SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-25036
VIDEONICS, INC.
(Exact name of Registrant as specified in its charter)
California 77-0118151
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1370 Dell Ave, Campbell, California 95008
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 866-8300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of October 30, 1998, there were 5,854,149 shares of the Registrant's
Common Stock outstanding.
This quarterly report on form 10-Q, including all exhibits, contains 12 pages,
of which this is page 1. The exhibit index is located on page 11 of this report.
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
VIDEONICS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 5,025 $ 5,360 $15,651 $15,328
Cost of revenues 2,959 2,916 9,406 9,635
------- ------- ------- -------
Gross profit 2,066 2,444 6,245 5,693
------- ------- ------- -------
Operating expenses:
Research and development 1,173 1,615 3,744 5,205
Selling and marketing 1,685 2,097 5,106 5,808
General and administrative 336 341 1,111 1,347
Amortization of intangibles - 98 - 295
------- ------- ------- -------
3,194 4,151 9,961 12,655
------- ------- ------- -------
Operating loss (1,128) (1,707) (3,716) (6,962)
------- ------- ------- -------
Other income (expense) net (9) 69 - 238
------- ------- ------- -------
Loss before income
taxes (1,137) (1,638) (3,716) (6,724)
Benefit from income
taxes - (470) (32) (1,923)
------- ------- ------- -------
Net loss $(1,137) $(1,168) $(3,684) $(4,801)
======= ======= ======= =======
Net loss per common share and per
common share - assuming dilution $ (0.19) $ (0.20) $ (0.63) $ (0.84)
======= ======= ======= =======
Shares used in computing net loss per
common share and per common share
- - assuming dilution 5,854 5,741 5,825 5,735
======= ======= ======= =======
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
2
<PAGE>
VIDEONICS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
September 30, December 31,
ASSETS 1998 1997
------ ------
(unaudited)
Current assets:
Cash and cash equivalents $ 1,221 $ 992
Accounts receivable, net 1,210 1,291
Inventories 8,204 9,938
Recoverable income taxes 2 550
Prepaids and other current assets 125 219
-------- --------
Total current assets 10,762 12,990
Property and equipment, net 1,803 2,438
Other assets 266 266
-------- --------
Total assets $ 12,831 $ 15,694
======== ========
LIABILITIES
Current liabilities:
Loan payable to shareholder $ 1,000 -
Accounts payable 1,431 $ 1,442
Accrued expenses 1,446 1,646
-------- --------
Total current liabilities 3,877 3,088
-------- --------
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized: 30,000 shares
Issued and outstanding: 5,854 shares at
September 30, 1998 and 5,785 shares at
December 31, 1997 20,645 20,613
Accumulated deficit (11,691) (8,007)
-------- --------
Total shareholders' equity 8,954 12,606
-------- --------
Total liabilities and shareholders' equity $ 12,831 $ 15,694
======== ========
The accompanying notes are an integral
part of these financial statements.
3
<PAGE>
<TABLE>
VIDEONICS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Nine Months Ended
September 30,
-----------------
<S> <C> <C>
1998 1997
------- -------
Cash flows from operating activities:
Net cash used in operating activities (464) (4,167)
------- -------
Cash flows from investing activities:
Purchase of property and equipment (339) (1,204)
Proceeds from sales of marketable securities - 1,500
------- -------
Net cash provided by (used in) investing activities (339) 296
------- -------
Cash flows from financing activities:
Proceeds from issuance of loans payable to shareholder 1,019 -
Repayments on loans payable to shareholder (19) -
Proceeds from issuance of common stock 32 50
------- -------
Net cash provided by financing activities 1,032 50
------- -------
Increase (decrease) in cash and cash equivalents 229 (3,821)
Cash and cash equivalents at beginning of year 992 6,538
------- -------
Cash and cash equivalents at end of period $ 1,221 $ 2,717
======= =======
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
4
<PAGE>
VIDEONICS, INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. The condensed financial statements at September 30, 1998 and for the
nine month period then ended are unaudited (except for the balance
sheet information as of December 31, 1997, which is derived from the
Company's audited financial statements) and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. The
condensed financial statements should be read in conjunction with the
financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997. The results of operations for this
nine month period ended September 30, 1998 are not necessarily
indicative of the results for the year ending December 31, 1998, or any
future interim period.
2. Inventories comprise (in thousands):
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
Raw materials $6,286 $7,649
Work in process 991 437
Finished goods 927 1,852
------ ------
$8,204 $9,938
====== ======
3. Loans Payable to Shareholder:
During the quarter ended March 31, 1998, the Company issued a secured
promissory note due to a shareholder of the Company for repayment of a
loan to the Company in the principal amount of $619,000. The principal
amount bore simple interest at a rate of 8.5% per year. Principal and
accrued interest were due upon demand. On April 3, 1998, the Company
repaid $19,000 of principal and all accrued interest through March 31,
1998 and replaced this note with an unsecured loan from the same
shareholder. The loan, in the amount of $600,000, bore interest at a
rate of 8.5% per year and was initially due on July 3, 1998. In July
1998, the loan was renewed under the same terms, and is due on October
16, 1998. On August 17, 1998, the Company borrowed an additional
$400,000 from this shareholder under the same terms, due October 16
1998. On October 16, 1998 the Company replaced these notes with an
unsecured loan from the same shareholder. This loan, in the amount of
$1,000,000, bears interest at 8% per year, and is due on October 16,
1999. Accrued interest is payable on a quarterly basis.
4. Recent Accounting Pronouncement:
In June of 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities", (SFAS 133) which establishes accounting and reporting
standards for derivative instruments, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. Management has evaluated the effects of this
standard and believes there will be no material impact on the Company's
financial position or results of operations. The Company will adopt
SFAS 133 as required for its first quarterly filing of the year 2000.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion in this section "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contains trend
analysis and other forward looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results could differ materially from
those expressed or forecasted in the forward looking statements. Factors that
might cause such a difference include, but are not limited to, the factors set
forth in this Form 10-Q, in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 and in the Company's other public filings. The
following discussion should be read in conjunction with the condensed financial
statements and notes thereto included elsewhere in this form 10-Q and the
Company's 1997 Form 10-K.
Results of Operations
Net Revenues. Net revenues decreased approximately 6% in the third
quarter of 1998 compared to the third quarter of 1997 and increased 2% in the
first nine months of 1998 compared to the first nine months of 1997. The
decrease between quarterly periods is primarily attributable to lower sales of
older videographer products offset partially by sales of its newer MXPro, which
began shipping in April 1998.
Gross Profit. Gross profit decreased approximately 15% in the third
quarter of 1998 compared to the third quarter of 1997 and increased 10% in the
first nine months of 1998 compared to the first nine months of 1997. Gross
profit, as a percentage of net revenues, were approximately 41% in the third
quarter of 1998 compared to approximately 46% in the third quarter of 1997 and
approximately 40% in the first nine months of 1998 compared to approximately 37%
in the first nine months of 1997. The percentage decrease between the quarterly
periods is primarily due to a change in product mix. Gross margin percentages
between nine month periods would have been similar if not for cost of revenue
adjustments in the first quarter of 1997 totaling $733,000 to inventory reserves
for components rendered obsolete by product revisions and to warranty reserves
for new product hardware updates.
Research and Development. Research and development expenses decreased 27%
and 28%, respectively, between the quarterly and nine month comparison periods
in fiscal years 1997 and 1998 and also decreased as a percentage of net revenues
from 30% to 23% between quarterly comparison periods in fiscal years 1997 and
1998 and from 34% to 24% for the nine month comparison periods for fiscal years
1997 and 1998. The decreased expenses were primarily due to a reduction of
personnel and the reduced use of consultants.
Selling and Marketing. Selling and marketing expenses decreased 20%
between the third quarter of 1997 and the third quarter of 1998 and 12% between
the first nine months of 1997 and the first nine months of 1998. The decreases
are related primarily to a reduction of personnel, lower commissions and lower
advertising expenses.
General and Administrative. General and administrative expenses decreased
1% between the 1997 and 1998 quarterly comparison periods and decreased 18%
between the nine month comparison periods in fiscal years 1997 and 1998. The
decrease between the nine month comparison periods is primarily due to a bad
debt expense of $263,000 in the first quarter of 1997, as well as lower
administrative costs in 1998.
Interest Income (expense). The Company had net interest expense of
$9,000, in the third quarter of 1998 compared to net interest income of $69,000
in the third quarter of 1997. The shift from interest income to interest expense
is primarily due to interest expense calculated on shareholder loans offset only
partially by interest income on lower cash balances available for investment.
6
<PAGE>
Benefit from Income Taxes. No tax benefit was recognized on this
quarter's loss. During the first nine months of 1998, the Company maintained a
100% valuation allowance against its deferred tax assets due to the uncertainty
surrounding the realization of such assets. If it is determined that it is more
likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced. During the first nine months of 1997, the Company
recorded a tax benefit totaling $1.9 million. This benefit was based on a 30%
tax rate which had been calculated based on anticipated net income for the year.
Factors That May Affect Future Results of Operations: The Company
believes that in the future its results of operations could be impacted by
factors such as delays in development and shipment of the Company's new products
and major new versions of existing products, market acceptance of new products
and upgrades, growth in the marketplace in which it operates, competitive
product offerings, and adverse changes in general economic conditions in any of
the countries in which the Company does business. The Company's results in prior
years have been affected by these factors, particularly with respect to
developing and introducing new products such as PowerScript, MXPro, Python and
Effetto Pronto in 1996, 1997 and 1998.
Due primarily to the factors noted above, the Company has experienced
substantial volatility in its operations. The Company's future earnings and
stock price may continue to be subject to significant volatility, particularly
on a quarterly basis. Any shortfall in revenue or earnings from levels expected
by securities analysts or anticipated by the Company based upon product
development and introduction schedules could have an immediate and significant
adverse effect on the trading price of the Company's common stock in any given
period. Additionally, the Company may not learn of such shortfalls until late in
the fiscal quarter, which could result in an even more immediate and adverse
effect on the trading price of the Company's common stock. Finally, the Company
participates in a highly dynamic industry, which often results in significant
volatility of the Company's common stock price. See the Company's 1997 Form 10-K
section entitled "Business - Research and Development".
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 fall of
1999. 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. Should the Company's internal systems or one or more significant
vendors, manufacturers or suppliers fail to achieve Year 2000 compliance, the
Company's business and its results of operations could be adversely affected.
The foregoing statements are forward looking. The Company's actual
results could differ because of several factors, including those set forth in
the subsection entitled "Factors That May Affect Future Results and Financial
Condition".
Liquidity and Capital Resources
From the Company's inception until its initial public offering in
December 1994, which resulted in net proceeds to the Company of $15.8 million,
the Company financed its operations through private sales of equity, shareholder
loans, cash flow from operations, and bank borrowings. Beginning in January of
1998, the Company again financed its operations through a shareholder loan which
as of September 30, 1998 totaled $1,000,000. As of September 30, 1998, the
Company had $1.2 million of cash and cash equivalents.
7
<PAGE>
Net cash used by operations was $464,000 for the first nine months ended
September 30, 1998 compared to net cash used in operations of $4.2 million for
the same period in 1997. The use of cash from operating activities during the
first nine months of 1998 is primarily due to a net loss before depreciation,
offset partially by a decrease in inventories and recoverable income taxes. The
decrease in cash from operating activities during the nine months ended
September 30, 1997 is primarily due to a net loss before the provisions for
doubtful accounts, excess and obsolete inventories, and depreciation and
amortization, an increase in inventories, an increase in recoverable income
taxes, offset partially by a decrease in receivables. Net cash used by investing
activities for the first nine months ended September 30, 1998 was $339,000, due
to property and equipment expenditures, primarily for computers, software and
engineering equipment used in research and development and other activities. Net
cash provided by investing activities for the nine months ended September 30,
1997 was $296,000, primarily due to the sale of marketable securities offset
partially by property and equipment expenditures, primarily for computers,
software and engineering equipment used in research and development and other
activities. Net cash provided by financing activities during the first nine
months of 1998 was $1.0 million, primarily because of shareholder loans and the
receipt of cash from the exercise of the stock options issued under the
Company's Stock Option Plans. Net cash provided by financing activities during
the first nine months of 1997 was $50,000, due entirely to the receipt of cash
from the exercise of stock options issued under the Company's Stock Option Plan.
The Company believes that its cash balances, together with its operating
cash flows and shareholder borrowings will be sufficient to meet the Company's
requirements for working capital and capital expenditures through the end of
1998.
8
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
<TABLE>
At the Annual Meeting of Shareholders on August 19, 1998, the following
persons were elected to the Board of Directors:
<CAPTION>
Votes
Affirmative -------------------------------
Votes Withheld Abstained
----- -------- ---------
<S> <C> <C> <C>
Michael L. D'Addio 5,751,399 37,410 0
Yeshwant Kamath 5,751,899 36,910 0
Mark C. Hahn 5,751,499 37,310 0
Carl E. Berg 5,752,699 36,110 0
N. William Jasper, Jr. 5,752,299 36,510 0
There were 5,788,809 shares of Common Stock represented at the meeting.
The following proposals were approved at the Company's Annual Meeting:
Votes
Affirmative -------------------------------
Votes Against Abstained
----- ------- ----------
To ratify the appointment of
Coopers & Lybrand L.L.P.
as the independent accountants
of the Company for the fiscal
year ending December 31, 1998 5,761,159 14,450 13,200
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Document
----------- -----------------------
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended September 30,
1998.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
VIDEONICS, INC.
---------------
Registrant
November 3, 1998
----------------
Date
By:/s/ James A. McNeill
James A. McNeill
Vice President of Finance,
Chief Financial Officer and
Assistant Secretary
(Principal Financial and Accounting
Officer and Authorized Signer)
10
<PAGE>
INDEX OF EXHIBITS
Exhibits:
27 Financial Data Schedule...............................................12
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S INCOME STATEMENT AND BALANCE SHEET DATED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,221
<SECURITIES> 0
<RECEIVABLES> 1,210
<ALLOWANCES> 0
<INVENTORY> 8,204
<CURRENT-ASSETS> 10,762
<PP&E> 1,803
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,831
<CURRENT-LIABILITIES> 3,877
<BONDS> 0
0
0
<COMMON> 20,645
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,831
<SALES> 15,651
<TOTAL-REVENUES> 15,651
<CGS> 9,406
<TOTAL-COSTS> 6,447
<OTHER-EXPENSES> 6,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,716)
<INCOME-TAX> (32)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,684)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
