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, 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) (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:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
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. [X]
At March 1, 1999, the aggregate market value of Common Stock held by
non-affiliates of the Registrant was approximately $3,133,971
As of March 1, 1999, there were 5,858,149 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Materials from the Registrant's definitive Proxy Statement relating to
its 1999 Annual Meeting of Shareholders to be held on or about August 19, 1999
(the "Proxy Statement") have been incorporated by reference into Part III, of
this Report.
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VIDEONICS, INC.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS....................................................... 3
ITEM 2. PROPERTIES.....................................................18
ITEM 3. LEGAL PROCEEDINGS..............................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...........18
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS............................................19
ITEM 6. SELECTED FINANCIAL DATA........................................19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................20
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.....30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY................51
ITEM 11. EXECUTIVE COMPENSATION.........................................51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.....................................................51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.......................................................52
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PART 1
This Annual Report on Form 10-K contains forwarding-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, 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 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 advancement, risks
associated with foreign operations, risks associated with the Company's efforts
to comply with Year 2000 requirements, and other factors, including those listed
below.
ITEM 1. BUSINESS
Videonics, Inc., a California corporation organized in 1986 (the
"Company" or "Videonics"), 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, 1998, more than
530,000 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. 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,
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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 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
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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 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.
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The Videonics Solution
The Company's solution is to design, develop, manufacture and market
products that incorporate advanced proprietary digital video technologies to
significantly reduce 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 its digital video post-production products.
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 the 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.
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 its recently sold Nova Division in Canton,
Connecticut, the Company contracts with third party manufacturers located in
Mexico for most product manufacturing.
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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 engineers or contract employees. The software is
proprietary and has been developed by the Company's software engineers or
contract employees.
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.
PROPRIETARY ASIC AND SOFTWARE CONTENT OF SELECTED PRODUCTS
Approximate Approximate Lines Year
Product ASIC Gate Count of Software Code Shipped
------- --------------- ---------------- -------
Sound Effects Mixer 0 1,000 1991
Thumbs Up Video Editor 4,000 6,000 1992
Video TitleMaker 2000 20,000 25,000 1994
Digital Video Mixer 62,000 15,000 1994
Edit Suite 8,000 28,000 1995
PowerScript 142,000 100,000 1996
Effetto Pronto (1) 250,000 600,000 1997
MXPro 118,000 107,000 1998
(1) Beta version shipped in 1997 with production version shipped in 1998.
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 $179
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, 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 time base corrector ("TBC")
feature that allows it to execute video mixing. A reduced view of all four video
inputs on a single "preview" monitor shows the action of all
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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
enables 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 accepts
S-video as well as composite video signals. 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.
MXPro. The MXPro Digital Video Mixer first shipped in April of 1998.
Designed from the ground up, the MXPro is the only 4-input, 10-bit video mixer
in its price category. Over 500 different effects, including stars, hearts and
diamonds, hard edges, soft edges, colored borders and shadows provide a
multitude of options for the creative video professional. Thirty transitions can
be placed in a user-definable menu for easy access. Basic, trailing effects
shapes, edges and the user-definable effects are organized into transition
"banks" and can be easily accessed with the press of one button. MXPro's built
in color correction capability and TBC eliminate the need for dedicated,
specialized equipment providing a similar function. Color correction parameters
can be selected separately for each channel of video. MXPro boasts a
signal-to-noise ratio of greater than 60db and bandwidth of 5.5mhz. MXPro
incorporates upgradeable architecture to support the future addition of DV
(Digital Video) inputs and outputs. MXPro has won several awards including: Best
"Stand Alone Special Effects Generator" from VideoMaker and the 1998 A/V Video
Magazine Platinum Award. The MXPro has a U.S. suggested retail price of $1,799.
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 seven 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 (General Purpose Interface) trigger input
allows remote
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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. In 1998, Personal TitleMaker won the Best Production Accessory Award
from Camcorder User Magazine.
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 3.0
won the VideoMaker 1998 Accessory product of the year. 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 MPEG video capture device
which allows PC and laptop users to send video e-mails, add streaming video to
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.
Python has a U.S. suggested retail price of $349.
Broadcast
Effetto Pronto. The first Effetto Pronto beta units shipped in limited
quantities in the fourth quarter of 1997 followed by production shipments in
June of 1998. Effetto Pronto consists of Effetto, a QuickTime based compositing
software component 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 character generator elements in real-time.
Effetto Pronto enables significant increases in productivity and frees the
creative process by allowing multiple iterations, rapid re-edits and rendering
speeds up to ten times faster than other compositing products. Effetto Pronto
offers virtually unlimited creative control, with effects and functions
previously unavailable in an integrated compositing package. Features include:
chrominance and luminance keying; a full complement of special effects; a
professional character generator with complete animation control over every
letter of text, the ability to design in true three-dimensional workspace and
instant feedback on a video monitor. Effetto software version 1.1 began shipping
in November of 1998 and included support for certain third-party Adobe After
Effects plug-ins. Effetto Pronto won several awards in 1998 including: 1998
Video Systems Vanguard Award, Digital Producer Magazine Best product of 1998,
1998 A/V Video Magazine Platinum Award in the Compositing/DVE category, Top
Tools of 1998 from Interactivity Magazine and the Editors Choice Award from
Videography Magazine for NAB'97. The Videonics' Effetto Pronto system has a U.S.
suggested retail price of $4,995.
PowerScript. First shipped in September 1996, PowerScript is a standalone
character generator that generates images, characters, and graphics internally,
without the aid of an external computer. Rotation, sizing, stretching, outlines,
color, transparency, and other advanced functions are imaged by its internal
PostScript engine. PowerScript is designed for broadcast, video production,
multimedia, industrial, and videography applications. It displays high quality
(10-bit digital video) anti-aliased titles and offers the character, graphics
display,
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and formatting features supported by the PostScript 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 (Phase Alternating Line) and NTSC (National
Television Standards Committee) versions. In 1998, two models of PowerScript
Studio 4000 were introduced and shipped. These models are a step-up from the
PowerScript Studio and include enhanced version 4.0 software and come bundled
with PowerScript Communicator, a Windows based software product that includes
control and scheduling of up to 10 PowerScript from remote locations. While
PowerScript is a standalone product, it also includes extensive networking
capabilities that allow users to connect the product to a separate computer or
computer network. It supports industry-standard Internet protocols (TCP/IP, FTP,
PPP) and accepts serial or Ethernet connections. These allow desktop computers,
using standard software and hardware, to transfer projects, fonts, graphics, and
other files. PowerScript images EPS-format graphic files, created using standard
graphic applications like Adobe Illustrator, CorelDraw, and Adobe Photoshop, on
standard platforms, including Macintosh, Windows, DOS, UNIX, and Amiga. A wide
range of additional features include expandable PC Card (PCMCIA) storage, TBC,
user-definable styles, roll and crawl, transition effects, clock/calendar, GPI
trigger, and video test patterns. The Videonics PowerScript product line has a
U.S. suggested retail price range of $3,000 to $6,000.
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. In January 1999, the Company completed the sale of certain of its
assets and the assumption of certain of its liabilities related to its Nova
Systems Division to a private company in Massachusetts. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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 is
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.
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 11
different U.S. trade shows during 1998, including the
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International Broadcasters Convention, the National Association of Broadcasters,
and INFOCOMM.
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 1998, 1997, and 1996, respectively, sales in
the United States accounted for approximately 64%, 67%, and 58% 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 and its
German subsidiary, which service 78 different countries, and by selling selected
products to international private label customers. In 1998, 1997, and 1996,
respectively, sales outside the United States accounted for approximately 36%,
33%, and 42% of the Company's total revenues. As of December 31, 1998, the
Company had 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.
Protectionist trade legislation in either the United States or other
countries, such as a change in the current tariff structures, export compliance
laws or other trade policies, could adversely affect the Company's ability to
sell in international markets. Furthermore, revenues from outside the United
States are subject to inherent risks related thereto, including the general
economic and political conditions in each country. There can be no assurance
that the economic crisis and currency issues currently being experienced in
certain parts of Asia and South America will not have a material adverse effect
on the Company's revenue or operating results in the future.
Sales made by the Company outside the United States are priced in U.S.
dollars and are, therefore, not subject to currency exchange fluctuations. The
Company's primary exposure to changes in exchange rates is related to its German
subsidiary and changes in the German
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mark. In 1998, 1997 and 1996 foreign currency fluctuations did not have a
material affect on the Company's operating results.
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 that 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 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 that service the broadcast
industry.
Desktop video products, such as 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 customer
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 character generator 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 seeks to distribute through
select private label relationships 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 that was manufactured by the Company and is sold under the Panasonic
brand name. While the Company has discontinued this product, it has an ongoing
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,
12
<PAGE>
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 between 1996 and 1997 and
remained flat between 1997 and 1998.
For 1998, 1997, and 1996, no one customer accounted for more than 10% of
revenues. Any termination by a significant customer of its relationship with the
Company or material reduction in the amount of business such a customer does
with the Company could materially adversely effect the Company's business,
financial condition or operating results. Also, see Note 10 of Notes to
Consolidated Financial Statements for information concerning sales to foreign
customers and industry segments.
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.
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, 1998, the Company employed 32 persons directly in manufacturing and
operations management in Campbell and has a permanent quality and test assurance
program at its contract manufacturers' locations in Mexico. Nova employed one
person 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
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<PAGE>
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 1998, 1997,
and 1996, the Company invested $4.8 million, $7.0 million, and $5.0 million,
respectively, constituting 24%, 35%, and 17% 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, 1998, the Company employed 32 hardware and software
engineers with technical skills in design and development of ASICs, digital or
analog video signal generation-processing, or embedded software.
In 1998, the Company continued to experience substantial delays in
completing the successful development of products. The Company completed and
began shipping MXPro and Effetto Pronto in April 1998 and June 1998,
respectively. MXPro, the Company's advanced Digital Mixer was originally
scheduled to begin shipments in the fourth quarter of 1997. Effetto Pronto, the
Company's digital video effects and compositing system, was originally scheduled
to begin production shipments in 1997. Delays in shipments of MXPro and Effetto
Pronto contributed to the revenue shortfall for 1998. In addition, the Company
had expected to introduce a digital video product for its Videographer market,
late in 1998 with first shipments to occur in early 1999. As of March 23, 1999,
this product has not yet been introduced to market. 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 beta shipments of Effetto
Pronto occurred later than originally planned, resulting in a significant
revenue shortfall for 1997, which, in turn, significantly affected profitability
as the Company suffered substantial operating losses. 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 that would have an adverse effect on the profitability of its
operations. There can be no assurance
14
<PAGE>
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 1998, 1997 and 1996. 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 1998, 1997
and 1996, which has had a substantial adverse impact on the Company's results of
operations. Such results have, in any event, fluctuated widely on a quarterly
basis. There can be no assurance that any new products will be developed
successfully, that the Company will be able to introduce additional new products
which will gain acceptance in the marketplace, 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 the majority of these desktop computer and
workstation-based vendors sell more sophisticated products primarily for the
broadcast professional and business and industrial markets at significantly
higher price points than the Company's products, these vendors are now
introducing products which target many of the same markets as the Company's
products and at similar price points.
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.
The desktop compositing and effects market is highly competitive and
requires the Company to partner with other companies offering complementary
products in order to provide complete solutions to customers. These companies
include Media 100, Artel, Puffin
15
<PAGE>
Designs and ICE. All of these and other companies continue to work with the
Company to demonstrate the compatibility of their respective offerings at
various trade shows and seminars. Maintaining this compatibility, while
enhancing its own products, continues to put a tremendous burden on the
Company's engineering resources. The Company is currently aware of several
competitors in this market, including Adobe and Discreet Logic. Many of these
companies have significantly greater financial, technical, manufacturing and
marketing resources than the Company. There can be no assurance that Company
will be able to keep up with the rapid technological change and evolving
industry standards.
In addition, certain product categories and market segments, on a
region-by-region basis, in which the Company does or may compete, are dominated
by certain vendors. As a result, the Company's ability to compete in these areas
may be limited.
The Company believes that the markets for its 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. 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. There can be no assurance however, that the Company will
have access to the Videonics brand name and trademark in all countries. The
inability to use the Videonics brand name and trademark in a country could
materially and adversely affect the Company's business in that country. The
Company routinely enters into confidentiality and assignment of invention
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
16
<PAGE>
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 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.
Employees
As of March 1, 1999, the Company had 88 full-time employees, including 25
in research and development, 28 in sales and marketing, 26 in operations, and 9
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.
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<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 is currently renegotiating this lease and expects to sign
a new lease at current market rates. As a new lease has not yet been signed,
there can be no assurance that this will occur. The Company also has a research
and development facility in Millis, Massachusetts, which has 2,500 square feet
under a lease, which expires on December 31, 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, 1999 unless terminated earlier
by the Company by providing a 60-day advance notice. On January 29, 1999, the
Company submitted its 60-day notice of termination. The Company had an
administrative, sales and marketing and research and development facility in
Belmont, California, totaling 6,050 square feet under a sublease. In December
1998, in accordance with the lease expiration, the Company moved its
administrative, sales and marketing and research and development personnel to
the Company's Campbell, California location.
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, 1998.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock has been listed on the Nasdaq National Market
System under the symbol "VDNX" since its initial public offering that 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, 1998 and 1997.
Q1 Q2 Q3 Q4
-- -- -- --
FY98 High $4.50 $4.63 $2.13 $1.50
Low $1.50 $1.38 $0.75 $0.47
FY97 High $9.50 $7.63 $7.63 $7.25
Low $3.75 $3.50 $4.38 $3.50
As of March 1, 1999, there were approximately 2,000 holders of the
Company's Common Stock. The closing sales price of the Company's Common Stock on
March 1, 1999 was $1.13 per share.
On October 6, 1998, the Company received a notice from Nasdaq that the
Company's Common Stock would be subject to delisting from the Nasdaq National
Market System ("Nasdaq/NMS") because the Company no longer met the $5,000,000
market value of public float (MVPF) requirement pursuant to Marketplace Rule
4450(a)(2) under maintenance standard 1. On March 11, 1999 the Company had a
hearing with Nasdaq with respect to delisting of the Company's shares. The
Company has not yet received notice of Nasdaq's decision resulting from such
hearing.
If Nasdaq delists the Company's Common Stock from Nasdaq/NMS, the Company
believes that it will meet the requirements for listing on the Nasdaq Small Cap
Market and that its Common Stock would, therefore, continue to be traded on the
Nasdaq market. However, there can be no assurance that the Company's Common
Stock will be listed on the Nasdaq Small Cap Market if such shares are delisted
from Nasdaq/NMS. Any delisting would likely affect shareholder liquidity with
respect to their common stock.
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.
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<PAGE>
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, 1998, and with respect to the balance sheets at December 31, 1998,
1997, 1996, 1995 and 1994 are derived from financial statements that have been
audited by PricewaterhouseCoopers LLP, 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, 1998 and 1997, and the statement of operations
for each of the three years in the period ended December 31, 1998 and the
independent auditors' report thereon, are included in Item 8 of this Report.
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<PAGE>
<TABLE>
Statement of Operations Data:
(in thousands, except per share data)
<CAPTION>
Year Ended December,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $19,672 $19,955 $29,195 $33,561 $31,498
Operating income (loss) (6,722)(4) (12,984)(3) 401 4,811(2) 5,627
Net income (loss) (6,713)(4) (13,441)(3) 744 3,746(2) 5,993(1)
Net income (loss) per
share - basic (1.15)(4) (2.34)(3) 0.13 0.69(2) 1.57(1)
Shares used in per share
calculation - basic 5,833 5,744 5,616 5,413 3,817
Net income (loss) per
share - diluted (1.15)(4) (2.34)(3) 0.13 0.65(2) 1.39(1)
Shares used in per share
calculation - diluted 5,833 5,744 5,933 5,791 4,324
Balance Sheet Data:
Working capital $ 4,404 $ 9,902 $21,412 $20,127 $18,394
Total assets 9,164 15,694 27,958 27,350 22,279
Shareholders' equity 5,927 12,606 25,731 24,149 19,403
Dividends declared per
share (5) - - - - 0.71
<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.
(3) Results for 1997 include: a $1.9 million write-off of intangible assets
related to Nova Systems; a $1.6 million increase in inventory reserves for
components rendered obsolete by product revisions of which approximately
$608,000 related to PowerScript and $265,000 related to KUB Systems and
$700,000 related to excess and obsolete assets at Nova Systems; a $124,000
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 equaled $9.6 million.
(4) Results for 1998 include a $1.3 million charge in the fourth quarter for
the write-down of the Company's open systems inventory to its net
realizable value.
(5) 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>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-K, including the following sections,
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,
including those listed below.
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 1996, the Company continued to diversify into the broadcast and
desktop markets with the acquisition of the assets of KUB Systems ("KUB") for
$350,000 in cash. KUB is 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. 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.
In 1997, the Company continued to improve the PowerScript Character
Generator. New versions of the operating software that 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 that 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
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<PAGE>
shipped in the fourth quarter of 1997, the first three quarters of 1997 did not
contain revenues from any of the aforementioned new products. To reduce
expenses, the Company reduced its personnel by twelve percent on January 15,
1998.
In the second quarter of 1998, the Company began production shipments of
MXPro and Effetto Pronto. Sales of MXPro tracked closely to the Company's plan,
while sales of Effetto Pronto were significantly below plan. Effetto Pronto did
not generate meaningful revenues during 1998, as customer acceptance was slower
than expected. Effetto Pronto's lower than anticipated revenues, combined with
continued significant research and development and sales and marketing expenses
associated with the product, resulted in a significant operating loss for the
Company. The Company expects that with improved strategic marketing efforts and
the release of a significant software upgrade, the product will better reach its
intended customer base. The next major software upgrade will contain significant
feature enhancements and is scheduled for release in the second quarter of 1999.
In addition, sales of the Company's open system products decreased significantly
from their 1997 run rate, due primarily to increased competition. As such, in
the fourth quarter of 1998, the Company reduced its open systems inventory to
its net realizable value. These factors, combined with declining sales of the
Company's older Videographer products and delays in shipment of the Company's
new Videographer products, resulted in operating losses in each quarter of 1998.
The Company expects losses during its first quarter of 1999, with results for
the remainder of the year dependent on planned shipment and customer acceptance
of new products. Although the Company reduced its 1998 operating expenses by
nearly $4.0 million compared to 1997, the Company further reduced personnel and
initiated other expense reductions in January 1999, to lower the Company's
breakeven point.
On January 29, 1999, the Company completed the sale of certain of the
assets and the assumption of certain of the liabilities related to its Nova
Systems Division ("Nova") to a private 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 intangible assets related to Nova. The sale
of Nova is expected to provide Videonics with net revenues from royalties in
1999. These royalties are predicated upon future sales of Nova products by the
acquiring company. The sale of Nova will not result in a capital gain or loss to
Videonics.
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Results of Operations
The following table sets forth certain items from the Company's
statements of income as a percentage of net revenues for the periods indicated:
Year Ended December 31,
1998 1997 1996
---- ---- ----
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 69.1 69.7 52.3
Gross profit 30.9 30.3 47.7
Operating expenses
Research & development 24.4 34.8 17.2
Selling & marketing 33.5 40.3 23.1
General & administrative 7.2 8.9 4.7
Amortization of intangible assets - 2.0 1.3
Write-off of intangible assets - 9.4 -
----- ----- -----
Total operating expenses 65.1 95.4 46.3
----- ----- -----
Operating income (loss) (34.2) (65.1) 1.4
Other income, net - 1.3 1.2
----- ----- -----
Income (loss) before income taxes (34.2) (63.8) 2.6
Provision for income taxes - 3.6 0.1
----- ----- -----
Net income (loss) (34.2)% (67.4)% 2.5%
====== ====== =====
Comparison of Years Ended December 31, 1998 and 1997
Net Revenues. Net revenues decreased 1% to $19.7 million in 1998, from
$20.0 million in 1997. This decrease is primarily attributable to reduced sales
of open systems products and older Videographer products offset by the
introduction of MXPro and Effetto Pronto. International revenues for 1998 were
$7.0 million or 36% of net revenues compared to $6.6 million or 33% of net
revenues in 1997.
Gross Profit. Gross profit remained at $6.1 million for both 1998 and
1997. Gross profit, as a percentage of net revenues, increased to 31% in 1998
from 30% in 1997. In 1998, the Company recorded a $1.3 million increase in
inventory reserves to reduce the carrying value of its open systems inventory.
In 1997, the Company recorded a $1.6 million increase in inventory reserves for
components rendered obsolete by product revisions of which approximately
$608,000 related to PowerScript, $265,000 related to KUB and $700,000 related to
excess and obsolete assets at Nova; and a $124,000 increase in warranty reserves
for PowerScript hardware updates.
Research and Development. Research and development expenses decreased 31%
to $4.8 million during 1998 compared to $7.0 million in 1997, and decreased as a
percentage of net revenues to 24% in 1998 from 35% in 1997. The decreased
expenses were primarily due to the reductions in personnel and decreased usage
of consultants as significant work on PowerScript and MXPro was completed in
1998. The Company further anticipates that research and development expenses
will decrease in 1999 due to reductions in personnel.
Selling and Marketing. Selling and marketing expenses decreased 18% to
$6.6 million in 1998 compared to $8.0 million in 1997, and decreased to 34% in
1998 compared to 40% in
24
<PAGE>
1997, as a percentage of net revenues. This decrease in selling and marketing
expenses was primarily a result of decreased advertising and promotional
expenses as the Company brought advertising expenditures in-line with current
revenue levels.
General and Administrative. General and administrative expenses decreased
20% to $1.4 million in 1998 compared to $1.8 million in 1997, and decreased to
7% in 1998 compared to 9% in 1997 as a percentage of net revenues. This decrease
was primarily due to a charge of $375,000 in 1997 to bad debt reserves for
specific accounts.
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. The write-off totaled $1.9 million and
was primarily due to continued losses and lack of commercially successful new
product introductions.
Interest Expense, net. In 1998 the Company recorded net interest expense
of $21,000 compared to net interest income of $261,000 in 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.
Provision for Income Taxes. At December 31, 1998 the Company recorded a
tax benefit of $30,000 on a pretax loss of $6.7 million. This benefit was
primarily the result of a state tax refund. In addition, the Company recorded an
income tax benefit of $3.7 million on its pretax loss offset completely by a
$3.7 million increase in the valuation allowance against the Company's deferred
tax assets. The Company continued to maintain 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. 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.
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 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, MXPro 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 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
25
<PAGE>
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 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."
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 February 1999, the Company had completed several Year 2000
projects, including upgrades of its Windows NT Operating System and tape backup
software, upgrade of its UNIX workstations, evaluation of the Company's MIS
system, evaluation of the Company's email and servers, evaluation of network
routing, interconnect, and firewall hardware and software compliance, evaluation
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 February 1999, the following Year 2000 projects are in process:
completion of the new email system and the conversion of email from the old
system, upgrade of the UNIX Operating System for the HP3000 hardware which
supports the Company's MIS system (expected completion is April 1999). Upgrade
of the MIS system software (expected completion is April 1999), development of a
list of critical vendors and identification of any material vendor problems
(expected completion is April 1999) and evaluation of the Company's EDI partners
(expected completion is May 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 February 1999, the Company's aggregate expenditures (excluding
employee costs) in connection with Year 2000 compliance has been less than
$10,000 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
26
<PAGE>
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.
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".
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 $1.6 million increase
in inventory reserves for components rendered obsolete by product revisions of
which approximately $608,000 related to PowerScript, $265,000 related to KUB
Systems and $700,000 related to excess and obsolete assets at Nova and a
$124,000 increase in warranty reserves was taken 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 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 were 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.
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. Additionally, expenses for the Company's German
sales office were included for the full year compared to only three
27
<PAGE>
months of expenses in 1996 as the Company established its German sales office in
October 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. The Company acquired
the assets of KUB Systems in May of 1996.
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.
28
<PAGE>
Quarterly Results of Operations
<TABLE>
The following table sets forth certain quarterly financial information
for the periods indicated. This information has been derived from unaudited
financial statements that, in the opinion of management, have been prepared on
the same basis as the audited information, and includes all normal recurring
adjustments necessary for a fair presentation of such information. The results
of operations for any quarter are not necessarily indicative of the results to
be expected for any future period.
<CAPTION>
1998 1997
---------------------------------- ---------------------------------
(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 $4,719 $5,907 $5,025 $4,021 $4,501 $5,467 $5,360 $4,627
Gross profit (loss) 1,742 2,437 2,066 (161) 959 2,290 2,444 362
Operating loss (1,705) (883) (1,128) (3,006) (3,508) (1,747) (1,707) (6,022)
Net loss (1,706) (841) (1,137) (3,029) (2,412) (1,221) (1,168) (8,640)
Net loss per share - basic and
diluted (0.29) (0.14) (0.19) (0.52) (0.42) (0.21) (0.20) (1.50)
Shares used in computing per
share amounts - basic and diluted 5,790 5,831 5,854 5,857 5,730 5,736 5,741 5,772
</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. In 1998 and 1997, 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 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. At December 31, 1998, the
Company's principal source of liquidity is cash of approximately $837,000.
Throughout most of 1998, the Company maintained borrowings from a major
shareholder ranging from $600,000 to $1.0 million at interest rates between 8.0%
- - 8.5%, terms that the Company considered more favorable than those it could
obtain from other commercial sources. At December 31, 1998, the Company had
borrowings from this shareholder totaling $1.0 million at an interest rate of
8.0% per year, due October 16, 1999.
29
<PAGE>
Operating Activities. In 1998, net cash used in operating activities was
$811,000, resulting primarily from an operating loss of $3.7 million after
adjusting for non-cash items, offset by a decrease in accounts receivable of
$414,000 and a decrease in inventories of $2.4 million. Accounts receivable
decreased because of lower sales during the fourth quarter of 1998 compared to
1997 and improved collections. Inventories decreased as the Company better
aligned its inventory with its current revenue levels. 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.
Investing Activities. Capital equipment expenditures in 1998, 1997 and
1996 were, $378,000, $1.6 million, and $1.3 million 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 $440,000 through the
end of 1999. 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.
Financing Activities. In 1998, the Company received $34,000 from the
exercise of stock options under the Company's stock option plans. In 1997, the
Company received $154,000 from the exercise of stock options under the Company's
stock option plans. In 1996, the Company received $100,000 from the exercise of
stock options under the Company's stock option plans. Additionally in 1996, the
Company paid the $1.0 million promissory note issued in connection with the Nova
acquisition.
The Company has incurred losses and negative cash flows from operations
for each of the two years in the period ended December 31, 1998 and is dependent
upon support from a substantial shareholder and upon generating sufficient
revenues from existing and soon to be released products in order to fund
operations. The substantial shareholder has agreed that, at the Company's
option, the loan may be extended until January 2000. In addition, Management has
taken steps to reduce costs, and after year-end announced 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 a commitment from a commercial source or its substantial
shareholder to provide additional funding as of the date of this report.
30
<PAGE>
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company's market risk disclosures pursuant to item 7A are not
material and are therefore not required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Balance sheets of the Company as of December 31, 1998 and 1997 and
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1998, together with the related notes and
the report of PricewaterhouseCoopers LLP, independent accountants, are set forth
on pages 32 to 50. Other required financial information is set forth herein, on
page 59.
31
<PAGE>
Videonics, Inc.
Consolidated Financial Statements
as of December 31, 1998 and 1997
32
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Videonics, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholder's equity and of cash flows
present fairly, in all material respects, the financial position of Videonics,
Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
San Jose, California
March 26, 1999
33
<PAGE>
Videonics, Inc.
Consolidated Balance Sheets
December 31, 1998 and 1997
(in thousands)
- --------------------------------------------------------------------------------
1998 1997
Assets
Current assets:
Cash and cash equivalents $ 837 $ 992
Accounts receivable, net 852 1,291
Inventories 5,830 9,938
Prepaid income taxes -- 550
Prepaids and other current assets 122 219
-------- --------
Total current assets 7,641 12,990
Property and equipment, net 1,507 2,438
Other assets 16 266
-------- --------
Total assets $ 9,164 $ 15,694
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Loan payable to shareholder $ 1,000 $ --
Accounts payable 947 1,442
Accrued expenses 1,290 1,646
-------- --------
Total current liabilities 3,237 3,088
-------- --------
Commitments and contingencies (Note 6)
Shareholders' equity:
Preferred stock, no par value:
Authorized: 10,000 shares in 1998 and 1997;
Issued and outstanding: None -- --
Common stock, no par value:
Authorized: 30,000 shares in 1998 and 1997;
Issued and outstanding: 5,858 shares in 1998 and
5,785 shares in 1997 20,647 20,613
Accumulated deficit (14,720) (8,007)
-------- --------
Total shareholders' equity 5,927 12,606
-------- --------
Total liabilities and shareholders' equity $ 9,164 $ 15,694
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
34
<PAGE>
Videonics, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)
- --------------------------------------------------------------------------------
Year Ended December 31,
1998 1997 1996
Net revenues $ 19,672 $ 19,955 $ 29,195
Cost of revenues 13,588 13,900 15,266
-------- -------- --------
Gross profit 6,084 6,055 13,929
-------- -------- --------
Operating expenses:
Research and development 4,798 6,951 5,027
Selling and marketing 6,593 8,041 6,741
General and administrative 1,415 1,779 1,367
Amortization of intangible assets -- 393 393
Write-off of intangible assets -- 1,875 --
-------- -------- --------
12,806 19,039 13,528
-------- -------- --------
Operating income (loss): (6,722) (12,984) 401
Interest, net (21) 261 361
-------- -------- --------
Income (loss) before income taxes (6,743) (12,723) 762
Provision for (benefit from) income taxes (30) 718 18
-------- -------- --------
Net income (loss) $ (6,713) $(13,441) $ 744
======== ======== ========
Net income (loss) per share - basic $ (1.15) $ (2.34) $ 0.13
======== ======== ========
Shares used in per share calculation - basic 5,833 5,744 5,616
======== ======== ========
Net income (loss) per share - diluted $ (1.15) $ (2.34) $ 0.13
======== ======== ========
Shares used in per share calculation - diluted 5,833 5,744 5,933
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
35
<PAGE>
<TABLE>
<CAPTION>
Videonics, Inc.
Consolidated Statements of Shareholders' Equity
For each of the three years in the period ended December 31, 1998
(in thousands, except per share data)
- ------------------------------------------------------------------------------------------------
Retained
Earnings
Common Stock (Accumulated Shareholders'
Shares Amount Deficit) Equity
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1995 5,518 $ 19,459 $ 4,690 $ 24,149
Issuance of common stock from
exercise of options 187 100 -- 100
Amortization of deferred compensation -- 48 -- 48
Tax benefit from exercise of
nonqualified stock 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
Issuance of common stock from
exercise of options 73 34 -- 34
Net loss -- -- (6,713) (6,713)
-------- -------- -------- --------
Balances, December 31, 1998 5,858 $ 20,647 $(14,720) $ 5,927
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Videonics, Inc.
Consolidated Statements of Cash Flows
(in thousands)
- --------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,713) $(13,441) $ 744
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Loss on disposal of property and equipment 5 76 --
Depreciation and amortization 1,304 1,563 1,190
Provision for doubtful accounts 25 375 (10)
Provision for excess and obsolete inventories 1,661 1,641 (240)
Deferred income taxes -- 1,299 111
Write-off of intangible assets -- 1,875 --
Change in assets and liabilities:
Accounts receivable 414 1,740 428
Inventories 2,447 (2,270) (3,232)
Prepaid income taxes 550 670 (150)
Prepaid and other current assets 97 274 (203)
Other 250 (252) (3)
Accounts payable (495) 352 (136)
Accrued expenses (356) 509 97
-------- -------- --------
Net cash used in operating activities (811) (5,589) (1,404)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (378) (1,611) (1,303)
Net cash paid in acquisition -- -- (350)
Purchases of marketable securities -- -- (1,500)
Proceeds from marketable securities -- 1,500 4,708
-------- -------- --------
Net cash provided by (used in) investing activities (378) (111) 1,555
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of loans payable to shareholder 1,000 -- --
Repayment of notes payable -- -- (1,000)
Proceeds from issuance of common stock 34 154 100
-------- -------- --------
Net cash provided by (used in) financing activities 1,034 154 (900)
-------- -------- --------
Decrease in cash and cash equivalents (155) (5,546) (749)
Cash and cash equivalents at beginning of year 992 6,538 7,287
-------- -------- --------
Cash and cash equivalents at end of year $ 837 $ 992 $ 6,538
======== ======== ========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 43 $ -- $ 31
Income taxes $ 2 $ 5 $ 44
Supplement schedule of non-cash financing activities:
Tax benefit from exercise of nonqualified
stock options $ -- $ 126 $ 690
<FN>
The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
</TABLE>
37
<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 stand-alone 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
Basis of preparation
The Company has incurred losses and negative cash flows from operations
for each of the two years in the period ended December 31, 1998 and is
dependent upon support from a substantial shareholder and upon generating
sufficient revenues from existing and soon to be released products in
order to fund operations. The substantial shareholder has agreed that, at
the Company's option, the loan may be extended until January 2000. In
addition, Management has taken steps to reduce costs, and after year-end
announced the sale of its Nova Systems division which had incurred losses
for 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. Management expects that the cost
reductions together with revenue generated from these products will be
sufficient to meet all the Company's obligations as they become due.
Principles of consolidation
The consolidated financial statements include the accounts for 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 recognized revenues from gross sales, upon shipment of
product, provided all significant obligations have been met. A provision
is made to estimate customer returns and estimated warranty
repair/replacement costs at the time a sale is recorded.
38
<PAGE>
Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
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.
Advertising expense for the period ended December 31, 1998, 1997, and
1996 was $721,000, $1,412,000, and $947,000, 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.
Valuations 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.
Inventories
Inventories are stated at the lower of standard cost (which approximates
actual cost on a first-in, first-out basis) or net realizable value.
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.
Comprehensive income
There are no differences between net income (loss) for each of the three
years ended in the period to December 31, 1998, and the comprehensive
income (loss) for those periods.
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.
39
<PAGE>
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 calculates earnings per share in accordance with Financial
Accounting Standards No. 128 ("SFAS 128), "Earnings Per Share." 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 (loss) per share is
calculated by dividing net income (loss) 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.
Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, accounts receivable, 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 of similar instruments.
Recent accounting pronouncements
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" 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 on the balance sheet and measure those instruments at fair
value. Management has not yet evaluated the effect of these change on its
operations. SFAS 133 will be effective for the Company's fiscal year
2000.
3. 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
40
<PAGE>
Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
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
=======
4. Balance Sheet Detail
Accounts receivable comprise (in thousands):
December 31,
1998 1997
Trade accounts receivable $ 998 $ 1,546
Less allowance for doubtful accounts (146) (255)
------- -------
$ 852 $ 1,291
======= =======
Inventories comprise (in thousands):
December 31,
1998 1997
Raw materials $ 4,381 $ 7,649
Work in process 375 437
Finished goods 1,074 1,852
------- -------
$ 5,830 $ 9,938
======= =======
Property and equipment comprise (in thousands):
December 31,
1998 1997
Machinery and equipment $ 3,248 $ 3,933
Furniture and fixtures 86 86
Leasehold improvements 179 179
Tooling 1,015 1,747
------- -------
4,528 5,945
Less accumulated depreciation and amortization (3,021) (3,507)
------- -------
$ 1,507 $ 2,438
======= =======
41
<PAGE>
Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Intangible assets comprise (in thousands):
December 31,
1997
Purchased technology $ 2,443
Goodwill 316
-------
2,759
Less accumulated amortization (884)
Write-off of intangible assets (1,875)
-------
$ -
=======
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.
Accrued expenses comprise (in thousands):
December 31,
1998 1997
Accrued advertising $ 163 $ 221
Accrued vacation 180 258
Salaries payable 228 239
Accrued acquisition reserve 239 250
Warranty reserve 77 198
Other accrued expenses 403 480
------- -------
$ 1,290 $ 1,646
======= =======
5. Loans Payable to Shareholder
At December 31, 1998, the Company has an unsecured loan from a
shareholder of the Company. 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.
6. 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, 1998, future minimum lease payments under
all non-cancelable operating leases were $192,000 and terminate in 1999.
Rent expense for the years ended December 31, 1998, 1997, and 1996
amounted to $448,000, $423,000 and $396,000, respectively.
42
<PAGE>
Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
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 or operations.
7. Income Taxes
The components of the provision for income taxes are as follows (in
thousands):
1998 1997 1996
Current:
Federal $ -- $ (380) $ (110)
State (30) -- 17
Deferred:
Federal -- 995 239
State -- 103 (128)
------- ------- -------
$ (30) $ 718 $ 18
======= ======= =======
The Company's effective tax rate on income (loss) before income tax
differs from the U.S. federal statutory regular tax rate as follows:
1998 1997 1996
Federal statutory income tax rate (34.0)% (34.0)% 34.0%
State income tax rate, net of federal benefit (7.3) (2.9) 5.7
Tax exempt interest -- -- (13.4)
Foreign net operating loss (5.4) 1.3 5.7
Research tax credits (4.8) (6.4) (32.8)
Other (3.8) 1.6 3.2
Increase in valuation allowance 54.9 46.0 --
------- ------- -------
(0.4)% 5.6 % 2.4%
======= ======= =======
43
<PAGE>
Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are presented below (in thousands):
1998 1997
Intangible assets $ 1,464 $ 1,366
Inventory reserves 1,322 891
Depreciation 47 45
Net operating loss carryforward 4,487 2,198
Tax credit carryforward 1,386 815
Deferred California research 442 --
Other accrued liabilities and reserves 405 537
------- -------
Subtotal 9,553 5,852
Less valuation allowance (9,553) (5,852)
------- -------
Net deferred tax asset $ -- $ --
======= =======
At December 31, 1998, the Company has federal and state net operating
losses of $11,500,000 and $2,750,000, respectively, which expire in 2018
and 2003, respectively. The Company also has federal and state tax credit
carryforwards of $850,000 and $550,000, respectively, which expire in
2018.
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 $5,852,000 at December 31,
1997 to $9,553,000 at December 31, 1998.
44
<PAGE>
Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
8. 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):
1998 1997 1996
Numerator - basic and diluted
Net income (loss) $ (6,713) $(13,441) $ 744
-------- -------- --------
Net income (loss) available to
common stockholders $ (6,713) $(13,441) $ 744
======== ======== ========
Denominator - basic
Weighted average common shares outstanding 5,833 5,744 5,616
-------- -------- --------
Basic net income (loss) per share $ (1.15) $ (2.34) $ 0.13
======== ======== ========
Denominator - diluted
Denominator - basic 5,833 5,744 5,616
Effect of dilutive securities:
Common stock options -- -- 317
-------- -------- --------
Diluted weighted average common shares 5,833 5,744 5,933
-------- -------- --------
Diluted net income (loss) per share $ (1.15) $ (2.34) $ 0.13
======== ======== ========
9. Shareholders' Equity
At December 31, 1998, 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 non-statutory stock
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 non-qualified 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.
45
<PAGE>
<TABLE>
<CAPTION>
Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------------------------------------------
A summary of stock option activity follows:
Outstanding Options
-----------------------------------------------------------------------
1987 and 1996 Plan Other
-------------------------- ------------ Weighted
Shares Average
Available Number of Number Exercise Exercise
for Grant Shares of Shares Price Total Price
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 136,510 590,927 -- $0.33-$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) -- 0.47-14.75 (1,413,857) 9.56
Options exercised -- (186,918) -- 0.33-7.50 (100,468) 0.54
----------- ------------ ----------- ----------
Balances, December 31, 1996 425,340 1,115,179 -- 0.33-14.75 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) -- 0.33-7.50 (154,128) 1.92
----------- ------------ ----------- ----------
Balances, December 31, 1997 377,168 1,083,202 -- 0.33-7.50 4,514,181 4.17
Options granted (871,354) 871,354 640,000 0.75-2.50 2,514,626 1.66
Options canceled 925,657 (925,657) (320,000) 0.47-7.50 (4,978,895) 4.00
Options exercised -- (73,250) 0.47 (34,183) 0.47
----------- ------------ ----------- ----------
Balances, December 31, 1998 431,471 955,649 320,000 $0.47-$5.00 $ 2,015,729 $ 1.58
=========== ============ =========== ==========
</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.
In March 1998, the Company granted a nonqualified stock option to an
officer of the Company to purchase a total of 320,000 shares of common
stock. The option was granted outside the Company's stock option plans,
at an exercise price of $2.13 per share, the fair market value of the
Company's Common Stock on the relevant date. On June 24, 1998, 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. In accordance with this offer, the option was canceled
and reissued at an exercise price of $1.50 per share, the fair market
value of the stock on June 24, 1998. Vesting of the new option will
follow the original option vest schedule except the option will remain
unvested until June 24, 1999 at which time vesting of new option will
vest according to the original vest schedule. This option is exercisable
for a term of ten years, vests over a four-year period and is cancelled
90 days after termination of employment. As of December 31, 1998, no
portion of the option was exercisable.
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.
46
<PAGE>
Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
On June 24, 1998, 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
669,222 shares at original exercise prices ranging from $2.50 to $5.00
per share were canceled and new options were issued at an exercise price
of $1.50 per share, the fair market value of the stock on June 24, 1998.
Vesting of the new options will follow the original options vest schedule
except options will remain unvested until June 24, 1999 at which time
vesting of new options will vest according to the original options vest
schedule.
Had compensation cost for the years ended December 31, 1998, 1997 and
1996 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, 1998, 1997 and 1996
would have been reduced to the pro forma amounts indicated below:
1998 1997 1996
Net income (loss) - pro forma $ (7,802) $ (15,557) $ 126
========= ========== ========
Net income (loss) per share - basic $ (1.34) $ (2.71) $ 0.02
========= ========== ========
Net income (loss) per share - diluted $ (1.34) $ (2.71) $ 0.02
========= ========== ========
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 the
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.
The weighted average fair value of options granted in 1998, 1997 and 1996
was $1.40, $2.22 and $4.10, respectively. The fair value of each option
grant is estimated on the date of the grant using the Black-Scholes
method with the following weighted average assumptions by subgroup:
1998 1997 1996
Risk-free interest rate 4.45%-5.61% 5.71-6.09% 5.36-6.36%
Expected life 5 5 3
Expected dividends -- -- --
Volatility 1.19 0.75 0.75
The weighted average expected life was calculated based on the vesting
period and the exercise behavior of the Company's employees. The
risk-free interest rate was calculated in accordance with the grant date
and estimated expected life.
47
<PAGE>
<TABLE>
Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------------------------------------------------------------
The options outstanding and currently exercisable by exercise price at
December 31, 1998 are as follows:
<CAPTION>
Options Currently
Options Outstanding Exercisable
---------------------------------------------------- ----------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exerciable Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 1998 Life Price 1998 Price
<S> <C> <C> <C> <C> <C> <C>
$0.47 - $0.75 190,547 6.17 $ 0.59 110,561 $ 0.48
$1.13 - $1.50 975,318 9.48 1.50 - -
$2.00 - $3.81 73,781 8.73 2.76 22,502 2.90
$5.00 - $8.88 36,003 8.52 5.48 25,507 5.45
------------- --------------
1,275,649 8.92 $ 1.58 158,570 $ 1.97
============= ==============
</TABLE>
10. Segment Information
In 1998, Videonics adopted SFAS 131. Prior years segment information has
been restated to present Videonics' two reportable segments - (1) Video
Production and (2) Signal Processing.
The accounting policies of the segments are the same as those described
in the "Summary of Significant Accounting Policies." Videonics evaluates
the performance of its segments based on revenue and operating income.
Videonics is organized primarily on the basis of three separate product
lines. Two of its product lines have been aggregated into the "Video
Production" segment. This segment manufactures and sells video
post-production equipment into broadcast, cable, industry and home
producer markets. "Signal Processing" represents the Company's Nova
Division that manufactures and sells signal conversion and processing
equipment primarily into television and cable studios.
The table below presents information about reported segments for the
years ending December 31, (in thousands):
1998 1997 1996
Video Production
Sales $ 17,750 $ 17,149 $ 24,794
Operating loss (6,474) (9,339) (43)
Signal Processing
Sales 1,922 2,806 4,401
Operating loss (248) (1,389) 825
Reconciling items -- (2,256) (381)
48
<PAGE>
Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
For the year ended December 31, 1997, reconciling items of $2,256,000
relate to the amortization and write-off of intangible assets. For the
year ended December 31, 1996, the reconciling item relates to the
amortization of intangible assets.
The Company markets and services it products in North America through its
own direct sales organization and through sales representatives. The
Company markets its products in foreign countries outside North America
through distributors and its wholly owned subsidiary in Germany.
The Company's German office is primarily a sales office. Revenue, loss
and assets employed by the Company's foreign subsidiary were not material
to the consolidated financial statements.
Geographic net export sales information is shown below (in thousands):
December 31,
1998 1997 1996
Revenues from unaffiliated customers:
United States $12,665 $13,317 $16,852
Europe 2,662 2,007 4,774
Asia 2,772 2,637 3,925
Americas (excluding the United States) 1,573 1,994 3,644
------- ------- -------
$19,672 $19,955 $29,195
======= ======= =======
For the years ended December 31, 1998, 1997 and 1996, no one customer
accounted for more than 10% of the revenues during the periods. The
Company has no significant assets in foreign countries.
11. 401(k) Plan
In August 1994, the Company adopted a 401(k) employee savings plan
wherein the employee can contribute up to specified Internal Revenue Code
limits and the Company matches, at a rate of 50%, the first $200 of the
employee's contribution per quarter. The employee's entitlement to the
Company matching contributions is fully vested on the date of
contribution. The Company, at its sole discretion and with the Board of
Directors' approval, can make an additional incremental contribution. To
date, the Company has not made discretionary contributions. The Company's
matching contributions charged against income totaled approximately
$39,000, $51,000 and $52,000 for the years ended December 31, 1998, 1997
and 1996, respectively.
49
<PAGE>
Videonics, Inc.
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
12. Subsequent Events
On January 29, 1999, the Company completed the sale of certain of the
assets and the assumption of certain of the liabilities related to its
Nova Systems Division to a private 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 is expected to provide Videonics with
net revenues from royalties in 1999. These royalties are predicated upon
future sales of Nova products by the acquiring company. The sale of Nova
will not result in a capital gain or loss to Videonics.
50
<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 incorporated herein by reference from the information contained 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 1999 Annual
Meeting of Shareholders to be held on or about August 19, 1999. Information
regarding compliance with the reporting requirements under Section 16(a) of the
Securities and Exchange Act of 1934, as amended is incorporated herein by
reference from the information under the caption "Executive Compensation
Compliance with Section 16(a) of the Securities and Exchange Act of 1934" in the
Proxy Statement. 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 from
the information under the caption "Executive Compensation" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
from 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
The information required by this item is incorporated herein by reference
from the information under the caption "Certain Transactions" contained in the
Proxy Statement.
51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements are filed as part of this report:
- Report of Independent Accountants
- Balance Sheets at December 31, 1998 and 1997
- Statements of Income for the Years Ended
December 31, 1998, 1997, and 1996
- Statement of Shareholders' Equity for the
Years Ended December 31, 1998, 1997, and
1996
- Statements of Cash Flows for the Years
Ended December 31, 1998, 1997, and 1996
- Notes to Financial Statements
2. Financial Statement Schedules
The following financial statement schedule is included in Item 14(d):
Schedule Title
-------- -----
Schedule II Valuation and Qualifying Accounts
Schedules other than the one listed above have been omitted since the
required information is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the financial statements or notes thereto.
3. Exhibits
Exhibit No.
-----------
3.01 Amended and Restated Articles of
Incorporation of Videonics, Inc., dated
December 19, 1994. (3)
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)
52
<PAGE>
10.02 Lease, dated September 27, 1995 between
Canton Gateway Office Park and Videonics,
Inc. at 50 Albany Turnpike, Canton,
Connecticut. (4)
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)
10.07 Letter of Employment Agreement with Steve
L. Peters. (4)
10.08 Promissory Note issued in connection with
loan by Videonics, Inc. to Steve L. Peters.
(4)
+10.09 Letter of Employment Agreement with
Yeshwant Kamath dated November 17, 1997. (7)
10.10 Loan agreement issued in connection with a loan by
Carl Berg to Videonics, Inc. dated October 16, 1998.
21.1 Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP,
Independent Accountants.
27.1 Financial Data Schedule
53
<PAGE>
(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, 1998.
- ----------
(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.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, and incorporated herein by
reference.
+ Confidential treatment has been requested with respect to certain
portions of this Exhibit. Such portions have been omitted and have
been filed separately with the Securities and Exchange Commission.
54
<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 28th day of
March, 1999.
VIDEONICS, INC.
By: /s/ Michael L. D'Addio
-----------------------
Michael L. D'Addio
Chief Executive Officer
<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 dates indicated.
<CAPTION>
Name and Signature Title Date
- ------------------ ----- ----
<S> <C> <C>
/s/ Michael L. D'Addio Chairman of the Board March 28, 1999
- ----------------------------- and Chief Executive Officer
Michael L. D'Addio (Principal Executive Officer)
/s/ B. Yeshwant Kamath President and Director March 28, 1999
- -----------------------------
B. Yeshwant Kamath
/s/ Gary L. Williams Vice President of Finance, March 28, 1999
- ----------------------------- and Chief Financial Officer
Gary L. Williams (Principal Financial Officer
and Principal Accounting
Officer)
/s/ Mark C. Hahn Vice President and Chief March 28, 1999
- ----------------------------- Technical Officer and
Mark C. Hahn Director
/s/ Carl E. Berg Director March 28, 1999
- -----------------------------
Carl E. Berg
/s/ N. William Jasper, Jr. Director March 28, 1999
- -----------------------------
N. William Jasper, Jr.
</TABLE>
55
<PAGE>
VIDEONICS, INC.
INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
Page in
Form 10-K
Financial statements:
Report of Independent Accountants.........................................33
Balance Sheets............................................................34
Statements of Income......................................................35
Statements of Shareholders' Equity........................................36
Consolidated Statements of Cash Flows.....................................37
Notes to Financial Statements.............................................38
Schedules:
Report of Independent Accountants................................58
II Valuation and Qualifying Accounts................................59
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:
21.1 Subsidiaries.....................................................__
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants...__
27.1 Financial Data Schedule..........................................__
56
<PAGE>
VIDEONICS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1998
ITEM 14(d)
FINANCIAL STATEMENT SCHEDULE
57
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT ON SCHEDULE
Our report on the financial statements of Videonics, Inc. and subsidiaries is
included on page 33 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 56 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
San Jose, California
March 26, 1999
58
<PAGE>
VIDEONICS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Valuation and Qualifying Accounts
(in thousands)
Balance at Charged to Balance
Beginning Costs and at End of
Description of Period Expenses Deductions Period
- ----------- --------- -------- ---------- ------
Year ended December 31, 1998
Allowance for doubtful accounts: $255 $ 25 $ (134) $ 146
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
Balance at Charged to Balance
Beginning Costs and at End of
Description of Period Expenses Deductions Period
- ----------- --------- -------- ---------- ------
Year ended December 31, 1998
Allowance for excess and
obsolete inventories: $1,753 $1,661 $(585) $ 2,829
Year ended December 31, 1997
Allowance for excess and
obsolete inventories: $377 $1,641 $(265) $ 1,753
Year ended December 31, 1996
Allowance for excess and
obsolete inventories: $826 $(240) $(209) $ 377
59
<PAGE>
VIDEONICS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1998
ITEM 14(c)
EXHIBITS
EXHIBIT 10.10
<PAGE>
Exhibit 10.10
October 16, 1998
Carl Berg
10050 Bandley Drive
Cupertino, CA 95014
BORROWER: Videonics, Inc.
LENDER: Carl Berg
This letter is our promise to repay.................................. $1,000,000
cash loaned to Borrower. This loan is due and payable on October 16, 1999.
Interest will be due on the outstanding balance for the actual days outstanding
at an annual interest rate of 8.0%. Quarterly interest payments will be made on
January 16, 1999, April 16, 1999, July 16, 1999 and October 16, 1999 on the
outstanding balance.
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 McNeill
James A. McNeill, Vice President, CFO
EXHIBIT 21.1
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT AS OF DECEMBER 31, 1998
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 statements of
Videonics, Inc. on Form S-8 (File Nos. 333-06665 and 333-21003) of our report
dated March 26, 1999, on our audit of the consolidated financial statements of
Videonics, Inc. as of December 31, 1998 and 1997, and for the years ended
December 31, 1998, 1997 and 1996, which report is incorporated by reference in
this report on Form 10-K, and our report dated March 26, 1999, on our audit of
the financial statement schedule, which report is included in this Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
March 30, 1999
<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, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 837
<SECURITIES> 0
<RECEIVABLES> 998
<ALLOWANCES> (146)
<INVENTORY> 5,830
<CURRENT-ASSETS> 7,641
<PP&E> 4,528
<DEPRECIATION> (3,021)
<TOTAL-ASSETS> 9,164
<CURRENT-LIABILITIES> 3,237
<BONDS> 0
0
0
<COMMON> 20,647
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,164
<SALES> 19,672
<TOTAL-REVENUES> 19,672
<CGS> 13,588
<TOTAL-COSTS> 13,588
<OTHER-EXPENSES> 12,806
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,743)
<INCOME-TAX> (30)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,713)
<EPS-PRIMARY> (1.15)
<EPS-DILUTED> (1.15)
</TABLE>
