<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarter ended December 27, 1997 Commission file number 000-18404
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TRUEVISION, INC.
(Exact name of registrant as specified in its charter)
----------------------------------
DELAWARE 77-0161747
(State of Incorporation) (I.R.S. Employer Identification No.)
2500 WALSH AVENUE, SANTA CLARA, CALIFORNIA 95051
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 562-4200
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 .
--- ---
Number of shares of Common Stock outstanding as of December 27, 1997:
12,854,883
<PAGE>
INDEX
TRUEVISION, INC.
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION Number
- ------------------------------ ------
<S> <C> <C>
Item 1: Consolidated Financial Statements
Consolidated Balance Sheets -
December 27, 1997 and June 28, 1997 2
Consolidated Statements of Operations - Three months
ended December 27, 1997 and December 28, 1996, and six
months ended December 27, 1997 and December 28, 1996 3
Consolidated Statements of Cash Flows -
Six months ended December 27, 1997 and December 28, 1996 4
Notes to Consolidated Financial Statements 5
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II - OTHER INFORMATION
- ------------------------------
Item 6: Exhibits and Reports on Form 8-K 13
SIGNATURES 14
- ----------
</TABLE>
1
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PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
TRUEVISION, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
Dec. 27, June 28,
1997 1997
- ----------------------------------- -------- --------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,032 $ 4,549
Accounts receivable, net 4,156 4,630
Inventory (Note 2) 3,995 7,746
Receivables from manufacturing subcontractors 1,493 157
Prepaid expenses and other assets 439 398
Income taxes receivable 33 73
-------- --------
Total current assets 14,148 17,553
Property and equipment, net (Note 3) 2,125 2,757
Other assets, net 147 178
-------- --------
Total assets $ 16,420 $ 20,488
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ -- $ 3,738
Accounts payable 2,095 2,475
Accrued employee compensation 1,523 1,492
Accrued restructuring and other costs (Note 5) 743 1,531
Advances on inventory held by distributors (Note 4) 219 644
Other accrued liabilities 2,513 2,581
Current portion of long-term obligations 68 65
-------- --------
Total current liabilities 7,161 12,526
Long-term obligations 63 86
-------- --------
Total liabilities 7,224 12,612
-------- --------
Stockholders' equity:
Preferred stock -- --
Common stock 53,273 53,015
Accumulated deficit (44,077) (45,139)
-------- --------
Total stockholders' equity 9,196 7,876
-------- --------
Total liabilities and stockholders' equity $ 16,420 $ 20,488
-------- --------
-------- --------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
2
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<TABLE>
<CAPTION>
TRUEVISION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Three months ended Six months ended
------------------ -------------------
Dec. 27, Dec. 28, Dec. 27, Dec. 28,
1997 1996 1997 1996
- --------------------------------------------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales (Note 4) $ 10,039 $ 10,911 $ 20,131 $ 20,959
Cost of sales 5,537 6,750 11,394 14,122
-------- -------- -------- --------
Gross profit 4,502 4,161 8,737 6,837
-------- -------- -------- --------
Operating expenses:
Research and development 1,219 1,517 2,624 3,260
Selling, general and administrative 2,524 3,324 4,908 7,614
-------- -------- -------- --------
Total operating expenses 3,743 4,841 7,532 10,874
-------- -------- -------- --------
Income (loss) from operations 759 (680) 1,205 (4,037)
Interest income 10 1 38 3
Interest expense (39) (72) (128) (127)
Other income (expense), net 2 (232) (20) (380)
-------- -------- -------- --------
Income (loss) before provision for income taxes
and cumulative effect of change in accounting
principle 732 (983) 1,095 (4,541)
Provision for income taxes 22 -- 33 --
-------- -------- -------- --------
Income (loss) before cumulative effect of change
in accounting principle 710 (983) 1,062 (4,541)
Cumulative effect of change in accounting
principle (Note 4) -- -- -- (4,858)
-------- -------- -------- --------
Net income (loss) $ 710 $ (983) $ 1,062 $ (9,399)
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings per share:
Income (loss) before cumulative effect of change
in accounting principle $ 0.06 $ (0.08) $ 0.08 $ (0.36)
Cumulative effect of change in accounting
principle $ -- $ -- $ -- $ (0.38)
Net income (loss) $ 0.06 $ (0.08) $ 0.08 $ (0.74)
Diluted earnings per share:
Income (loss) before cumulative effect of change
in accounting principle $ 0.05 $ (0.08) $ 0.08 $ (0.36)
Cumulative effect of change in accounting
principle $ -- $ -- $ -- $ (0.38)
Net income (loss) $ 0.05 $ (0.08) $ 0.08 $ (0.74)
Weighted average common shares and equivalents:
Basic 12,832 12,679 12,796 12,677
Diluted 13,788 12,679 13,367 12,677
</TABLE>
See accompanying notes to Consolidated Financial Statements.
3
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<TABLE>
<CAPTION>
TRUEVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended
(Unaudited) -------------------
Dec. 27, Dec. 28,
1997 1996
- ----------------------------------- -------- --------
(In thousands)
<S> <C> <C>
OPERATING CASH FLOWS:
Net income (loss) $ 1,062 $ (9,399)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Cumulative effect of change in accounting principle -- 4,858
Provision for doubtful accounts 100 162
Depreciation and other amortization 793 1,144
(Gain) loss on disposal of fixed assets 16 (16)
Other -- 45
Changes in assets and liabilities:
Accounts receivable 374 2,607
Inventory 3,730 (435)
Receivables from manufacturing subcontractors (1,336) 19
Prepaid expenses and other assets (41) 298
Income taxes receivable 40 --
Accounts payable (380) (1,541)
Accrued employee compensation 31 739
Accrued restructuring and other costs (788) --
Advances on inventory held by distributors (425) 412
Other accrued liabilities (68) (515)
-------- --------
Net cash provided by (used in) operating activities 3,108 (1,622)
-------- --------
INVESTING CASH FLOWS:
Acquisitions of property and equipment (125) (540)
Acquisitions of other assets -- (315)
-------- --------
Net cash used in investing activities (125) (855)
-------- --------
FINANCING CASH FLOWS:
Borrowings (payments) on line of credit, net (3,738) 128
Borrowings (payments) on debt obligations, net (20) (1)
Issuance of common stock, net 258 198
-------- --------
Net cash provided by (used in) financing activities (3,500) 325
-------- --------
Net decrease in cash and cash equivalents (517) (2,152)
Cash and cash equivalents, beginning of period 4,549 6,101
-------- --------
Cash and cash equivalents, end of period $ 4,032 $ 3,949
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest $ 143 $ 127
Income taxes $ 3 $ 79
Noncash investing and financing activities:
Property and equipment acquired under capital leases $ 27 $ --
Property and equipment transferred from inventory $ 21 $ 152
</TABLE>
See accompanying notes to Consolidated Financial Statements.
4
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. Basis of Presentation
The consolidated financial statements presented in this Quarterly
Report on Form 10-Q are unaudited. However, in the opinion of management,
all adjustments have been made for a fair presentation of the periods
presented. The consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended June 28, 1997.
The results of operations for the three month and six month periods ended
December 27, 1997 are not necessarily indicative of the results that may be
expected for the year ending June 27, 1998.
The Company's fiscal calendar and its reporting year ends on the Saturday
closest to June 30.
NOTE 2. Inventory
A summary of inventory follows (in thousands):
<TABLE>
<CAPTION>
Dec. 27, June 28,
1997 1997
-------- --------
<S> <C> <C>
Purchased parts and subassemblies $ 1,119 $ 2,675
Work-in-progress 1,106 2,039
Finished goods 892 2,031
Finished goods held by distributors 878 1,001
-------- --------
Total $ 3,995 $ 7,746
-------- --------
-------- --------
</TABLE>
NOTE 3. Property and Equipment
A summary of property and equipment follows (in thousands):
<TABLE>
<CAPTION>
Dec. 27, June 28,
1997 1997
-------- --------
<S> <C> <C>
Computer equipment and machinery $ 9,496 $ 9,535
Furniture and fixtures 776 775
Leasehold improvements 111 111
-------- --------
Subtotal 10,383 10,421
Less: Accumulated depreciation (8,258) (7,664)
-------- --------
Total $ 2,125 $ 2,757
-------- --------
-------- --------
</TABLE>
NOTE 4. Accounting Change - Recognition of Distributor Revenue
Revenue from product sales to dealers, OEMs, VARs and end users is
recognized upon shipment. 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
5
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changing the accounting method was $4,858,000 or $0.38 per share. This
amount was reflected in the quarter ended September 28, 1996.
NOTE 5. Restructuring and Other Costs
During the quarter ended June 28, 1997, the Company recorded a charge for
restructuring and other costs of $1,680,000. This charge primarily consisted
of costs associated with downsizing facilities and reduction in headcount.
The Company had remaining reserves of $1,531,000 and $743,000 as of June 28,
1997 and December 27, 1997, respectively, relating to this restructuring. A
summary of restructuring activities along with the respective remaining
reserves follows (in thousands):
<TABLE>
<CAPTION>
Reserve Reserve
balance @ balance @
June 28, Dec. 27,
1997 Payments 1997
--------- -------- ---------
<S> <C> <C> <C>
Downsizing facilities $ 1,063 $ (382) $ 681
Reduction in headcount 385 (385) --
Other 83 (21) 62
--------- -------- ---------
Total $ 1,531 $ (788) $ 743
--------- -------- ---------
--------- -------- ---------
</TABLE>
NOTE 6. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, EARNINGS PER SHARE. This
Statement is effective for financial statements issued for periods ending
after December 15, 1997. This Statement replaces the presentation of primary
EPS with the 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 of
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.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto, and the Annual Report on
Form 10-K for the year ended June 28, 1997. The following discussion 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, and those
described under "Certain Factors That May Affect the Company's Future Results
of Operations" in the Company's Annual Report on Form 10-K for the year ended
June 28, 1997.
CURRENT QUARTER COMPARED TO PRIOR QUARTER AND PRIOR YEAR QUARTER
RESULTS OF OPERATIONS
NET SALES. Net sales were $10.0 million for the quarter ended December
27, 1997, a decrease of $0.9 million from the $10.9 million for the quarter
ended December 28, 1996, and a decrease of $0.1 million from the $10.1
million for the quarter ended September 27, 1997. International net sales
represented 33% of net sales for the quarter ended December 27, 1997,
compared to 36% for the quarter ended December 28, 1996, and 30% for the
quarter ended September 27, 1997.
OEM net sales were $3.4 million for the quarter ended December 27, 1997,
an increase of $1.1 million, or 48%, from the $2.3 million for the quarter
ended December 28, 1996, and an increase of $0.7 million, or 26%, from the
$2.7 million for the quarter ended September 27, 1997. The increase in OEM
business from the quarter ended December 28, 1996 was primarily due to the
inclusion of sales of the DVCPRO-based TARGA 2000 RTX product line, which the
Company began shipping during the third quarter of fiscal 1997. The increase
was partially offset by the inclusion of revenue from license fees and
engineering services revenue in the second quarter of fiscal 1997 as
discussed below.
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.
Sales to the retail/distribution channel during the quarter ended
December 27, 1997 were $6.7 million, a decrease of $1.9 million, or 22%, from
the $8.6 million for the quarter ended December 28, 1996, and a decrease of
$0.7 million, or 9%, from the $7.4 million for the quarter ended September
27, 1997. Sales to the retail/distribution channel decreased from the
quarter ended December 28, 1996 primarily due to lower sales of the BRAVADO
1000 product line, which has been discontinued. This decrease was partially
offset by increased unit sales of the TARGA 2000 RTX product line sold
primarily through the Company's national network of Signature VARs. Sales to
the retail/distribution channel decreased from the quarter ended September
27, 1997 primarily due to lower sales of the TARGA 1000 and the TARGA 2000
product lines. The introductory level TARGA 1000 and the mid-range TARGA 2000
product lines are comprised of older products; consequently, the Company
has reduced its sales and marketing promotions of these products in fiscal
1998 in order to focus on the high-end of the product line. The downward
sales trend for these products is expected to continue in future quarters but
the Company expects this decrease to be offset by increased sales of the
"X" series product line (TARGA 2000 DTX, RTX and SDX with MADRAS), and
sales of the new video production workstations and BRAVADO 2000 as discussed
below. There can be no assurance that the market acceptance of these new
products will be sufficient to offset the decline in sales of the Company's
older products.
In January 1998, the Company began selling completely configured video
production workstations directly to end-users 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.
In early March 1998, the Company will begin 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.
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 non-OEM customers generally have not placed scheduled
orders in advance and, historically, backlog at the beginning of each quarter
represents only a portion of the product sales anticipated in that quarter.
Quarterly net sales and operating results therefore depend on the volume and
timing of bookings received during a quarter and sales made by distributors
during a quarter, 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.
7
<PAGE>
OEM net sales for the quarters ended December 27, 1997 and December 28, 1996
included $0.2 million and $0.5 million, respectively, of revenues from license
fees under product license agreements and engineering services revenue from
product design and development agreements. Such revenues recorded during the
quarter ended September 27, 1997 were nominal.
GROSS PROFIT. The Company had a gross profit of $4.5 million, or 45% of
net sales, for the quarter ended December 27, 1997, compared to $4.2 million,
or 38% of net sales, for the quarter ended December 28, 1996, and $4.2
million, or 42% of net sales, for the quarter ended September 27, 1997.
Although net sales for the quarters ended December 27, 1997 and September 27,
1997 were essentially the same as compared to the quarter ended December 28,
1996, the gross profit for these quarters improved substantially as the
Company shifted its focus towards the high-end of the product line, which are
higher margin products, and reduced manufacturing expense levels from
implementation of the Company's restructuring plan (see "Special Charges -
Fiscal 1997" below). Additionally, the gross profit for the quarter ended
December 28, 1996 is slightly lower than normal due to the inclusion of
revenue from license fees and engineering services revenue in the quarter,
which approximated the related costs. The costs associated with the revenue
from license fees and engineering services revenue for the quarter ended
December 27, 1997 approximated the Company's gross profit for the quarter.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $1.2 million, or 12% of net sales, for the quarter ended December 27,
1997, compared to $1.5 million, or 14% of net sales, for the quarter ended
December 28, 1996 and $1.4 million, or 14% of net sales, for the quarter
ended September 27, 1997. The decrease in dollars in the quarters ended
December 27, 1997 and September 27, 1997 was primarily due to reduced expense
levels from the implementation of the Company's restructuring plan (see
"Special Charges - Fiscal 1997" below). Additionally, research and
development expenses for the quarter ended December 28, 1996 were slightly
lower than normal due to a shift in resources to support engineering services
revenue as discussed above. In the absence of any unusual circumstances or
events, the Company expects its research and development spending in absolute
dollars to remain relatively constant in fiscal 1998.
The Company believes that continued investment in research and
development is critical to its future growth and competitive position in its
market for broadcast video and color imaging systems and is directly related
to timely development of new and enhanced products. The Company, therefore,
may experience increased 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 the Company to maintain or
increase sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $2.5 million, or 25% of net sales, for the
quarter ended December 27, 1997, compared to $3.3 million, or 30% of net
sales, for the quarter ended December 28, 1996, and $2.4 million, or 24% of
net sales, for the quarter ended September 27, 1997. Selling, general and
administrative expenses for the quarter ended December 27, 1997 decreased
$0.8 million, or 24%, from the quarter ended December 28, 1996, and decreased
$0.1 million, or 4%, from the quarter ended September 27, 1997. The decrease
in the quarters ended December 27, 1997 and September 27, 1997 was primarily
due to reduced expense levels from 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 its current
level of sales. In the absence of any unusual circumstances or events, the
Company expects its selling, general and administrative spending in absolute
dollars to remain relatively constant in fiscal 1998, with the exception of
the fourth quarter of fiscal 1998 which will be slightly higher due to the
Company's marketing promotions in connection with an industry trade show
sponsored by the National Association of Broadcasters in April 1998.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, for the quarter
ended December 28, 1996 is comprised primarily of residual expenses
associated with the RasterOps product line.
CURRENT SIX MONTH PERIOD COMPARED TO PRIOR YEAR SIX MONTH PERIOD
8
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NET SALES. Net sales were $20.1 million for the six month period ended
December 27, 1997, a decrease of $0.8 million, or 4%, from the $20.9 million
for the six month period ended December 28, 1996. International net sales
represented 31% for the six month period ended December 27, 1997, compared to
33% for the six month period ended December 28, 1996.
OEM net sales were $6.1 million for the six month period ended December
27, 1997, an increase of $1.7 million, or 39%, from the $4.4 million for the
six month period quarter ended December 28, 1996. The increase in OEM
business was primarily due to the inclusion of sales of the DVCPRO-based
TARGA 2000 RTX product, which the Company began shipping during the third
quarter of fiscal 1997.
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.
Sales to the retail/distribution channel for the six month period ended
December 27, 1997 were $14.0 million, a decrease of $2.6 million, or 15%,
from the $16.6 million for the six month period ended December 28, 1996.
Sales to the retail/distribution channel decreased primarily due to lower
sales of the BRAVADO 1000 product line, which has been discontinued. This
decrease was partially offset by increased unit sales of the TARGA 2000 RTX
product line sold primarily through the Company's national network of
Signature VARs.
In January 1998, the Company began selling completely configured video
production workstations directly to end-users 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.
In early March 1998, the Company will begin 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.
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 non-OEM customers generally have not placed scheduled
orders in advance and, historically, backlog at the beginning of each quarter
represents only a portion of the product sales anticipated in that quarter.
Quarterly net sales and operating results therefore depend on the volume and
timing of bookings received during a quarter and continued sell-through of
products by the distribution channel, 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 for the six month periods ended December 27, 1997 and
December 28, 1996 included $0.2 million and $0.5 million, respectively, of
revenues from license fees under product license agreements and engineering
services revenue from product design and development agreements.
GROSS PROFIT. The Company had a gross profit of $8.7 million, or 43% of
net sales, for the six month period ended December 27, 1997, compared to $6.8
million, or 32% of net sales, for the six month period ended December 28,
1996. Although net sales were essentially the same for the six month periods,
the gross profit for the current six month period substantially improved as
the Company shifted its focus towards the high-end of the product line which
are higher margin products and reduced manufacturing expense levels from
implementation of the Company's restructuring plan (see "Special Charges
- -Fiscal 1997" below). Additionally, the gross profit for the six month
period ended December 28, 1996 is slightly lower than normal due to the
inclusion of revenue from license fees and engineering services revenue in
the period, which approximated the related costs. The costs associated with
the revenue from license fees and engineering services revenue for the period
ended December 27, 1997 approximated the Company's gross profit for the
period.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $2.6 million, or 13% of net sales, for the six month period ended
December 27, 1997, compared to $3.3 million, or 16% of net sales, for the six
month period ended December 28, 1996. Research and development expenses for
the current six month period decreased $0.7 million, or 21%, primarily due to
reduced expense levels from the implementation of the Company's restructuring
plan (see "Special Charges - Fiscal 1997" below). Additionally, research and
development expenses for the six month period ended December 28, 1996 were
slightly lower than normal due to a shift in resources to support engineering
revenue as discussed above. In the absence of any unusual circumstances or
events, the Company expects its research and development spending in absolute
dollars to remain relatively constant in fiscal 1998.
The Company believes that continued investment in research and
development is critical to its future growth and competitive position in its
market for broadcast video and color imaging systems and is directly related
to timely development of new and enhanced products. The Company, therefore,
may experience increased research and development spending in future periods.
Because
9
<PAGE>
of the inherent uncertainty of development projects, there can be no
assurance that increased research and development efforts will result in
successful product introductions, or enable to maintain or increase sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $4.9 million, or 24% of net sales, for the six
month period ended December 27, 1997, compared to $7.6 million, or 36% of net
sales, for the six month period ended December 28, 1996. Selling, general
and administrative expenses for the current six month period decreased $2.7
million, or 36%, primarily due to reduced expense levels from 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
its current level of sales. In the absence of any unusual circumstances or
events, the Company expects its selling, general and administrative spending
in absolute dollars to remain relatively constant in fiscal 1998, with the
exception of the fourth quarter of fiscal 1998 which will be slightly higher
due to the Company's marketing promotions in connection with an industry
trade show sponsored by the National Association of Broadcasters in April
1998.
OTHER INCOME (EXPENSE), NET. Other income (expense), net, for the six
month period ended December 28, 1996 is comprised primarily of residual
expenses associated with the old RasterOps product line.
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. The downsizing of facilities, lease
terminations and fixed asset reductions decreased facilities expenses by
approximately $0.2 million in the second quarter of fiscal 1998 and $0.4
million in the first half of fiscal 1998, and is expected to decrease
facilities expenses by approximately $0.4 million in the remainder of fiscal
1998. The reduction in headcount decreased employee costs by approximately
$0.6 million in the second quarter of fiscal 1998 and $1.2 million in the
first half of fiscal 1998, and is expected to decrease employee costs by
approximately $1.1 million in the remainder of fiscal 1998.
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.
LIQUIDITY AND CAPITAL RESOURCES
At December 27, 1997, the Company had cash and cash equivalents of $4.0
million, a decrease of $0.5 million from the $4.5 million at June 28, 1997,
but an increase of $2.5 million from the $1.6 million at September 27, 1997.
The decrease from June 28, 1997 includes the repayment of $3.7 million in
borrowings under the line of credit. Working capital was $7.0 million at
December 27, 1997, an increase of $2.0 million from the $5.0 million at June
28, 1997, and an increase of $1.1 million from the $5.9 million at September
27, 1997. The increase in working capital during the first half of fiscal
1998 reflects the Company's improved operations.
10
<PAGE>
Net cash provided by operating activities was $3.1 million during the six
month period ended December 27, 1997, compared to $1.6 million used in
operating activities during the six month period ended December 28, 1996.
During the six month period ended December 27, 1997, the Company generated
cash flow from operations primarily due to net income of $1.1 million, a
reduction in inventory of $3.7 million, and the non-cash effect from
depreciation and amortization of $0.8 million. These factors were partially
offset by payments of $0.8 million related to the Company's restructuring
plan (see "Special Charges - Fiscal 1997" above) and an increase in
receivables from manufacturing subcontractors of $1.3 million. The inventory
levels decreased substantially primarily due to the Company's continuing
inventory reduction plan, which includes a shift to turnkey manufacturing.
The net cash used in operating activities during the six month period ended
December 28, 1996 was primarily due to a net loss of $9.4 million and a
decrease in accounts payable of $1.5 million. These factors were partially
offset by the non-cash effect from the charge for the change in accounting
method of $4.9 million, a decrease in accounts receivable of $2.6 million,
and the non-cash effect from depreciation and amortization of $1.1 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. Distributor revenue accounted for $6.8
million, or 34% of the Company's net sales for the six month period ended
December 27, 1997, compared to $12.2 million, or 58%, for the six month
period ended December 28, 1996. 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.
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 two 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. As of December 27, 1997, the Company
had made no purchases of this component pursuant to the agreement. As of
February 8, 1998, the Company had purchased $0.4 million of the component
pursuant to the agreement.
Net cash used in investing activities was $0.1 million during the six
month period ended December 27, 1997, compared to $0.9 million during the six
month ended December 28, 1996. At December 27, 1997, the Company had no
material commitments for the purchase of capital equipment.
Net cash used in financing activities was $3.5 million during the six
month period ended December 27, 1997, compared to $0.3 million provided by
financing activities during the six month period ended December 28, 1996. In
the first quarter of fiscal 1998, the Company repaid $3.7 million in
borrowings under the line of credit.
The Company has a 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 covenant of the line
of credit is a tangible net worth covenant. As of December 27, 1997, the
Company had no borrowings and $4.4 million available under the line of
credit. As of February 8, 1998, the Company had no borrowings and $2.2
million available under the line of credit.
The Company's cumulative operating losses in the 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 significantly improved performance in fiscal 1998 including significant
reductions in losses and/or the achievement of profitable operations.
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 27, 1998.
11
<PAGE>
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.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended
December 27, 1997.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 10, 1998 by: /s/ R. JOHN CURSON
--------------------------------
R. John Curson
Senior Vice President, Chief Financial
Officer and Secretary
(signing as duly authorized signatory
on behalf of the registrant and in his
capacity as principal financial
officer of the registrant.)
14
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