SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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)
Registrant's telephone number, including area code: (408) 866-8300
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 [ ]
As of July, 31, 1998, there were 5,854,149 shares of the Registrant's
Common Stock outstanding.
This quarterly report on form 10-Q, including all exhibits, contains 11 pages,
of which this is page 1. The exhibit index is located on page 10 of this report.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
VIDEONICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 5,907 $ 5,467 $ 10,626 $ 9,968
Cost of revenues 3,470 3,177 6,447 6,719
-------- -------- -------- --------
Gross profit 2,437 2,290 4,179 3,249
-------- -------- -------- --------
Operating expenses:
Research and development 1,189 1,607 2,571 3,590
Selling and marketing 1,780 1,925 3,421 3,711
General and administrative 351 407 775 1,006
Amortization of intangibles 98 197
-------- -------- -------- --------
3,320 4,037 6,767 8,504
-------- -------- -------- --------
Operating loss (883) (1,747) (2,588) (5,255)
-------- -------- -------- --------
Other income, net 10 78 9 169
-------- -------- -------- --------
Loss before income
taxes (873) (1,669) (2,579) (5,086)
Benefit from income
taxes (32) (448) (32) (1,453)
-------- -------- -------- --------
Net loss $ (841) $ (1,221) $ (2,547) $ (3,633)
======== ======== ======== ========
Net loss per common share and per
common share - assuming dilution $ (0.14) $ (0.21) $ (0.44) $ (0.63)
======== ======== ======== ========
Shares used in computing net loss per
common share and per common share
- assuming dilution 5,831 5,736 5,810 5,733
======== ======== ======== ========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
VIDEONICS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
-------- --------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 924 $ 992
Accounts receivable, net 1,794 1,291
Inventories 8,713 9,938
Recoverable income taxes 2 550
Prepaids and other current assets 114 219
-------- --------
Total current assets 11,547 12,990
Property and equipment, net 2,033 2,438
Other assets 266 266
-------- --------
Total assets $ 13,846 $ 15,694
======== ========
LIABILITIES
Current liabilities:
Loan payable to shareholder $ 600
Accounts payable 1,624 $ 1,442
Accrued expenses 1,531 1,646
-------- --------
Total current liabilities 3,755 3,088
-------- --------
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized: 30,000 shares
Issued and outstanding: 5,854 shares at
June 30, 1998 and 5,785 shares at
December 31, 1997 20,645 20,613
Accumulated deficit (10,554) (8,007)
-------- --------
Total shareholders' equity 10,091 12,606
-------- --------
Total liabilities and shareholders' equity $ 13,846 $ 15,694
======== ========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
VIDEONICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Six Months Ended
June 30,
---------------------
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net cash used in operating activities (495) (2,914)
------- -------
Cash flows from investing activities:
Purchase of property and equipment (205) (674)
Proceeds from sales of marketable securities -- 1,500
------- -------
Net cash provided by (used in) investing activities (205) 826
------- -------
Cash flows from financing activities:
Proceeds from issuance of loans payable to shareholder 619 --
Repayments on loans payable to shareholder (19) --
Proceeds from issuance of common stock 32 47
------- -------
Net cash provided by financing activities 632 47
------- -------
Decrease in cash and cash equivalents (68) (2,041)
Cash and cash equivalents at beginning of year 992 6,538
------- -------
Cash and cash equivalents at end of period $ 924 $ 4,497
======= =======
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
4
<PAGE>
VIDEONICS, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. The condensed financial statements at June 30, 1998 and for the six
month period then ended are unaudited (except for the balance sheet
information as of December 31, 1997, which is derived from the
Company's audited financial statements) and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. The
condensed financial statements should be read in conjunction with the
financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997. The results of operations for this
six month period ended June 30, 1998 are not necessarily indicative of
the results for the year ending December 31, 1998, or any future
interim period.
2. Inventories comprise (in thousands):
June 30, December 31,
1998 1997
------- -------
(unaudited)
Raw materials $ 6,866 $7,649
Work in process 431 437
Finished goods 1,416 1,852
------- -------
$ 8,713 $9,938
======= ======
3. Loans Payable to Shareholder:
During the quarter ended March 31, 1998, the Company issued a secured
promissory note due to a certain shareholder of the Company for
repayment of a loan to the Company in the principal amount of $619,000.
The principal amount bore simple interest at a rate of 8.5% per year.
Principal and accrued interest were due upon demand. On April 3, 1998,
the Company repaid $19,000 of principal and all accrued interest
through March 31, 1998 and replaced this note with an unsecured loan
from the same shareholder. The loan, in the amount of $600,000, bore
interest at a rate of 8.5% per year and was initially due on July 3,
1998. In July 1998, the loan was renewed under the same terms, and is
due on October 16, 1998.
4. Recent Accounting Pronouncement:
In June of 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities", (SFAS 133) which establishes accounting and reporting
standards for derivative instruments, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. Management has evaluated the effects of this
standard and believes there will be no material impact on the Company's
financial position or results of operations. The Company will adopt
SFAS 133 as required for its first quarterly filing of the year 2000.
5
<PAGE>
ITEM 2. 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 expressed or forecasted in the forward looking statements. Factors that
might cause such a difference include, but are not limited to, the factors set
forth in this Form 10-Q, in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and in the Company's other public filings.
Results of Operations
Net Revenues. Net revenues increased approximately 8% in the second
quarter of 1998 compared to the second quarter of 1997 and 7% in the first six
months of 1998 compared to the first six months of 1997. The increase is
primarily attributable to sales of MXPro, which began shipping in April 1998.
Gross Profit. Gross profit increased approximately 6% in the second
quarter of 1998 compared to the second quarter of 1997 and 29% in the first six
months of 1998 compared to the first six months of 1997. Gross profit, as a
percentage of net revenues, were approximately 41% in the second quarter of 1998
compared to approximately 42% in the second quarter of 1997 and approximately
39% in the first six months of 1998 compared to approximately 33% in the first
six months of 1997. Gross margins between six month periods would have been
similar if not for cost of revenue adjustments in the first quarter of 1997
totaling $733,000 to inventory reserves for components rendered obsolete by
product revisions and to warranty reserves for new product hardware updates.
Research and Development. Research and development expenses decreased 26%
and 28%, respectively, between the quarterly and six month comparison periods in
fiscal years 1997 and 1998 and decreased as a percentage of net revenues. The
decreased expenses were primarily due to a reduction of personnel and the
reduced use of consultants.
Selling and Marketing. Selling and marketing expenses decreased 8%
between the second quarter of 1997 and the second quarter of 1998 and 8% between
the first six months of 1997 and the first six months of 1998. The decrease is
related primarily to a reduction of personnel.
General and Administrative. General and administrative expenses decreased
14% between the quarterly comparison periods and decreased 23% between the six
month comparison periods in fiscal years 1997 and 1998. The decrease relates
primarily to lower administrative costs.
Interest Income The Company had net interest income of $10,000, in the
second quarter of 1998 compared to net interest income of $78,000 in the second
quarter of 1997 representing a decrease of 87%. This decrease is primarily due
to interest expense calculated on shareholder loans offset by interest income on
lower cash balances available for investment and interest income from a long
outstanding state tax refund claim.
Benefit from Income Taxes. During the second quarter of 1998 the Company
recorded an income tax benefit of $32,000 as a result of a state tax refund.
During the first six months of 1998, the Company maintained a 100% valuation
allowance against its deferred tax assets due to the uncertainty surrounding the
realization of such assets. If it is determined that it is more likely than not
that the deferred tax assets are realizable, the valuation allowance will be
reduced. During the first six months of 1997, the Company had recorded a tax
benefit totaling $1.5 million. This benefit was based on a 30% tax rate which
had been calculated based on anticipated net income for the year.
6
<PAGE>
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, MXPro, and Effetto
Pronto in 1996, 1997 and 1998.
Due primarily to the factors noted above, the Company has experienced
substantial volatility in its operations. The Company's future earnings and
stock price may continue to 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 the Company's 1997 Form 10-K
section entitled "Business - Research and Development".
Liquidity and Capital Resources
From the Company's inception until its initial public offering in
December 1994, which resulted in net proceeds to the Company of $15.8 million,
the Company financed its operations through private sales of equity, shareholder
loans, cash flow from operations, and bank borrowings. In January of 1998, the
Company again financed its operations through a shareholder loan totaling
$619,000. As of June 30, 1998, the Company had $924,000 of cash and cash
equivalents.
Net cash used by operations was $495,000 for the first six months ended
June 30, 1998 compared to net cash used in operations of $2.9 million for the
same period in 1997. The use of cash from operating activities during the first
six months of 1998 is primarily due to a net loss before depreciation, an
increase in receivables, offset partially by a decrease in inventories and
recoverable income taxes. The decrease in cash from operating activities during
the first six months ended June 30, 1997 is primarily due to a net loss before
the provisions for doubtful accounts, excess and obsolete inventories, and
depreciation and amortization, an increase in inventories, an increase in
recoverable income taxes, offset partially by a decrease in receivables. Net
cash used by investing activities for the first six months ended June 30, 1998
was $205,000, due to property and equipment expenditures, primarily for
computers, software and engineering equipment used in research and development
and other activities. Net cash provided by investing activities for the first
six months ended June 30, 1997 was $826,000, primarily due to the sale of
marketable securities offset partially by property and equipment expenditures,
primarily for computers, software and engineering equipment used in research and
development and other activities. Net cash provided by financing activities
during the first six months of 1998 was $632,000, primarily because of
shareholder loans and the receipt of cash from the exercise of the stock options
issued under the Company's Stock Option Plans. Net cash provided by financing
activities during the first six months of 1997 was $47,000, due entirely to the
receipt of cash from the exercise of the stock options issued under the
Company's Stock Option Plan.
The Company believes that its cash balances, together with its operating
cash flows and shareholder borrowings will be sufficient to meet the Company's
requirements for working capital and capital expenditures through the end of
1998.
7
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Document
---------- -----------------------
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended June 30,
1998.
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
VIDEONICS, INC.
----------------------------
Registrant
August 6, 1998
----------------------------
Date
By:/s/ James A. McNeill
----------------------------
James A. McNeill
Vice President of Finance,
Chief Financial Officer and
Assistant Secretary
(Principal Financial and Accounting
Officer and Authorized Signer)
9
<PAGE>
INDEX OF EXHIBITS
Exhibits:
27 Financial Data Schedule..................................11
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S INCOME STATEMENT AND BALANCE SHEET DATED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-30-1998
<CASH> 924
<SECURITIES> 0
<RECEIVABLES> 1,794
<ALLOWANCES> 0
<INVENTORY> 8,713
<CURRENT-ASSETS> 11,547
<PP&E> 2,033
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,846
<CURRENT-LIABILITIES> 3,755
<BONDS> 0
0
0
<COMMON> 20,645
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,846
<SALES> 10,626
<TOTAL-REVENUES> 10,626
<CGS> 6,447
<TOTAL-COSTS> 6,447
<OTHER-EXPENSES> 6,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,579)
<INCOME-TAX> (32)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3841)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
