SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
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 July 31, 1999, there were 5,869,099 shares of the Registrant's
Common Stock outstanding.
This quarterly report on form 10-Q, including all exhibits, contains 17 pages,
of which this is page 1. The exhibit index is located on page 15 of this report.
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
Item 1. Financial Statements
VIDEONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 3,394 $ 5,907 $ 7,059 $ 10,626
Cost of revenues 1,930 3,470 4,137 6,447
-------- -------- -------- --------
Gross profit 1,464 2,437 2,922 4,179
-------- -------- -------- --------
Operating expenses:
Research and development 725 1,189 1,623 2,571
Selling and marketing 1,153 1,780 2,149 3,421
General and administrative 392 351 766 775
-------- -------- -------- --------
2,270 3,320 4,538 6,767
-------- -------- -------- --------
Operating loss (806) (883) (1,616) (2,588)
Other income (expense), net (15) 10 (28) 9
-------- -------- -------- --------
Loss before income
taxes (821) (873) (1,644) (2,579)
Benefit from income
taxes -- (32) -- (32)
-------- -------- -------- --------
Net loss $ (821) $ (841) $ (1,644) $ (2,547)
======== ======== ======== ========
Net loss per common share - basic
and diluted $ (0.14) $ (0.14) $ (0.28) $ (0.44)
======== ======== ======== ========
Shares used in computing net loss per
common share - basic and diluted 5,867 5,831 5,862 5,810
======== ======== ======== ========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
2
<PAGE>
VIDEONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
1999 1998
-------- --------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 663 $ 837
Accounts receivable, net 1,115 852
Inventories 4,801 5,830
Prepaids and other current assets 90 122
-------- --------
Total current assets 6,669 7,641
Property and equipment, net 948 1,507
Other assets 44 16
-------- --------
Total assets $ 7,661 $ 9,164
======== ========
LIABILITIES
Current liabilities:
Loan payable to shareholder -- $ 1,000
Accounts payable $ 1,061 947
Accrued expenses 1,277 1,290
-------- --------
Total current liabilities 2,338 3,237
-------- --------
Long term liabilities:
Loan payable 1,035 --
-------- --------
Total liabilities 3,373 3,237
-------- --------
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized: 30,000 shares
Issued and outstanding: 5,867 shares at
June 30, 1999 and 5,858 shares at
December 31, 1998 20,652 20,647
Accumulated deficit (16,364) (14,720)
-------- --------
Total shareholders' equity 4,288 5,927
-------- --------
Total liabilities and shareholders' equity $ 7,661 $ 9,164
======== ========
The accompanying notes are an integral
part of these financial statements.
3
<PAGE>
VIDEONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
---------------
1999 1998
----- -----
Cash flows from operating activities:
Net cash used in operating activities (216) (495)
----- -----
Cash flows from investing activities:
Proceeds from disposition 52 --
Purchase of property and equipment (50) (205)
----- -----
Net cash provided by (used in) investing activities 2 (205)
----- -----
Cash flows from financing activities:
Proceeds from issuance of loans payable to shareholder 35 619
Repayments on loans payable to shareholder -- (19)
Proceeds from issuance of common stock 5 32
----- -----
Net cash provided by financing activities 40 632
----- -----
Decrease in cash and cash equivalents (174) (68)
Cash and cash equivalents at beginning of year 837 992
----- -----
Cash and cash equivalents at end of period $ 663 $ 924
===== =====
The accompanying notes are an integral
part of these financial statements.
4
<PAGE>
VIDEONICS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed financial statements at June 30, 1999 and for the six month
period then ended are unaudited (except for the balance sheet information
as of December 31, 1998, 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, 1998. The results of operations for
this six month period ended June 30, 1999 are not necessarily indicative of
the results for the year ending December 31, 1999, or any future interim
period.
2. Inventories comprise (in thousands):
June 30, December 31,
1999 1998
------ ------
(unaudited)
Raw materials $3,921 $4,381
Work in process 281 375
Finished goods 599 1,074
------ ------
$4,801 $5,830
====== ======
3. Note Payable to Shareholder:
On April 16, 1999, the Company replaced a $1,000,000 unsecured loan
bearing interest at 8% per year and due on October 16, 1999, with a new
loan in the amount of $1,035,000 that bears interest at a rate of 8%
per year and is due on January 16, 2001. The new loan is unsecured and
from the same director and significant shareholder of the Company as
the previous loan. Accrued interest under the new loan is payable at
maturity.
5
<PAGE>
VIDEONICS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Sale of Nova Systems:
On January 29, 1999, the Company completed the sale of certain assets
and the assumption of certain liabilities related to its Nova Systems
Division ("Nova") to a privately held company in Massachusetts. For the
year ended December 31, 1998, Nova recorded revenues of $1.9 million
and a loss from operations of $248,000. For the year ended December 31,
1997, Nova recorded revenues of $2.8 million and a loss from operations
of $1.4 million, which included a write-off of $700,000 of
non-performing assets. Additionally in 1997, Videonics wrote off $1.9
million of intangibles related to Nova. The sale of Nova may provide
Videonics with net revenues from royalties of up to a maximum of
approximately $450,000, contingent upon future sales of Nova products
by the acquiring company. Royalties will be paid, to the extent due, by
the acquiring company on a monthly basis from March 1999 until receipt
of approximately $450,000. The sale of Nova did not result in a
material capital gain or loss to Videonics.
5. Segment Information:
In 1998, Videonics adopted SFAS 131. At December 31, 1998, Videonics
presented two reportable segments - (1) Video Production and (2) Signal
Processing.
The Company's "Video Production" segment manufactures and sells video
post-production equipment into broadcast, cable, industry and home
producer markets. The Company's "Signal Processing" segment, which was
represented by the Company's Nova Division, manufactured and sold
signal conversion and processing equipment primarily into television
and cable studios. As described in Note 4, the Company's Nova System
Division ("Signal Processing" segment) was sold on January 29, 1999.
The table below presents information about reported segments for six
months ending June 30, (in thousands):
1999 1998
------- -------
Video Production
Sales $ 6,968 $ 9,642
Operating loss (1,580) (2,425)
Signal Processing
Sales 91 (1) 984
Operating loss (36)(1) (163)
(1) Results presented are through January 29, 1999, the date the
Company completed its sale of Nova.
6
<PAGE>
VIDEONICS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Comprehensive Loss
There are no differences between net loss for the three and six months
ended June 30, 1998 and 1999 and the comprehensive loss for the these
periods
7. 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 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 in the year 2001.
7
<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
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements regarding market
opportunities, market share growth, competitive growth, new product
introductions, success of research and development expenses, customer acceptance
of new products, gross margin and selling, general and administrative expenses.
These forward-looking statements involve risks and uncertainties, and the
cautionary statements set forth below, specifically those contained in "Factors
That May Affect Future Results of Operations," identify important factors that
could cause actual results to differ materially from those predicted in any such
forward-looking statements. Such factors include, but are not limited to,
adverse changes in general economic conditions, including adverse changes in the
specific markets for the Company's products, adverse business conditions,
decreased or lack of growth in the market for video post-production equipment,
adverse changes in customer order patterns, increased competition, lack of
acceptance of new products, pricing pressures, lack of success in technological
advancements, risks associated with foreign operations, risks associated with
the Company's efforts to comply with Year 2000 requirements, and other factors.
Results of Operations
Net Revenues. Net revenues decreased approximately 43% in the second
quarter of 1999 compared to the second quarter of 1998 and 34% in the first six
months of 1999 compared to the first six months of 1998. The decrease in revenue
was due in part to the sale of the Company's Nova Division and decreased sales
of the Company's older videographer products.
Gross Profit. Gross profit decreased approximately 40% in the second
quarter of 1999 compared to the second quarter of 1998 and 30% in the first six
months of 1999 compared to the first six months of 1998. Gross profit, as a
percentage of net revenues, were approximately 43% in the second quarter of 1999
compared to approximately 41% in the second quarter of 1998 and approximately
41% in the first six months of 1999 compared to approximately 39% in the first
six months of 1998. The increase in gross profit as a percentage of revenues is
due primarily to a change in product mix and royalty payments.
Research and Development. Research and development expenses decreased 39%
and 37%, respectively, between the quarterly and six-month comparison periods in
fiscal years 1998 and 1999. The decrease was due to the Company's sale of Nova
and a decrease in personnel. Research and development expenses remained fairly
consistent as a percentage of net revenues within those comparison periods.
Selling and Marketing. Selling and marketing expenses decreased 35%
between the second quarter of 1998 and the second quarter of 1999 and decreased
37% between the first six months of 1998 and the first six months of 1999. The
decrease was due to the Company's sale of Nova, a decrease in personnel and
reduced advertising expenses.
8
<PAGE>
General and Administrative. General and administrative expenses increased
12% between the second quarter of 1998 and the second quarter of 1999 and
decreased 1% between the first six months of 1998 and the first six months of
1999. The increase between quarterly periods relates primarily to increased
personnel expenses and costs associated with the Annual Shareholders Meeting.
Other Income/Expense, net. The Company recorded interest expense of
$15,000 in the second quarter of 1999 compared to interest income of $10,000 in
the second quarter of 1998. The increase in expense is primarily due to interest
expense calculated on higher borrowings during the first six months of 1999,
only partially offset by interest income on cash balances available for
investment.
Benefit from Income Taxes. During the first six months of 1999 and 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 second quarter
of 1998 the Company recorded an income tax benefit of $32,000 as a result of a
state tax refund.
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 1998 Form 10-K
section entitled "Business - Research and Development".
Year 2000 Update
Many currently installed computer systems, software products and other
equipment utilizing microprocessors are coded to accept only two digit entries
in the date code field. These date code fields will need to accept four digit
entries to distinguish twenty-first century dates from twentieth century dates.
This is commonly referred to as the "Year 2000 issue."
9
<PAGE>
The Company is aware of the Year 2000 issue and has commenced a program
to identify, remediate, test and develop plans to address the Year 2000 issue.
Its corporate networks and computing hardware operate on Unix and Microsoft
Windows NT Operating Systems. The Company relies on its fully integrated
Computer Associates MANMAN system ("MIS system") for all accounting,
manufacturing, and procurement functions. The Company makes use of EDI and other
forms of electronic data exchange with two of its customers and one financial
institution. The Company has no automated manufacturing, or automated testing
systems which could be materially adversely affected by Year 2000 problems.
As of June 1999, the Company had completed several Year 2000 projects,
including upgrades of its Windows NT Operating System and tape backup software,
evaluation and upgrade of its UNIX workstations and UNIX Operating System for
the HP3000 hardware which supports the Company's MIS system, evaluation of the
Company's MIS system, evaluation and upgrade of the Company's email and servers,
evaluation of network routing, interconnect, and firewall hardware and software
compliance, evaluation and upgrade of the Company's telephone, security, and
voicemail equipment and evaluation of the Company's products. The Company's
review of the Year 2000 issue with respect to its internal systems preliminarily
indicates no material problems.
As of June 1999, the following Year 2000 projects are in process: upgrade
of the MIS system software (expected completion is September 1999), continued
tracking of critical vendors and identification of any material vendor problems
(ongoing during 1999) and evaluation of the Company's EDI partners (expected
completion is October 1999). Although testing is not complete, it appears that
the Company's products are "Year 2000 compliant" although, some products may
require the user to perform a simple reset of the product (ongoing during 1999).
As of June 1999, the Company's aggregate expenditures (excluding employee costs)
in connection with Year 2000 compliance has been less than $20,000 and the
Company estimates the total cost of its Year 2000 projects will be approximately
$50,000.
The Company currently does not anticipate that the cost of Year 2000
compliance will be material to its financial condition or results of operations.
However, satisfactorily addressing the Year 2000 issue is dependent on many
factors, some of which are not completely within the Company's control. Further,
the Company does not currently have any contingency plans if its planning
activities fail. Should the Company's internal systems or the internal systems
of 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 failure to correct a material Year 2000 problem could
result in an interruption in, or failure of, certain normal business activities
or operations. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of third-party
suppliers and customers, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on the
Company's results of operations, liquidity or financial condition. The Company's
Year 2000 compliance project is expected to significantly reduce the Company's
level of uncertainty about the Year 2000 issue and, in particular, about the
Year 2000 compliance and readiness of third parties it deals with. The Company
believes that, with the implementation of new business systems and completion of
the project as scheduled, the possibility of significant interruptions of normal
operations should be reduced.
10
<PAGE>
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 of Operations".
Liquidity and Capital Resources
Net cash used by operations was $216,000 in the first six months of 1999
compared to $495,000 for the same period last year. The use of cash from
operating activities during the first six months of 1999 is due to a net loss
before depreciation and an increase in accounts receivable, substantially offset
by a decrease in inventories and an increase in accounts payable. The use of
cash from operating activities during the first six months of 1998 is primarily
due to a net loss before depreciation, an increase in receivables, offset
partially by a decrease in inventories and recoverable income taxes. Net cash
provided by investing activities in the first six months of 1999 was $2,000, as
the Company received $52,000 in connection with the sale of Nova, offset
partially by property and equipment expenditures primarily for computers,
software and engineering equipment used in research and development and other
activities. Net cash used by investing activities in the first six months of
1998 was $205,000, due to property and equipment expenditures primarily for
computers, software and engineering equipment used in research and development
and other activities. Net cash provided by financing activities during the first
six months of 1999 was $40,000, primarily due to an increase in 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 in financing
activities during the first six months of 1998 was $632,000 primarily from the
Promissory Note and the receipt of cash from the exercise of the stock options
issued under the Company's Stock Option Plans.
The Company has incurred losses and negative cash flows from operations
for each of the two years in the period ended June 30, 1999 and is dependent
upon support from a director and significant shareholder and upon generating
sufficient revenues from existing and soon to be released products in order to
fund operations. In addition, Management has taken steps to reduce costs,
including the sale of its Nova Systems Division, which had incurred losses in
each of the two years in the period ended December 31, 1998. The Company is
assessing its product lines to identify how to enhance existing or create new
distribution channels. During 1999, the Company is developing and expects to
release two next generation products for its core Video Production segment. 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
1999. The Company does not currently have any commitment from a commercial
source or its director and significant shareholder to provide any additional
funding as of the date of this report.
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
1999.
11
<PAGE>
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's market risk disclosures pursuant to Item 3 are not material
and are therefore not required.
12
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Document
----------- -----------------------
10.14 Promissory Note between Carl Berg and Videonics Inc.
dated April 16, 1999
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended June 30,
1999.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VIDEONICS, INC.
----------------------------------
Registrant
August 13, 1999
----------------------------------
Date
By: /s/ Gary L. Williams
----------------------------------
Gary L. Williams
Vice President of Finance,
Chief Financial Officer and
Assistant Secretary
(Principal Financial and Accounting
Officer and Authorized Signer)
14
<PAGE>
INDEX OF EXHIBITS
Exhibits:
10.14 Promissory Note between Carl Berg and Videonics Inc. dated
April 16, 1999...........................................16
27 Financial Data Schedule..............................................17
15
EXHIBIT 10.14
This loan replaces the note dated October 16, 1998.
April 16, 1999
Carl Berg
10050 Bandley Drive
Cupertino, CA 95014
BORROWER: Videonics, Inc.
LENDER: Carl Berg
This letter is our promise to repay.................................. $1,035,000
cash loaned to Borrower. This loan is due and payable on January 16, 2001.
Interest will be due on the outstanding balance for the actual days outstanding
from January 16, 1999 at an annual interest rate of 8.0%. Interest will be paid
at maturity on January 16, 2001.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower defaults under
any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or
person that may materially affect any of Borrower's property or
Borrower's ability to repay this loan or perform Borrower's obligations
under this loan. (c) Borrower becomes insolvent, a receiver is appointed
for any part of Borrower's property, Borrower makes an assignment for the
benefit of creditors, or any proceeding is commenced either by Borrower
or against Borrower under any bankruptcy or insolvency laws.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance of this loan and all accrued unpaid interest immediately due, without
notice, and then Borrower will immediately pay that amount. Lender may delay or
forgo enforcing any of its rights or remedies under this loan without losing
them.
GENERAL: This note has been delivered to Lender and accepted by Lender in the
State of California. If there is a lawsuit, Borrower agrees upon Lender's
request to submit to the jurisdiction of the courts of Santa Clara County, the
State of California. This loan shall be governed by and construed in accordance
with the laws of the State of California.
BORROWER: Videonics, Inc.
By: /s/ James A. McNeill
----------------------------------------
James A. McNeill, Senior Vice President
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S INCOME STATEMENT AND BALANCE SHEET DATED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 663
<SECURITIES> 0
<RECEIVABLES> 1,115
<ALLOWANCES> 0
<INVENTORY> 4,801
<CURRENT-ASSETS> 6,669
<PP&E> 948
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,661
<CURRENT-LIABILITIES> 2,338
<BONDS> 1,035
0
0
<COMMON> 20,652
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,661
<SALES> 7,059
<TOTAL-REVENUES> 7,059
<CGS> 4,137
<TOTAL-COSTS> 4,137
<OTHER-EXPENSES> 4,538
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,644)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,644)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
