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, 1997
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 2, 1998, the aggregate market value of Common Stock held by
non-affiliates of the Registrant was approximately $8,932,053.
As of March 2, 1998, there were 5,784,899 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Materials from the Registrant's definitive Proxy Statement relating to
its 1998 Annual Meeting of Shareholders to be held on or about August 19, 1998
(the "Proxy Statement") have been incorporated by reference into Part III, of
this Report.
<PAGE>
<TABLE>
VIDEONICS, INC.
<CAPTION>
TABLE OF CONTENTS
<S> <C>
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..48
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.......................................48
ITEM 11. EXECUTIVE COMPENSATION................................................................48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................49
</TABLE>
2
<PAGE>
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. As of December 31, 1997, more than
460,000 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.
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
3
<PAGE>
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 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
4
<PAGE>
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.
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
5
<PAGE>
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 emerging
markets. The Company believes that distributing products through domestic
dealers and international wholesalers is a cost-effective method of reaching
potential product users.
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.
<TABLE>
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.
<CAPTION>
PROPRIETARY ASIC AND SOFTWARE CONTENT OF SELECTED PRODUCTS
Approximate Approximate Lines Year
Product ASIC Gate Count of Software Code Shipped
------- --------------- ---------------- -------
<S> <C> <C> <C>
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
Effetto Pronto 250,000 600,000 1997
</TABLE>
6
<PAGE>
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 $34,700 for certain broadcast
products.
Videographer
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, the Video
Post-Production Product of The Year 1994-1995 by Video Camera Magazine U.K, and
the 1997 Audio Video International Product of The Year Award for Special Effects
Generator. The Digital Video Mixer has a U.S. suggested retail price of $1,199.
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
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. The Video TitleMaker 3000
received the 1997 Consumer Electronics Show Innovations Award. TitleMaker 3000
carries a U.S. suggested retail price of $799 and is available in other language
versions.
Personal TitleMaker. First shipped in November 1997, the Personal
TitleMaker is a character generator primarily aimed at the camcorder enthusiasts
looking for an entry-level titler. The Personal TitleMaker offers its users: a
choice of 7 high-resolution fonts; over 1,000,000 colors for titles, backgrounds
and borders; fades, rolls and crawls; ability to superimpose over video or
colored or patterned backgrounds; full set of accented and international
characters and a GPI trigger input allows remote triggering of titles from
external controllers, such as Videonics' Thumbs Up editor and Edit Suite.
Personal TitleMaker carries a U.S. suggested retail price of $399.
7
<PAGE>
MediaMotion. MediaMotion is a machine-control plug-in software product
for non-linear (disk-based) video editing applications including Adobe Premiere.
MediaMotion adds the ability to control VCRs, camcorders and other GPI
triggerable devices from inside Adobe Premiere and Ulead's MediaStudio Pro. 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 Windows operating systems at a U.S. suggested retail price of
$179.
Python. First shipped in November 1997, Python captures, digitally
compresses, and plays back full-motion video from any video source including
camcorders, VCRs, and cameras. Python is an external video capture device which
allows PC and laptop users to send video e-mails, create video Web pages, and
add full-motion video to multimedia presentations. Python creates highly
compressed video files in real time, using the industry-standard MPEG-1 format.
Python also captures high-resolution JPEG still pictures. Software for viewing
MPEG video and JPEG still pictures is widely available on most PCs. It has a
U.S. suggested retail price of $349.
Broadcast
Effetto Pronto. Shipped beta version units in limited quantities in the
fourth quarter of 1997. Effetto Pronto is slated for the video industry's most
creative professionals who use desktop graphics and video production tools. It
combines software with add-in hardware for real-time rendering of video effects.
With near-real-time previewing of effects, Effetto Pronto allows significant
increases in productivity and frees the creative process by allowing multiple
iterations and rapid re-edits. Designed to be platform independent, Effetto
Pronto consists of Effetto, a QuickTime based compositing software and Pronto, a
dedicated resolution independent PCI hardware accelerator card. The Pronto PCI
accelerator card can process almost one million pixels of film, video, graphics
and CG elements in real-time.
Effetto Pronto offers virtually unlimited creative control, with effects
and functions previously unavailable in an integrated compositing package which
includes: chrominance and luminance keying; a full complement of special
effects; and a professional character generator with complete animation control
over every letter of text.
The Videonics' Effetto Pronto system will have a U.S. suggested retail
price of $4,995.
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
(10-bit 4:2:2 digital video) anti-aliased titles and offers the character,
graphics display, and formatting features supported by the PostScript(TM)
display technology. Two high-end versions of PowerScript were added in 1997;
PowerScript Studio has composite and Y/C video inputs and outputs while
PowerScript Studio Component offers analog component inputs and outputs, in
addition to composite and Y/C. Both models are available in PAL and NTSC
versions.
PowerScript is a standalone character generator - 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
8
<PAGE>
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.
The Videonics' PowerScript product line has a U.S. suggested retail price
of $3,000 to $5,000 depending on the model.
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.
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 applications
where the highest 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. The Nova
StudioFrame Series range in price from $1,345 to $34,700 depending on the
configuration.
9
<PAGE>
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 19
different U.S. trade shows during 1997, including the Consumer Electronics Show,
the National Association of Broadcasters, and COMDEX.
The Company's standalone products carry a standard two-year warranty on
both parts and labor. Each of the Company's computer based products carry either
a two-year warranty on hardware and a 90 day warranty on software or a one-year
warranty on both hardware and software. 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 1997, 1996, and 1995, respectively, sales in
the United States accounted for approximately 67%, 58%, and 51% 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 eight employees who service
and support its international private label customers and country specific
distributors. The Company's international distributors also 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
10
<PAGE>
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, such as Python and Effetto Pronto, use a general
purpose computer as their control element. These products are sold through VARs
and retailers who may 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.
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. The
Company's private label sales decreased significantly in 1997.
For 1997, 1996, and 1995, 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 and has had in the past 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, 1997, the Company employed 33 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 four
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 1997, 1996,
and 1995, the Company invested $7.0 million, $5.0 million, and $3.1 million,
respectively, constituting 35%, 17%, and 9% 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 then use
to prototype subsequent new products.
As of December 31, 1997, the Company employed 46 hardware and software
engineers with technical skills in design and development of ASICs, digital or
analog video signal generation-processing, or embedded software.
During 1997, the Company continued to experience substantial delays in
completing the successful development of products. The Company completed and
began shipping Python, Personal TitleMaker and a beta version of Effetto Pronto
in the fourth quarter of 1997. Shipments of Python and Effetto Pronto occurred
later than originally planned, resulting in a significant revenue shortfall for
1997, which, in turn, significantly affected profitability as the
12
<PAGE>
Company suffered substantial operating losses. MX Pro, the Company's advanced
Digital Mixer, introduced in September of 1997 and scheduled to begin shipments
in the fourth quarter of 1997, has not shipped as of March 23, 1998. The
PowerScript Character Generator in the NTSC video format, introduced in 1995,
was completed for shipment in September of 1996. After extensive field use,
major revisions of PowerScript's software were made in 1997, with additional
improvements being made in the first quarter of 1998. 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 product development delays which would have an adverse effect on the
profitability of its 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. Delays in new product
development have had an adverse material impact on the Company's growth in 1995,
1996 and 1997. Similar adverse effects on the Company's results of operations
can be expected until new products are successfully introduced and accepted by
end users. 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, 1996
and 1997, 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, 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, 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
13
<PAGE>
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. In 1997, the Company reached an
agreement with a third party patent holder in which royalties are payable on
certain of the Company's products. Payment of these royalties 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 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.
14
<PAGE>
Employees
As of March 2, 1998, the Company had 122 full-time employees, including
38 in research and development, 37 in sales and marketing, 36 in operations, and
11 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
February 28, 1999. 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 and under a lease which expires on
October 31, 1998. The Company has an administrative, sales and marketing and
research and development 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.
No matter was submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year ended December 31, 1997.
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
<TABLE>
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 years ended December 31, 1997 and 1996.
<CAPTION>
Q1 Q2 Q3 Q4
-- -- -- --
<S> <C> <C> <C> <C>
FY97 High $ 9.50 $ 7.50 $ 5.88 $7.13
Low $ 4.13 $ 3.82 $ 4.88 $ 4.13
FY96 High $13.00 $12.25 $10.88 $10.00
Low $ 7.00 $ 7.50 $ 7.75 $ 7.25
</TABLE>
As of March 2, 1998, there were approximately 2,200 holders of the
Company's Common Stock. The closing sales price of the Company's Common Stock on
March 2, 1998 was $2.875 per share.
Other than the distributions to S corporation shareholders for certain
income tax liabilities associated with the Company's 1994 earnings through
December 14, 1994,, 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>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
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, 1997, and with respect to the balance sheets at December 31, 1997,
1996, 1995, 1994 and 1993 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, 1997 and 1996, and the statement of operations
for each of the three years in the period ended December 31, 1997 and the
independent auditors' report thereon, are included in Item 8 of this Report.
<CAPTION>
Year Ended December,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues $19,955 $29,195 $33,561 $31,498 $13,885
Operating income (loss) (12,984) (3) 401 4,811 5,627 809
Net income (loss) (13,441) (3) 744 3,746 5,993 (1) 605
Net income (loss) per share (2.34) (3) 0.13 0.65 1.39 (1) 0.16
Net income (loss) per share,
excluding charge for
purchased research and development (2.34) (3) 0.13 0.88 (2) 1.39 (1) 0.16
Shares used in computing per share
amounts 5,744 5,933 5,791 4,324 3,842
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Balance Sheet Data:
Working capital (deficiency) $ 9,902 $21,412 $20,127 $18,394 ($493)
Total assets 15,694 27,958 27,350 22,279 5,524
Shareholders' equity (deficit) 12,606 25,731 24,149 19,403 214
Dividends declared per share (4) - - - 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.
(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) Results for 1997 include: a $1.9 million write-off of intangible assets
related to Nova Systems; a $1.4 million increase in inventory reserves for
components rendered obsolete by product revisions of which approximately
$458,000 related to PowerScript and $265,000 related to KUB Systems and
$700,000 related to obsolete and slow moving assets at Nova Systems; a
$274,000 increase in warranty reserves for PowerScript hardware updates; a
tax charge of $5.9 million due to the establishment of a valuation
allowance against the company's deferred tax assets; and a $100,000 charge
for the reduction of approximately 12 percent of the company's work force.
The total of these charges equals $9.6 million.
(4) 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 capture, 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 1995, the Company improved its 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
approximately $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. With 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 and a delay in bringing additional new products to market,
the Company expected losses for the first quarter of 1997, with results for the
remainder of the year dependent on planned shipment and customer acceptance of
new products.
In 1997, the Company continued to improve the PowerScript Character
Generator. New versions of the operating software which enhanced the user
interface and operating speed of the product were released in 1997. Signal
timing issues were addressed with the introduction of two new higher priced
versions of PowerScript (PowerScript Studio and PowerScript Studio Component)
targeted at higher end customers. In 1997, the Company announced four major new
products which were expected to ship in 1997: Effetto Pronto, MXPro, Python and
Personal TitleMaker. As of December 31, 1997, the Company had brought Python and
Personal TitleMaker to market in commercial quantities. Since Python and
Personal TitleMaker were shipped in the fourth quarter of 1997, the first three
quarters of 1997 did not contain revenues from any of the aforementioned new
products. With additional costs in Research and
19
<PAGE>
Development and Sales and Marketing related to the Company's diversification
into the broadcast and desktop markets, declining sales of the Company's older
Videographer products and delays in shipment of new products, the Company had
operating losses in each quarter of 1997. The Company expects losses during its
first and second quarter of 1998, with results for the remainder of the year
dependent on planned shipment and customer acceptance of new products. To reduce
expenses, the Company reduced its personnel by twelve percent on January 15,
1998.
<TABLE>
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:
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 69.7 52.3 51.1
Gross profit 30.3 47.7 48.9
Operating expenses
Research & development 34.8 17.2 9.4
Selling & marketing 40.3 23.1 15.4
General & administrative 8.9 4.7 3.6
Amortization of intangible assets 2.0 1.3 0.3
Write-off of intangible assets 9.4 - -
Charge for purchased R&D - - 5.8
----- ----- -----
Total operating expenses 95.4 46.3 34.5
----- ----- -----
Operating income (loss) (65.1) 1.4 14.4
Other income, net 1.3 1.2 2.1
----- ----- -----
Income (loss) before income taxes (63.8) 2.6 16.5
Provision for income taxes 3.6 0.1 5.3
----- ----- -----
Net income (loss) (67.4)% 2.5% 11.2%
===== ===== =====
</TABLE>
Comparison of Years Ended December 31, 1997 and 1996
Net Revenues. Net revenues decreased 32% to $20.0 million in 1997, from
$29.2 million in 1996. This decrease is primarily attributable to reduced sales
of older Videographer products, and the absence of major new product sales
during the first three quarters of the year. International revenues for 1997
were $6.6 million or 33% of net revenues compared to $12.3 million or 42% of net
revenues in 1996. The percentage decrease in international revenue in 1997 is
due primarily to decreased sales of older Videographer products and delays in
the introduction of Python and other new products in the international market.
Gross Profit. Gross profit decreased 57% to $6.1 million in 1997 from
$13.9 million in 1996. Gross profit, as a percentage of net revenues, decreased
to 30% in 1997 from 48% in 1996. The percentage decrease in gross profit is
principally attributable to charges for the following: a $1.4 million increase
in inventory reserves for components rendered obsolete by product revisions of
which approximately $458,000 related to PowerScript, $265,000 related to KUB
Systems and $700,000 related to obsolete and slow moving assets at Nova Systems;
and a $274,000 increase in warranty reserves for PowerScript hardware updates.
Additionally, fixed manufacturing overhead, such as salaries and facilities
costs, have been spread over lower revenues.
Research and Development: Research and development expenses increased 38%
to $7.0 million during 1997 compared to $5.0 million in 1996, and increased as a
percentage of net
20
<PAGE>
revenues to 35% in 1997 from 17% in 1996. The increased expenses were primarily
due to the Company's hiring of additional hardware and software engineers who
are working on the development of the Company's new products, combined with
increased salary levels. In addition, research and development expenses include
the personnel of KUB Systems for the full 1997 year compared to only seven
months in 1996. The Company anticipates that research and development expenses
should decrease slightly in 1998 due to reductions in personnel and decreased
usage of consultants and should also decline as a percentage of net revenues as
sales of new products take hold and increase the overall net revenues of the
Company.
Selling and Marketing. Selling and marketing expenses increased 19% to
$8.0 million in 1997 compared to $6.7 million in 1996, and increased to 40% in
1997 compared to 23% in 1996, 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 and the expenses of the German sales office for
the full year compared to only three months of 1996.
General and Administrative. General and administrative expenses increased
30% to $1.8 million in 1997 compared to $1.4 million in 1996, and increased to
9% in 1997 compared to 5% in 1996 as a percentage of net revenues. This increase
was primarily due to a charge of $375,000 to bad debt reserves for specific
accounts, the inclusion of KUB Systems expenses for the full 1997 year compared
to only seven months in 1996, and increased salary levels.
Write-off of Intangibles: In 1997, the Company wrote-off the remaining
unamortized value of the purchased technology and goodwill established in
connection with the acquisition of Nova Systems. The write-off totaled $1.9
million and was primarily due to continued losses and lack of commercially
successful new product introductions.
Interest Income, net. Interest income decreased 28% to $261,000 in 1997
compared to $361,000 in 1996, primarily as a result of a significantly lower
average cash balance.
Provision for Income Taxes. At December 31, 1997 the Company incurred a
tax charge of $718,000 on a pretax loss of $12.7 million. This charge was the
result of the establishment of a $5.9 million valuation allowance against the
Company's deferred tax assets offset partially by an income tax benefit of $4.6
million the Company recorded on its pretax loss. The Company has established a
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. In 1996, the 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 its 32% rate for 1995. The rate of 2%
for 1996 was primarily the result of higher than expected federal and state
research tax credits on significantly increased research and development
spending, and lower than expected taxable income.
Factors That May Affect Future Results of Operations: The Company
believes its future results of operations will likely 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, Effetto Pronto, MX
Pro and Python.
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
21
<PAGE>
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".
Year 2000 Issues: The Year 2000 problem is the result of computer
programs being written using two digits rather than four to define the
applicable year. The Company's plan for the Year 2000 problem entails the
research and testing of its computer systems. The plan calls for compliance
verification with external vendors supplying the Company's software. To date,
the Company has not encountered any material Year 2000 issues concerning its
respective computer programs. The Company plans to complete its Year 2000
research and testing by the end of 1998. All costs associated with carrying out
the Company's plan for the Year 2000 problem are being expensed as incurred. The
costs associated with the Year 20000 problem, as presently estimated, are not
expected to have a material adverse effect on the Company's business, financial
condition and results of operations.
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.
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.
22
<PAGE>
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.
<TABLE>
Quarterly Results of Operations
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>
1997 1996
---------------------------------- ----------------------------------
(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 $4,501 $5,467 $5,360 $4,627 $7,059 $7,055 $6,770 $8,311
Gross profit 959 2,290 2,444 362 3,501 3,422 3,219 3,786
Operating income (loss) (3,508) (1,747) (1,707) (6,022) 604 236 (41) (399)
Net income (loss) (2,412) (1,221) (1,168) (8,640) 449 212 31 52
Net income (loss) per share (0.42) (0.21) (0.20) (1.50) 0.08 0.04 0.01 0.01
Shares used in computing per
share amounts 5,730 5,736 5,741 5,772 5,900 5,946 5,942 5,946
- ----------
</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 1997 and 1996, 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, 1997, the Company's
principal source of liquidity is cash of $992,000 dollars. In January 1998, the
Company borrowed $619,000 from a major shareholder at an interest rate of 8.5
percent, terms which the Company considered more favorable than those it could
obtain from other commercial sources.
23
<PAGE>
Operating Activities. In 1997, net cash used in operating activities was
$5.6 million, resulting primarily from an operating loss of $6.6 million after
adjusting for non-cash items, an increase in inventories of $2.3 million, offset
by a decrease in accounts receivable of $1.7 million. Inventories increased
primarily in anticipation of new product shipments and lower than expected
shipments of new products in 1997. Receivables decreased primarily because of
decreased sales. 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 $203,000, 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 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.
Investing Activities. Capital equipment expenditures in 1997, 1996 and
1995 were $1.6 million, $1.3 million, and $958,000 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 1998. In 1997, the Company had redemptions of $1.5 million of
marketable securities. 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.
Financing Activities. In 1997, the Company received $154,000 from the
exercise of stock options under the Company's stock option plan. 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.
The Company believes that its current cash, borrowings from a
shareholder, 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 1998.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Balance sheets of the Company as of December 31, 1997 and 1996 and
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997, 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
as of December 31, 1997 and 1996 and
for each of the three years
in the period ended December 31, 1997
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, 1997 and 1996, and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
San Jose, California
January 30, 1998
27
<PAGE>
<TABLE>
VIDEONICS, INC.
CONSOLIDATED BALANCE SHEETS, December 31, 1997 and 1996
(in thousands)
<CAPTION>
1997 1996
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 992 $ 6,538
Marketable securities 1,500
Accounts receivable, net 1,291 3,406
Inventories 9,938 9,309
Deferred income taxes 1,299
Prepaid income taxes 550 1,094
Prepaids and other current assets 219 493
-------- --------
Total current assets 12,990 23,639
Property and equipment, net 2,438 2,037
Other assets 266 14
Intangible assets, net 2,268
-------- --------
Total assets $ 15,694 $ 27,958
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 1,442 $ 1,090
Accrued expenses 1,646 1,137
-------- --------
Total current liabilities 3,088 2,227
-------- --------
Commitments and contingencies (Note 7)
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized: 10,000 shares in 1997 and 1996;
Issued and outstanding: None
Common stock, no par value:
Authorized: 30,000 shares in 1997 and 1996
Issued and outstanding: 5,785 shares in 1997 and 5,705
shares in 1996
20,613 20,297
Retained earnings (accumulated deficit) (8,007) 5,434
-------- --------
Total shareholders' equity 12,606 25,731
-------- --------
Total liabilities and shareholders' equity $ 15,694 $ 27,958
======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
28
<PAGE>
<TABLE>
VIDEONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net revenues $ 19,955 $ 29,195 $ 33,561
Cost of revenues 13,900 15,266 17,160
------------- ------------- -------------
Gross profit 6,055 13,929 16,401
------------- ------------- -------------
Operating expenses:
Research and development 6,951 5,027 3,138
Selling and marketing 8,041 6,741 5,181
General and administrative 1,779 1,367 1,208
Amortization of intangible assets 393 393 98
Write-off of intangible assets 1,875
Charge for purchased in-process research and development 1,965
------------- ------------- -------------
19,039 13,528 11,590
------------- ------------- -------------
Operating income (loss) (12,984) 401 4,811
Interest, net 261 361 732
------------- ------------- -------------
Income (loss) before income taxes (12,723) 762 5,543
Provision for income taxes 718 18 1,797
------------- ------------- -------------
Net income (loss) $ (13,441) $ 744 $ 3,746
============= ============= =============
Net income (loss) per share - basic $ (2.34) $ 0.13 $ 0.69
============= ============= =============
Shares used in per share calculation - basic 5,744 5,616 5,413
============= ============= =============
Net income (loss) per share - diluted $ (2.34) $ 0.13 $ 0.65
============= ============= =============
Shares used in per share calculation - diluted 5,744 5,933 5,791
============= ============= =============
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
29
<PAGE>
<TABLE>
VIDEONICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the three years in the period ended December 31, 1997
(in thousands, except per share data)
<CAPTION>
Retained
Common Stock Earnings
----------------------- (Accumulated Shareholders'
Shares Amount Deficit) Equity
----- ----------- ------------ -----------
<S> <C> <C> <C> <C>
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 3746 3,746
----- ----------- ------------ -----------
Balances, December 31, 1995 5,518 19,459 4690 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
options 690 690
Net income 744 744
----- ----------- ------------ -----------
Balances, December 31, 1996 5,705 20,297 5,434 25,731
Issuance of common stock from exercise of
options 80 154 154
Amortization of deferred compensation 36 36
Tax benefit from exercise of nonqualified stock
options 126 126
Net loss (13,441) (13,441)
----- ----------- ------------ -----------
Balances, December 31, 1997 5,785 $ 20,613 $ (8,007) $ 12,606
===== =========== ============ ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
30
<PAGE>
<TABLE>
VIDEONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(13,441) $ 744 $ 3,746
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss on disposal of property and equipment 76
Depreciation and amortization 1,563 1,190 788
Provision for doubtful accounts 375 (10) 28
Provision for excess and obsolete inventories 1,641 (240) 336
Charge for purchased in-process research and development 1,965
Deferred income taxes 1,299 111 (760)
Write-off of intangible assets 1,875
Changes in assets and liabilities:
Accounts receivable 1,740 428 (1,713)
Inventories (2,270) (3,232) (3,305)
Prepaid income taxes 670 (150) 563
Prepaids and other current assets 274 (203) (37)
Other (252) (3) 12
Accounts payable 352 (136) (690)
Accrued expenses 509 97 (594)
-------- -------- --------
Net cash provided by (used in) operating activities (5,589) (1,404) 339
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,611) (1,303) (958)
Net cash paid in acquisition (350) (3,920)
Purchases of marketable securities (1,500) (4,708)
Proceeds from marketable securities 1,500 4,708
Acquisition of intangible assets (94)
-------- -------- --------
Net cash provided by (used in) investing activities (111) 1,555 (9,680)
-------- -------- --------
Cash flows from financing activities:
Repayment of notes payable (1,000)
Proceeds from issuance of common stock 154 100 135
-------- -------- --------
Net cash provided by (used in) financing activities 154 (900) 135
-------- -------- --------
Decrease in cash and cash equivalents (5,546) (749) (9,206)
Cash and cash equivalents at beginning of year 6,538 7,287 16,493
-------- -------- --------
Cash and cash equivalents at end of year $ 992 $ 6,538 $ 7,287
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 31 $ 16
Income taxes $ 5 $ 44 $ 1,924
Supplemental schedule of non-cash financing activities:
Tax benefit from exercise of nonqualified stock options $ 126 $ 690 $ 817
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
31
</TABLE>
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED 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 CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
2. Summary of Significant Accounting Policies, continued:
Advertising, continued:
Advertising expense for the period ended December 31, 1997, 1996, and
1995 was $1,412,000, $947,000, and $502,000, respectively.
Income Taxes:
The Company accounts for income taxes under the liability method. Under
the liability 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. The Company is required to adjust its deferred tax
liabilities in the period when tax rates or the provisions of the
income tax laws change. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized.
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 CONSOLIDATED 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 CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
2. Summary of Significant Accounting Policies, continued:
Stock Based Compensation:
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 the 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."
Net Income (Loss) Per Share:
The Company has adopted Financial Accounting Standards No. 128 ("SFAS
128"), "Earnings Per Share" and, accordingly, all prior periods
presented have been restated. Basic net income (loss) per share is
calculated by dividing income (loss) available to common shareholders
by the weighted average number of common shares outstanding for the
period. Diluted net income per share is calculated by dividing net
income available to common shareholders by the weighted average number
of common and dilutive common equivalent shares outstanding during the
period. Dilutive common equivalent shares consist of common stock
issuable upon the exercise of stock options (using the treasury stock
method). The adoption of this standard did not have a material impact
on the Company's net income (loss) per share.
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. Estimated fair values for marketable
securities, which are separately disclosed elsewhere are based on
quoted market prices for the same or similar instruments.
Continued
35
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
2. Summary of Significant Accounting Policies, continued:
Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income". This statement establishes requirements for
disclosure of comprehensive income and becomes effective for the
Company for the fiscal year beginning after December 15, 1997, with
reclassification of earlier financial statements for comparative
purposes. Comprehensive income generally represents all changes in
shareholders' equity except those resulting from investments or
contributions by shareholders. The Company is evaluating alternative
formats for presenting this information, but does not expect this
pronouncement to materially impact the Company's results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related Information". This
statement establishes standards for disclosure about operating segments
in annual financial statements and selected information in interim
financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. This statement supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business
Enterprise". The new standard becomes effective for the Company for the
fiscal year beginning after December 15, 1997, and requires that
comparative information from earlier years be restated to conform to
the requirement of this standard. The Company is evaluating the
requirements of SFAS 131 and the effects, if any, on the Company's
current reporting and disclosures.
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 CONSOLIDATED 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. In 1997, the Company wrote-off the remaining unamortized value of
the purchased technology and goodwill established in connection with the
acquisition of Nova Systems. The write-off totaled $1,875,000 and was
primarily due to continued losses and lack of commercially successful new
product introductions.
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 CONSOLIDATED 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 marketable securities consist of municipal securities
which were held by one investment bank, bearing interest at 4.0% per
annum. At December 31, 1997 and 1996, there were no realized gains or
losses on the disposal of marketable securities.
Continued
38
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
6. Balance Sheet Detail:
<TABLE>
Accounts receivable comprise (in thousands):
<CAPTION>
December 31,
--------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Trade accounts receivable $ 1,546 $ 3,529
Less allowance for doubtful accounts (255) (123)
---------- -----------
$ 1,291 $ 3,406
========== ===========
</TABLE>
<TABLE>
Inventories comprise (in thousands):
<CAPTION>
December 31,
--------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Raw materials $ 7,649 $ 6,210
Work in process 437 1,437
Finished goods 1,852 1,662
---------- -----------
$ 9,938 $ 9,309
========== ===========
</TABLE>
<TABLE>
Property and equipment comprise (in thousands):
<CAPTION>
December 31,
--------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Machinery and equipment $ 3,933 $ 3,013
Furniture and fixtures 86 126
Leasehold improvements 179 103
Tooling 1,747 1,270
---------- -----------
5,945 4,512
Less accumulated depreciation and amortization (3,507) (2,475)
---------- -----------
$ 2,438 $ 2,037
========== ===========
</TABLE>
Continued
39
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
6. Balance Sheet Detail, continued:
<TABLE>
Intangible assets comprise (in thousands):
<CAPTION>
December 31,
--------------------------------
1997 1996
------------- ------------
<S> <C> <C>
Purchased technology $ 2,443 $ 2,443
Goodwill 316 316
----------- ----------
2,759 2,759
Less accumulated amortization (884) (491)
Write-off of intangible assets (1,875)
----------- ----------
$ - $ 2,268
=========== ==========
</TABLE>
<TABLE>
Accrued expenses comprise (in thousands):
<CAPTION>
December 31,
--------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Accrued advertising $ 221 $ 137
Accrued vacation 258 154
Salaries payable 239 201
Accrued acquisition reserve 250 250
Warranty reserve 198 74
Other accrued expenses 480 321
------------- ------------
$ 1,646 $ 1,137
============ ===========
</TABLE>
7. Commitments and Contingencies:
The Company leases a building for its principal facility under an
operating lease which expires in July 1999. Under the terms of the lease,
the Company is responsible for utilities, taxes, insurance and
maintenance. At December 31, 1997, future minimum lease payments under all
noncancelable operating leases were as follows (in thousands):
1998 $ 399
1999 142
----------
$ 541
==========
Continued
40
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
7. Commitments and Contingencies, continued:
Rent expense for the years ended December 31, 1997, 1996, and 1995
amounted to $423,000, $396,000, and $239,000, 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:
The components of the provision for income taxes are as follows (in
thousands):
1997 1996 1995
------------- ------------ -------------
Current:
Federal $ (380) $ (110) $ 2,117
State - 17 440
Deferred:
Federal 995 239 (640)
State 103 (128) (120)
------------- ------------ -------------
$ 718 $ 18 $ 1,797
============= ============ =============
Continued
41
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED 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>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Federal statutory income tax rate (34.0)% 34.0% 34.0%
State income tax rate, net of federal benefit (2.9) 5.7 5.3
Tax exempt interest (13.4) (1.6)
Foreign net operating loss 1.3 5.7
Federal and state tax credits (6.4) (32.8) (1.9)
Other 1.6 3.2 (3.4)
Increase in valuation allowance 46.0
--------- --------- --------
5.6% 2.4% 32.4%
========= ========= ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below (in thousands):
1997 1996
------------- -------------
Intangible assets $ 1,366 $ 848
Inventory reserves 891 149
Depreciation 45 99
Net operating loss carryforward 2,198
Tax credit carryforward 815
Other accrued liabilities and reserves 537 203
------------- -------------
Subtotal 5,852 1,299
Less valuation allowance (5,852)
------------- -------------
Net deferred tax asset $ - $ 1,299
============= =============
At December 31, 1997, the Company has federal and state net operating
losses of $5,500,000 and $3,200,000, respectively, which expire in 2012
and 2002, respectively. The Company also has federal and state tax credit
carryforwards of $580,000 and $235,000, respectively, which expire in
2012.
Continued
42
<PAGE>
8. Income Taxes, continued:
In accordance with generally accepted accounting principles, a valuation
allowance must be established for a deferred tax asset if its uncertain
that a tax benefit may be realized from the asset in the future. The
Company has established a valuation allowance to the extent of its
deferred tax assets since it is not certain that a benefit can be realized
in the future due to the Company's operating losses. The Company's
valuation allowance increased from zero at December 31, 1996 to $5,852,000
at December 31, 1997.
<TABLE>
9. Net Income (Loss) Per Share:
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted
net income (loss) per share is provided as follows (in thousands,
except per share amounts):
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Numerator - Basic and Diluted
Net income (loss) $(13,441) $ 744 $ 3,746
-------- -------- --------
Net income (loss) available to common
stockholders
$(13,441) $ 744 $ 3,746
======== ======== ========
Denominator - Basic
Weighted average common shares outstanding 5,744 5,616 5,413
-------- -------- --------
Basic net income (loss) per share $ (2.34) $ 0.13 $ 0.69
======== ======== ========
Denominator - Diluted
Denominator - Basic 5,744 5,616 5,413
Effect of Dilutive Securities:
Common Stock Options -- 317 378
-------- -------- --------
Diluted weighted average common shares 5,744 5,933 5,791
-------- -------- --------
Diluted net income (loss) per share $ (2.34) $ 0.13 $ 0.65
======== ======== ========
</TABLE>
Continued
43
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
10. Shareholders' Equity:
At December 31, 1997, 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 (1987 Plan). The 1987 Plan had been set to
terminate, in accordance with its terms, on January 1, 1997. Effective May
1997, the Company's Board of Directors authorized the amendment of the
1987 Plan to permit the grant of nonstatutory stock options beyond the
expiration date for replacement or substitution of options previously
granted under the 1987 Plan that have expired or terminated. 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-to-four year period and are canceled 90 days after
termination of employment.
<TABLE>
A summary of stock option activity follows:
<CAPTION>
Outstanding Options Weighted
Shares ---------------------------------------------- Average
Available Number Exercise Exercise
for Grant of Shares Price Total Price
--------- --------- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1994 227,160 667,590 $.33-$9.35 $ 799,891 $1.20
Options granted (92,450) 92,450 $11.75-$14.75 1,227,575 13.28
Options canceled 1,800 (1,800) $1.67-$14.75 (10,788) 6.00
Options exercised (167,313) $.33-$11.75 (135,244) 0.81
--------- --------- --------------
Balances, December 31, 1995 136,510 590,927 $.33-$14.75 1,881,434 3.18
Additional shares
reserved 1,000,000
Options granted (859,128) 859,128 $7.50-$9.00 6,752,363 7.86
Options canceled 147,958 (147,958) $.47-$14.75 (1,413,857) 9.56
Options exercised (186,918) $.33-$7.50 (100,468) 0.54
--------- --------- --------------
Balances, December 31, 1996 425,340 1,115,179 $.33-$14.75 7,119,472 6.38
Options granted (929,534) 929,534 $3.81-$5.00 4,536,769 4.88
Options canceled 881,362 (881,362) $3.81-$9.00 (6,987,932) 7.93
Options exercised (80,149) $.33-$7.50 (154,128) 1.92
--------- --------- --------------
Balances, December 31, 1997 377,168 1,083,202 $ 4,514,181 $4.17
========= ========= ==============
</TABLE>
Compensation of approximately $114,000 had 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 was
recognized as a charge to income over the three-year vesting period
commencing in October 1994 and terminating in September 1997.
Continued
44
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
10. Shareholders' Equity, continued:
On August 19, 1997, the Company offered employees the right to cancel
certain outstanding stock options at original exercise prices and receive
new options with a new exercise price. Options to purchase a total of
733,072 shares at original exercise prices ranging from $7.50 to $14.75
per share were canceled and new options were issued at an exercise price
of $5.00 per share, the fair market value of the stock on August 19, 1997.
Vesting under the new options commenced on the date of the original
options first vest date with an additional year added to the new options
vesting period, increasing their original vesting period from three years
to four years.
<TABLE>
Had compensation cost for the years ended December 31, 1997, 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 (loss) and net income (loss) per
share for the years ended December 31, 1997, 1996 and 1995 would have been
reduced to the pro forma amounts indicated below:
<CAPTION>
1997 1996 1995
--------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss) - pro forma $ (15,557) $ 126 $ 3,625
=============== ============= =============
Net income (loss) per share - pro forma $ (2.71) $ 0.02 $ 0.63
=============== ============= =============
</TABLE>
The impact on pro forma income (loss) and pro forma net income (loss) per
share in the table above may not be indicative of the effect in future
years as options vest over several years and the Company continues to
grant stock options to employees. This policy may or may not continue.
<TABLE>
The weighted average fair value of options granted in 1997, 1996 and 1995
was $2.22, $4.10, and $7.13, repectively. 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:
<CAPTION>
1997 1996 1995
------------------ ------------------ -----------------
<S> <C> <C> <C>
Risk-free interest rate 5.71%-6.09% 5.36%-6.36% 5.58%-7.25%
Expected life 5 3 3
Expected dividends - - -
Volatility 0.75 0.75 0.75
</TABLE>
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
45
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
10. Shareholders' Equity, continued:
<TABLE>
The options outstanding and currently exercisable by exercise price at
December 31, 1997 and 1996 are as follows:
<CAPTION>
Options
Currently
Options Outstanding Exercisable
------------------------------------------ ---------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 1997 Life Price 1997 Price
----- ---- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$0.46-$0.46 179,573 4.33 $0.47 179,573 $0.47
$2.00-$4.88 192,560 8.37 $4.25 63,367 $4.04
$5.00-$5.00 705,069 9.63 $5.00 283,547 $5.00
$7.50-$8.88 6,000 8.77 $8.54 2,250 $7.96
--------- -------
1,083,202 8.52 $4.17 528,737 $3.36
========= =======
</TABLE>
<TABLE>
<CAPTION>
Options
Currently
Options Outstanding Exercisable
------------------------------------------ ---------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 1996 Life Price 1996 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
--------- -------
1,115,179 8.17 $6.36 446,932 $3.94
========= =======
</TABLE>
11. 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.
Continued
46
<PAGE>
VIDEONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
11. Segment Information, continued:
The Company's German office is primarily a sales office. Revenue, loss and
assets employed by the Company's foreign subsidiary were not material to
the consolidated financial statements.
<TABLE>
Geographic net export sales information is shown below (in thousands):
<CAPTION>
December 31,
------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
United States $ 13,317 $ 16,852 $ 17,210
Europe 2,007 4,774 6,823
Asia 2,637 3,925 6,865
Americas (excluding the United States) 1,994 3,644 2,663
-------------- -------------- --------------
$ 19,955 $ 29,195 $ 33,561
============== ============== ==============
</TABLE>
For the years ended December 31, 1997, 1996, and 1995, no one customer
accounted for more than 10% of revenues during the periods. The Company
has no significant assets in foreign countries.
12. 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 $51,000, $52,000, and $38,000 for the years ended
December 31, 1997, 1996, and 1995, respectively.
47
<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 1998 Annual Meeting of Shareholders to be held on or about August 19,1998
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.
48
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
<TABLE>
<CAPTION>
The following financial statements are included in Item 8:
<S> <C>
- Report of Independent Accountants
- Balance Sheets at December 31, 1997 and 1996
- Statements of Income for the Years Ended December 31, 1997, 1996, and
1995
- Statement of Shareholders' Equity for the Years Ended December 31,
1997, 1996, and 1995
- Statements of Cash Flows for the Years Ended December 31, 1997, 1996,
and 1995
- Notes to Financial Statements
2. Financial Statement Schedules
</TABLE>
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.
<TABLE>
3. Exhibits
<CAPTION>
Exhibit No.
-----------
<S> <C>
3.01 Amended and Restated Articles of Incorporation of Videonics, Inc.,
dated December 19, 1994. (3)
3.02 Amended and Restated Bylaws of Videonics, Inc. as Adopted by the
Board of Directors on October 27, 1994 (3)
10.01 Lease, dated July 6, 1994 between H-K Associates and Videonics, Inc.
at 1370 Dell Avenue, Campbell, California. (1)
10.02 Lease, dated September 27, 1995 between Canton Gateway Office Park
and Videonics, Inc. at 50 Albany Turnpike, Canton, Connecticut. (4)
49
<PAGE>
10.03 Sublease, dated July 11, 1996 between Diba, Inc. and Videonics, Inc.
at 270 Harbor Boulevard, Belmont, California. (4)
10.04 Stock Option Plan, and related agreements. (2)
10.05 Asset Purchase Agreement relating to the acquisition of Nova Systems,
Inc., by Videonics, Inc., dated September 7, 1995. (5)
10.06 Asset Purchase Agreement relating to the acquisition of KUB Systems,
Inc., by Videonics, Inc., dated May 24, 1996. (6)
10.7 Letter of Employment Agreement with Steve L. Peters. (4)
10.8 Promissory Note issued in connection with loan by Videonics, Inc. to
Steve L. Peters. (4)
+10.9 Letter of Employment Agreement with Yeshwant Kamath dated November
17, 1997.
21.1 Subsidiaries
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants.
27.1 Financial Data Schedule
</TABLE>
(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, 1997.
- ----------
(1) 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.
(2) Incorporated by reference to Registration Statement (No. 333-21003) on
Form S-8.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994, and incorporated herein by
reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, and incorporated herein by
reference.
(5) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
September 7, 1995, and incorporated herein by reference.
(6) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
June 6, 1996, and incorporated herein by reference.
+ Confidential treatment of certain portions of this Letter of
Employment Agreement has been applied for with the Securities and
Exchange Commissions.
50
<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 27th day of
March, 1998.
VIDEONICS, INC.
By: /s/ Michael L. D'Addio By: /s/ James A. McNeill
----------------------------- -------------------------------
Michael L. D'Addio James A. McNeill
Chief Executive Vice President of Finance,
Officer Chief Financial Officer and
Assistant Secretary
<TABLE>
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.
<CAPTION>
Name and Signature Title Date
- ------------------ ----- ----
<S> <C> <C>
/s/ Michael L. D'Addio Chairman of the Board March 27, 1998
- --------------------- and CEO
Michael L. D'Addio
/s/ B. Yeshwant Kamath President March 27, 1998
- ---------------------
B. Yeshwant Kamath
/s/ Mark C. Hahn Vice President and Chief March 27, 1998
- --------------------------------- Technical Officer
Mark C. Hahn
/s/ Carl E. Berg Director March 27, 1998
- ---------------------------------
Carl E. Berg
/s/ N. William Jasper, Jr. Director March 27, 1998
- ---------------------------------
N. William Jasper, Jr.
</TABLE>
51
<PAGE>
<TABLE>
VIDEONICS, INC.
INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
<CAPTION>
Page in
Form 10-K
<S> <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...........................................................54
II Valuation and Qualifying Accounts...........................................................55
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:
10.9 Letter of Employment Agreement with Yeshwant Kamath dated November 17, 1997.................__
21.1 Subsidiaries................................................................................__
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants................................__
27.1 Financial Data Schedule.....................................................................__
</TABLE>
52
<PAGE>
VIDEONICS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1997
ITEM 14(d)
FINANCIAL STATEMENT SCHEDULE
53
<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 52 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.
Coopers & Lybrand L.L.P.
San Jose, California
January 30, 1998
54
<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, 1997
Allowance for doubtful accounts: $123 $375 $(243) $ 255
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
</TABLE>
55
<PAGE>
VIDEONICS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1997
ITEM 14(c)
EXHIBITS
EXHIBIT 10.9
<PAGE>
Exhibit 10.9
CONFIDENTIAL TREATMENT REQUESTED
[*] Denotes information for which confidential treatment has been
requested. Confidential portions omitted have been filed with separately with
the Commission.
[VIDEONICS LOGO GOES HERE] 1370 Dell Ave.
Campbell, CA 95008-6604
408-866-8300 o FAX: 408-866-4859
Web: http://www.videonics.com
November 17, 1997
Yeshwant Kamath
Belmont, CA
Dear Yeshwant:
On behalf of Videonics Inc. (the "Company") and the Board of Directors, I am
pleased to promote you to President and confirm your election to the Board of
Directors. This position is a full time position. The effective date of this
promotion will be November 24, 1997, and you will be reporting directly to me.
We have agreed on the terms of your employment as follows:
1. Compensation: Your annual salary will be $150,000.00. The Company will pay
you bi-weekly in accordance with the Company's standard payroll policies.
Your new salary will begin as of November 24, 1997. Your incentive
compensation for 1997 is $5,000, which will be paid in January 1998. Your
target incentive compensation for 1998 will be $50,000-100,000, with
quarterly payments. It will be based on some easily measurable criterion
that you and I will work out, and subject to the approval of the Board
Compensation Committee.
2. Benefits: You will be entitled, during the term of your employment, to the
Company's standard benefits covering employees, as such may be in effect
from time to time.
<PAGE>
Yeshwant Kamath
November 17, 1997
Page 2
3. Stock Options: Subject to compliance with applicable state and federal
securities laws, the Company will grant you a non-qualified option to
purchase 320,000 shares of the Company's Common Stock. The Option will be
granted by the Board no later than March 31, 1998 at market value. The
option will vest over four years with 1/8 of the shares vesting at the end
of each six month period until all shares are vested, subject to your
continued employment with the Company through the end of each applicable
period. The first vesting date will be May 31, 1998 and the second vesting
date will be November 30, 1998.
4. In the event that the Company is sold in its entirety or there is a change
in control, and your employment is terminated within one year after that
event, all unvested options become vested and you will receive one years
salary paid bi-weekly over the following twelve months as severance pay.
For these purposes, a change of control shall mean the sale of 50% or more
of the voting securities of the Company in one transaction or within 12
months pursuant to a series of related transactions.
5. [*]
6. At-Will Employment: You should be aware that under California law your
employment with the Company is for no specified period and constitutes
"at-will" employment. As a result, you are free to terminate your
employment at any time, for any reason or for no reason. Similarly, the
Company is free to terminate your employment at any time, for any reason or
for no reason. In the event of termination of your employment, you will not
be entitled to any payments, benefits, damages, awards, or compensation
other than as may otherwise be available in accordance with the Company's
established employee plans and policies at the time of termination This
paragraph is subject to the provisions of paragraph 7 below.
<PAGE>
Yeshwant Kamath
November 17, 1997
Page 3
7. Severance Agreement: In the event of termination of your employment, and
neither paragraph 4 or 5 applies, you will be entitled to three (3) months
base salary. During those 3 months, you will receive no bonuses and vesting
of all previously granted stock options will cease.
8. Proprietary Information Agreement: As a condition of accepting this offer
of employment, you will be required to complete, sign and return an updated
version of the Company's standard form of Proprietary Information
Agreement.
Yeshwant, the Board and I are pleased that you have agreed to become President
and a Board member of Videonics. Please indicate your acceptance by signing
below.
Sincerely yours,
Videonics, Inc.
/s/ Michael D'Addio
- ---------------------
Michael L. D'Addio
Chairman and CEO
ACCEPTED:
/s/ Yeshwant Kamath 11/25/97
- ------------------------ -----------
Yeshwant Kamath Date
EXHIBIT 21.1
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT AS OF DECEMBER 31, 1997
Videonics Vertrieb Deutschland GmbH (Germany)
EXHIBIT 23.1
<PAGE>
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 30, 1998, on our audits of the consolidated financial statements
and financial statement schedule of Videonics, Inc. and subsidiaries as of
December 31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997, which report is included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
San Jose, California
March 30, 1998
<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, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 992
<SECURITIES> 0
<RECEIVABLES> 1,546
<ALLOWANCES> (255)
<INVENTORY> 9,938
<CURRENT-ASSETS> 12,990
<PP&E> 5,945
<DEPRECIATION> (3,507)
<TOTAL-ASSETS> 15,694
<CURRENT-LIABILITIES> 3,088
<BONDS> 0
0
0
<COMMON> 20,613
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 15,694
<SALES> 19,955
<TOTAL-REVENUES> 19,955
<CGS> 13,900
<TOTAL-COSTS> 13,900
<OTHER-EXPENSES> 19,039
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,723)
<INCOME-TAX> 718
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,441)
<EPS-PRIMARY> (2.34)
<EPS-DILUTED> (2.34)
</TABLE>
