as
incurred.
CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company places its cash and cash equivalents, primarily checking
and money market accounts, with high credit-quality financial institutions and
does not believe that any significant credit risk is associated with these
financial instruments at June 27, 1998. The Company has net accounts receivable
from customers located primarily in the United States, Europe, and Asia/Pacific
and other geographic areas of $2,762,000, $371,000 and $778,000, respectively.
The Company performs various evaluations of its customers' financial condition
and credit worthiness, and maintains an allowance for uncollectable accounts
receivable based upon expected collectibility of all accounts receivable. The
Company believes the recorded value of financial instruments approximate fair
value at each balance sheet date.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock options grants to employees using the
intrinsic value method described in accordance with Accounting Principles Board
Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees."
Accordingly, no compensation expense has been recognized in the Company's
consolidated statements of operations.
In October 1995, the Financial Accounting Standard Boards issued Statement
of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." SFAS No. 123 requires the measurement of the fair
value of stock-based compensation to be included in the statement of operations
or disclosed in the notes to financial statements. The Company has elected the
disclosure-only alternative under SFAS No. 123 and will continue to account for
stock-based compensation for employees under APB Opinion No. 25.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed on the basis of the weighted average
number of common shares outstanding plus common stock equivalents, when
dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings per Share."
The Company has presented earnings per share for all periods in accordance with
the new standard. SFAS 128 requires the presentation of basic and diluted
earnings per share. Basic earnings per share is computed using the weighted
average number of common shares outstanding during the period. Diluted earnings
per share includes the effect of dilutive potential common shares (options)
issued during the period (using the treasury stock method). The following data
is presented in thousands, except per share data:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
JUNE 27 JUNE 28 JUNE 29,
1998 1997 1996
--------- ---------- ---------
<S> <C> <C> <C>
Net income (loss)........................................... $ 1,344 $ (19,787) $ 3,626
--------- ---------- ---------
--------- ---------- ---------
Weighted average shares outstanding--basic.................. 12,893 12,694 12,403
Dilutive options............................................ 353 -- 1,132
--------- ---------- ---------
Weighted average shares outstanding--diluted................ 13,246 12,694 13,535
--------- ---------- ---------
--------- ---------- ---------
Earnings per share
Basic..................................................... $ 0.10 $ (1.56) $ 0.29
Dilutive effect of outstanding options.................... 0.00 0.00 (0.02)
--------- ---------- ---------
Diluted................................................... $ 0.10 $ (1.56) $ 0.27
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
Options and warrants to purchase 277,550, 808,324 and 939,500 shares of
common stock were outstanding at the end of fiscal 1998, 1997 and 1996,
respectively, but were not included in the computations of Diluted earnings per
share because the options' exercise prices were greater than the average market
price of the common shares, or because the Company's net loss per share would
have decreased.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive
Income." SFAS No. 130 establishes standards of reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 is effective for financial statements issued
for periods beginning after December 15, 1997. Adoption of SFAS No. 130 is not
anticipated to have a material effect on the Company's financial statements.
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131 requires public
companies to disclose certain operating and financial information by business
segment in their annual and interim financial statements. SFAS No. 131 is
effective for financial statements issued for periods beginning after December
15, 1997. The business segment disclosures of the Company determined in
accordance with SFAS No. 131 are the same as those determined using the prior
rules and, therefore, adoption of SFAS No. 131 is not anticipated to have a
material impact on the Company's financial statements.
NOTE 2. INVENTORY
A summary of inventory follows (in thousands):
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1998 1997
--------- ---------
<S> <C> <C>
Purchased parts and subassemblies........................................ $ 398 $ 2,675
Work-in-progress......................................................... 2,398 2,039
Finished goods........................................................... 1,125 2,031
Finished goods held by distributors...................................... 630 1,001
--------- ---------
Total.................................................................. $ 4,551 $ 7,746
--------- ---------
--------- ---------
</TABLE>
NOTE 3. PROPERTY AND EQUIPMENT
A summary of property and equipment follows (in thousands):
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1998 1997
--------- ---------
<S> <C> <C>
Computer equipment and machinery......................................... $ 8,298 $ 9,535
Furniture and fixtures................................................... 688 775
Leasehold improvements................................................... 111 111
--------- ---------
Subtotal................................................................. 9,097 10,421
Less: accumulated depreciation........................................... (7,376) (7,664)
--------- ---------
Total.................................................................. $ 1,721 $ 2,757
--------- ---------
--------- ---------
</TABLE>
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. ACCOUNTING CHANGE--RECOGNITION OF DISTRIBUTOR REVENUE
In the quarter ended September 28, 1996, the Company changed its accounting
method for recognizing distributor revenue, whereby the Company defers
recognizing revenue, and does not relieve inventory on shipments to
distributors, until shipment by the distributor. Previously, the Company
recognized revenue, after recording appropriate reserves for sales returns from
distributors and allowances granted to them, at the time of shipment to the
distributor. Distributor agreements allow certain rights of return and price
protection on products held by distributors. The Company believes that deferral
of distributor sales and related gross margins until the product is shipped by
the distributors results in a more meaningful measurement of operations and is a
preferable method of accounting for distributor revenue. Cash received in
advance of recognizing distributor revenue is recorded as advances on inventory
held by distributors.
The cumulative effect on prior years of changing the accounting method was
$4.9 million, or $0.38 per share. This amount was reflected in the quarter ended
September 28, 1996. The estimated pro forma amounts for the year ended June 29,
1996 assuming the new method of accounting had been applied retroactively would
be net sales of $65.9 million and net income of $1.0 million, or $0.08 per
share.
NOTE 5. RESTRUCTURING AND OTHER COSTS
During the quarter ended June 28, 1997, the Company recorded a charge for
restructuring of $1.7 million. This charge primarily consisted of costs
associated with downsizing facilities and reduction in headcount. Also, as a
result of the Company's decision to close its European offices, the
restructuring charge included costs associated with lease terminations and
write-off of fixed assets for the sales offices located in France and the United
Kingdom, and the write-off of the cumulative translation adjustment.
At June 28, 1997, the accrued restructuring and other costs reserve balance
was $1.5 million. In fiscal 1998, these reserves were used to offset severance
payments of $0.4 million, non-utilized facilities costs of $0.6 million and
European office closure costs of $0.1 million. The remaining balance of $0.4
million at June 27, 1998 is expected to be utilized during fiscal 1999.
NOTE 6. LINE OF CREDIT
In September 1998, the Company received a commitment for a new one year bank
revolving line of credit ("the Credit Agreement") which consists of a $5,000,000
revolving line of credit facility ("Facility A") and a $2,000,000 EXIM backed
revolving line of credit facility ("Facility B"). This Credit Agreement replaced
the Company's previous $7,000,000 bank revolving line of credit agreement. Under
Facility A, borrowings are available up to $5,000,000 based on domestic eligible
invoiced receivables. Under Facility B, borrowings are available up to
$2,000,000 based on foreign eligible invoiced receivables and export finished
goods and channel inventory (borrowings on inventory are capped at a maximum of
$1,000,000). This Credit Agreement provides for interest based on the bank's
prime rate plus 0.50% and 0.25% for borrowings under Facility A and Facility B,
respectively. The Credit Agreement contains various financial covenants
including maintaining certain financial ratios and tests. The primary financial
ratios include quick ratio, debt to tangible net worth and profitability
covenants. Borrowings under the Credit Agreement are collateralized by the
Company's assets.
At June 27, 1998, the Company had no borrowings under the existing revolving
line of credit agreement, and was in compliance with the financial covenant
regarding tangible net worth. Interest on borrowings was based on the banks
prime rate plus 2.00% per annum.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current tax expense:
Federal....................................................... $ 37 $ -- $ 80
State......................................................... 5 -- 30
Foreign....................................................... -- (3) --
--- ----------- -----
Subtotal.................................................... 42 (3) 110
--- ----------- -----
Deferred tax expense:
Federal....................................................... -- 1,513 --
State......................................................... -- -- --
--- ----------- -----
Subtotal.................................................... -- 1,513 --
--- ----------- -----
Total..................................................... $ 42 $ 1,510 $ 110
--- ----------- -----
--- ----------- -----
</TABLE>
Deferred tax assets consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Reserves and nondeductible expenses....................... $ 3,500 $ 4,658 $ 1,800
Credit carryovers......................................... 1,400 1,451 1,468
Net operating loss carryforwards.......................... 16,250 16,400 14,200
---------- ---------- ----------
Gross deferred tax assets............................... 21,150 22,509 17,468
Valuation allowance....................................... (21,150) (22,509) (15,955)
---------- ---------- ----------
Total net deferred tax assets......................... $ 0 $ 0 $ 1,513
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
At June 27, 1998, the Company had gross deferred tax assets of $21,150,000
relating primarily to net operating loss carryforwards. These deferred tax
assets have been fully reserved due to the uncertainty of future realization of
the net operating loss carryforwards. In the fourth quarter of fiscal 1997, the
Company recorded a provision for income taxes of $1,513,000 to fully reserve for
deferred tax assets.
The Company has approximately $44,000,000 of net operating loss and credit
carryforwards that expire beginning in 2009. Utilization of operating losses may
be limited due to changes in ownership under Section 382 of the Internal Revenue
Code of 1986, as amended.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES (CONTINUED)
The difference between the effective income tax rate and the applicable U.S.
statutory rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate................................................ 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefit........................ 6.1 6.1 6.1
Decrease in valuation allowance....................................... (37.0) (40.1) (37.2)
--------- --------- ---------
Total............................................................. 3.1% 0% 2.9%
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 8. STOCKHOLDERS' EQUITY
COMMON STOCK
In June 1995 the Company issued 2,000,000 shares of Common Stock in a
private placement to investors in exchange for cash of $4.43 per share; the net
proceeds from the sale were approximately $8,428,000. As part of the sale of
shares to the investors, the Company issued warrants to the investors for the
purchase of 500,000 additional shares of Common Stock and also issued a warrant
to the placement agent of the private placement for the purchase of 135,824
shares of Common Stock. The purchase price of each share issuable upon exercise
of each warrant is $5.22. The expiration date of the warrants was June 19, 1998,
however, the Board of Directors has approved a one year extension, subject to
certain conditions. Additionally, on August 8, 1995 the Company issued an
additional 650,000 shares of its Common Stock in a private placement to
investors for $6.26 per share; the net proceeds from the sale were approximately
$3,500,000. The proceeds were used primarily to fund the settlement of the
Company's stockholder class action lawsuit.
In October 1994, the Company issued a warrant to the Company's president and
chief executive officer for the purchase of 400,000 shares of Common Stock. 25%
of the warrant vested in January, 1995, and 6,666.67 shares per month vests
thereafter. The purchase price of each share issuable upon exercise of the
warrant is $2.75 and, as of June 27, 1998, a total of 380,000 shares of the
Company's Common Stock may be purchased under the warrant.
In June 1993, the Company, as part of the sale of shares to an investor,
issued a warrant to the investor for the purchase of up to such number of
additional shares of Common Stock such that the aggregate investor holding of
Common Stock, acquired directly from the Company as of the date of any such
purchase, will not exceed 19.99% of the then issued and outstanding Common Stock
of the Company. The purchase price of each share issuable upon exercise of the
rights under the warrant was $9. The warrant expired on June 7, 1996.
AMENDED 1988 INCENTIVE STOCK PLAN
The Company's Amended 1988 Incentive Stock Plan (the "Old Option Plan") was
approved by the Board of Directors and ratified by the stockholders in 1988.
Under the Old Option Plan, shares of Common Stock have been reserved for
issuance to employees and consultants of the Company, as approved by the Board
of Directors. Amendments increasing the number of shares reserved for issuance
under the Old Option Plan were adopted by the Board of Directors and ratified by
the stockholders in each year thereafter for an aggregate of 4,241,300 shares
reserved for issuance under the Old Option Plan. The Old Option Plan, which
expired in February 1998, provided for incentive as well as non-statutory stock
options and stock purchase rights.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
Options and stock purchase rights under the Old Option Plan are granted at
prices determined by the Board, subject to certain conditions more fully
described in the Option Plan. Generally, these conditions specify floor prices
for the grants ranging from 85% to 110% of the fair market value of the stock at
the date of the grant, as determined by the Board, based upon the type of the
award and the number of shares of Common Stock held by the grantees at the date
of the award. No options have been granted at exercise prices less than 100% of
such fair market value at the date of grant. Options granted under the Old
Option Plan expire over ten years.
Options granted generally vest 25% one year after issuance and 1/48th each
month thereafter for 36 months. Options are adjusted pro rata for any changes in
the capitalization of the Company, such as stock splits and stock dividends. In
addition, the outstanding options issued under the Old Option Plan will
terminate within a period set by the Board after termination of employment.
In April 1997, the Company offered employees the opportunity to participate
in an option repricing program. Under the program, each employee could elect on
or before April 30 that 90% of his or her existing option issued under the Old
Option Plan be converted into a repriced option, subject to final approval by
the Compensation Committee of the Company's Board of Directors. The per share
exercise price of each repriced option would be equal to the fair market value
of the Company's Common Stock on the conversion date (on or about May 2, 1997).
All repriced options have a vesting start date identical to that of the
converted option, but the vesting schedule of the repriced option would be
forty-two months instead of the forty-eight months vesting schedule of the
converted option. On May 2, 1997, the option repricing program and the options
selected for conversion under the program were approved by the Compensation
Committee. On such date, the fair market value of the Company's Common Stock was
$2.16 and options to purchase 2,302,179 shares at a weighted average exercise
price of $4.99 per share were converted into repriced options to purchase
2,059,460 shares.
As of June 27, 1998, no new options can be issued and options to purchase
1,807,489 shares of Common Stock are outstanding under the Old Plan, 848,444 of
which are exercisable.
AMENDED AND RESTATED 1991 DIRECTOR OPTION PLAN
The Company's Amended and Restated 1991 Director Option Plan (the "Plan")
was adopted by the Board of Directors in July 1991 and was subsequently amended
by the Board in October 1991, July 1992 and September 1995. The Plan provides
for the granting of non-statutory stock options to non-employee directors of the
Company. A total of 150,000 shares of Common Stock were originally reserved for
issuance under the Plan. An amendment increased the number of shares to 250,000
shares. Under the terms of the Plan, (i) non-employee directors who were members
of the Board on July 25, 1991 received an option to purchase 10,000 shares of
Common Stock, which options became exercisable at the rate of 25% per year for
four years following July 1, 1991, (ii) each non-employee director who becomes a
member of the Board after July 25, 1991, will receive an option on the date that
such director first becomes a member of the Board to purchase 10,000 shares of
Common Stock, which option shall become exercisable at the rate of 25% per year
for four years following the date of grant and (iii) each non-employee director
who is a member of the Board immediately before the Company's Annual Meeting and
remains a member of the Board immediately after such Annual Meeting, shall
receive on the date of the Annual Meeting, for so long as such non-employee
director remains a member of the Board, an additional option to purchase 2,500
shares of Common Stock subject to four year vesting from the date of grant
similar to the vesting provisions set forth above. Options granted under the
Plan have a term of ten years. As of June 27, 1998,
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
options to purchase 110,000 shares of Common Stock are outstanding under the
Plan, 74,375 of which are exercisable.
1997 EQUITY INCENTIVE PLAN
The Company's 1997 Equity Incentive Plan (the "Incentive Plan") was approved
by the Board of Directors in December 1997 and ratified by the stockholders in
April 1998. Under the Incentive Plan, 600,000 shares of Common Stock have been
reserved for issuance to employees, directors, and consultants of the Company,
as approved by the Board of Directors. The Incentive Plan, which expires in
December 2007, provides for incentive as well as non-statutory stock options and
stock purchase rights.
Options and stock purchase rights under the Incentive Plan are granted at
prices determined by the Board, subject to certain conditions more fully
described in the Incentive Plan. Generally, these conditions specify floor
prices for the grants ranging from 85% to 110% of the fair market value of the
stock at the date of the grant, as determined by the Board, based upon the type
of the award and the number of shares of Common Stock held by the grantees at
the date of the award. No options have been granted at exercise prices less than
100% of such fair market value at the date of grant. Options granted under the
Incentive Plan expire over ten years.
Options granted generally vest 25% one year after issuance and 1/48th each
month thereafter for 36 months. Options are adjusted pro rata for any changes in
the capitalization of the Company, such as stock splits and stock dividends. In
addition, the outstanding options issued under the Incentive Plan will terminate
within a period set by the Board after termination of employment.
As of June 27, 1998, options to purchase 186,400 shares of Common Stock were
outstanding under the Incentive Plan, none of which were exercisable.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
The activity under the option plans, combined, was as follows:
<TABLE>
<CAPTION>
SHARES
AVAILABLE STOCK OPTIONS EXERCISE PRICE
FOR GRANT OUTSTANDING PER SHARE
----------- ------------- ----------------
<S> <C> <C> <C>
BALANCES AT JULY 1, 1995........................................... 474,518 1,749,471
Increase in number of shares authorized............................ 615,000 --
Options granted.................................................... (1,039,250) 1,039,250 $4.12 - $ 9.25
Options exercised.................................................. -- (329,706) $1.87 - $ 7.75
Options canceled................................................... 236,654 (236,654) $2.75 - $11.25
----------- -------------
BALANCES AT JUNE 29, 1996.......................................... 286,922 2,222,361
Increase in number of shares authorized............................ 600,000 --
Options granted.................................................... (2,880,706) 2,880,706 $1.94 - $ 6.75
Options exercised.................................................. -- (24,508) $0.22 - $ 4.89
Options canceled................................................... 2,615,341 (2,615,341) $2.16 - $10.00
----------- -------------
BALANCES AT JUNE 28, 1997.......................................... 621,557 2,463,218
Increase in number of shares authorized............................ 1,200,000 --
Shares unavailable due to cancellation of Old Option Plan.......... (1,383,960) --
Options granted.................................................... (880,275) 880,275 $1.75 - $ 4.00
Options exercised.................................................. -- (210,937) $0.22 - $ 2.75
Options canceled................................................... 996,278 (1,028,667) $1.75 - $ 7.88
----------- -------------
BALANCES AT JUNE 27, 1998.......................................... 553,600 2,103,889
----------- -------------
----------- -------------
SHARES EXERCISABLE AT JUNE 27, 1998................................ 922,819
-------------
-------------
</TABLE>
Information relating to stock options outstanding under the option plans,
combined, at June 27, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED --------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------- --------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Range of exercise prices:
$1.75 - $ 2.56 1,952,875 8.9 years $ 2.07 836,852 $ 2.16
$2.75 - $ 4.00 113,514 7.6 years $ 3.39 53,467 $ 3.05
$6.00 - $ 7.75 27,500 5.6 years $ 6.91 22,500 $ 6.75
$11.25 - $11.25 10,000 4.1 years $ 11.25 10,000 $ 11.25
----------- -----------
2,103,889 922,819
----------- -----------
----------- -----------
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes model with the following assumptions used for grants during fiscal
years 1998, 1997 and 1996: annual dividend yield of 0.0% for all periods;
weighted average interest rates of 5.93%, 6.42% and 5.83% for options granted
during the fiscal years 1998, 1997 and 1996, respectively; weighted average
option terms of 4 years for all periods; and expected volatility factors of 90%,
65% and 65% for fiscal years 1998, 1997 and 1996, respectively. The weighted
average fair value of options granted during fiscal years 1998, 1997 and 1996
was $0.83, $1.10 and $4.17, respectively, per share.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCKHOLDERS' EQUITY (CONTINUED)
1990 EMPLOYEE STOCK PURCHASE PLAN
In August 1990, the Board of Directors adopted an Employee Stock Purchase
Plan which enables substantially all employees in the United States to subscribe
to shares of Common Stock on semi-annual offering dates at a purchase price of
85% of the fair market value of the stock on the offering date or, if lower, 85%
of the fair market value of the stock on the semi-annual exercise date. A
maximum of 500,000 shares are authorized for subscription over a 20 year period.
During fiscal years 1998, 1997 and 1996, there were 99,240, 74,119 and 63,023
shares, respectively, issued under the 1990 Employee Stock Purchase Plan.
The Company has reserved such number of shares of Common Stock as necessary
to cover shares issuable under options, warrants and the 1990 Employee Stock
Purchase Plan.
The fair value of each stock award is estimated on the date of grant using
the Black-Scholes model with the following assumptions used for grants during
fiscal years 1998, 1997 and 1996: annual dividend yield of 0.0% for all periods;
weighted average interest rates of 5.34%, 5.40 and 5.22% for stock awards
granted during fiscal year 1998, 1997 and 1996, respectively; weighted average
expected stock award terms of six months for all periods; and expected
volatility factors of 75%, 65% and 65% for fiscal 1998, 1997 and 1996,
respectively. The weighted average fair value of the stock awards granted during
fiscal years 1998, 1997 and 1996 was $0.66, $1.47 and $1.89, respectively, per
share.
FAIR VALUE DISCLOSURES
Had compensation cost for the Company's stock option and stock purchase
plans been determined based on the fair value of the options at the grant dates
using the Black-Scholes model as provided by SFAS No. 123, the Company's net
income (loss) and net income (loss) per share for the fiscal years 1998, 1997
and 1996 would have been as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported................................................. $ 1,344 $ (19,787) $ 3,626
Pro forma................................................... $ 387 $ (21,896) $ 3,221
Basic net income (loss) per share:
As reported................................................. $ 0.10 $ (1.56) $ 0.29
Pro forma................................................... $ 0.03 $ (1.72) $ 0.26
Diluted net income (loss) per share:
As reported................................................. $ 0.10 $ (1.56) $ 0.27
Pro forma................................................... $ 0.03 $ (1.72) $ 0.24
</TABLE>
The pro forma amounts reflect compensation expenses related to fiscal 1998,
1997 and 1996 employee and director option grants and employee stock purchase
plan awards only. In future years, the pro forma annual compensation expense may
increase due to the additional expense associated with future grants combined
with the expense associated with grants in prior years.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INDUSTRY, GEOGRAPHIC AND CUSTOMER INFORMATION
The Company operates in one industry segment, which is computer peripherals.
The Company has no significant foreign assets or liabilities. Export sales by
geographic area, as a percentage of net sales, for the years ended June 27,
1998, June 28, 1997 and June 29, 1996 consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Europe.......................................................... 17.7% 12.4% 15.5%
Asia/Pacific.................................................... 13.4 16.1 8.8
Other........................................................... 0.1 0.9 0.9
--- --- ---
Total......................................................... 31.2% 29.4% 25.2%
--- --- ---
--- --- ---
</TABLE>
During fiscal 1995, the Company entered into a three-year OEM agreement with
a major customer under which the customer had agreed to make minimum aggregate
purchases of certain products of $40,000,000 during calendar years 1995 through
1997. In the fourth quarter of fiscal 1996, the customer and the Company
negotiated a fully paid license fee in the amount of $1,450,000 for the customer
to manufacture certain products used by the customer, rather than purchase them
from the Company. The Company did not in fiscal 1998 and fiscal 1997 and does
not in the future expect to receive any further revenues or royalties resulting
from the customer's manufacture and use of such products. The Company has no
further obligations to the customer. This customer accounted for 2.6%, 1.2% and
35.9% of the Company's net sales during fiscal 1998, 1997 and 1996,
respectively. No customers accounted for more than 10% of the Company's net
sales in fiscal 1998. In fiscal 1997, the Company's largest domestic
distributor, Ingram Micro, accounted for 11.0% of the Company's net sales. No
customers accounted for more than 10% of the Company's net sales in fiscal 1996.
NOTE 10. COMMITMENTS AND CONTINGENCIES
In August 1997, the Company entered into an agreement with a major supplier
to purchase $1.6 million of a certain component during fiscal 1998 and 1999. The
component is used in the majority of the Company's products and is currently
available only from this supplier. The supplier is discontinuing the component
and the purchase commitment represents the Company's anticipated usage
requirements for the next three years. The inability to obtain sufficient
quantities of this key component as required, or to develop an alternative
component, could result in delays or reductions in product shipments to the
Company's customers. However, the Company's future generation products, which
are expected to be released within the next two years, will not require this
component. At June 27, 1998 the Company has purchased approximately $0.7 million
under this agreement.
The Company occupies its principal facilities under non-cancelable leases
expiring in March 2001 and August 2003. The Company is required to pay taxes,
insurance and maintenance expenses for these facilities. The Company also leases
other facilities and equipment under operating leases. Rent expense under
non-cancelable operating leases, principally for the rental of office space, for
the years ended June 27, 1998, June 28, 1997 and June 29, 1996 was $895,000,
$1,101,000 and $1,070,000, respectively.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments at June 27, 1998 under non-cancelable lease
obligations are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR ENDING LEASES LEASES
- ------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
1999..................................................................... $ 46 $ 944
2000..................................................................... 31 946
2001..................................................................... 15 781
2002..................................................................... -- 286
2003..................................................................... -- 286
Years thereafter......................................................... -- 36
--- -----------
Total minimum lease payments............................................. 92 $ 3,279
-----------
-----------
Less: amount representing interest....................................... 2
---
Present value of net minimum lease payments.............................. 90
Less: current portion of capital lease obligations....................... 46
---
Capital lease obligations.............................................. $ 44
---
---
</TABLE>
Capital leases are for manufacturing and office equipment. Capital lease
property included in property, plant and equipment is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1998 1997
----------- -----------
<S> <C> <C>
Computer equipment and machinery.......................................... $ 254 $ 338
Less: accumulated depreciation............................................ (116) (106)
----- -----
Total................................................................... $ 138 $ 232
----- -----
----- -----
</TABLE>
The Company, in the normal course of business, receives and makes inquiries
with respect to possible patent infringements and other litigation. The Company
believes that it is unlikely that the outcome of the patent infringement
inquiries or other litigation will have a material adverse effect on the
Company's financial position or results of operations.
NOTE 11. RELATED PARTY TRANSACTIONS
During the quarter ended June 29, 1996, the Company's net sales included
revenue of $957,000 from a 14.4% stockholder of the Company.
43
<PAGE>
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 27, MARCH 28, DECEMBER 27, SEPTEMBER 27,
QUARTER ENDED 1998 1998 1997 1997
- ------------------------------------------------------------- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
FISCAL 1998
Net sales.................................................... $ 8,654 $ 8,004 $ 10,039 $ 10,092
Gross profit................................................. $ 3,834 $ 3,621 $ 4,502 $ 4,235
Income from operations....................................... $ 30 $ 252 $ 759 $ 446
Net income................................................... $ 37 $ 245 $ 710 $ 352
Basic net income per share................................... $ 0.00 $ 0.02 $ 0.05 $ 0.03
Diluted income per share..................................... $ 0.00 $ 0.02 $ 0.05 $ 0.03
<CAPTION>
JUNE 28, MARCH 29, DECEMBER 28, SEPTEMBER 28,
1997 1997 1996 1996
--------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
FISCAL 1997
Net sales.................................................... $ 10,757 $ 11,904 $ 10,911 $ 10,048
Gross profit................................................. $ 2,145 $ 4,226 $ 4,161 $ 2,676
Loss from operations......................................... $ (7,396) $ (1,337) $ (680) $ (3,357)
Cumulative effect of accounting change....................... $ -- $ -- $ -- $ (4,858)
Net loss..................................................... $ (8,926) $ (1,462) $ (983) $ (8,416)
Basic net loss per share..................................... $ (0.70) $ (0.12) $ (0.08) $ (0.66)
Diluted loss per share....................................... $ (0.70) $ (0.12) $ (0.08) $ (0.66)
</TABLE>
During the quarter ended June 28, 1997, the Company recorded a charge for
restructuring and other costs of $1,680,000. This charge primarily included
costs associated with downsizing facilities and reduction in headcount. Also, as
a result of the Company's decision to close its European offices, the
restructuring charge included costs associated with lease terminations and
write-offs of assets for the sales offices located in France and the United
Kingdom, and the write-off of the cumulative translation adjustment. In
addition, the Company recorded charges to fully reserve for deferred tax assets
of $1,513,000, inventory valuation adjustments of $955,000, the write-off of
certain other assets (including prepaid royalties no longer having economic
value) of $450,000, and settlement of pending lawsuits and other legal costs of
$350,000.
During the quarter ended September 28, 1996, the Company changed its
accounting method for recognizing distributor revenue. The first quarter of
fiscal 1997 included a $4,858,000 charge for the cumulative effect on prior
years of changing the accounting method. In addition, the Company recorded
inventory valuation adjustments of $500,000 and severance related costs of
$250,000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
44
<PAGE>
PART III
Certain information required by Part III is omitted from this Annual Report
on Form 10-K in that the registrant will file a definitive proxy statement
pursuant to Regulation 14A with respect to the 1998 Annual Meeting of
Stockholders (the "Proxy Statement") with the Securities and Exchange
Commission; certain information to be included therein is incorporated herein by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The information concerning the Company's directors required by this Item is
incorporated by reference to the section entitled "Election of
Directors--Nominees," "Certain Relationships and Related Transactions" and
"Compliance with the Reporting Requirements Section 16(a)" in the Company's
Proxy Statement.
(b) The information concerning the Company's executive officers required by this
item is incorporated by reference to the section in Part I entitled
"Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Directors," "Compensation of Executive
Officers--Summary Compensation Table," "Option Grants In Last Fiscal Year,"
"Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-End Option
Values," "Employment Agreements" and "Compensation Committee Interlocks and
Insider Participation" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
section entitled "Security Ownership Of Certain Beneficial Owners And
Management" in the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
section entitled "Election of Directors--Information Concerning Nominees" and
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement.
With the exception of the information explicitly incorporated by reference
to the Company's Proxy Statement in Part IV of this Annual Report on Form 10-K,
the Company's Proxy Statement is not deemed as filed as part of this report.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS--see Item 8
(b) REPORTS FILED ON FORM 8-K
There were no reports on Form 8-K filed for the year ended June 27, 1998.
(c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan Merger between RasterOps Corporation and Truevision (1)
3.1 Certificate of Incorporation in the State of Delaware (1)
3.2 Bylaws (1)
4.1 See Exhibit 3.1
4.2 Modification Agreement dated October 27, 1988, as amended March 12, 1990 (2)
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.1 Amended 1988 Incentive Stock Plan (8)
10.2 Form of Incentive Stock Option Agreement (3)
10.3 Form of Incentive Stock Option Agreement (provides for payment by promissory note) (3)
10.4 Form of Nonstatutory Stock Option Agreement (3)
10.5 Form of Nonstatutory Stock Option Agreement (provides for payment by promissory note) (3)
10.6 Form of Stock Purchase Agreement (3)
10.7 Form of Stock Purchase Agreement (provides for payment by promissory note) (3)
10.8 Form of Stock Bonus Agreement (8)
10.9 1990 Employee Stock Purchase Plan (3)
10.10 Form of 1990 Employee Stock Purchase Plan Subscription Agreement (3)
10.11 Amended and Restated 1991 Director Option Plan (8)
10.12 Form of Director Option Agreement (4)
10.13 Lease Agreement for the Company's executive offices in Santa Clara, California dated February 1989, as
amended May 1989 (2)
10.14 Second Amendment to the Lease Agreement for the Company's executive offices in Santa Clara, California
dated January 18, 1996 (8)
10.15 Lease Agreements for the Company's executive offices in Indianapolis, Indiana, dated June 7, 1991 (5)
10.16 Form of Indemnification Agreement (2)
10.21 Manufacturing License Agreement by and between the Company and Avid dated December 30, 1994 (6)
10.22 First Addendum to the Manufacturing License Agreement by and between the Company and Avid dated December
30, 1994 (8)
10.23 Product Design and Development Agreement by and between the Company and Matsushita dated March 19, 1996
(7)
10.24 Form of Employment Agreement between the Company and Lou Doctor (6)
10.25 Loan and Security Agreement by and between the Company and Silicon Valley Bank dated May 2, 1996 (8)
10.26 Loan and Security Agreement by and between the Company and Silicon Valley Bank dated February 21, 1997
(10)
10.27 Loan and Security Agreement by and between the Company and Silicon Valley Bank (EXIM Program) dated
February 21, 1997 (10)
10.28 Waiver and Amendment to the Loan and Security Agreement by and between the Company and Silicon Valley
Bank dated August 20, 1997 (10)
10.29 Waiver and Amendment to the Loan and Security Agreement (EXIM Program) by and between the Company and
Silicon Valley Bank dated August 20, 1997 (10)
10.30 Loan and Security Agreement by and between the Company and Silicon Valley Bank dated September, 19, 1997
(10)
10.31 Loan and Security Agreement (EXIM Program) by and between the Company and Silicon Valley Bank dated
September 19, 1997 (10)
10.32 1997 Equity Incentive Plan (11)
18.1 Preferability Letter from Independent Accountants re: Change in Accounting Principle (9)
21.1 List of Subsidiaries (6)
24.1 Consent of Independent Accountants (see page 49)
27.1 Financial Data Schedule
27.2 Financial Data Schedule Restated
27.3 Financial Data Schedule Restated
</TABLE>
46
<PAGE>
NOTES TO EXHIBITS
(1) Filed as an exhibit to the Company's report on Form 8-K, filed November 3,
1995, and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1,
File No. 33-33995, which was declared effective May 8, 1990, and
incorporated herein by reference.
(3) Filed as an exhibit to the Company's Registration Statement on Form S-8,
filed February 1, 1991, and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1991, and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended July 1, 1995, and incorporated herein by reference.
(7) Filed as an exhibit to the Company's report on Form 8-K/A, filed August 6,
1996, and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended June 29, 1996, and incorporated herein by reference.
(9) Filed as an exhibit to the Company's quarterly report on Form 10-Q for the
quarter ended September 28, 1996, and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended June 28, 1997, and incorporated herein by reference.
(11) Filed as an exhibit to the Company's Registration Statement on Form S-8,
filed April 21, 1998 and incorporated herein by reference.
(d) FINANCIAL STATEMENT SCHEDULES
See Item (a) above.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Santa Clara, State of California, on September 23, 1998.
<TABLE>
<S> <C> <C>
TRUEVISION, INC.
By: /s/ R. JOHN CURSON
-----------------------------------------
R. John Curson
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND SECRETARY
(PRINCIPAL FINANCIAL OFFICER)
</TABLE>
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this Annual Report on Form 10-K has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------ --------------------------------------- ----------------------
<C> <S> <C>
/s/ WALTER W. BREGMAN
-------------------------------------- Chairman of the Board of Directors September 23, 1998
Walter W. Bregman
/s/ LOUIS J. DOCTOR
-------------------------------------- President, Chief Executive Officer September 23, 1998
Louis J. Doctor (Principal Executive Officer)
/s/ R. JOHN CURSON Senior Vice President, Chief Financial
-------------------------------------- Officer and Secretary September 23, 1998
R. John Curson (Principal Financial Officer)
-------------------------------------- Director September 23, 1998
William H. McAleer
-------------------------------------- Director September 23, 1998
Kieth E. Sorenson
/s/ CONRAD J. WREDBERG
-------------------------------------- Director September 23, 1998
Conrad J. Wredberg
</TABLE>
48
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-63135, 333-36453, 333-36455, and 333-50631) and
in the Prospectus constituting part of the Registration Statement on Form S-3
(No. 33-62703) of Truevision, Inc. of our report dated August 13, 1998 included
in this Annual Report on Form 10-K.
PRICEWATERHOUSE COOPERS LLP
San Jose, California
September 23, 1998
49
<PAGE>
TRUEVISION, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------------
BALANCE CHARGED TO CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND OTHER FROM AT END
OF PERIOD EXPENSES(1) ACCOUNTS RESERVES(2) OF PERIOD
----------- --------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for sales returns, doubtful accounts and
price protection:
1998............................................... $ 650 $ 62 $ 25 $ 289 $ 448
1997............................................... $ 1,018 $ 360 $ 196 $ 924 $ 650
1996............................................... $ 1,291 $ 472 $ -- $ 745 $ 1,018
Reserves for inventory:
1998............................................... $ 810 $ 238 $ -- $ 651 $ 397
1997............................................... $ 1,218 $ 981 $ -- $ 1,389 $ 810
1996............................................... $ 1,514 $ 687 $ -- $ 983 $ 1,218
</TABLE>
- ------------------------
(1) With respect to the allowance for receivables, amounts include charges to
net sales for sales returns.
(2) With respect to the allowance for receivables, amounts include charges to
reserves for sales returns. With respect to reserves for inventory, amounts
exclude cost of sales write downs of inventory.
50
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000833619
<NAME> TRUEVISION, INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> JUN-27-1998
<CASH> 4,973
<SECURITIES> 0
<RECEIVABLES> 4,052
<ALLOWANCES> 141
<INVENTORY> 4,551
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0
0
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