<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 28, 1998 Commission file number 000-18404
--------------------------
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 March 28, 1998:
12,972,066
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<PAGE>
INDEX
TRUEVISION, INC.
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION Number
- ------------------------------ ------
<C> <S> <C>
Item 1: Consolidated Financial Statements
Consolidated Balance Sheets -
March 28, 1998 and June 28, 1997 2
Consolidated Statements of Operations -
Three months ended March 28, 1998 and
March 29, 1997, and nine months ended
March 28, 1998 and March 29, 1997 3
Consolidated Statements of Cash Flows -
Nine months ended March 28, 1998 and March 29, 1997 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 4: Submission of Matters to a Vote of Security Holders 13
Item 6: Exhibits and Reports on Form 8-K 13
SIGNATURES 14
- ----------
</TABLE>
1
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
TRUEVISION, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited) March 28 June 28
1998 1997
- ------------------------------------------------------------ ----------- ----------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,087 $ 4,549
Accounts receivable, net 2,876 4,630
Inventory (Note 2) 5,452 7,746
Receivables from manufacturing subcontractors 614 157
Prepaid expenses and other assets 574 398
Income taxes receivable 32 73
--------- ---------
Total current assets 15,635 17,553
Property and equipment, net (Note 3) 1,936 2,757
Other assets, net 131 178
--------- ---------
Total assets $ 17,702 $ 20,488
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ -- $ 3,738
Accounts payable 3,410 2,475
Accrued employee compensation 1,497 1,492
Accrued restructuring and other costs (Note 5) 552 1,531
Advances on inventory held by distributors (Note 4) 123 644
Other accrued liabilities 2,294 2,581
Current portion of long-term obligations 57 65
--------- ---------
Total current liabilities 7,933 12,526
Long-term obligations 53 86
--------- ---------
Total liabilities 7,986 12,612
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 53,548 53,015
Accumulated deficit (43,832) (45,139)
--------- ---------
Total stockholders' equity 9,716 7,876
--------- ---------
Total liabilities and stockholders' equity $ 17,702 $ 20,488
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
TRUEVISION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Three months ended Nine months ended
------------------------- --------------------------
Mar. 28, Mar. 29, Mar. 28, Mar. 29,
1998 1997 1998 1997
- ----------------------------------------------------- ---------- ---------- --------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales (Note 4) $ 8,004 $ 11,904 $ 28,135 $ 32,863
4,383 7,678 15,777 21,800
-------- -------- -------- --------
Gross profit 3,621 4,226 12,358 11,063
-------- -------- -------- --------
Operating expenses:
Research and development 1,205 1,674 3,829 4,934
Selling, general and administrative 2,164 3,889 7,072 11,503
-------- -------- -------- --------
Total operating expenses 3,369 5,563 10,901 16,437
-------- -------- -------- --------
Income (loss) from operations 252 (1,337) 1,457 (5,374)
Interest income 52 1 90 4
Interest expense (42) (82) (170) (209)
Other income (expense), net (9) (44) (29) (424)
-------- -------- -------- --------
Income (loss) before provision for income taxes
and cumulative effect of change in accounting principle 253 (1,462) 1,348 (6,003)
Provision for income taxes 8 -- 41 --
-------- -------- -------- --------
Income (loss) before cumulative effect of change
in accounting principle 245 (1,462) 1,307 (6,003)
Cumulative effect of change in accounting
principle (Note 4) -- -- -- (4,858)
-------- -------- -------- --------
Net income (loss) $ 245 $ (1,462) $ 1,307 $ (10,861)
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings per share:
Income (loss) before cumulative effect of change
in accounting principle $ 0.02 $ (0.12) $ 0.10 $ (0.47)
Cumulative effect of change in accounting principle $ -- $ -- $ -- $ (0.39)
Net income (loss) $ 0.02 $ (0.12) $ 0.10 $ (0.86)
Diluted earnings per share:
Income (loss) before cumulative effect of change
in accounting principle $ 0.02 $ (0.12) $ 0.10 $ (0.47)
Cumulative effect of change in accounting principle $ -- $ -- $ -- $ (0.39)
Net income (loss) $ 0.02 $ (0.12) $ 0.10 $ (0.86)
Weighted average common share and equivalents:
Basic 12,944 12,710 12,845 12,682
Diluted 13,225 12,710 13,328 12,682
</TABLE>
See accompanying notes to Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
TRUEVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Nine months ended
---------------------------------
March 28, March 29,
1998 1997
- -------------------------------------------------------------------------- ----------- -----------
(In thousands)
<S> <C> <C>
OPERATING CASH FLOWS:
Net income (loss) $ 1,307 $ (10,861)
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 100 122
Depreciation and other amortization 1,118 1,669
(Gain) loss on disposal of fixed assets 19 (16)
Other -- 32
Changes in assets and liabilities:
Accounts receivable 1,654 344
Inventory 2,273 2,283
Receivables from manufacturing subcontractors (457) 120
Prepaid expenses and other assets (176) 260
Income taxes receivable 41 (811)
Accounts payable 935 (1,887)
Accrued employee compensation 5 466
Accrued restructuring and other costs (979) --
Advances on inventory held by distributors (521) 711
Other accrued liabilities (287) 97
-------- -------
Net cash provided by (used in) operating activities 5,032 (2,613)
-------- -------
INVESTING CASH FLOWS:
Acquisitions of property and equipment (248) (731)
Acquisitions of other assets -- (317)
-------- -------
Net cash used in investing activities (248) (1,048)
-------- -------
FINANCING CASH FLOWS:
Borrowings (payments) on line of credit, net (3,738) 461
Borrowings (payments) on debt obligations, net (41) (126)
Issuance of common stock, net 533 335
-------- -------
Net cash provided by (used in) financing activities (3,246) 670
-------- -------
Net increase (decrease) in cash and cash equivalents
1,538 (2,991)
Cash and cash equivalents, beginning of period 4,549 6,101
-------- -------
Cash and cash equivalents, end of period $ 6,087 $ 3,110
-------- -------
-------- -------
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest $ 184 $ 209
Income taxes $ 3 $ 82
Noncash investing and financing activities:
Property and equipment acquired under capital leases $ 27 $ --
Property and equipment transferred from inventory $ 21 $ 329
</TABLE>
See accompanying notes to Consolidated Financial Statements.
4
<PAGE>
TRUEVISION, INC.
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 and nine month periods ended
March 28, 1998 are not necessarily indicative of the results that may be
expected for the fiscal 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>
Mar. 28, June 28,
1998 1997
-------- --------
<S> <C> <C>
Purchased parts and subassemblies $ 2,024 $ 2,675
Work-in-progress 940 2,039
Finished goods 1,994 2,031
Finished goods held by distributors 494 1,001
-------- --------
Total $ 5,452 $ 7,746
-------- --------
-------- --------
</TABLE>
NOTE 3. Property and Equipment
A summary of property and equipment follows (in thousands):
<TABLE>
<CAPTION>
Mar. 28, June 28,
1998 1997
-------- --------
<S> <C> <C>
Computer equipment and machinery $ 9,587 $ 9,535
Furniture and fixtures 776 775
Leasehold improvements 111 111
-------- --------
Subtotal 10,474 10,421
Less: Accumulated depreciation (8,538) (7,664)
-------- --------
Total $ 1,936 $ 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 changing the
accounting method was $4,858,000 or $0.38 per share. This amount was
reflected in the quarter ended September 28, 1996.
5
<PAGE>
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 $552,000 as
of June 28, 1997 and March 28, 1998, respectively, relating to this
restructuring. A summary of restructuring activities along with the
respective remaining reserves follows (in thousands):
<TABLE>
<CAPTION>
Reverse Reverse
balance @ balance @
June 28, Mar. 28,
1997 Payments 1998
-------- -------- --------
<S> <C> <C> <C>
Downsizing facilities $ 1,063 $ (564) $ 499
Reduction in headcount 385 (385) --
Other 83 (30) 53
-------- -------- --------
Total $ 1,531 $ (979) $ 552
-------- -------- --------
-------- -------- --------
</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
earnings per share (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 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.
The computation of diluted EPS for the quarter and nine month period
ended March 28, 1998 presented on the face of the consolidated statements of
income does not include 1,274,213 shares and 1,203,173 shares, respectively,
because to do so would have been anti-dilutive for the periods presented.
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 Interim 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 $8.0 million for the quarter ended March 28,
1998, a decrease of $3.9 million, or 33%, from the $11.9 million for the
quarter ended March 29, 1997, and a decrease of $2.0 million, or 20%, from
the $10.0 million for the quarter ended December 27, 1997. International net
sales represented 36% of net sales for the quarter ended March 28, 1998,
compared to 23% for the quarter ended March 29, 1997, and 33% for the quarter
ended December 27, 1997. International net sales for the quarter ended March
28, 1998 included revenue from a product design and development agreement
(see OEM discussion below).
Sales to the retail/distribution channel during the quarter ended March
28, 1998 were $5.9 million, a decrease of $2.1 million, or 26%, from the $8.0
million for the quarter ended March 29, 1997, and a decrease of $0.8 million,
or 12%, from the $6.7 million for the quarter ended December 27, 1997. 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.
Sales to the retail/distribution channel also decreased 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 Company's 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 new products (video production
workstations, additions to the TARGA video card family 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. The
7
<PAGE>
retail/distribution business for the quarter ended March 29, 1998 included
$0.1 million of revenue from the initial shipments of these workstations.
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.
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.
The volume and timing of recognition of revenue from distributor 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.
OEM net sales were $2.1 million for the quarter ended March 28, 1998, a
decrease of $1.8 million, or 46%, from the $3.9 million for the quarter ended
March 29, 1997, and a decrease of $1.3 million, or 38%, from the $3.4
million for the quarter ended December 27, 1997. The decrease in OEM
business for the quarter ended March 28, 1998 was primarily due to a delayed
product launch by one of the Company's major customers. The decrease was
partially offset by the inclusion of revenue from a product design and
development agreement in the quarter as discussed below. OEM net sales for
the quarter ended March 29, 1997 included the initial shipments of the
Company's DVCPRO TARGA 2000 RTX product and shipments of the TARGA 2000
RTX/DTX to an OEM software company bundling Truevision products with its
software. OEM net sales for the quarter ended December 27, 1997 included
sales of the DVCPRO-based TARGA 2000 RTX product line, which the Company
began shipping during the third quarter of fiscal 1997 as discussed above.
OEM net sales for the quarters ended March 28, 1998, March 29, 1997 and
December 27, 1997 included $0.7 million, $0.2 million and $0.2 million,
respectively, of revenue from license fees under product license agreements
and 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 the quarter ended
March 28, 1998 included revenue of $0.5 million pursuant to this agreement.
GROSS PROFIT. The Company had a gross profit of $3.6 million, or 45% of
net sales, for the quarter ended March 28, 1998, compared to $4.2 million, or
36% of net sales, for the quarter ended March 29, 1997 and $4.5 million, or
45% of net sales, for the quarter ended December 27, 1997. Although net sales
for the quarters ended March 28, 1998 and December 27, 1997 were lower as
compared to the quarter ended March 29, 1997, the gross profit for these
quarters improved substantially as the Company shifted its focus towards the
high-end of its 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 quarters ended March 28, 1998, March 29, 1997 and
December 27, 1997 included revenue from license fees and engineering services
revenue for the periods as discussed above.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $1.2 million, or 15% of net sales, for the quarter ended March 28, 1998,
compared to $1.7 million, or 14% of net sales, for the quarter ended March
29, 1997 and $1.2 million, or 12% of net sales, for the quarter ended
December 27, 1997. The decrease in dollars in the quarters ended March 28,
1998 and December 27, 1997 was primarily due to reduced expense levels from
the implementation of the Company's restructuring plan (see "Special Charges
- - Fiscal 1997" below). In the absence of unusual circumstances or events, the
Company expects that research and development spending in absolute dollars to
remain relatively constant through the remainder of 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
8
<PAGE>
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 $2.2 million, or 27% of net sales, for the
quarter ended March 28, 1998, compared to $3.9 million, or 33% of net sales,
for the quarter ended March 29, 1997 and $2.5 million, or 25% of net sales,
for the quarter ended December 27, 1997. The decrease in the quarters ended
March 28, 1998 and December 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 March 29, 1997 is comprised primarily of residual expenses
associated with the RasterOps product line, offset by tax related credits
generated from the amended income tax returns for the years ended August 28,
1992 and September 30, 1989.
CURRENT NINE MONTH PERIOD COMPARED TO PRIOR YEAR NINE MONTH PERIOD
NET SALES. Net sales were $28.1 million for the nine month period ended
March 28, 1998, a decrease of $4.8 million, or 15%, from the $32.9 million
for the nine month period ended March 29, 1997. International net sales
represented 35% of net sales for the nine month period ended March 28, 1998,
compared to 29% for the nine month period ended March 29, 1997.
Sales to the retail/distribution channel were $19.9 million during the
nine month period ended March 28, 1998, a decrease of $4.7 million, or 19%,
from the $24.6 million for the nine month period ended March 29, 1997. 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.
Sales to the retail/distribution channel also decreased 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 Company's 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 new products (video production
workstations, additions to the TARGA video card family and BRAVADO 2000 as
discussed below).
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.
9
<PAGE>
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 solutions 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.
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.
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.
OEM net sales were $8.2 million for the nine month period ended March
28, 1998, a decrease of $0.1 million, or 1%, from the $8.3 million for the
nine month period ended March 29, 1997. OEM net sales for the nine month
periods ended March 28, 1998 and March 27, 1997 included $0.9 million and
$0.7 million, respectively, of revenues from license fees under product
license agreements and 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 the
nine month period ended March 28, 1998 included revenue of $0.5 million
pursuant to this agreement.
GROSS PROFIT. The Company had a gross profit of $12.4 million, or 44% of
net sales, for the nine month period ended March 28, 1998, compared to $11.1
million, or 34% of net sales, for the nine month period ended March 29, 1997.
The gross profit for the current nine 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 nine month
periods ended March 28, 1998 and March 29, 1997 included revenue from
license fees and engineering services revenue for the periods as discussed
above. The costs associated with the revenue from license fees and
engineering services revenue for the nine month period ended March 28, 1998
were approximately $0.3 million. The revenue from license fees and
engineering services revenue for the the nine month period ended March 29,
1997 approximated the related costs.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $3.8 million, or 14% of net sales, for the nine month period ended March
28, 1998, compared to $4.9 million, or 15% of net sales, for the nine month
period ended March 29, 1997. Research and development expenses for the
current nine month period decreased $1.1 million, or 22%, primarily due to
reduced expense levels from the implementation of the Company's restructuring
plan (see "Special Charges - Fiscal 1997" below). In the absence of
unusual circumstances or events, the Company expects that research and
development spending in absolute dollars to remain relatively constant
through the remainder of 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 to maintain or increase sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $7.1 million, or 25% of net sales, for the nine
month period ended March 28, 1998, compared to $11.5 million, or 35% of net
sales, for the nine month period ended March 29, 1997. Selling, general and
administrative expenses for the current nine month period decreased $4.4
million, or 38%, primarily due to reduced expense levels from the
implementation of the Company's restructuring
10
<PAGE>
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 nine
month period ended March 29, 1997 is 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, partially offset by tax related credits generated
from the amended income tax returns for the years ended August 28, 1992 and
September 30, 1989.
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 balance. The downsizing of facilities, lease terminations
and fixed asset reductions decreased facilities expenses by approximately $0.2
million in the third quarter of fiscal 1998 and $0.6 million in the nine month
period ended March 28, 1998, and is expected to decrease facilities expenses by
approximately $0.2 million in the remainder of fiscal 1998. The reduction in
headcount decreased employee costs by approximately $0.6 million in the third
quarter of fiscal 1998 and $1.8 million in the nine month period ended March 28,
1998, and is expected to decrease employees costs by approximately $0.6 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 a charge of $4.9 million, or
$0.38 per share. This amount was reflected in the quarter ended September 28,
1996.
LIQUIDITY AND CAPITAL RESOURCES
At March 28, 1998, the Company had cash and cash equivalents of $6.1
million, an increase of $1.6 million from the $4.5 million at June 28, 1997
and an increase of $2.1 million from the $4.0 million at December 27, 1997.
The increase in cash and cash equivalents during fiscal 1998 was partially
offset by the repayment of $3.7 million in borrowings under the line of
credit in the first quarter of 1998. Working capital was $7.7 million at
March 28, 1998, an increase of $2.7 million from the $5.0 million at June 28,
1997 and an increase of $0.7 million from the $7.0 million at December 27,
1997. The increase in working capital during fiscal 1998 reflects the
Company's improved operations.
Net cash provided by operating activities was $5.0 million during the
nine month period ended March 28, 1998, compared to $2.6 million used in
operating activities during the nine month period ended March 29, 1997.
During the nine month period ended March 28, 1998, the Company
11
<PAGE>
generated cash flow from operations primarily due to net income of $1.3
million, a reduction in inventory of $2.3 million, a decrease in accounts
receivables of $1.7 million, the non-cash effect from depreciation and
amortization of $1.1 million and an increase in accounts payable of $0.9
million. These factors were partially offset by payments of $1.0 million
related to the Company's restructuring plan (see "Special Charges - Fiscal
1997" above), an increase in receivables from manufacturing subcontractors of
$0.5 million and a decrease in advances on inventory held by distributors of
$0.5 million. The inventory levels decreased substantially during fiscal 1998
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 nine month period ended March 29, 1997 was primarily
due to a net loss of $10.9 million, a decrease in accounts payable of $1.9
million and an increase in income taxes receivable of $0.9 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 reduction in inventory of $2.3
million, the non-cash effect from depreciation and amortization of $1.7
million, an increase in advances on inventory held by distributors of $0.7
million, and an increase in accrued expenses 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. Distributor revenue accounted for $9.5
million, or 34% of the Company's net sales for the nine month period ended
March 28, 1998, compared to $16.5 million, or 67%, for the nine month period
ended March 29, 1997. 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 March 28, 1998, the Company had
purchased $0.6 million of the component pursuant to the agreement.
Net cash used in investing activities was $0.2 million during the nine
month period ended March 28, 1998, compared to $1.0 million during the nine
month period ended March 29, 1997. At March 28, 1998, the Company had no
material commitments for the purchase of capital equipment.
Net cash used in financing activities was $3.2 million during the nine
month period ended March 28, 1998, compared to $0.7 million provided by
financing activities during the nine month period ended March 29, 1997. 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 March 28, 1998, the Company
had no borrowings and $1.8 million available under the line of credit. As of
May 3, 1998, the Company had no borrowings and $2.3 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.
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,
12
<PAGE>
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.
13
<PAGE>
PART II - OTHER INFORMATION
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).
<TABLE>
<CAPTION>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<C> <S>
(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
March 28, 1998.
</TABLE>
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 11, 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.)
15
<TABLE> <S> <C>
<PAGE>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> MAR-28-1998
<CASH> 6,087
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