SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-25036
VIDEONICS, INC.
(Exact name of Registrant as specified in its charter)
California 77-0118151
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1370 Dell Ave., Campbell, California 95008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 866-8300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value Nasdaq National Market System
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 the 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. [ ]
At March 3, 1997, the aggregate market value of Common Stock held by
non-affiliates of the Registrant was approximately $15,344,780.
As of March 3, 1997, there were 5,735,045 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Materials from the Registrant's definitive Proxy Statement relating to
its 1997 Annual Meeting of Shareholders to be held May 22, 1997 (the "Proxy
Statement") have been incorporated by reference into Part III, of this Report.
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VIDEONICS, INC.
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS.............................................................................. 3
ITEM 2. PROPERTIES............................................................................16
ITEM 3. LEGAL PROCEEDINGS.....................................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..................................16
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY SECURITIES AND RELATED SHAREHOLDERS MATTERS....17
ITEM 6. SELECTED FINANCIAL DATA...............................................................18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................................19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................................25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.......................................47
ITEM 11. EXECUTIVE COMPENSATION................................................................47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................48
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PART 1
The following discussion in this section "Business" contains forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Actual results could differ materially from those projected in the
forward looking statements as a result of the factors set forth below and
elsewhere in this Form 10-K.
ITEM 1. BUSINESS
Videonics, Inc., a California corporation organized in 1986 (the
"Company"), is a leader in the design, development, manufacture, and sale of
affordable, high quality, real time, digital video post-production equipment.
The Company's products process, edit, and mix raw video footage as well as
enhance such footage with audio, special effects, and titles, resulting in
professional quality video production. Videonics equipment is used throughout
the world in the post-production of videos. In June of 1996, the Company hired
all the personnel and acquired substantially all the assets and certain
liabilities of KUB Systems ("KUB"). KUB develops and sells products for
compositing and adding special effects to videos for broadcast. KUB products are
desktop video products that incorporate the use of a personal computer for the
control and user interface of the post production functions. As of December 31,
1996, more than 450,000 units of Videonics equipment have been sold worldwide.
Videonics' products incorporate general purpose computers,
special-purpose microprocessor-based systems, and internally developed
application specific integrated circuits ("ASICs") with digital signal
processing ("DSP") and other capabilities. The Company also implements much of
its products' functionality in software. The Company believes that its
proprietary technologies provide the infrastructure to develop a broad array of
video post-production solutions in a timely manner. By reducing the cost of high
performance post-production equipment, Videonics is making post-production
capabilities available to an expanding market of potential users.
The Video Production Process
The video production process consists of three steps: pre-production,
production, and post-production.
Pre-production is the planning of a video: writing a script, creating
storyboards (sketches which show how a scene will look and describing
transitions), planning shots, budgeting, obtaining props and locations, and
scheduling. Production is the shooting of the video scenes, with or without
sound. Post-production involves assembling and combining video footage with
titles, effects, and audio elements to create a master tape ready for
distribution.
The need for video post-production processing arises from the fact that
it is very difficult to make an original recording serve as the finished
production. Doing so would require that scenes be shot in the final order and
that no errors occur during the original recording session. Each time a mistake
is made, the user would have to position the tape precisely at the end of the
previous scene and reshoot the desired scene perfectly. Titles and effects must
be planned ahead of time and inserted exactly at the appropriate moments,
working from a complete, thorough script. Since this scenario is impractical in
most situations, the user instead shoots raw footage and assembles the final
video production by using post-production equipment to arrange the desired
scenes and add effects, titles, and other improvements. For video makers who
desire a polished product, the post-production process is essential.
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Generally, post-production includes five major elements. Video editing is
the process of removing, rearranging, and recording video footage from one or
more video sources onto a single video output medium (e.g., videotape). Video
mixing allows video from multiple sources to be combined in many ways beyond a
simple cut or fade. Transition effects, such as dissolves or fades (one video
scene fades away as another appears), wipes and slides (a moving boundary sweeps
in new video as the old video is pushed away), and compression effects (videos
shrink away or expand to fill the screen) are all used as "fillers" between
scenes. Video special effects manipulate video images to add dramatic elements.
Special effects can be used to modify the video material, changing its color,
flipping the image, and adding picture warping effects to achieve a different
mood or appearance such as those created by a picture within a picture. A chroma
key helps to superimpose one image over another (e.g., enabling a TV weather
forecaster to stand in front of an animated weather map). Video titling is the
process of adding text, special characters, and basic graphic elements to the
video. Titles can be superimposed on the video or on colored backgrounds. Titles
help tell the story, identify people, places, and objects, add credits, and the
like. A variety of colors, patterns, fonts, sizes, and effects (e.g., scrolls
and crawls) can be used. Audio mixing is the process of combining various sound
elements such as native sound (the original sound recorded with the video),
narration, music, and sound effects (e.g., a crashing window, a lion's roar, or
an explosion).
The Markets For Video Post-Production Equipment
The Company believes that the market for video post-production equipment
generally can be separated into five segments, categorized by the users'
requirements and individual expertise: videographer; business and industry;
videophile; education; and broadcast professional. These markets for video
post-production equipment cover a wide range of users, price sensitivity,
expertise levels, applications, demographics, and objectives.
Videographer. Videographers are typically full-time or part-time
entrepreneurs producing videotapes on a commercial basis. They may record
special events such as weddings, birthdays, sporting competitions, religious
ceremonies, and other celebrations. Videographers also perform substantial work
on a commercial basis for business and industry. For instance, a videographer
may produce videos for customer instruction in the use of a product, create a
"home" or "commercial property" tour video for small residential and commercial
real estate brokerage concerns, or make videos of vacation destinations for
travel agents. Videographers want their videos to have the same appearance as
those produced by broadcast professionals.
Business and Industry. The business and industry category includes both
internal and external production facilities producing video for government,
corporate, institutional, and other large organizations. An internal user could
include the in-house production department of a large corporation or a
charitable organization. The external user could be an independent video
production facility marketing its expertise to large institutions which lack an
in-house video production department. A typical corporate user in this market
might produce videos for instruction in the use of the corporation's products
(e.g., how to install and use a cellular telephone or a new computer), employee
training manuals, sales or promotional aids for product presentation, video
informational brochures, or video newsletters from management to shareholders or
employees.
Videophile. The videophile is a video enthusiast or hobbyist whose
interest has led to the adoption of new video technology for personal use. The
videophile generally shoots a video for personal non-commercial purposes with
the intention of editing raw video footage into a finished video production. The
videophile's camcorders, VCRs, and editing equipment are affordable and high
quality. Occasionally, videophiles capitalize on their growing expertise by
becoming videographers. A typical videophile may belong to a "video club" along
with other video making enthusiasts or merely want to record entertainment
events and historical milestones for family and friends. Videophiles may create
a tape library in several different video formats and may want an easy method to
consolidate and edit tapes into a single, standard
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format. Videophiles require affordable post-production equipment that works with
different tape formats and is easy to use.
Education. The education market consists of the audio-visual departments
of educational institutions, which use video internally to serve the needs of
the institution as well as teach students the art of video production. While
some uses in an educational setting may be no different than those of business
and industry, other uses include recording sporting events to improve a player's
performance, recording a debate or dramatic performance to teach speaking or
other acting skills, and replacing, as in the case of a video yearbook, still
photography with video.
Broadcast Professional. The broadcast professional is the most demanding
video post-production equipment user, requiring equipment to meet the highest
quality broadcast standards in order to create finished commercial video
productions. Industry analysts have estimated that there are more than 16,000
worldwide sites for equipment in this user category, including studio, cable,
network, and television broadcasters as well as independent post-production
facilities. Users in this market are generally less price-sensitive than those
in other categories, frequently paying from $100,000 to $2,000,000 for a
complete suite of video post-production equipment. This specialized equipment
also requires a large investment in user training and studio facilities.
The Videonics Solution
The Company's solution is to design, develop, manufacture and market
products that incorporate advanced proprietary digital video technologies to
reduce significantly the cost and difficulty of creating high quality video. The
Company's current product line provides solutions for each stage of the
post-production process. The majority of the Company's products are
single-purpose microprocessor-based systems that utilize DSP algorithms in ASICs
and proprietary software, all developed by the Company. The Company also
provides post-production solutions which operate on general purpose computers
and local area networks. These solutions are generally categorized as desktop
video. Company-developed software, incorporated in each Videonics product,
provides easy-to-use implementations of sophisticated video post-production
processes.
By using proprietary ASICs and software to replace more costly video
post-production equipment, the Company has been able to significantly reduce the
cost of digital video post-production products. As a consequence, the Company
has been able to offer its products at attractive prices to users in this
market. Moreover, the Company's products contain features that have minimized
the need for most video makers to purchase more expensive systems in order to
create high quality video.
Strategy
Videonics' objective is to maintain and expand its position in the video
post-production market. The Company has implemented this strategy by means of
its acquisitions, as well as internally developed technologies, products, and
marketing programs. By reducing the cost of high performance post-production
equipment, the Company makes post-production capabilities available to an
expanding market of potential users. The Company's business strategy
incorporates the following elements:
Expand Proprietary Technology Base. The Company believes that its
proprietary digital video hardware and software technology provides a
competitive advantage in achieving timely development of a broad array of video
post-production solutions. The Company intends to continue to devote significant
resources to expanding its library of circuits, proprietary ASICs and associated
software to develop products that incorporate higher levels of performance,
functionality, and integration.
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Broaden Product Line. The Company intends to expand its product line in
order to broaden its potential market and to reduce its reliance on any specific
market segment. Videonics has been an innovator in developing affordable,
full-featured editing products primarily for the videographer, business and
industry, and videophile market segments. The Company seeks to leverage this
expertise by developing new products with enhanced functionality that establish
price/performance leadership in other market segments, including broadcast and
desktop video. The acquisitions of Nova, Abbate, and KUB, along with the
development of the PowerScript Character Generator, are all tactics used to
accomplish this objective.
Expand Worldwide Distribution. The Company intends to further develop its
United States market by targeting specific vertical distribution channels to
reach the broadcast professional and business and industry markets.
Internationally, the Company is expanding its distribution channels in the
emerging markets of Asia, South America, Central Europe, and Africa. The Company
believes that distributing products through domestic dealers and international
wholesalers is a cost-effective method of reaching potential product users. In
addition, the Company allies itself with third parties to sell certain products
in specific countries. These selective selling arrangements allow the Company to
have improved distribution in certain markets or geographic areas over its
conventional sales channels. An example of such an arrangement includes that
which the Company has with Sony.
Heighten Brand Name Awareness. The Company believes that its brand name
awareness will remain an important factor in the distribution channels where its
products are sold, and it takes steps to heighten such recognition by selected
advertising, attendance at industry trade shows, and maintaining a focused
public relations campaign.
Leverage Manufacturing and Distribution. The Company's strategy is to use
its resources in a cost-effective manner. Wherever practical, the Company uses
third party services for activities such as manufacturing and accessing certain
sales channels. For instance, except for start-up production and the specialized
signal processing products from Nova, the Company contracts with third party
manufacturers located in Mexico for most product manufacturing.
Technology
Digital technology has been incorporated in all of the Company's products
developed in the 1990s. This technology is principally implemented by means of
Company-developed DSP ASICs and software. All of the Company's ASICs have been
developed by the Company's resident team of designers. The software is all
proprietary and has been developed by the Company's software engineers.
The Company's engineers employ proprietary hardware and software
libraries in conjunction with other advances in technology, such as fast turn
gate arrays and VHDL design methodology, to prototype new products in an
efficient manner. One measure of the growth in the technical sophistication of
the Company's products is illustrated below in terms of the increasing numbers
of complex gate arrays in its proprietary ASICs and of lines of code in its
proprietary software algorithms in select products.
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PROPRIETARY ASIC AND SOFTWARE CONTENT OF SELECTED PRODUCTS
Approximate Approximate Lines Year
Product ASIC Gate Count of Software Code Shipped
------- --------------- ----------------- -------
Sound Effects Mixer 0 1,000 1991
Thumbs Up Video Editor 4,000 6,000 1992
Video TitleMaker 2000 20,000 25,000 1994
Digital Video Mixer 62,000 15,000 1994
Edit Suite 8,000 28,000 1995
PowerScript 142,000 100,000 1996
Selected Products
The Company offers a broad range of digital video products, each designed
to meet specific video post-production needs. The products work with most of the
commonly used broadcast standards, videotape formats, and with most brands and
models of video equipment. The Company's products range in price from under $100
for certain software products to more than $20,000 for certain broadcast
products.
PowerScript. First shipped in September 1996, PowerScript is an advanced
PostScript video character generator designed for broadcast, video production,
multimedia, industrial, and videography applications. It displays high quality
(17.5 ns resolution, 10-bit 4:2:2 digital video) anti-aliased titles and offers
the character, graphics display, and formatting features supported by the
PostScript display technology.
PowerScript is a standalone character generator, meaning that it makes
images, characters, and graphics internally, without the aid of an external
computer. Rotation, sizing, stretch, outlines, color, transparency, and other
advanced functions are imaged by its internal PostScript engine.
While PowerScript is standalone, it also includes extensive networking
capabilities that allow users to connect the product to a separate computer or
computer network. It supports industry-standard Internet protocols (TCP/IP, FTP,
PPP) and accepts serial or Ethernet connections. These allow desktop computers,
using standard software and hardware, to transfer projects, fonts, graphics, and
other files. PowerScript images EPS-format graphic files, created using standard
graphic applications like Adobe Illustrator, CorelDraw, and Adobe Photoshop, on
standard platforms, including Macintosh, Windows, DOS, UNIX, and Amiga. A wide
range of additional features include expandable PC Card (PCMCIA) storage, TBC
(time base corrector), user-definable styles, roll and crawl, transition
effects, clock/calendar, GPI trigger, video test patterns, and optional analog
component output.
In March of 1997, Videonics shipped version 1.1, an upgrade to the
original PowerScript product, that offers greater speed, an enhanced user
interface, improved documentation, and other performance improvements. The
upgrade is being made available to all existing customers at no charge.
PowerScript has a U.S. suggested retail price of $3000.
Edit Suite. The Edit Suite, first shipped in 1995, is an A/B-roll edit
controller which automates multiple source editing. It memorizes the in and out
points for each scene from up to four independent videotape sources, controlling
the players and recorder to automatically complete the production. It works with
a wide range of camcorders, VCRs, and VTRs (Video Tape Recorders), ranging from
simple consumer units with Control-L or Panasonic 5-pin edit control to
professional RS-232 and RS-422-controlled decks. It also supports consumer and
professional time code standards, including RC, SMPTE VITC (Society of Motion
Picture and Television Engineers, Vertical Interval Time Code), and LTC
(Longitudinal Time Code), for
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accurate productions. The unit works with GPI (General Purpose
Interface)-controllable mixers and titlers, including the Videonics Digital
Video Mixer and Video TitleMakers, to automatically trigger effects and titles.
Edit Suite won the 1995 Video Magazine VIVA! Gold award and the EIA (Electronic
Industries Association) Consumer Electronics Show's 1995 Innovations Award for
design and engineering innovation. It has a U.S. suggested retail price of $699.
Digital Video Mixer. The Digital Video Mixer, first shipped in February
1994, effectively provides a user with a portable video production facility. The
Digital Video Mixer has four video inputs and offers over 200 effects at any of
ten speeds; these effects include fades, wipes, slides, dissolves,
picture-in-picture, flips, luminance key, color generation, zooms, freeze
frames, color and negative reversals, rolls, the ability to superimpose one
video image over another, and a split screen. The Digital Video Mixer
incorporates four ASICs, including an ASIC with a TBC feature that allows it to
produce video mixing. A reduced view of all four video inputs on a single
"preview" monitor shows the action of all four sources without the need for
additional monitors. The Digital Video Mixer offers a "picture-in-picture" which
allows two moving video images to be placed on the screen at once. A unique
"compose" function allows the user to create a complex image made up of any
number of still images and colored rectangles, along with a moving video or
solid color background. The "chroma key" feature allows the user to shoot a
subject against a solid color background and replace that color with a separate
video source. This is the same technique used to place a weather forecaster in
front of a weather map. The product has S-video as well as composite connectors.
The Digital Video Mixer has won numerous awards, including the Outstanding New
Editing Equipment Award for 1994 by Video Magazine, the European Video Editing
Product of The Year for 1994-1995 by the European Video Awards Panel, and the
Video Post-Production Product of The Year 1994-1995 by Video Camera Magazine
U.K. The Digital Video Mixer has a U.S. suggested retail price of $1,199.
Video TitleMaker 2000. The Video TitleMaker 2000, first shipped in March
1994, replaced the Company's original Video TitleMaker character generator. The
Video TitleMaker 2000 has a broader range of features including better video
quality and improved signal-to-noise ratio. The product delivers high resolution
(720 by 480 pixels) titles for smooth, clean letters and has 92 font/size
combinations, each of which can be rendered in over a million colors. Many
styling features can be added, including outline, shadow, colored backgrounds,
colored patterns (such as rainbow), and borders. The product contains a full set
of accented and international characters including boxes, hearts, arrows, and
similar pictorial characters, as well as the accents needed for foreign
languages. Titles can be superimposed over solid color backgrounds, patterns, or
moving video with special effects adding motion between pages of titles. Complex
scrolling effects are also possible. For instance, a page of titles can scroll
from one direction, stay on the screen for a user-defined interval, and then
scroll out another direction. In addition, effects such as fades, wipes, and
scrolls can be mixed. The unit holds approximately 8,000 characters, which can
be grouped into pages and projects. A lithium battery backup preserves titles,
even when power is lost. The product has S-video as well as composite-video
connectors and advanced features such as "Preview Out." A built-in demonstration
presents an unattended demonstration of the product's features. The Video
TitleMaker 2000 has a U.S. suggested retail price of $599. A version of this
product is sold exclusively in Japan by Sony.
Video TitleMaker 3000. First shipped in September 1996, the Video
TitleMaker 3000 is a step up from the TitleMaker 2000. Its two-piece design,
with a separate PC-style keyboard, makes it easier to type in text. User
productivity is also improved with the superior keyboard and more than three
times the processing speed of the TitleMaker 2000. The product offers more than
200 font-size combinations (compared to 92 in TitleMaker 2000) and doubles the
amount of user memory to store over 16,000 characters. A clock/calendar function
allows the user to display the time and date and permits the user to
automatically trigger a page of titles at a specified time and date, and to
repeat that action periodically. The product features the same video quality and
resolution as the TitleMaker 2000 and includes its other features: 1,000,000
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colors; fades, rolls and crawls; bold, shadow, and outline; ability to
superimpose over video or colored or patterned backgrounds; full set of accented
and international characters; and storage as projects. TitleMaker 3000 carries a
U.S. suggested retail price of $799 and is available in language-specific
versions.
Video ToolKit. The Video ToolKit is a software product for both Macintosh
(first shipped in 1995) and Windows based PCs (scheduled for shipment in March,
1997). It catalogs video scenes and performs assembly editing, controlling VCRs
and camcorders to record the good footage on a new tape. It supports a wide
range of VCR and camcorder control protocols, including Control-L, Panasonic
5-pin, RS-232/422, and Sony ViSCA. It also supports consumer and professional
time codes, including RC and SMPTE VITC. The Video ToolKit also supports
QuickTime non-linear (disk-based) digital video, as well as tape-to-tape
editing. Users can include QuickTime clips in a taped production and can record
productions on tape or as QuickTime. It also permits users to output their edit
lists in HTML form to make it easy to publish video clips on the World Wide Web.
The Video ToolKit carries a U.S. suggested retail price of $279.
MediaMotion. MediaMotion is a machine-control plug-in software product
for Adobe Premiere, a popular non-linear (disk-based) video editing application
marketed by Adobe Systems, Inc., for use with personal computers using either
Intel microprocessors or those which are used by Apple's Macintosh line of
personal computers. MediaMotion adds the ability to control VCRs and camcorders
from inside Adobe Premiere. It also works with Data Translation's Media 100.
With MediaMotion, a user can batch-digitize select portions of source tapes,
allowing unattended recording to disk. This saves time and disk space.
MediaMotion is available for both the Windows and Macintosh operating systems at
a U.S. suggested retail price of $99.
The Company's Nova product line includes time base correctors, frame
synchronizers, transcoders, video converters and signal distribution products.
Nova's end users are in broadcasting, cable television ("CATV"), multimedia
studios, corporate A/V, video conferencing and presentation, and industrial
market areas. Nova brought several new products to market in 1996.
NovaAVD Audio/Video Delay System. NovaAVD Audio/Video Delay system
utilizes the latest digital video processing technology, the device provides up
to 10 seconds of real time uncompressed audio and video programming delay. The
NovaAVD is ideal for live program profanity monitoring, momentary delay of
network feeds, lip-sync correction, amphitheater video/audio matching and system
synchronization.
NovaMNR. The NovaMNR standalone Median Noise Reducer is designed to
eliminate a wide variety of impulse and transmission noise from satellite,
microwave, and fiber optic feeds. The NovaMNR can also be utilized in non-linear
video editing applications to minimize input noise and increase operating
efficiencies.
StudioFrame Series. First shipped in the summer of 1996, the Nova
StudioFrame Series is a modular, flexible, digital/analog signal processing
system. StudioFrame is designed to accommodate the evolving video and audio
interfacing requirements of both today and tomorrow. Targeting those
applications where the utmost video quality is demanded, the system can be
easily configured to accomplish a wide variety of ultra-transparent signal
conversion/processing functions. A comprehensive range of both digital and
analog function modules are available, including: Serial Digital Converters,
Noise Reducers, Synchronizers, Time-Base-Correctors, Distribution Amplifiers,
and Format Converters.
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Marketing
The primary goal of the Company's marketing efforts is to increase
awareness of the Company's products and technology and of their advantages over
competing products or technologies. These objectives are accomplished through
advertising programs directed at users of post-production equipment, a targeted
public relations program, trade show exhibitions, and educational programs in
video making.
The Company advertises principally in magazines directed at broadcast
professionals, videographers, and video producers in the business, industrial,
and educational segments of the market. Videonics has received editorial mention
in many of these publications. The Company exhibited its products at 20
different U.S. trade shows during 1996, including the Consumer Electronics Show,
the National Association of Broadcasters, and COMDEX. In 1996 the Company
presented movie making seminars in cities throughout the U.S. as well as
England, Canada, Australia, and New Zealand.
All Company products carry a standard two-year warranty on both parts and
labor. In 1995, the Company added a ProService feature that enabled customers to
receive their repaired units within 48-72 hours in exchange for payment of rush
charges. The Company's HelpLine allows customers to talk directly with support
personnel equipped to answer user questions. This support is free to the
Company's customers except for the cost of the phone call. The Company believes
that it obtains valuable feedback from offering this service, which it then uses
in developing new products.
Sales
Domestic Sales. The Company wholesales its products in the United States
through a direct sales organization, supported by independent manufacturers
representative organizations. In 1996, 1995, and 1994, respectively, sales in
the United States accounted for approximately 58%, 51%, and 60% of the Company's
total revenues. The Company sells to a variety of sales channels which in turn
sell to end users. The Company's sales channels include Value Added Resellers
(VARs) who specialize in selling to the Broadcast Market, direct mail order
businesses, audio/visual specialty stores, camera and video shops, industrial
dealers which service business and industry, catalogs, and certain mass
merchants. The majority of the Company's sales channels specialize in
audio-visual or video products and have product knowledgeable sales personnel.
International Sales. The Company has addressed the international market
opportunity by selling its products through wholesale distributors servicing 78
different countries and by selling selected products to several international
private label customers. The Company currently has twelve employees who service
and support its international private label customers and country specific
distributors. The Company's international distributors sell the Company's
products under the Videonics and Nova brand names, through channels similar to
those used by the Company in the United States. These distributors also provide
dealers with marketing programs, such as advertising and public relations, as
well as customer service and technical support.
Distribution channels. The Company sells to three categories of buyers,
both internationally and domestically: videographer, broadcast, and desktop
video.
Videographer products may be defined as free standing, easy to use,
inexpensive products which address a particular need, such as video mixing or
titling. These products are sold through direct mail order businesses,
audio/visual specialty stores, camera and video shops.
Broadcast products may be defined as those which operate in a
professional edit studio and may be used in conjunction with a master control
panel or a switcher, or may also operate
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as stand alone units. These units must comply with industry technical
specifications for video quality. An example of this type of product is the
PowerScript Character Generator. Broadcast products are sold principally through
VARs and system houses which service the broadcast industry.
Desktop video products use a general purpose computer as their control
element. These products are sold through VARs and retailers who also sell
general purpose computers, software, and peripherals.
Localized marketing. The Company works with its private label customers
and international distributors to provide extensive support by adapting both its
products and accompanying publications for the local country of distribution.
Promotional materials, such as brochures, are produced in the local language.
Universal symbols, rather than language specific text, are used for many user
interface elements such as on-screen displays. All products are designed to meet
most local regulatory standards. In Europe, for example, products are
manufactured for the PAL television standard. The Company's products are further
designed to support local languages. The Company's Video TitleMaker products
include special characters and accents to support French, German, Italian,
Spanish, Dutch, Russian, Hungarian, Polish, Greek, Romanian, Turkish, and the
Scandinavian languages. The Company's product architecture facilitates
additional localization by substituting one read only memory ("ROM") component
for another (e.g., a Czech/Slovak ROM for an English ROM) to become a local
product. The product architecture accommodates this further by supporting
non-English character sets including those that read and produce from right to
left, such as Hebrew.
Private label relationships. The Company believes that strategic
alliances are essential to compete successfully in certain large foreign
markets, particularly Japan. The Company therefore distributes in Japan through
select private label relationships. These relationships are with well known
electronics manufacturers having highly developed distribution channels and
substantial brand name recognition in the country of distribution. This strategy
enables the Company to concentrate its efforts on technology and product
development, rather than making the heavy financial and time commitment required
to build distribution channels in these difficult-to-access markets. The
Company's first private label relationship in Japan was with Matsushita
Electrical Industrial Co., Ltd. ("Matsushita.") Matsushita purchased a custom
version of the Company's EditMaker product which was manufactured by the Company
and is sold under the Panasonic brand name. While the Company has discontinued
its domestic version of this product, it has an ongoing sales and support
obligation to Matsushita. The Company currently manufactures the Sony Titler, a
Japanese language character generator for sale in Japan known as the Sony
XV-J1000. Designed to Sony specifications by the Company's product development
team in Campbell, California, the Sony Titler is manufactured by the Company and
shipped to Sony from the United States. The Sony Titler includes a front-end
processor, which translates from a standard keyboard into 6,930 unique Kanji and
Kana (Japanese) characters for subsequent video display (up to 110,880 different
font/size character variations). This software-intensive product provides all
the functionality of its English language counterpart, plus some additional
functions required by the Japanese language. Such features include the ability
to present text (titles) in either a horizontal or a vertical format.
For 1996, 1995, and 1994, no one customer accounted for more than 10% of
revenues.
Backlog. The Company typically operates with a small amount of backlog.
Accordingly, the Company generally does not have a material backlog of unfilled
orders, and revenues in any quarter are substantially dependent on orders booked
in that quarter. Any significant weakening in customer demand would therefore
have an almost immediate adverse impact on the Company's operating results and
on the Company's ability to maintain profitability.
11
<PAGE>
Manufacturing and Suppliers
Typically, the Company initiates small production runs of new products at
the Company's headquarters in Campbell, California before transferring
manufacturing to third party contract manufacturers located in Mexico. Final
configuration and testing ordinarily take place at the Company's headquarters.
Generally, when received in Campbell, each of the products undergoes testing and
inspection before final shipment to customers. The Company uses an integrated
materials management system for purchasing, inventory control, cost accounting,
and invoicing. All products in the Nova product line are assembled, tested, and
distributed from the Company's facility in Canton, Connecticut. As of December
31, 1996, the Company employed 32 persons directly in manufacturing and
operations management in Campbell and has a permanent quality and test assurance
program at its contract manufacturers' locations in Mexico. Nova employed five
people in its separate manufacturing and operations group in Canton,
Connecticut.
The Company is dependent on sole source suppliers for certain components
used in its products. These components include certain key integrated circuits,
which are utilized in the Company's products, ASICs or gate arrays,
microprocessors, filters, converters, and other parts. Although the Company has
generally been able to procure components on a timely basis, an extended
interruption in the supply of any of the components currently obtained from a
single source could have a material adverse effect on the Company's operating
results. While the Company believes alternative sourcing of these items could be
developed, this might result in additional cost in materials and overhead. In
addition, the Company buys most of its components from third party vendors on a
purchase order basis without any advance contractual commitments and does not
carry significant inventories of these items. A shortage of any one part such as
ROM semiconductor devices, or an increase in the price of a part, could
adversely affect production of the Company's products or reduce gross margins.
There can be no assurance that component supplies will be adequate at all times
to ensure that customer product orders will be manufactured or filled in a
timely manner.
Research and Development
The Company places a high priority on research and development.
Development efforts focus on video quality, system performance, feature set
expansion, user productivity, improved processing, and storage. In 1996, 1995,
and 1994, the Company invested $5.0 million, $3.1 million, and $1.6 million,
respectively, constituting 17%, 9%, and 5% of its total net revenues in research
and development, respectively. Because digitized video consumes large amounts of
data and requires substantial computer power to process such data, the Company's
engineers constantly seek new methods to improve its products' capacity and
manipulation of video. Maximizing the processing of video information contained
in video random access memory ("VRAM"), through the development of ASICs, is a
focus of the Company's development staff, as are the compression and storage
issues necessitated when integrating and manipulating large amounts of video
data. As part of this ongoing effort, the Company has made significant
investments in advanced computer programming tools. The Company's engineers work
extensively with VHDL design methodology. Any new ASIC designs are maintained in
VHDL libraries, which product designers may use to prototype subsequent new
products.
As of December 31, 1996, the Company employed 41 hardware and software
engineers with technical skills in design and development of ASICs, digital or
analog video signal generation-processing, or embedded software.
During 1996, the Company continued to experience substantial delays in
completing the successful development of products. The PowerScript Character
Generator in the NTSC video format, introduced in 1995, was completed for
shipment in September of 1996. After extensive field use, a major revision (1.1)
of PowerScript's software was completed for shipment in March of 1997.
PowerScript is the first major product offering that the Company has brought to
12
<PAGE>
market in nearly two years. Although the Company's other 1996 new product
releases such as; TitleMaker 3000, the Nova Median Noise Reducer, and the Nova
StudioFrame Signal Processing System, demanded significant technical expertise
and design, they did not require the same level of technical sophistication as
PowerScript. The ASIC and software technology of PowerScript will be utilized in
other products that the Company currently has in development. As the complexity
of the Company's product designs and feature sets continues to increase, the
Company may continue to experience similar delays in the future, especially if
the Company expands through acquisition of other companies' products and
technology which it seeks to integrate with its own product line and operations.
There can be no assurance that the Company will be successful in the timely
development of new products to replace or supplement existing products or that
the Company will be successful in integrating acquired products or technologies
with its current business. In 1995, the Company announced four new products.
Since this announcement, only two products have shipped. One began shipping in
June of 1995. PowerScript began shipping in September 1996, and the other two
products had still not been introduced successfully on a commercial basis as of
March 1997. This has had an adverse material impact on the Company's growth in
1995 and 1996 and, until these products are successfully introduced and accepted
by end users, can be expected to have a similar adverse effect in the future on
the Company's results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The Company's success depends, in part, on its ability to anticipate new
technological developments, to develop expertise in such technologies, and to
develop and introduce in a timely and cost-effective manner additional features
and new products that satisfy customer needs and desires. As noted above, the
Company has been unable to ship new products in a timely fashion in 1995 and
1996, which has had a substantial adverse impact on the Company's results of
operations. Such results have, in any event, fluctuated widely on a quarterly
basis. There can be no assurance that any new products will be developed
successfully, that the Company will be able to introduce additional new products
which will gain acceptance in the marketplace or that the Company will
successfully assess new technological developments and incorporate them into
future or current products, or that the Company will be able to do so in a
timely fashion. Any future failure to develop or introduce new products in a
timely manner, or customer rejection of new products, may have a material
adverse effect on the Company's future results of operations.
Competition
In the videographer and desktop video markets, the Company has
encountered competition from smaller and comparably-sized companies which offer
functionally similar products, as well as from larger companies, such as Sony,
Matsushita, and JVC, which market both traditional analog equipment as well as
new digital video post-production devices. A number of competitors exist who
have substantially greater resources than the Company and who make digital video
editing products and other post-production devices for operation on personal
computers and workstations. Although these desktop computer and
workstation-based vendors sell more sophisticated products primarily for the
broadcast professional and business and industrial markets and at significantly
higher price points than the Company's products, it is possible that such
vendors may at some future time introduce products which target the same markets
as the Company's products.
The character generation and graphics imaging systems market is highly
competitive and is characterized by rapid technological change and evolving
industry standards. Rapid obsolescence of products, frequent development of new
products and significant price erosion are all features of the industry in which
the Company operates. The Company anticipates increased competition from both
existing companies and new market entrants. The Company is currently aware of
several major and a number of smaller competitors. In the standalone character
generator area, the Company believes its primary competitors are Chyron, For-A,
Knox, and AVS. Many of these companies have significantly greater financial,
technical,
13
<PAGE>
manufacturing and marketing resources than the Company. In addition, certain
product categories and market segments, on a region-by-region basis, in which
the Company does or may compete, are dominated by certain vendors. As a result,
the Company's ability to compete in these areas may be limited.
The Company believes that the markets for the Company's products will
remain highly competitive. The Company believes that its ability to compete
depends on factors both within and outside its control, including the success
and timing of new product developments introduced by the Company and its
competitors, product performance and price, market presence and customer
support. There can be no assurance that the Company will be able to compete
successfully with respect to these factors. Maintaining any advantage that the
Company may have over its competitors will require continuing investments by the
Company in research and development, sales and marketing and customer service
and support. In addition, as the Company enters new markets, whether through
acquisitions, alliances with other companies or on its own, the Company may
encounter distribution channels, technical requirements and competitive factors
that differ from those in the markets in which it currently operates. There can
be no assurance the Company will be able to compete successfully in these new
markets. In addition, increased competition in any of the Company's current
markets could result in price reductions, reduced margins or loss of market
share, any of which could materially and adversely affect the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors.
Proprietary Rights
The Company relies on a combination of trade secret, copyright and
trademark laws, and contractual agreements to safeguard its proprietary rights
in technology and products. In addition, the Company has several patents. The
Company has registered the Videonics brand name and certain product trademarks
in the United States, as well as in some of its international markets. The
Company routinely enters into confidentiality and assignment of inventions
agreements with each of its employees and nondisclosure agreements with its key
customers and vendors.
While the Company relies on these measures to protect its proprietary
rights, there can be no assurance that the Company's technology is adequately
protected by such measures or that the technology will not be reverse-engineered
by third parties without violation of the Company's proprietary rights. Such
protection may not preclude competitors from developing products with features
and prices similar to or even better than those of the Company. The Company
believes that its products and other proprietary rights do not infringe upon the
proprietary rights or products of third parties. However, the Company has
received communications from a third party patent holder asserting patent rights
claims embracing certain of the Company's products. The Company believes that
the ultimate resolution of these claims will not have an adverse material effect
on the Company's financial condition or results of operations. There can be no
assurance, however, that other third parties will not assert infringement claims
against the Company in the future or that such claims will not result in costly
litigation or require the Company to license intellectual property rights from
third parties. There can be no assurance that any such licenses would be
available on terms acceptable to the Company, if at all.
The Company believes that, because the pace of technological change is so
rapid in the digital video electronics industry, the best protection for its
proprietary rights is its continued substantial investment in research and
development to apply the latest advances in data storage and data compression to
the integration of video post-production functions. The Company believes that
any legal protection afforded by patent, copyright, and trade secret laws will
be less of a factor on the Company's ability to compete than the ability and
creativity of its research
14
<PAGE>
and development staff to develop products which satisfy customer needs.
Moreover, the Company believes that market positioning and rapid market entry
are equally important to the success of its products.
Employees
As of March 3, 1997, the Company had 141 full-time employees, including
47 in research and development, 41 in sales and marketing, 39 in operations, and
14 in finance and administration. None of the Company's employees is represented
by a labor union or is covered by collective bargaining agreements. The Company
believes that its employee relations are good. The Company has never experienced
a work stoppage.
15
<PAGE>
ITEM 2. PROPERTIES.
The Company's principal administrative, sales and marketing, research and
development, and operating facilities are located in Campbell, California and
consist of approximately 29,900 square feet under a lease which expires on July
31, 1999. The Company also has a research and development facility in Millis,
Massachusetts which has 2,500 square feet under a lease which expires on
December 31, 1998. The Company has an administrative, sales and marketing,
research and development, and operating facility in Canton, Connecticut. The
building is approximately 5,000 square feet under a lease which expires on July
31, 1997. The Company has an administrative, sales and marketing, research and
development, and operating facility in Belmont, California which has 6,050
square feet under a sublease which expires on December 31, 1998.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a Special Meeting of Shareholders on December 12, 1996, an amendment
to the Company's 1996 Stock Option Plan was approved, pursuant to which
1,000,000 shares of common stock were reserved for issuance.
Votes
Affirmative ----------------------
Votes Against Abstained
----- ------- ---------
Approval of the Company's
Amended 1996 Stock
Option Plan 3,406,106 790,831 19,745
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock has been listed on the Nasdaq National Market
System under the symbol "VDNX" since its initial public offering which was
declared effective on December 15, 1994. Prior to that date, there was no
established public trading market for the Company's Common Stock. The following
table sets forth the quarterly high and low sales price information of the
Common Stock during the fiscal year ended December 31, 1996.
Q1 Q2 Q3 Q4
---- ---- ---- ----
FY96 High $13.00 $12.25 $10.88 $10.00
Low $ 7.00 $ 7.50 $ 7.75 $ 7.25
FY95 High $20.25 $17.50 $24.00 $21.25
Low $11.25 $13.25 $15.50 $10.75
As of March 3, 1997, there were approximately 2,100 holders of the
Company's Common Stock. The closing sales price of the Company's Common Stock on
March 3, 1997 was $4.875 per share.
Prior to the Company's initial public offering on December 15, 1994, the
Company had been treated for federal and state income tax purposes as an S
corporation under the Internal Revenue Code of 1986, as amended (the "Code"). As
a result, the Company's S corporation shareholders had been required to pay
taxes based on the Company's earnings through the date immediately preceding the
date of termination of the Company's S corporation tax status, regardless of
whether such amounts had been distributed to the shareholders. Following the
Company's initial public offering, the Company was no longer eligible for
Subchapter S treatment and is taxed as a C corporation under applicable Internal
Revenue Service regulations and rules.
In 1994, the Company made distributions to its S corporation shareholders
for certain income tax liabilities associated with the Company's 1994 earnings
through December 14, 1994, of $2.7 million.
Other than the distributions to S corporation shareholders described in
the preceding paragraphs, the Company has never declared or paid dividends on
its Common Stock and does not anticipate paying any dividends in the foreseeable
future. The Company currently intends to retain its earnings, if any, for the
operation and development of its business.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
The selected financial data set forth below with respect to the Company's
statements of operations for each of the years in the five year period ended
December 31, 1996, and with respect to the balance sheets at December 31, 1996,
1995, 1994, 1993 and 1992 are derived from financial statements that have been
audited by Coopers & Lybrand L.L.P., independent accountants. The financial data
should be read in conjunction with the Company's Financial Statements and
related Notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Report. The
balance sheets as of December 31, 1996 and 1995, and the statement of operations
for each of the three years in the period ended December 31, 1996 and the
independent auditors' report thereon, are included in Item 8 of this Report.
<CAPTION>
Year Ended December,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues $29,195 $33,561 $31,498 $13,885 $11,564
Operating income 401 4,811 5,627 809 734
Net income 744 3,746 5,993(1) 605 518
Net income per share 0.13 0.65 1.39(1) 0.16 -
Net income per share, excluding charge for
purchased research and development (2) 0.13 0.88 1.39(1) 0.16 -
Shares used in computing per share
amounts 5,933 5,791 4,324 3,842 -
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital (deficiency) $21,412 $20,127 $18,394 ($493) ($801)
Total assets 27,958 27,350 22,279 5,524 3,549
Shareholders' equity (deficit) 25,731 24,149 19,403 214 (417)
Dividends declared per share (3) - - 0.71 0.01 -
<FN>
- ----------
(1) In connection with its December 15, 1994, initial public offering, the
Company terminated its S corporation status and recorded a one time tax
benefit of $650,000, which is reflected in the Company's 1994 results. On a
pro forma basis, utilizing a 38 percent tax rate and excluding net
operating losses, pro forma net income and pro forma net income per share
for the period ending December 31, 1994 would have been $3,424,000 and
$0.79, respectively. See Provision for Income Taxes under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of this Report" for further discussion.
(2) Results for 1995 include a one-time charge of $1,965,000 for purchased
in-process research and development related to the acquisition of Nova.
Without this one-time charge, the net income of $3,746,000 would have been
$5,075,000 or $0.88 per share. See Note 3 of Notes to the Financial
Statements.
(3) See Part II, Item 5 of this Report regarding the distributions of dividends
to the Company's S corporation shareholders to cover certain of their
income tax liabilities resulting from the Company's earnings.
</FN>
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion in this section "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contains trend
analysis and other forward looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results could differ materially from
those projected in the forward looking statements as a result of the factors set
forth below and elsewhere in this Form 10-K.
Overview
Videonics is a designer of affordable, high-quality, digital video
post-production equipment. Videonics products are used by videographers,
business, industry, education and videophiles; they are also used in the
broadcast, cable, video presentation and video conferencing markets. The company
manufactures standalone and personal-computer-based hardware and software
products that edit and mix raw video footage and add special effects and titles.
Products include edit controllers, video and audio mixers, video processors,
character generators, multimedia software, computer-based animation and video
compositing systems, frame synchronizers, time base correctors, video format
converters, transcoders, distribution amplifiers, routing switchers and
audio/visual delay systems.
In February 1994, the Company first shipped its Digital Video Mixer
product, which significantly added to the capabilities and features of the
Company's line of video post-production equipment and sold for more than twice
the price of any of the Company's other then current products. In 1994, this
product represented approximately 64% of revenues, and together with the Video
TitleMaker 2000, also introduced in 1994, represented approximately 85% of
revenues.
In 1995, the Company continued to improve gross profit through volume
related purchasing, improved manufacturing, and a lower proportional amount of
OEM revenues. The Company began shipping its Edit Suite product in June 1995. In
September 1995, the Company hired all the personnel, acquired substantially all
the assets and certain liabilities of Nova, a manufacturer of video signal
processing equipment in the broadcast market, and incurred a one time charge of
$2.0 million, for purchased in-process research and development. In addition, in
September of 1995, the Company hired the personnel and acquired substantially
all the assets of Abbate, a developer of desktop video products.
In 1996, the Company continued to diversify into the broadcast and
desktop markets with the acquisition of the assets of KUB Systems, a developer
of desktop digital video production equipment for the broadcast market. In
addition, the Company made significant changes in the structure of its Research
and Development department which included the addition of a new Vice President
of R&D. The TitleMaker 3000 and the PowerScript Character Generator were
introduced at the end of the third quarter of 1996 resulting in the first
quarterly increase in revenues in five quarters. However, after shipping
PowerScript to a wide base of customers, deficiencies in the user interface and
certain signal timing issues in specific applications were discovered that made
the product difficult to sell. A new version of the operating software was
released in March of 1997, which improved the user interface and operating speed
of the product. The signal timing issues will be addressed with the introduction
of two additional higher priced versions of PowerScript targeted at higher end
customers and expected to be introduced at the National Association of
Broadcasters Show in April of 1997. Additional costs in Research and Development
and Sales and Marketing related to the Company's diversification into the
broadcast and desktop markets, combined with lower sales of the Company's older
Videographer products, are expected to result in a loss for the first quarter of
1997, with results for the remainder of the year dependent on planned shipment
and customer acceptance of new products.
19
<PAGE>
Results of Operations
The following table sets forth certain items from the Company's
statements of income as a percentage of net revenues for the periods indicated:
YEAR ENDED DECEMBER 31,
1996 1995 1994
---- ---- ----
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 52.3 51.1 60.3
Gross profit 47.7 48.9 39.7
Operating expenses
Research & development 17.2 9.4 5.1
Selling & marketing 23.1 15.4 14.0
General & administrative 4.7 3.6 2.7
Amortization of intangible assets 1.3 0.3 -
Charge for purchased R&D - 5.8 -
---- ---- ----
Total operating expenses 46.3 34.5 21.8
---- ---- ----
Operating income 1.4 14.4 17.9
Other income (expense), net 1.2 2.1 (0.4)
---- ---- ----
Income before income taxes 2.6 16.5 17.5
Provision for (benefit from)
income taxes 0.1 5.3 (1.5)
---- ---- ----
Net income 2.5 11.2 19.0
==== ==== ====
Comparison of Years Ended December 31, 1996 and 1995
Net Revenues. Net revenues decreased 13% to $29.2 million in 1996, from
$33.6 million in 1995. This decrease is primarily attributable to decreased
sales of older Videographer products and the absence of new products during the
first three quarters of the year, partially offset by the additional revenues of
Nova Systems. International revenues for 1996 were $12.3 million or 42% of net
revenues compared to $16.4 million or 49% of net revenues in 1995. The
percentage decrease in international revenue in 1996 is due primarily to delays
in the introduction of PowerScript and other new products in the international
market.
Gross Profit. Gross profit decreased 15% to $13.9 million in 1996 from
$16.4 million in 1995. Gross profit, as a percentage of net revenues, decreased
to 48% in 1996 from 49% in 1995. The percentage decrease in gross profit is
principally attributable to spreading fixed manufacturing overhead, such as
salaries and facilities costs, over lower revenues.
Research and Development: Research and development expenses increased 60%
to $5.0 million during 1996 compared to $3.1 million in 1995, and increased as a
percentage of net revenues to 17% in 1996 from 9% in 1995. The increased
expenses were primarily due to the Company's hiring of consultants and engineers
in 1996, who are working on the development of the Company's new products. In
addition, research and development expenses include the personnel of Nova and
Abbate for the full 1996 year and the personnel of KUB Systems since June 1996.
The Company anticipates that research and development expenses will continue to
increase in absolute terms due to ongoing and future product development.
Selling and Marketing. Selling and marketing expenses increased 30% to
$6.7 million in 1996 compared to $5.2 million in 1995, and increased to 23% in
1996 compared to 15% in 1995, as a percentage of net revenues. This increase in
selling and marketing expenses was primarily a result of increased personnel,
advertising and promotional expenses as the Company diversifies into the
broadcast and desktop markets.
20
<PAGE>
General and Administrative. General and administrative expenses increased
13% to $1.4 million in 1996 compared to $1.2 million in 1995, and increased to
5% in 1996 compared to 4% in 1995 as a percentage of net revenues. This increase
was primarily due to the addition of personnel.
Interest Income, net. Interest income decreased 51% to $361,000 in 1996
compared to $732,000 in 1995, primarily as a result of the Company's investment
in tax exempt securities for the full year 1996 combined with a significantly
lower average cash balance.
Provision for Income Taxes. The Company's December 31, 1996 effective
rate of 2% was below the 36% rate which the Company had utilized in calculating
its tax provision for the first three quarters of 1996 and less than the 32%
rate for 1995. The rate of 2% was primarily the result of higher than expected
federal and state research credits on significantly increased research and
development spending, and lower than expected 1996 taxable income.
Factors That May Affect Future Results of Operations: The Company
believes that in the future its results of operations could be impacted by
factors such as delays in development and shipment of the Company's new products
and major new versions of existing products, market acceptance of new products
and upgrades, growth in the marketplace in which it operates, competitive
product offerings, and adverse changes in general economic conditions in any of
the countries in which the Company does business. The Company's results in prior
years have been affected by these factors, particularly with respect to
developing and introducing new products such as PowerScript.
Due to the factors noted above, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in revenue or earnings from levels expected by securities
analysts or anticipated by the Company based upon product development and
introduction schedules could have an immediate and significant adverse effect on
the trading price of the Company's common stock in any given period.
Additionally, the Company may not learn of such shortfalls until late in the
fiscal quarter, which could result in an even more immediate and adverse effect
on the trading price of the Company's common stock. Finally, the Company
participates in a highly dynamic industry, which often results in significant
volatility of the Company's common stock price. See "Business - Research and
Development".
Comparison of Years Ended December 31, 1995 and 1994
Net Revenues. Net revenues increased 7% from $31.5 million in 1994 to
$33.6 million in 1995. This increase is primarily attributable to sales of the
Edit Suite product beginning in June 1995 and the acquisition of Nova in
September 1995. The increase was offset by the discontinuation of the Video
Equalizer in January, decreased sales in certain older products, and lower OEM
sales to Sony. International revenues for 1995 were $16.4 million or 49% of net
revenues compared to $12.7 million or 40% of net revenues in 1994. The increase
in international revenue in 1995 is due primarily to increased European and
Asian sales. The Company expects that international revenues will continue to
represent a significant portion of its net revenues.
Gross Profit. Gross profit increased 31% to $16.4 million in 1995 from
$12.5 million in 1994. Gross profit, as a percentage of net revenues, increased
to 49% in 1995 from 40% in 1994. The percentage increase is principally
attributable to purchasing and manufacturing efficiencies in 1995 over 1994 and
the greater proportion of Videonics brand name products sold, which are
typically at higher margins, when compared to OEM products.
21
<PAGE>
Research and Development. Research and development expenses increased 93%
to $3.1 million during 1995 compared to $1.6 million in 1994, and increased as a
percentage of net revenues to 9% in 1995 from 5% in 1994. The increased expenses
were primarily due to the Company's hiring of consultants and additional
hardware and software engineers in 1995, who are working on the development of
the Company's new products. In addition, since September 1995, research and
development expenses include the personnel of Nova and Abbate who were
principally in engineering. The Company anticipates that research and
development expenses will continue to increase in absolute terms due to ongoing
and future product development.
Selling and Marketing. Selling and marketing expenses increased 18% to
$5.2 million in 1995 compared to $4.4 million in 1994, and increased to 15% in
1995 compared to 14% in 1994 as a percentage of net revenues. This increase in
selling and marketing expenses as a percentage of net revenues was primarily a
result of increased advertising and promotional expenses.
General and Administrative. General and administrative expenses increased
39% to $1.2 million in 1995 compared to $866,000 in 1994, and increased 4% in
1995 compared to 3% in 1994 as a percentage of net revenues. This increase was
substantially due to the additional reporting requirements and shareholder
communications of a public company for all of 1995 and the addition of Nova's
administrative expenses.
Provision for Income Taxes. The Company's December 31, 1995 effective
rate of 32% was below the 38% rate which the Company had utilized in calculating
its tax provision for the first and second quarters of 1995 and used to
calculate its 1994 pro forma taxes and pro forma net income. The rate of 32% was
a result of lower than expected 1995 revenue, a higher percentage of foreign
sales and an increased research and development credit due to the significant
increase in research and development spending. See Comparison of Years Ended
December 31, 1994 and 1993, "Provision for Income Taxes," for further discussion
of 1994's recorded tax benefit. In 1994, if the Company had been taxed for the
full year as a C corporation utilizing an effective tax rate of 38%, exclusive
of all available Net Operating Loss carryforwards ("NOLs"), the Company's pro
forma net income and pro forma net income per share would have been $3.4 million
or $0.79 per share respectively.
Interest Income. As a result of the equity raised in connection with its
initial public stock offering in late 1994, the Company earned net interest
income in 1995 of $732,000 compared to net interest expense of $106,000 in 1994.
22
<PAGE>
Quarterly Results of Operations
<TABLE>
The following table sets forth certain quarterly financial information
for the periods indicated. This information has been derived from unaudited
financial statements that, in the opinion of management, have been prepared on
the same basis as the audited information, and includes all normal recurring
adjustments necessary for a fair presentation of such information. The results
of operations for any quarter are not necessarily indicative of the results to
be expected for any future period.
<CAPTION>
1996 1995
---------------------------------- ------------------------------------
(in thousands, except Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
per share data) -- -- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $7,059 $7,055 $6,770 $8,311 $8,253 $8,505 $8,691 $8,112
Gross profit 3,501 3,422 3,219 3,786 3,886 4,070 4,580 3,865
Operating income (loss) 604 236 (41) (399) 1,665 1,955 284 907
Net income 449 212 31 52 1,189 1,361 332 864
Net income per share 0.08 0.04 0.01 0.01 0.21 0.24 0.06 0.15
Net income per share excluding
charge for purchased R&D (1) 0.08 0.04 0.01 0.01 0.21 0.24 0.27 0.15
Shares used in computing per
share amounts 5,900 5,946 5,942 5,946 5,764 5,763 5,813 5,824
<FN>
- ----------
(1) Results for the third quarter of 1995 include a one-time charge of
$1,965,000 for purchased in-process research and development related to the
acquisition of Nova. Without this one-time charge, net income for the third
quarter of 1995 would have been $1,550,000 or $0.27 per share. See Note 3
of Notes to the Financial Statements.
</FN>
</TABLE>
The Company has experienced significant quarterly fluctuations in
operating results and anticipates that these fluctuations will continue in the
future. The fluctuation in revenues in the periods reflected above are
attributable to various factors including the timing of new product
introductions and shipments, variations in product mix sold, and private label
sales. Particularly in 1996 and 1995, the Company's delay in the sales of
previously announced new products had a significant effect on the Company's
results of operations, and there can be no assurance that the Company will be
able to introduce and timely sell new products on a basis which will avoid
quarterly fluctuations in the future, or even that such new products will be
successful in the marketplace.
The Company typically operates with a small backlog. Therefore, quarterly
revenues and operating results have generally depended on the volume and timing
of orders received during the quarter. Backlog is not an accurate predictor of
what the Company's revenues will be in future periods, and there can be no
assurance that the Company will be profitable in any particular quarter.
Liquidity and Capital Resources
From the Company's inception until its initial public offering in
December 1994, which resulted in net proceeds of $15.8 million, the Company
financed its operations through private sales of equity, shareholder loans, cash
flow from operations, and bank borrowings. At December 31, 1996, the Company's
principal source of liquidity is cash and marketable securities of $8.0 million
dollars.
Operating Activities. In 1996, net cash used in operating activities was
$1.4 million, resulting primarily from an increase in inventories of $3.2
million, an increase in prepaid and other current assets of $204,000, a decrease
in the provision for excess and obsolete inventory of $240,000 offset by a
profit of $744,000, depreciation and amortization of $1.2 million, and a
decrease in accounts receivable of $428,000. Inventories increased primarily in
anticipation of
23
<PAGE>
new product shipments and lower than expected shipments of new products in 1996.
In 1995, net cash provided by operating activities was $339,000, resulting from
a profit of $3.8 million, which included a non-cash charge of $2.0 million for
purchased in-process research and development related to the Nova acquisition.
In 1995, operating profit excluding the non-cash charge, was partially offset by
an increase in accounts receivable of $1.7 million and an increase in
inventories of $3.3 million. Receivables increased due to third and fourth
quarter 1995 sales promotions with extended terms and inventories increased in
anticipation of new product shipments. In 1994, cash provided by operating
activities was $6.3 million, resulting from a profit of $6.0 million,
depreciation of $587,000, and deferred taxes of $650,000 partially offset by a
decrease in accounts payable amounting to $278,000.
Investing Activities. Capital equipment expenditures in 1996, 1995 and
1994 were $1.3 million, $958,000, and $686,000 respectively, primarily for
computers, software and engineering equipment used in research and development
and other activities. The Company currently anticipates that additions to
property and equipment will require capital expenditures of $1.5 million through
the end of 1997. In 1996, the Company had net redemptions of $3.2 million of
marketable securities. In May 1996, the Company acquired substantially all the
assets and assumed certain liabilities of KUB Systems for $350,000 in cash. In
1995, the Company purchased $4.7 million of marketable securities and had no
redemptions. In September 1995 the Company acquired substantially all the assets
and certain liabilities of Nova for $5.0 million in cash, $4.0 million of which
was paid at closing and $1.0 million through a promissory note payable in two
installments of $500,000 each in March 1996 and September 1996, with accrued
interest. There were no purchases or redemptions of marketable securities in
1994.
Financing Activities. In 1996, the Company received $100,000 from the
exercise of stock options under the Company's stock option plan. Additionally,
the Company paid the $1.0 million promissory note issued in connection with the
Nova acquisition. In 1995 the only cash generated from financing activities was
$135,000 from the exercise of stock options under the Company's stock option
plan. In March 1994, the Company borrowed $2.8 million under an unsecured bank
note bearing interest at the prime rate. The note was guaranteed by two
shareholders. Proceeds from the note were used to retire all shareholder loans
plus accrued interest. In September 1994, the Company replaced the bank note
with a $2.4 million bank line of credit secured by all the Company's assets,
with $400,000 restricted to standby letters of credit. In the fourth quarter of
1994, the Company repaid the balance plus accrued interest outstanding under the
line of credit agreement. The Company made distributions of $2.7 million to its
S corporation shareholders in 1994 to cover certain of the income tax
liabilities incurred by such shareholders with respect to the Company's earnings
in 1994.
The Company believes that its current cash and marketable securities,
together with its operating cash flows, will be sufficient to meet the Company's
requirements for working capital, and capital expenditures, through the end of
1997.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Balance sheets of the Company as of December 31, 1996 and 1995 and
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996, together with the related notes and
the report of Coopers & Lybrand L.L.P., independent accountants, are set forth
on the following pages. Other required financial information is set forth
herein, as more fully described in Item 14 hereof.
25
<PAGE>
VIDEONICS, INC.
-----
FINANCIAL STATEMENTS
for the three years ended December 31, 1996
26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Videonics, Inc.
Campbell, California
We have audited the accompanying consolidated balance sheets of Videonics, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the related statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Videonics, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
San Jose, California
January 31, 1997
27
<PAGE>
<TABLE>
VIDEONICS, INC.
CONSOLIDATED BALANCE SHEETS, December 31, 1996 and 1995
(in thousands)
<CAPTION>
ASSETS
1996 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,538 $ 7,287
Marketable securities 1,500 4,708
Accounts receivable, net 3,406 3,824
Inventories 9,309 5,561
Deferred income taxes 1,299 1,410
Prepaid income taxes 1,094 254
Prepaids and other current assets 493 284
----------- -----------
Total current assets 23,639 23,328
Property and equipment, net 2,037 1,350
Other assets 14 11
Intangible assets, net 2,268 2,661
----------- -----------
Total assets $ 27,958 $ 27,350
=========== ===========
LIABILITIES
Current liabilities:
Notes payable $ - $ 1,000
Accounts payable 1,090 1,226
Accrued expenses 1,137 975
----------- -----------
Total current liabilities 2,227 3,201
----------- -----------
Commitments and contingencies (Note 7).
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized: 10,000 shares in 1996 and 1995;
Issued and outstanding: None
Common stock, no par value:
Authorized: 30,000 shares in 1996 and 1995
Issued and outstanding: 5,705 shares in 1996 and 5,518
shares in 1995
20,297 19,459
Retained earnings 5,434 4,690
----------- -----------
Total shareholders' equity 25,731 24,149
----------- -----------
Total liabilities and shareholders' equity $ 27,958 $ 27,350
=========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
28
<PAGE>
<TABLE>
VIDEONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues $ 29,195 $ 33,561 $ 31,498
Cost of revenues 15,266 17,160 18,986
----------- ----------- -----------
Gross profit 13,929 16,401 12,512
----------- ----------- -----------
Operating expenses:
Research and development 5,027 3,138 1,624
Selling and marketing 6,741 5,181 4,395
General and administrative 1,367 1,208 866
Amortization of intangible assets 393 98 -
Charge for purchased in-process research and development - 1,965 -
----------- ----------- -----------
13,528 11,590 6,885
----------- ----------- -----------
Operating income 401 4,811 5,627
Other income (expense):
Interest, net 361 732 (106)
Other - - 2
----------- ----------- -----------
Income before income taxes 762 5,543 5,523
Provision for (benefit from) income taxes 18 1,797 (470)
----------- ----------- -----------
Net income $ 744 $ 3,746 $ 5,993
=========== =========== ===========
Net income per share $ 0.13 $ 0.65 $ 1.39
=========== =========== ===========
Shares used in per share calculation 5,933 $ 5,791 4,324
=========== =========== ===========
Unaudited pro forma information (Note 2):
Pro forma income before income taxes $ 5,523
Pro forma provision for income taxes 1,218
-----------
Pro forma net income $ 4,305
===========
Pro forma net income per share $ 1.00
===========
Pro forma shares used in per share calculation 4,324
===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
29
<PAGE>
<TABLE>
VIDEONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the three years in the period ended December 31, 1996
(in thousands, except per share data)
<CAPTION>
Common Stock Retained
---------------------- Earnings Shareholders'
Shares Amount (Deficit) Equity
-------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Balances, December 31, 1993 3,748 $ 2,599 $ (2,385) $ 214
Payment of cash dividends to shareholders ($.711
per share) (2,664) (2,664)
Issuance of common stock from exercise of options 3 2 2
Public offering of common stock, net of issuance
costs 1,600 15,848 15,848
Amortization of deferred compensation 10 10
Net income 5,993 5,993
-------- ----------- ---------- -----------
Balances, December 31, 1994 5,351 18,459 944 19,403
Issuance of common stock from exercise of options 167 135 135
Amortization of deferred compensation 48 48
Tax benefit from exercise of nonqualified stock
options 817 817
Net income 3,746 3,746
-------- ----------- ---------- -----------
Balances, December 31, 1995 5,518 19,459 4,690 24,149
Issuance of common stock from exercise of options 187 100 100
Amortization of deferred compensation 48 48
Tax benefit from exercise of nonqualified stock 690 690
options 744 744
-------- ----------- ---------- -----------
Balances, December 31, 1996 5,705 $ 20,297 $ 5,434 $ 25,731
======== =========== ========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
30
<PAGE>
<TABLE>
VIDEONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 744 $ 3,746 $ 5,993
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Loss on disposal of property and equipment 102
Depreciation and amortization 1,190 788 587
Provision for doubtful accounts (10) 28 155
Provision for excess and obsolete inventories (240) 336 469
Charge for purchased in-process research and development 1,965
Deferred income taxes 111 (760) (650)
Changes in assets and liabilities:
Accounts receivable 428 (1,713) (96)
Inventories (3,232) (3,305) (65)
Prepaid income taxes (150) 563
Prepaids and other current assets (203) (37) 24
Other (3) 12 5
Accounts payable (136) (690) (278)
Accrued expenses 97 (594) 94
-------- -------- --------
Net cash provided by (used in) operating activities (1,404) 339 6,340
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,303) (958) (986)
Net cash paid in acquisition (350) (3,920)
Purchases of marketable securities (1,500) (4,708)
Proceeds from marketable securities 4,708
Acquisition of intangible assets (94)
-------- -------- --------
Net cash provided by (used in) investing activities 1,555 (9,680) (986)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of loans payable to bank 2,840
Proceeds from issuance of common stock 100 135 15,850
Repayments on note payable to bank (2,840)
Repayment on notes payable (1,000)
Repayments on notes payable to shareholders (2,250)
Dividend paid to shareholders (2,664)
-------- -------- --------
Net cash provided by (used in) financing activities (900) 135 10,936
-------- -------- --------
Increase (decrease) in cash and cash equivalents (749) (9,206) 16,290
Cash and cash equivalents at beginning of year 7,287 16,493 203
-------- -------- --------
Cash and cash equivalents at end of year $ 6,538 $ 7,287 $ 16,493
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 31 $ 16 $ 719
Income taxes $ 44 $ 1,924
Supplemental schedule of non-cash financing activities:
Tax benefit from exercise of nonqualified stock options $ 690 $ 817
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
31
<PAGE>
VIDEONICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Business:
Videonics, Inc. (the Company) was incorporated on July 3, 1986. The
Company is a designer of digital video post-production equipment. The
Company's products are used by videographers, business, industry,
education and videophiles; they are also used in the broadcast, cable,
video presentation and video conferencing markets. The Company
manufactures standalone and personal-computer-based hardware and software
products that edit and mix raw video footage, add special effects and
titles, and process audio and video signals.
2. Summary of Significant Accounting Policies:
Principles of Consolidation:
The consolidated financial statements include the accounts of
Videonics, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates:
The preparation of 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
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition:
The Company recognizes revenues from gross sales, less a provision for
estimated future customer returns and exchanges, upon shipment of
product.
Research and Development Expenditures:
Research and development expenditures are charged to operations as
incurred.
Advertising:
The Company expenses the production costs of advertising as the
expenses are incurred. The production costs of advertising consist
primarily of magazine advertisements, agency fees and other direct
production costs.
Continued
32
<PAGE>
VIDEONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Advertising, continued:
Advertising expense for the period ended December 31, 1996, 1995 and
1994 was $947,000, $502,000 and $447,000, respectively.
Income Taxes:
Prior to an initial public offering on December 15, 1994, the Company
elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, the Company was not
subject to corporate federal taxation. The Company was subject only to
a 1.5% state surcharge tax. Accordingly, no provision for taxes on
income earned through December 15, 1994 had been made, except for the
state surcharge, because the remaining taxes are the obligation of the
shareholders.
Upon conversion to a C corporation on December 15, 1994, the Company
received a one-time tax benefit of $650,000 (see Note 8). In addition,
for the period December 16 through December 31, 1994, the Company was
taxed as a C corporation, and a current tax provision utilizing
statutory rates is accordingly reflected for this period. The Company
uses the liability method in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
Cash and Equivalents:
Cash equivalents consist of highly liquid investments with original
maturities at time of purchase of three months or less.
Marketable Securities:
Marketable securities are classified as available-for-sale and
therefore are carried at fair value. Unrealized holding gains and
losses on such securities are reported net of related taxes as a
separate component of shareholders' equity. Realized gains and losses
on sales of all such securities are reported in earnings and computed
using the specific identification cost method.
Inventories:
Inventories are stated at the lower of standard cost (which
approximates actual cost on a first-in, first-out basis) or market.
Continued
33
<PAGE>
VIDEONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Property and Equipment:
Property and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets
ranging from two to five years. Leasehold improvements are amortized on
a straight-line basis over the lesser of the term of the lease or the
estimated useful life of the asset.
Goodwill and Intangible Assets:
Capitalized purchased technology and goodwill relating to an
acquisition (see Note 3) are amortized over a seven year life.
Product Warranty:
Since 1994, the Company warrants all parts and labor on domestic sales
for two years. The Company provides for the estimated cost to repair or
replace these products at the time of sale.
Concentrations of Credit Risk:
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
and cash equivalents and trade accounts receivable.
The Company maintains its cash and cash equivalents with financial
institutions located in California and in high grade commercial paper
with original maturities of less than three months. As part of its cash
management process, the Company performs periodic evaluations of the
relative credit standing of these financial institutions.
The Company's customer base is dispersed across many different
geographic areas throughout the world and consists principally of
distributors and dealers in the electronics industry. The Company
performs ongoing credit evaluations of its customers and maintains an
allowance for potential credit losses. The Company generally receives
confirmed letters of credit or cash in advance of shipping to
distributors located outside North America.
Continued
34
<PAGE>
VIDEONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Distributions to Shareholders:
The Company made dividend distributions to its S corporation
shareholders in 1994 to cover certain of the income tax liabilities
incurred by such shareholders with respect to the Company's earnings.
Since the above mentioned distribution to its S corporation
shareholders, the Company has not declared or paid dividends on its
common stock.
Computation of Earnings Per Share:
Net income per share is calculated using the weighted average number of
common and dilutive common equivalent shares outstanding during the
period. Dilutive common equivalent shares consist of common shares
issuable upon exercise stock options (using the treasury stock method).
Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, options to purchase common stock granted with exercise
prices below the assumed initial public offering price per share during
the twelve months preceding the date of the initial filing of the
Registration Statement are included in the calculation of common
equivalent shares, using the treasury stock method, as if they were
outstanding for all periods presented.
Pro Forma Net Income Per Share:
For 1994, pro forma net income and pro forma net income per share have
been determined assuming the Company had been taxed as a C corporation
for federal income tax purposes for all periods presented. Pro forma
net income per share has been computed using the weighted average
number of common and dilutive common equivalent shares outstanding for
the period. If Net Operating Loss carryforwards were not available for
the year ending December 31, 1994, pro forma net income and pro forma
net income per share would have been $3,424,000 and $0.79,
respectively.
Continued
35
<PAGE>
VIDEONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Fair Value of Financial Instruments:
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts
payable and other accrued liabilities approximate fair value due to
their short maturities. Based on borrowing rates currently available to
the Company for loans with similar terms, the carrying value of notes
payable approximates fair value. Estimated fair values for marketable
securities, which are separately disclosed elsewhere are based on
quoted market prices for the same or similar instruments.
Recent Accounting Pronouncement:
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earning per Share", (SFAS 128) which specifies the
computation, presentation and disclosure requirements for Earnings Per
Share. SFAS 128 will become effective for the Company's 1997 fiscal
year. The impact of adopting SFAS 128 on the Company's financial
statements has not yet been determined.
3. Acquisition of Nova Systems:
Effective September 7, 1995, the Company acquired substantially all the
assets and certain liabilities of Nova Systems (Nova). Nova is a developer
and manufacturer of video frame synchronizers, digital time base
correctors and video signal processing equipment used for video and audio
post production in the broadcast, cable, video presentation, and video
conferencing markets. Under the terms of the acquisition, the Company
agreed to pay Nova $4,000,000 in cash and $1,000,000 in a note payable due
in two installments of $500,000 on March 7, 1996 and September 6, 1996,
with accrued interest at a rate of 6% per annum. In accordance with the
acquisition agreement, the purchase price is subject to certain
adjustments. Adjustments have been established at $200,000 and are shown
as a receivable from the seller and serve to reduce the purchase price.
The acquisition has been accounted for as a purchase transaction and the
results of operations of Nova have been included with those of the Company
since September 7, 1995.
Continued
36
<PAGE>
VIDEONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
3. Acquisition of Nova Systems, continued:
The purchase price consisted of (in thousands):
Cash paid $ 4,000
Notes payable to seller 1,000
Receivable from seller (200)
-----------
$ 4,800
-----------
The purchase price was allocated to assets and liabilities acquired based
on the underlying fair value of assets and liabilities as follows (in
thousands):
Cash $ 80
Accounts receivable 134
Inventory 517
Other assets 13
Property and equipment 35
Intangible assets 2,665
Purchased research and development 1,965
Accounts payable (247)
Accrued expenses (362)
-----------
$ 4,800
-----------
Intangibles consist of purchased technology and goodwill of $2,443,000 and
$222,000, respectively, which are being amortized over a period of seven
years.
The amount allocated to purchased in-process research and development
totaling $1,965,000 was expensed on the acquisition date as the technology
had not reached technological feasibility and had no alternative future
use. Net of income taxes, this charge was equal to $0.23 per share.
Continued
37
<PAGE>
VIDEONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
4. Acquisition of KUB Systems:
Effective May 24, 1996, the Company hired all the personnel and acquired
certain assets and certain liabilities of KUB Systems (KUB). KUB is a
developer and manufacturer of advanced digital video production equipment
for the broadcast, post-production, and institution video production
markets. Under the terms of acquisition, the Company paid KUB $350,000 in
cash. The acquisition has been accounted for as a purchase transaction and
the results of operations of KUB have been included with those of the
Company since May 24, 1996, the date the purchase was consummated.
The purchase price consisted of (in thousands):
Cash paid $ 350
The purchase price was allocated to assets and liabilities acquired as
follows (in thousands):
Inventory $ 276
Other current assets 6
Property 133
Accrued expenses (65)
---------
$ 350
---------
5. Marketable Securities:
At December 31, 1996 and 1995 marketable securities are stated at cost
which approximate fair value. Marketable securities consist of municipal
securities, which were held by one investment bank in 1996 and two
investment banks in 1995. Interest rates in 1996 and 1995 were 4.0% per
annum and 4.0% to 4.4% per annum, respectively. Balances at December 31,
1996 mature in February 1997. At December 31, 1996 and 1995, there were no
realized gains or losses on disposals of marketable securities.
Continued
38
<PAGE>
VIDEONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
6. Balance Sheet Detail:
Accounts receivable comprise (in thousands):
December 31,
------------------------------
1996 1995
------------ ------------
Trade accounts receivable $ 3,529 $ 3,997
Less allowance for doubtful accounts (123) (173)
------------ ------------
$ 3,406 $ 3,824
============ ============
Inventories comprise (in thousands):
December 31,
------------------------------
1996 1995
------------ ------------
Raw materials $ 6,210 $ 3,659
Work in process 1,437 1,095
Finished goods 1,662 807
------------ ------------
$ 9,309 $ 5,561
============ ============
Property and equipment comprise (in thousands):
December 31,
------------------------------
1996 1995
------------ ------------
Machinery and equipment $ 3,013 $ 2,068
Furniture and fixtures 126 58
Leasehold improvements 103 58
Tooling 1,270 1,008
------------ ------------
4,512 3,192
Less accumulated depreciation
and amortization (2,475) (1,842)
------------ ------------
$ 2,037 $ 1,350
============ ============
Continued
39
<PAGE>
VIDEONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
6. Balance Sheet Detail, continued:
Intangible assets comprise (in thousands):
December 31,
-----------------------------
1996 1995
----------- -----------
Purchased technology $ 2,443 $ 2,443
Goodwill 316 316
----------- -----------
2,759 2,759
Less accumulated amortization (491) (98)
----------- -----------
$ 2,268 $ 2,661
=========== ===========
Accrued expenses comprise (in thousands):
December 31,
-----------------------------
1996 1995
----------- -----------
Accrued advertising $ 137 $ 107
Accrued vacation 154 184
Salaries payable 201 111
Accrued acquisition reserve 250 250
Other accrued expenses 395 323
----------- ----------
$ 1,137 $ 975
=========== ==========
7. Commitments and Contingencies:
The Company leases a building for its principal facility under an
operating lease which expires in July 1999. The Company may cancel this
lease as of April 1997. Under the terms of the lease, the Company is
responsible for utilities, taxes, insurance and maintenance. At December
31, 1996, future minimum lease payments under all noncancelable operating
leases were as follows (in thousands):
1997 $ 380
1998 345
1999 153
----------
$ 878
==========
Continued
40
<PAGE>
VIDEONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
7. Commitments and Contingencies, continued:
Rent expense for the years ended December 31, 1996, 1995 and 1994 amounted
to $396,000, $239,000 and $183,000, respectively.
The Company has received communications from a third party patent holder
asserting patent rights embracing certain of the Company's products.
Management believes that the ultimate resolution of these matters will not
have a material adverse effect on the Company's financial condition or
results of operations.
8. Income Taxes:
As stated in Note 2, the Company was taxed as an S corporation through
December 15, 1994, after which the Company converted to a C corporation
and received a one-time tax benefit. The components of the provision for
(benefit from) income taxes are as follows (in thousands):
1996 1995 1994
--------- ---------- --------
Current:
Federal $ (110) $ 2,117 $ 110
State 17 440 70
Deferred:
Federal 239 (640) (650)
State (128) (120)
--------- ---------- --------
$ 18 $ 1,797 $ (470)
========= ========== ========
Continued
41
<PAGE>
VIDEONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
8. Income Taxes, continued:
<TABLE>
The Company's effective tax rate on income before income tax differs from
the U.S. federal statutory regular tax rate as follows:
<CAPTION>
1996 1995 1994
-------- --------- ------------
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
State income tax rate, net of federal benefit 5.7 5.3 1.0
Tax exempt interest (13.4) (1.6)
Foreign net operating loss 5.7
Federal and state tax credits (32.8) (1.9)
Benefit of S corporation status through December
15, 1994
(32.0)
Other 3.2 (3.4) (11.5)
-------- --------- ---------
2.4% 32.4% (8.5)%
======== ========= =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below (in thousands):
1996 1995
--------- ---------
Intangible assets $ 848 $ 728
Inventory reserves 149 307
Sales return reserves 46 48
Accounts receivable reserves 49 65
Depreciation 99 75
Other accrued liabilities and reserves 108 187
--------- ---------
$ 1,299 $ 1,410
========= =========
Continued
42
<PAGE>
VIDEONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
9. Shareholders' Equity:
At December 31, 1996, the Company has reserved 1,000,000 shares of common
stock for issuance under its 1996 Amended Stock Option Plan. In addition,
the Company has reserved 900,000 shares of common stock for issuance under
its 1987 Stock Option Plan which terminates, in accordance with its terms,
on January 1, 1997. The Plans provide for the granting of incentive stock
options to officers and employees of the Company and nonqualified
incentive stock options to employees, officers and directors of the
Company at prices not less than the fair market value of the Company's
common stock. Options generally vest over a three-year period and are
canceled 90 days after termination of employment.
<TABLE>
A summary of stock option activity follows:
<CAPTION>
Outstanding Options
Shares ---------------------------------------------
Available Number Exercise
for Grant of Shares Price Total
------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Balances, December 31, 1993 317,235 580,764 $.33-$1.67 $ 266,351
Options granted (112,200) 112,200 $2.00-$9.35 573,594
Options canceled 22,125 (22,125) $.47-$4.33 (38,538)
Options exercised (3,249) $.47 (1,516)
------------- ------------- ---------------
Balances, December 31, 1994 227,160 667,590 $.33-$9.35 799,891
Options granted (92,450) 92,450 $11.75-$14.75 1,227,575
Options canceled 1,800 (1,800) $1.67-$14.75 (10,788)
Options exercised (167,313) $.33-$11.75 (135,244)
------------- ------------- ---------------
Balances, December 31, 1995 136,510 590,927 $.33-$14.75 1,881,434
Additional shares reserved 1,000,000
Options granted (859,128) 859,128 $7.50-$9.00 6,752,363
Options canceled 147,958 (147,958) $.47-$14.75 (1,413,857)
Options exercised (186,918) $.33-$7.50 (100,468)
------------- ------------- ---------------
Balances, December 31, 1996 425,340 1,115,179 $.33-$14.75 7,119,472
============= ============= ===============
</TABLE>
At December 31, 1996, options to purchase 446,932 shares were exercisable.
Compensation of approximately $114,000 has been attributed to stock
options granted after March 1994 and prior to the sale of the Company's
common stock in an initial public offering. The compensation is being
recognized as a charge to income over the three-year vesting period
commencing in October 1994.
Continued
43
<PAGE>
VIDEONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
9. Shareholders' Equity, continued:
The Company accounts for stock based compensation using the intrinsic
value method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee must pay
to acquire the stock.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting standards No. 123, "Accounting for Stock-Based
Compensation." Had compensation cost for the years ended December 31, 1996
and 1995 been determined based on the fair value at the grant date,
consistent with the provisions of SFAS No. 123 and been included in the
Company's operations, the Company's net income and net income per share
for the years ended December 31, 1996 and 1995 would have been reduced to
the pro forma amounts indicated below:
1996 1995
---------- ------------
Net income - as reported $ 744 $ 3,746
========== ============
Net income - pro forma $ 126 $ 3,625
========== ============
Net income per share - as reported $ 0.13 $ 0.65
========== ============
Net income per share - pro forma $ 0.02 $ 0.63
========== ============
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes method with the following weighted average
assumptions by subgroup:
1996 1995
-------------- ---------------
Risk-free interest rate 5.36%-6.36% 5.58%-7.25%
Expected life 3 3
Expected dividends - -
Volatility 0.75 0.75
The weighted average expected life was calculated based on the vesting
period and the exercise behavior of the Company's employees. The risk-free
interest rate was calculated in accordance with the grant date and
estimated expected life.
Continued
44
<PAGE>
VIDEONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
9. Shareholders' Equity, continued:
<TABLE>
The options outstanding and currently exercisable by exercise price at
December 31, 1996 are as follows:
<CAPTION>
Options Currently
Options Outstanding Exercisable
-------------------------------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.33-$0.47 231,283 4.82 $0.46 231,283 $0.46
$2.00-$4.50 47,600 7.41 $3.86 35,251 $3.83
$7.50-$7.50 511,962 9.18 $7.50 115,725 $7.50
$7.87-$9.00 263,334 9.30 $8.61 29,672 $8.80
$9.35-$14.75 61,000 8.07 $11.36 35,001 $11.15
</TABLE>
10. Segment Information:
The Company is engaged in a single industry segment encompassing the
development and marketing of computer based video products. The Company
markets and services its products in North America through its own direct
sales organization and through sales representatives. The Company markets
its products in foreign countries outside North America through
distributors and its wholly owned subsidiary in Germany.
The Company's German office is primarily a sales office. Revenue, income
and assets employed by the Company's foreign subsidiary were not material
to the consolidated financial statements.
Continued
45
<PAGE>
VIDEONICS, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
10. Segment Information, continued:
<TABLE>
Geographic net export sales information is shown below (in thousands):
<CAPTION>
December 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
United States $ 16,852 $ 17,210 $ 18,772
Europe 4,774 6,823 5,466
Asia 3,925 6,865 4,530
Americas (excluding the United States) 3,644 2,663 2,730
------------- ------------- -------------
$ 29,195 $ 33,561 $ 31,498
============= ============= =============
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, no one customer
accounted for more than 10% of revenues during the periods. The Company
has no significant assets in foreign countries.
11. 401(k) Plan:
In August 1994, the Company adopted a 401(k) employee savings plan wherein
the employee can contribute up to specified Internal Revenue Code limits
and the Company matches, at a rate of 50%, the first $800 contributed by
the employee. The employee's entitlement to the Company matching
contributions is fully vested on the date of contribution. The Company at
its sole discretion with the Board of Directors' approval can make
incremental contributions. To date, the Company has not made discretionary
contributions. The Company's matching contributions charged against income
totaled approximately $52,000, $38,000 and $23,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
46
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information concerning the directors and executive officers of the
Company is set forth under the caption "Election of Directors" with respect to
directors and under the caption "Management" with respect to executive officers,
contained in the Company's Proxy Statement (the "Proxy Statement") relating to
its 1997 Annual Meeting of Shareholders to be held on May 22, 1997 and is
incorporated by reference into this Report. The Proxy Statement will be filed
with the Securities and Exchange Commission in accordance with Rule 14a-6(B)
promulgated under the Securities Exchange Act of 1934. With the exception of the
foregoing information and other information specifically incorporated by
reference into this Report, the Proxy Statement is not being filed as a part
hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" contained in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the Common Stock beneficially owned by each
director and executive officer of the Company, by all officers and directors of
the Company as a group, and by each shareholder known by the Company to be the
beneficial owner of 5% of the outstanding Common Stock, is incorporated herein
by reference to the information under the caption "Security Ownership of Certain
Beneficial Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to this item is incorporated herein by reference
to the information under the caption "Certain Transactions" contained in the
Proxy Statement.
47
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements are included in Item 8:
- Report of Independent Accountants
- Balance Sheets at December 31, 1996 and 1995
- Statements of Income for the Years Ended December 31,
1996, 1995, and 1994
- Statement of Shareholders' Equity for the Years Ended
December 31, 1996, 1995, and 1994
- Statements of Cash Flows for the Years Ended December
31, 1996, 1995, and 1994
- Notes to Financial Statements
2. Financial Statement Schedules
The following financial statement schedule is included in Item 14(d):
Schedule II -- Valuation and Qualifying Accounts
Schedules other than the one listed above have been omitted since the
required information is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the financial statements or notes thereto.
3. Exhibits
Exhibit No.
-----------
*3.01 Amended and Restated Articles of Incorporation of
Videonics, Inc., dated December 19, 1994.
*3.02 Amended and Restated Bylaws of Videonics, Inc. as
Adopted by the Board of Directors on October 27,
1994.
*10.01 Lease, dated July 6, 1994 between H-K Associates and
Videonics, Inc. at 1370 Dell Avenue, Campbell,
California.
10.02 Lease, dated September 27, 1995 between Canton
Gateway Office Park and Videonics, Inc. at 50 Albany
Turnpike, Canton, Connecticut.
48
<PAGE>
10.03 Sublease, dated July 11, 1996 between Diba, Inc. and
Videonics, Inc. at 270 Harbor Boulevard, Belmont,
California.
*10.04 Stock Option Plan, and related agreements.
**10.05 S corporation Termination, Tax Allocation, and
Indemnification Agreement, dated November 28, 1994,
among Videonics, Inc. and certain shareholders.
**10.06 Loan Agreement, dated September 30, 1994, between
Videonics, Inc. and Cupertino National Bank.
**10.07 Commercial Security Agreement, dated September 30,
1994, between Videonics, Inc. and Cupertino National
Bank.
***10.08 Asset Purchase Agreement relating to the acquisition
of Nova Systems, Inc., by Videonics, Inc., dated
September 7, 1995.
****10.09 Asset Purchase Agreement relating to the acquisition
of KUB Systems, Inc., by Videonics, Inc., dated May
24, 1996.
10.10 Letter of Employment Agreement with Steve L. Peters.
10.11 Promissory Note issued in connection with loan by
Videonics, Inc. to Steve L. Peters.
11. Statement Regarding Computation of Per Share
Earnings.
23.1 Consent of Coopers & Lybrand L.L.P., Independent
Accountants.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K with the Commission during the
fiscal quarter ended December 31, 1996.
- ----------
* Incorporated by reference to Registration Statement (No. 333-21003) on Form
S-8.
** Filed as an Exhibit to the Company's Registration Statement on Form S-1
(No. 33-85734) as declared effective by the Commission on December 15,
1994, and incorporated herein by reference.
*** Filed as an Exhibit to the Company's Current Report on Form 8-K dated
September 7, 1995, and incorporated herein by reference.
**** Filed as an Exhibit to the Company's Current Report on Form 8-K dated June
6, 1996, and incorporated herein by reference.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 18th day of
March, 1997.
VIDEONICS, INC.
By: /s/ Michael L. D'Addio By: /s/ James A. McNeill
----------------------- ----------------------------
Michael L. D'Addio James A. McNeill
President and Chief Vice President of Finance,
Executive Officer Chief Financial Officer and
Assistant Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
and in the capacities and on the date indicated.
Name and Signature Title Date
- ------------------------------ ----- ----
s/ Michael L. D'Addio Chairman of the Board, March 18, 1997
- --------------------- President and CEO
Michael L. D'Addio
/s/ Mark C. Hahn Vice President and Chief March 18, 1997
- ------------------------------ Technical Officer
Mark C. Hahn
/s/ Carl E. Berg Director March 18, 1997
- ------------------------------
Carl E. Berg
/s/ N. William Jasper, Jr. Director March 18, 1997
- ------------------------------
N. William Jasper, Jr.
50
<PAGE>
<TABLE>
VIDEONICS, INC.
INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
<CAPTION>
Page in
Form 10-K
<S> <C> <C>
Financial statements:
Report of Independent Accountants.............................................................. 27
Balance Sheets ................................................................................ 28
Statements of Income .......................................................................... 29
Statements of Shareholders' Equity............................................................. 30
Consolidated Statements of Cash Flows.......................................................... 31
Notes to Financial Statements.................................................................. 32
Schedules:
Report of Independent Accountants.................................................. 53
II Valuation and Qualifying Accounts.................................................. 54
Schedules not listed above have been omitted because the
information required to be set forth therein is not
required or is shown in the financial statements or notes
thereto.
Exhibits:
10.02 Lease, dated September 27, 1995 between Canton Gateway
Office Park and Videonics, Inc. at 50 Albany Turnpike, Canton, Connecticut......... __
10.03 Sublease, dated July 11, 1996 between Diba, Inc. and Videonics, Inc.
at 270 Harbor Boulevard, Belmont, California....................................... __
10.10 Letter of Employment Agreement with Steve L. Peters................................ __
10.11 Promissory Note issued in connection with loan by Videonics, Inc. to
Steve L. Peters.................................................................... __
11. Statement Regarding Computation of Earnings Per Share.............................. __
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants....................... __
</TABLE>
51
<PAGE>
VIDEONICS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1996
ITEM 14(d)
FINANCIAL STATEMENT SCHEDULE
52
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT ON SCHEDULE
Our report on the financial statements of Videonics, Inc. and subsidiaries is
included on page 27 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page 51 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basis financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
-----------------------------------
COOPERS & LYBRAND L.L.P.
53
San Jose, California
January 31, 1997
<PAGE>
<TABLE>
VIDEONICS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Valuation and Qualifying Accounts
(in thousands)
<CAPTION>
Balance at Charged to Balance
Beginning Costs and at End of
Description of Period Expenses Deductions Period
- ----------- --------- -------- ---------- ------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts: $173 $(10) $ 40 $ 123
Year ended December 31, 1995
Allowance for doubtful accounts: $150 $ 28 $ (5) $ 173
Year ended December 31, 1994
Allowance for doubtful accounts: $ 50 $155 $(55) $ 150
</TABLE>
54
<PAGE>
<TABLE>
Directors and Officers
<CAPTION>
Board of Directors Officers
<S> <C>
Michael L. D'Addio Jack M. Aiello
President, Chief Executive Officer Vice President of Customer Relations
and Chairman of the Board
Jeffrey A. Burt
Carl E. Berg Vice President of Operations
Private investor, member of the
board of directors of Integrated Michael L. D'Addio
Device Technology, Valence President, Chief Executive Officer
Technology, and Systems Integrated and Chairman of the Board
Research
James Francis
Mark C. Hahn Executive Vice President of Sales and
Vice President, Chief Technical Marketing
Officer and Secretary
Mark C. Hahn
N. William Jasper, Jr. Vice President, Chief Technical
President and Chief Operating Officer and Secretary
Officer of Dolby Laboratories, Inc.
Tom Herrmann
Committees of the Board Vice President of International Sales
AUDIT & COMPENSATION Wojciech Majewski
Vice President of Business Development
Carl E. Berg
N. William Jasper, Jr. James A. McNeill
Vice President of Finance, Chief
Financial Officer and Assistant
Secretary
David O'Kelly
Vice President of Domestic Sales
Steve Peters
Vice President of Research
and Development
</TABLE>
55
<PAGE>
Shareholder Information
Annual Meeting
The Videonics, Inc. annual shareholders' meeting will be held on May 22, 1997.
Shareholder Information
Videonics' Common Stock trades on the Nasdaq National Market tier of The Nasdaq
Stock Market System under the symbol "VDNX." Copies of Videonics' Report on Form
10-K for the fiscal year ended December 31, 1996 (incorporated in full in this
Annual Report) and additional copies of this Annual Report may be obtained
without charge upon written request from:
Videonics, Inc.
Investor Relations
1370 Dell Ave
Campbell, California 95008
Tel: 408-866-8300
Fax: 408-866-4859
Transfer Agent and Registrar
Boston EquiServe
150 Royall Street
Canton, MA 02021
Independent Accountants
Coopers & Lybrand L.L.P., San Jose, California
Independent Counsel
Wise & Shepard L.L.P., Palo Alto, California
Corporate Headquarters
Videonics, Inc.
1370 Dell Ave
Campbell, California 95008
Tel: 408-866-8300
56
<PAGE>
VIDEONICS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1996
ITEM 14(c)
EXHIBITS
57
THIRD LEASE MODIFICATION AGREEMENT
THIS AGREEMENT made as of this 27th day of September, 1995 between
CANTON GATEWAY OFFICE PARK, a Connecticut General Partnership, with an office at
160 Farmington Avenue, Farmington, Connecticut 06032 (hereinafter called
"Landlord") and VIDEONICS, Inc., 1370 Dell Avenue, Campbell, California 95008
(hereinafter called "Tenant").
WITNESSETH:
WHEREAS by the office lease dated March 1, 1990, Landlord and Tenant's
successor in interest entered into an office Lease for certain Premises located
on the Second and Third Floor of Building Three, Canton Gateway Office Park,
Canton, Connecticut (hereinafter called the "Lease"), which Premises are more
fully described in the Lease; and
WHEREAS the Lease was modified by the Lease Modification Agreement
dated November 19, 1991 (hereinafter called the "Lease"), and
WHEREAS the Lease was modified by Second Lease Modification Agreement
dated June 21, 1994 (the Lease, the First Lease Modification, the Second Lease
Modification Agreement and this Lease Modification Agreement are hereby
collectively called the "Lease"); and
WHEREAS, Landlord and Tenant wish to modify the Lease.
NOW THEREFORE, for One Dollar ($1.00) and other valuable consideration,
the receipt and adequacy of which is hereby acknowledged, Landlord and Tenant
agree to modify the Lease as follows:
1. The effective date of this Lease Modification is October 1, 1995.
2. Article I (Premises) shall be amended to reflect that the Demised
Premises are the office spaces located on the second and third
floor of Building Number 3, as more particularly described in the
attached Exhibit A and Exhibit B respectively.
3. Article 3 (Rent) shall be amended wherein necessary so that
annual rent will be Sixty-Six Thousand and 00/100 ($66,000.00)
Dollars payable in equal monthly installments of Five Thousand
Five Hundred and 00/100 ($5,500.00) for the period commencing
October 1, 1995 and ending July 31, 1997.
Article 3 (Rent) shall be further amended by making the so-called
base year on account of Operating Expenses for the Portion of the
Demised Premises located on the second floor to be the twelve
month period of July 1, 1993 to June 30, 1994.
Article 3 (Rent) shall be further amended by making the so-called
base year on account of Operating Expenses for the Portion of the
Demised Premises located on the third floor equal to the expenses
incurred during the twelve month period of October 1, 1995
through September 30, 1996. The first payment will be due October
1, 1996 and tenant's pro-rata share of Operating Expenses on
account of the Portion of the Demised Premises on the third floor
shall be 8.997%.
Article 3 (Rent) shall be further amended by making the so-called
base year on account of Real Estate Taxes for the Portion of the
Demised Premises located on the third floor equal to the January
1, 1996 payment multiplied by two (2). The first payment will be
due October 1, 1996 and tenant's pro-rata share of Real Estate
Taxes on account of the Portion of Demised Premises located on
the third floor shall be 8.997%.
4. Landlord shall provide the following work at the Demised
Premises: Repaint and touch-up as needed on the Third Floor,
remove and replace the carpeting throughout the Third Floor,
install new vinyl tile and align with the face of the wall as
shown by Exhibit C, and replace two cabinets doors as located on
Exhibit C.
<PAGE>
5. Tenant shall pay a One Thousand and 00/100 Dollar ($1,000.00)
payment upon the signing of this Lease Modification for the
replacement of the carpeting.
6. Except as modified herein, the Lease and all Exhibits and Riders
annexed thereto shall remain in full force and effect, and is
hereby ratified and confirmed.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
and seals the day and year first above written.
Signed, Sealed and Delivered
in the presence of:
LANDLORD
CANTON GATEWAY OFFICE PARK
/s/ Sandra Gifford
- ----------------------------- By: /s/ Jeffrey Reiner
---------------------------
/s/ (unknown)
- -----------------------------
TENANT
VIDEONICS, 1NC.
/s/ Sandra Gifford
- ----------------------------- By: /s/ Steven Kreinik
---------------------------
/s/ (unknown)
- -----------------------------
Its Duly Authorized:
STATE OF CONNECTICUT )
) ss.
COUNTY OF HARTFORD )
On this 27 day of September, 1995, personally appeared Stephen Kreinik,
of Videonics, Inc., its President, signer and sealer of the foregoing instrument
and acknowledged the same to be his free act and deed and the free act and deed
of said corporation before me.
/s/ Sandra Gifford
-----------------------------------------
Notary Public/Commissioner Superior Court
C O R N I S H & C A R E Y C O M M E R C I A L
-----
C & C
-----
O N C O R I N T E R N A T I O N A L
================================================================================
SUBLEASE
================================================================================
Sublessor: Diba, Inc., A Delaware Corporation Subject Property: 270--276
Harbor Boulevard.,
Belmont, California
Sublessee: Videonics, Inc., a California corporation Date: July 11, 1996
1. Parties:
This Sublease is made and entered into as of July 11, 1996, by and between Diba,
Inc., A Delaware Corporation ("Sublessor"), and Videonics, Inc., A California
Corporation ("Sublessee"), under The Master Lease dated December 18, 1995,
between Harbor Belmont Associates, as "Lessor" and Sublessor under this Sublease
as "Lessee." A copy of the Master Lease is attached hereto as Attachment I and
incorporated herein by this reference.
2. Provisions Constituting Sublease:
2.1 This Sublease is subject to all of the terms and conditions of the
Master Lease. Sublessee hereby assumes and agrees to perform all of the
obligations of "Lessee" under the Master Lease to the extent said
obligations apply to the Subleased Premises and Sublessee's use of the
Common Areas, except as specifically set forth herein. Sublessor hereby
agrees to cause Lessor under the Master Lease to perform all of the
obligations of Lessor thereunder to the extent said obligations apply
to the Subleased Premises and Sublessee's use of the Common Areas.
Sublessee shall not commit or permit to be committed on the Subleased
Premises or on any other portion of the Project any act or omission
which violates any term or condition of the Master Lease. Except to the
extent waived or consented to in writing by the other party or parties
hereto who are affected thereby, neither of the parties hereto will, by
renegotiation of the Master Lease, assignment, subletting, default or
any other voluntary action, avoid or seek to avoid the observance or
performance of the terms to be observed or performed hereunder by such
party, but will at all times in good faith assist in carrying out all
the terms of this Sublease and in taking all such action as may be
necessary or appropriate to protect the rights of the other party or
parties hereto who are affected thereby against impairment. Nothing
contained in this Section 2.1 or elsewhere in this Sublease shall
prevent or prohibit Sublessor (a) from exercising its right to
terminate the Master Lease pursuant to the terms thereof or (b) from
assigning its interest in this Sublease or subletting the Premises to
any other third party.
2.2 All of the terms and conditions contained in the Master Lease are
incorporated herein, except as specifically provided below, and the
terms and conditions specifically set forth in this Sublease, shall
constitute the complete terms and conditions of this Sublease, except
the following paragraphs of the Master Lease which shall solely be the
obligation of Sublessor:
- --------------------------------------------------------------------------------
901 MARINERS ISLAND BOULEVARD, SUITE 125, SAN MATEO, CA 94404
(415) 341 5800 FAX (415) 341 7024
- --------------------------------------------------------------------------------
Page 1 of 6.
<PAGE>
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C & C
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================================================================================
SUBLEASE
================================================================================
3 (a), Base Rent (Basic Lease information), Tenant Improvements
(exhibit B)
3. Subleased Premises and Rent:
3.1 Subleased Premises:
Sublessor leases to Sublessee and Sublessee leases from Sublessor the
Subleased Premises upon all of the terms, covenants and conditions
contained in this Sublease. The Subleased Premises consist of
approximately 6,050 square feet, located at 270--276 Harbor Boulevard.
3.2 Rent:
Sublessee shall pay to Sublessor as Rent for the Subleased Premises the
sum in accordance with the following schedule, without deductions,
offset, prior notice or demand. Rent shall be payable by Sublessee to
Sublessor in consecutive monthly installments on or before the first
day of each calendar month during the Sublease Term. If the Sublease
commencement date or the termination date of the Sublease occurs on a
date other than the first day or the last day, respectively, of a
calendar month, then the Rent for such partial month shall be prorated
and the prorated Rent shall be payable on the Sublease commencement
date or on the first day of the calendar month in which the Sublease
termination date occurs, respectively.
Month Monthly Rent
August 15, 1996 through December 31, 1996 $5,570.00 NNN
January 1, 1997 through December 31, 1997 $5,810.00 NNN
January 1, 1998 through December 31, 1998 $6,100.00 NNN
Sublessee further agrees to pay the operating expenses as they are
presented to Sublessor.
3.3 Security Deposit:
In addition to the Rent specified above, Sublessee shall pay to
Sublessor an equivalent of one month's rent as a non-interest bearing
Security Deposit. In the event Sublessee has performed all of the terms
and conditions of this Sublease during the term hereof, Sublessor shall
return to Sublessee, within ten days after Sublessee has vacated the
Subleased Premises, the Security Deposit less any sums due and owing to
Sublessor.
4. Rights of Access and Use:
4.1 Use:
Sublessee shall use the Subleased Premises only for those purposes
permitted in the Master Lease, unless Sublessor and Master Landlord
consent in writing to other uses prior to the commencement thereof.
- --------------------------------------------------------------------------------
901 MARINERS ISLAND BOULEVARD, SUITE 125, SAN MATEO, CA 94404
(415) 341 5800 FAX (415) 341 7024
- --------------------------------------------------------------------------------
Page 2 of 6.
<PAGE>
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================================================================================
SUBLEASE
================================================================================
5. Sublease Term:
5.1 Sublease Term:
The Sublease Term shall be for the period commencing on August 15,
1996, and continuing through December 31, 1998. In no event shall the
Sublease Term extend beyond the Term of the Master Lease.
5.2 Inability to Deliver Possession:
In the event Sublessor is unable to deliver possession of the Subleased
Premises at the commencement of the term, Sublessor shall not be liable
for any damage caused thereby, nor shall this Sublease be void or
voidable but Sublessee shall not be liable for Rent until such time as
Sublessor offers to deliver possession of the Subleased Premises to
Sublessee, but the term hereof shall not be extended by such delay. If
Sublessee, with Sublessor's consent, takes possession prior to
commencement of the term, Sublessee shall do so subject to all the
covenants and conditions hereof and shall pay Rent for the period
ending with the commencement of the term at the same rental as that
prescribed for the first month of the term prorated at the rate of
1/30th thereof per day. In the event Sublessor has been unable to
deliver possession of the Subleased Premises within 30 days from the
commencement date, Sublessee, at Sublessee's option, may terminate this
Sublease.
6. Notices:
All notices, demands, consents and approvals which may or are required to be
given by either party to the other hereunder shall be given in the manner
provided in the Master Lease, at the addresses shown on the signature page
hereof. Sublessor shall notify Sublessee of any Event of Default under the
Master Lease, or of any other event of which Sublessor has actual knowledge
which will impair Sublessee's ability to conduct its normal business at the
Subleased Premises, as soon as reasonably practicable following Sublessor's
receipt of notice from the Landlord of an Event of Default or actual knowledge
of such impairment. If Sublessor elects to terminate the Master Lease, Sublessor
shall so notify Sublessee by giving at least 30 days notice prior to the
effective date of such termination.
7. Broker Fee:
Upon execution of the Sublease, Sublessor shall pay Cornish & Carey Commercial,
a licensed real estate broker, fees set forth in a separate agreement between
Sublessor and Broker, or in the event there is no separate agreement between
Sublessor and Broker, a sum determined per separate agreement for brokerage
services rendered by Broker to Sublessor in these transactions.
8. Compliance With Americans With Disabilities Act:
Sublessee shall be responsible for the installation and cost of any and all
improvements, alterations or other work required on or to the Subleased Premises
or to any other portion of the property and/or building of which the Subleased
Premises are a part, required or reasonably necessary because of: (1)
Sublessee's use of the Subleased Premises or any portion thereof; (2) the use by
a Sublessee by reason of
- --------------------------------------------------------------------------------
901 MARINERS ISLAND BOULEVARD, SUITE 125, SAN MATEO, CA 94404
(415) 341 5800 FAX (415) 341 7024
- --------------------------------------------------------------------------------
Page 3 of 6.
<PAGE>
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-----
================================================================================
SUBLEASE
================================================================================
assignment or sublease; or (3) both, including any improvements, alterations or
other work required under the Americans With Disabilities Act of 1990.
Compliance with the provisions of this Section 8 shall be a condition of
Sublessor granting its consent to any assignment or Sublease of all or a portion
of this Sublease and the Subleased Premises described in this Sublease.
9. Compliance With Nondiscrimination Regulations:
It is understood that it is illegal for Sublessor to refuse to display or
sublease the Subleased Premises, or to assign, surrender or sell the Master
Lease, to any person because of race, color, religion, national origin, sex,
sexual orientation, marital status or disability.
10. Toxic Contamination Disclosure:
Sublessor and Sublessee each acknowledge that they have been advised that
numerous federal, state, and/or local laws, ordinances and regulations ("Laws")
affect the existence and removal, storage, disposal, leakage of and
contamination by materials designated as hazardous or toxic ("Toxics"). Many
materials, some utilized in everyday business activities and property
maintenance, are designated as hazardous or toxic.
Some of the Laws require that Toxics be removed or cleaned up by landowners,
future landowners or former landowners without regard to whether the party
required to pay for "clean up" caused the contamination, owned the property at
the time the contamination occurred or even knew about the contamination. Some
items, such as asbestos or PCBs, which were legal when installed, now are
classified as Toxics, and are subject to removal requirements. Civil lawsuits
for damages resulting from Toxics may be filed by third parties in certain
circumstances.
Sublessor and Sublessee each acknowledge that Broker has no specific expertise
with respect to environmental assessment or physical condition of the Subleased
Premises, including, but not limited to, matters relating to: (i) problems which
may be posed by the presence or disposal of hazardous or toxic substances on or
from the Subleased Premises, (ii) problems which may be posed by the Subleased
Premises being within the Special Studies Zone as designated under the
Alquist-Priolo Special Studies Zone Act (Earthquake Zones), Section 2621-2630,
inclusive of California Public Resources Code, and (iii) problems which may be
posed by the Subleased Premises being within a HUD Flood Zone as set forth in
the U.S. Department of Housing and Urban Development "Special Flood Zone Area
Maps," as applicable.
Sublessor and Sublessee each acknowledge that Broker has not made an independent
investigation or determination of the physical or environmental condition of the
Subleased Premises, including, but not limited to, the existence or nonexistence
of any underground tanks, sumps, piping, toxic or hazardous substances on the
Subleased Premises. Sublessee agrees that it will rely solely upon its own
investigation and/or the investigation of professionals retained by it or
Sublessor, and neither Sublessor nor Sublessee shall rely upon Broker to
determine the physical and environmental condition of the Subleased Premises or
to determine whether, to what extent or in what manner, such condition must be
disclosed to potential sublessees, assignees, purchasers or other interested
parties.
- --------------------------------------------------------------------------------
901 MARINERS ISLAND BOULEVARD, SUITE 125, SAN MATEO, CA 94404
(415) 341 5800 FAX (415) 341 7024
- --------------------------------------------------------------------------------
Page 4 of 6.
<PAGE>
-----
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-----
================================================================================
SUBLEASE
================================================================================
11. Rent Abatement and Damages to Personal Property:
In the event Sublessor, pursuant to the terms of the Master Lease, is entitled
to and receives rent abatement, then to the extent such rent abatement affects
the subleased premises, Sublessee shall be entitled to rent abatement in an
amount that the net rentable area of the subleased premises bears to the total
net rentable area of the Master Lease, and only to the extent any such abatement
applies to the sublease term. In addition, any amounts paid or credited to
Sublessor under the terms of the Master Lease for damage to personal property
shall be credited to Sublessee, subject to the same limitations set forth above.
Sublessor:. DIBA, INC., a Delaware corporation
By: /s/ Farzad Dibachi Date: 7/25/96
-------------------------------- -------------------------------
Farzad Dibachi, President
Address: 270 Harbor Boulevard
Belmont, CA 94002
Sublessee: VIDEONICS, INC., a California corporation
By: /s/ Jim McNeill Date: 7/20/96
-------------------------------- -------------------------------
Jim McNeill, Vice President of
Finance & CFO
Address: 1370 Dell Avenue
Campbell, California 95008
NOTICE TO SUBLESSOR AND SUBLESSEE: CORNISH & CAREY COMMERCIAL, IS NOT AUTHORIZED
TO GIVE LEGAL OR TAX ADVICE; NOTHING CONTAINED IN THIS SUBLEASE OR ANY
DISCUSSIONS BETWEEN CORNISH & CAREY AND SUBLESSOR AND SUBLESSEE SHALL BE DEEMED
TO BE A REPRESENTATION OR RECOMMENDATION BY CORNISH & CAREY COMMERCIAL, OR ITS
AGENTS OR EMPLOYEES AS TO THE LEGAL EFFECT OR TAX CONSEQUENCES OF THIS DOCUMENT
OR ANY TRANSACTION RELATING THERETO. ALL PARTIES ARE ENCOURAGED TO CONSULT WITH
THEIR INDEPENDENT FINANCIAL CONSULTANTS AND/OR ATTORNEYS REGARDING THE
TRANSACTION CONTEMPLATED BY THIS PROPOSAL.
- --------------------------------------------------------------------------------
901 MARINERS ISLAND BOULEVARD, SUITE 125, SAN MATEO, CA 94404
(415) 341 5800 FAX (415) 341 7024
- --------------------------------------------------------------------------------
Page 5 of 6.
[GRAPHIC VIDEONICS 1370 Dell Ave.
OMITTED] The Video Editing Company Campbell, CA 95008
408-866-8300 o FAX: 408-866-4859
February 3, 1996
Steve Peters
20341-170th Ave NE
Woodinville, WA 98072
Dear Steve,
This letter will formalize the offer we have reached. As we had discussed, I
have taken much of the text from our respective e-mails and faxes, so the
following may be choppy, but I think captures the intent and tone of our
discussions and agreements. Let me know if you believe anything is not in
accordance with our agreements. I look forward to a mutually enjoyable and
beneficial relationship.
1. Your title will be Vice President of Research and Development and you will be
an Officer of the Corporation.
2. I think it is worthwhile to include your "Summary of Philosophy" in this
document. You wrote: "I have tried to keep the concerns of the Company in mind.
It will take a team effort to ensure Company growth and I wouldn't want to harm
that team effort by my compensation or incentives. I believe that I will become
a key element in the Company's success and the Company will treat me
accordingly.
My proposed first steps on the job would be to become involved in the testing
and release to manufacturing of the current products. In addition I want to use
all of the current products in making video's at my residence. Together these
actions will allow me to get to know the people involved and the capabilities
and limitations of the current product mix."
3. Base Salary.
Your base salary will be $98K with a guaranteed bonus of $42K the first year.
Guaranteed bonuses will be $38K in year 2 and $34K in year 3.
4. Incentive Bonus
<PAGE>
Page 2
Your thoughts on this are copied below:
"There will be no bonus in yr. 1 (due to move and stock), yr. 2 and on, I will
be eligible for an incentive bonus plan (can be applied to guaranteed Bonus)
that should have a reasonable chance of exceeding the guaranteed bonus by 50%.
Care should be taken to insure my incentives cannot lead to a conflict with
other members of executive team. Some thoughts on incentive bonus possibilities
(possible mixture that is easy to calculate):
Cash Bonus for each product released on Time (Able to ship to customers)
x% of revenue on new products for 1st year of shipments
Profit Sharing in Company
% Engineering productivity increase ($K of revenue per engineer for instance)
My job will be to insure efficiently developed, high-quality, products produced
in a predictable manner, that are perceived as valuable by our customer base.
The incentive program should be based on these attributes. The most immediate
need is predictable schedules through R&D. It is important that these products
be manufacturable however, so I should be measured until the products can be
produced and shipped. The products need to sell and the Company needs to make a
profit so the incentive should also take these factors into account (rather than
solely R&D performance in producing the product). I agree to work out the
specific incentive program after I join. Something to the effect of, as long as
the company is in good financial health and my performance is excellent there is
a reasonable chance for my total compensation to be in the $160,000 range."
Videonics agrees with these concepts.
5. Stock Options
An employee stock option to purchase 50,000 shares of stock will be granted upon
employment at the lowest possible price. To date in January, since we offered
you employment, the lowest price has been $9.75. If the closing stock price is
lower than that between now and February 19, 1996, your option will be granted
at the lower price. Vesting is in steps every six months, at 1/6 the total, for
three years.
You have said:
"I would like to have the opportunity to receive a further option in one year
(or at least before the 3 year Evergreen proposal). I don't expect a guarantee
just a reasonable consideration. It is my belief that this further option could
have
<PAGE>
Page 3
significant near term upside potential and if structured appropriately, could be
valuable to the Company by defining a stretch incentive to be accomplished for
this option."
We agree to consideration of additional options, but without any guarantees. We
may mutually find that there is an interrelationship with incentive
compensation. We agree that if you are terminated within one year after a merger
or buyout your shares will be fully vested.
6. Company life insurance is one and one half times salary. Currently the
maximum amount available is $150,000. If and when the maximum is increased your
salary plus guaranteed bonus will be eligible.
7. Move.
Your thoughts on this are copied below:
"I believe that it could take 4 months to complete the move and during most of
that time I will be maintaining two residences and be away from my family.
During the transition period I will need to travel back and forth (and have my
family travel as appropriate). I propose a suitable 2 bedroom, furnished
apartment for this time period (I am not sure what this would cost). I suspect
this would be one round trip a week with at least 3 trips where we would both
travel (or 19 round trips total). I would bring one of my cars to the Bay Area
at the third trip so would require 2 weeks of a rental car in the Bay Area and
maybe 10 days of rental cars in the Seattle area. I think we should consider the
travel expenses as a business trip until I move into the apartment. At that
point I wouldn't expect meals and laundry etc. to be reimbursed since it would
become equivalent to my current situation."
Your travel costs will be covered as business expenses. We agree to a four month
transition with housing supplied at no cost to you for that time period and
trips approximately as you propose. Your family's travel costs unfortunately
cannot be considered that way and part of the moving expenses will be taxable to
you. We believe federal and state law are the same on moving expenses.
Basically, household moving expenses and direct travel costs are deductible, but
not most other costs. (Federal law changed on this starting in 1994.) We will
reimburse you at cost for deductible expenses and at 1.6 times cost for
reasonable, non-deductible expenses. This covers 37.5% allowance for federal and
state taxes. This should allow your move costs to come out basically a wash.
We do not considered expenses related to selling or buying a home as
reimbursable expenses. We will offer you $10,000 as a moving bonus to help a
little bit with housing costs, payable when you relocate. This bonus must be
repaid if you resign in less than one year.
<PAGE>
Page 4
8. Misc.
You suggested:
"I want to become familiar with all of the current Videonics equipment. This
would require a S-VHS VCR, Hi-8 VCR, and a Macintosh computer. I propose this be
purchased by R&D for tax reasons and that my salary would be reduced by 1/2 the
total cost and I would then own this equipment (I believe it is in both our
interests for me to do this). I estimate this would cost about $5K."
Your equipment proposal is acceptable to us.
9. Severance Option
I think our dialog on this is clear, so I have left it intact. Your quote:
"Although I do not anticipate any problems I think we should at least discuss
the only real risk that I see. That is my relationship with Mark. Mark is key to
the Company. It is critical that Mark is coming up with new product and
technology ideas. It is also critical that these ideas get implemented. If for
some reason Mark and I can't work this out (again I do not think this will
happen, just pointing out that it could) I understand that I would have to go. I
would be willing to give the Company that option up front if we agreed to terms.
It would take me a year to recover fully so I propose 1 years salary (with
guaranteed bonus) and an accelerated vesting of 6 months on my option. This
would be the Company's option and not mine."
My reply. "We agree that you and Mark must work well together, but it is in all
of our interests to make this happen, and we are all responsible if it does not.
We do not think it is right to have accelerated vesting on termination and
haven't done this before. We can offer three months severance if the company
terminates you. We will also agree to one year severance pay if you are
terminated within one year after a merger or buyout."
Your answer: "Mark and I will get along very well. In fact I think we will be an
unstoppable combination. I believe it is in both of our interests to have
discussed the severance issues in advance. Your proposal is acceptable to me."
10. Per our discussions, you will start work on the afternoon of Feb. 19. We
will give you an advance that will approximate your first months salary at that
time, and deduct it from your first three bi-weekly paychecks.
<PAGE>
Page 5
I think that covers all the points we have worked out. Please let me know if
there are any issues to clarify or discuss. I will be in the office this
afternoon and at home 408-255-1707 the rest of the weekend. If not, please sign
indicating your agreement below. Please call before faxing back so I can
maintain confidentiality.
Welcome to Videonics!
Best regards,
/s/ James A. McNeill
- ---------------------------------
James A McNeill, CFO
I accept the offer as outlined.
/s/ Steve Peters
- -----------------------------------
Steve Peters Date
EXHIBIT 10.11
DO NOT DESTROY THIS NOTE: When paid, this note and the Deed of Trust must
be surrendered to the First American Title Insurance Company with request for
reconveyance.
STRAIGHT NOTE
(This Note contains an acceleration clause)
$250,000,000 San Jose, California. January 24, 1997
On or before January 4, 2000, for value received, the undersigned, jointly and
severally promise(s) to pay to Videonics, Incorporated or order, at place
designated by payee, the sum of Two hundred fifty thousand Dollars, with
interest from (coe) until paid, at the rate of six per cent (6%) per annum,
there will be no monthly payments, all due and payable on January 4, 2000 at
which time the entire principal balance with interest due thereon shall be due
and payable in full.
This Note is subject to Section 2966 of the civil code which provides that the
holder of this Note shall give written notice to the trustor or his successor in
interest of prescribed information at least 90 and not more than 150 days before
any balloon payment is due.
Should interest not be so paid, it shall thereafter bear like interest as the
principal, but such unpaid interest so compounded shall not exceed an amount
equal to simple interest on the unpaid principal at the maximum rate permitted
by law. Should default be made in the payment of any installment of interest
when due, the whole sum of principal and interest shall become immediately due
and payable at the option of the holder of this note.
If the trustor shall sell, convey or alienate said property, or any part
thereof, or any interest therein, or shall be divested of this title or any
interest therein in any manner or way, whether voluntarily or involuntarily,
without the written consent of the beneficiary being first had and obtained,
beneficiary shall have the right, at its option, except as prohibited by law, to
declare any indebtedness or obligations secured hereby, irrespective of the
maturity date specified in any note evidencing the same, immediately due and
payable.
Should suit be commenced to collect this note or any portion thereof, such sum
as the Court may deem reasonable shall be added hereto as attorney's fees.
Principal and interest payable in lawful money of the United States of America.
This note is secured by a certain DEED OF TRUST to the FIRST AMERICAN TITLE
INSURANCE COMPANY, a California corporation, as TRUSTEE.
We hereby certify this to be a true
copy of the original
FIRST AMERICAN TITLE GUARANTY COMPANY
By __________________________________
/s/ Steve L. Peters /s/ Linda M. Peters
- ---------------------------- ---------------------------------------
Steve L. Peters Linda M. Peters
Exhibit 11
VIDEONICS, INC.
COMPUTATION OF EARNINGS PER SHARE (1)
(In thousands, except per share amounts)
Year Ended December 31
-----------------------------
1996 1995 1994
---- ---- ----
Net income $744 $3,746 $5,993
Common shares outstanding at end of period 5,705 5,518 5,351
Adjustments to reflect weighted average for
shares issued during period (89) (105) (1,534)
Adjustments for options calculated under the
treasury stock method 317 378 448
Common stock equivalents issued pursuant to
SAB 83 (2) - - 62
Common and equivalent shares outstanding 5,933 5,791 4,324
Net income per share $0.13 $0.65 $1.39
(1)This schedule should be read with Notes 2 of Notes to Consolidated Financial
statements.
(2)Pursuant to the Securities and Exchange Commission's Staff Accounting
Bulletin 83, all securities issued during the twelve month period prior to
filing a registration statement for the initial public offering (November 29,
1994), are included in the calculation of common stock equivalents as if
outstanding for all periods prior to the effective date of the initial public
offering (December 15, 1994) even if anti-dilutive. The common stock equivalents
of options are computed under the treasury stock method, using the estimated
initial public offering price and applicable exercise prices.
(3)There is no difference between primary and fully diluted net income per
share.
70
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Videonics, Inc. on Forms S-8 (File Nos. 333-06665 and 333-21003) of our report
dated January 31, 1997, on our audits of the consolidated financial statements
and financial statement schedule of Videonics, Inc. and subsidiaries as of
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, which report is included in this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
-----------------------------------------
COOPERS & LYBRAND L.L.P.
San Jose, California
March 18, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S INCOME STATEMENT AND BALANCE SHEET DATED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,538
<SECURITIES> 1,500
<RECEIVABLES> 3,529
<ALLOWANCES> (123)
<INVENTORY> 9,309
<CURRENT-ASSETS> 23,639
<PP&E> 4,512
<DEPRECIATION> (2,475)
<TOTAL-ASSETS> 27,958
<CURRENT-LIABILITIES> 2,227
<BONDS> 0
<COMMON> 20,297
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 27,958
<SALES> 29,195
<TOTAL-REVENUES> 29,195
<CGS> 15,266
<TOTAL-COSTS> 15,266
<OTHER-EXPENSES> 13,528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 762
<INCOME-TAX> 18
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 744
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
