SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-25036
VIDEONICS, INC.
(Exact name of Registrant as specified in its charter)
California 77-0118151
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1370 Dell Ave, Campbell, California 95008
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 866-8300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of July 31, 2000, there were 5,899,299 shares of the Registrant's
Common Stock outstanding.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VIDEONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues & other income $ 2,932 $ 3,394 $ 5,991 $ 7,059
Cost of revenues 1,770 1,930 3,652 4,137
------- ------- ------- -------
Gross profit 1,162 1,464 2,339 2,922
------- ------- ------- -------
Operating expenses:
Research and development 515 725 1,076 1,623
Selling and marketing 831 1,153 1,529 2,149
General and administrative 280 392 497 766
------- ------- ------- -------
1,626 2,270 3,102 4,538
------- ------- ------- -------
Operating loss (464) (806) (763) (1,616)
Interest expense, net (32) (15) (53) (28)
------- ------- ------- -------
Loss before income taxes (496) (821) (816) (1,644)
Benefit from income taxes -- -- -- --
------- ------- ------- -------
Net loss $ (496) $ (821) $ (816) $(1,644)
======= ======= ======= =======
Net loss per common share - basic and diluted $ (0.08) $ (0.14) $ (0.14) $ (0.28)
======= ======= ======= =======
Shares used in computing net loss per
common share - basic and diluted 5,899 5,867 5,893 5,862
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
VIDEONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
-------- --------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 330 $ 715
Accounts receivable, net 1,018 886
Inventories 3,787 3,785
Prepaids and other current assets 85 145
-------- --------
Total current assets 5,220 5,531
Property and equipment, net 372 513
Other assets 45 45
-------- --------
Total assets $ 5,637 $ 6,089
======== ========
LIABILITIES
Current liabilities:
Notes payable $ 250 --
Accounts payable 1,097 $ 974
Accrued expenses 703 734
-------- --------
Total current liabilities 2,050 1,708
-------- --------
Long term liabilities:
Loan payable 1,035 1,035
-------- --------
Total liabilities 3,085 2,743
-------- --------
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized: 30,000 shares
Issued and outstanding: 5,899 shares at
June 30, 2000 and 5,874 shares at
December 31, 1999 20,722 20,700
Accumulated deficit (18,170) (17,354)
-------- --------
Total shareholders' equity 2,552 3,346
-------- --------
Total liabilities and shareholders' equity $ 5,637 $ 6,089
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<TABLE>
VIDEONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Six Months Ended
June 30,
-------------------------
2000 1999
----- -----
<S> <C> <C>
Cash flows from operating activities:
Net cash used in operating activities (499) (216)
----- -----
Cash flows from investing activities:
Proceeds from disposition -- 52
Purchase of property and equipment (159) (50)
----- -----
Net cash provided by (used in) investing activities (159) 2
----- -----
Cash flows from financing activities:
Proceeds from short term borrowings 250 --
Proceeds from issuance of loans payable to shareholder -- 35
Proceeds from issuance of common stock 23 5
----- -----
Net cash provided by financing activities 273 40
----- -----
Decrease in cash and cash equivalents (385) (174)
Cash and cash equivalents at beginning of year 715 837
----- -----
Cash and cash equivalents at end of period $ 330 $ 663
===== =====
The accompanying notes are an integral part of these financial statements.
</TABLE>
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VIDEONICS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed financial statements at June 30, 2000 and for the six
month period then ended are unaudited (except for the balance sheet
information as of December 31, 1999, which is derived from the
Company's audited financial statements) and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. The
condensed financial statements should be read in conjunction with the
financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of
operations, contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999. The results of operations for this
six month period ended June 30, 2000 are not necessarily indicative of
the results for the year ending December 31, 2000, or any future
interim period.
2. Inventories comprise (in thousands):
June 30, December 31,
2000 1999
------ ------
(unaudited)
Raw materials $3,101 $3,179
Work in process 420 302
Finished goods 266 304
------ ------
$3,787 $3,785
====== ======
3. Note Payable to Shareholder:
On April 16, 1999, the Company replaced a $1,000,000 unsecured loan
bearing interest at 8% per year and due on October 16, 1999, with a new
unsecured loan in the amount of $1,035,000 bearing interest at a rate
of 8% per year and due on January 16, 2001. The new loan is from the
same director and significant shareholder of the Company as the
previous loan. Accrued interest under the new loan is payable at
maturity. On March 22, 2000, the loan in the amount of $1,035,000 was
amended to change the maturity date from January 16, 2001 to January
16, 2002.
5
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VIDEONICS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Disposal of Subsidiary and Business:
Sale of Nova Systems
On January 29, 1999, the Company completed the sale of certain assets
and the assumption of certain liabilities related to the sale of its
Nova Systems Division ("Nova") to a privately held company in
Massachusetts. For the year ended December 31, 1998, Nova recorded
revenues of $1.9 million and a loss from operations of $248,000. The
sale of Nova may provide the Company with net revenues from royalties
of up to a maximum of approximately $450,000, contingent upon future
sales of Nova products by the acquiring company. Royalties will be
paid, to the extent due, by the acquiring company on a monthly basis
from March 1999 until receipt of approximately $450,000. The sale of
Nova resulted in a $48,000 loss to the Company. As of June 30, 2000,
royalties of $360,000 have been received.
Sale of the German Subsidiary
On September 29, 1999, the Company sold its wholly owned subsidiary in
Germany. The Company's German subsidiary was primarily a sales office.
Revenue, net loss and assets employed by the Company's foreign
subsidiary were not material to the consolidated financial statements.
The Company recorded a loss of $65,000 in connection with the sale.
5. Segment Information:
In 1998, Videonics adopted SFAS 131. At December 31, 1998, Videonics
presented two reportable segments - (1) Video Production and (2) Signal
Processing.
The Company's "Video Production" segment manufactures and sells video
post-production equipment into broadcast, cable, industry and home
producer markets. The Company's "Signal Processing" segment, which was
represented by the Company's Nova Systems Division, manufactured and
sold signal conversion and processing equipment primarily into
television and cable studios. As described in Note 4, the Company's
Nova Systems Division ("Signal Processing" segment) was sold on January
29, 1999.
6
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VIDEONICS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The table below presents information about reported segments for six
months ending June 30, (in thousands):
2000 1999
------- -------
Video Production
Sales $ 5,991 $ 6,968
Operating loss (763) (1,580)
Signal Processing
Sales -- 91 (1)
Operating loss -- (36)(1)
(1) Results presented are through January 29, 1999, the date the
Company completed its sale of Nova.
6. Line of Credit
In August 1999, the Company obtained a $1.0 million asset based line of
credit from Venture Banking Group, a division of Cupertino National
Bank, secured by the Company's assets. Interest on any advances will be
calculated at a rate of 1.5% above prime. Under the terms of the line
of credit, the Company is required to maintain certain financial ratios
and meet other covenants, including those related to net worth,
profitability and indebtedness. The maturity date of the line of credit
is August 25, 2001. In connection with this agreement the Company
issued to the Venture Banking Group a warrant to purchase 95,000 shares
of the Company's common stock at an exercise price of $0.65. This
warrant expires on September 15, 2002. The Company recognized $45,000
(the fair value of the warrant issued using the Black-Scholes model) as
prepaid financing costs during the quarter ended September 1999. This
amount is being amortized to interest expense over the term of the
loan. The Company was in violation of the profitability covenant at
June 30, 2000 and was required to obtain a waiver. As of August 10,
2000, an aggregate of $250,000 is outstanding under the line of credit.
7. Comprehensive Loss
There are no differences between net loss for the three and six months
ended June 30, 1999 and 2000 and the comprehensive loss for the these
periods.
7
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VIDEONICS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. Recent Accounting Pronouncement:
In June of 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities", (SFAS 133) which establishes accounting and reporting
standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. Management has evaluated the effects of this
standard and believes there will be no material impact on the Company's
financial position or results of operations. The Company will adopt
SFAS 133 as required for its first quarterly filing in the year 2001.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation
of APB Opinion No. 25 ("FIN 44"). FIN 44 establishes guidance for the
accounting for stock option grants or modifications to existing stock
options awards and is effective for option grants made after June 30,
2000. FIN 44 also establishes guidance for the repricing of stock
options and determining whether a grantee is an employee, for which the
guidance was effective after December 15, 1998 and modifying a fixed
option to add a reload feature, for which the guidance was effective
after January 12, 2000. The Company does not expect that the adoption
of the remaining provisions will have a material effect on the
financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
provides guidance on the recognition, presentation and disclosure of
revenue in financial statements filed with the Securities and Exchange
Commission. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to
revenue recognition policies. SAB 101 is effective for the fiscal
quarter beginning October 1, 2000, however earlier adoption is
permitted. The Company has not yet determined the impact, if any, that
adoption will have on the consolidated financial statements.
8
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion in this section "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements regarding market
opportunities, market share growth, competitive growth, new product
introductions, success of research and development expenses, customer acceptance
of new products, gross margin and selling, general and administrative expenses.
These forward-looking statements involve risks and uncertainties, and the
cautionary statements set forth below, specifically those contained in "Factors
That May Affect Future Results of Operations," identify important factors that
could cause actual results to differ materially from those predicted in any such
forward-looking statements. Such factors include, but are not limited to,
adverse changes in general economic conditions, including adverse changes in the
specific markets for the Company's products, adverse business conditions,
decreased or lack of growth in the market for video post-production equipment,
adverse changes in customer order patterns, increased competition, lack of
acceptance of new products, pricing pressures, lack of success in technological
advancements, risks associated with foreign operations, and other factors.
Results of Operations
Net Revenues. Net revenues decreased approximately 14% in the second
quarter of 2000 compared to the second quarter of 1999 and 15% in the first six
months of 2000 compared to the first six months of 1999. The decrease in revenue
was due primarily to a decrease in sales of the Company's older videographer
products offset slightly by shipments of CommandPost and StudioSketch, which
began shipping during the last days of March 2000.
Gross Profit. Gross profit decreased approximately 21% in the second
quarter of 2000 compared to the second quarter of 1999 and 20% in the first six
months of 2000 compared to the first six months of 1999. Gross profit, as a
percentage of net revenues, was approximately 40% in the second quarter of 2000
compared to approximately 43% in the second quarter of 1999 and approximately
39% in the first six months of 2000 compared to approximately 41% in the first
six months of 1999. The decrease in gross profit as a percentage of revenues is
due primarily to lower margins on some of the Company's older products and
manufacturing costs spread over lower revenues.
Research and Development. Research and development expenses decreased
29% and 33%, respectively, between the quarterly and six-month comparison
periods in fiscal years 1999 and 2000. The decrease is primarily due to a
decrease in personnel.
Selling and Marketing. Selling and marketing expenses decreased 28%
between the second quarter of 1999 and the second quarter of 2000 and decreased
29% between the first six months of 1999 and the first six months of 2000. The
decrease is primarily due to a decrease in personnel and reduced advertising
expenses.
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General and Administrative. General and administrative expenses
decreased 29% between the second quarter of 1999 and the second quarter of 2000
and decreased 35% between the first six months of 1999 and the first six months
of 2000. The decrease is primarily due to a decrease in personnel, partially
offset by an increase in legal expenses.
Other Income/Expense, net. The Company recorded interest expense of
$32,000 in the second quarter of 2000 compared to interest expense of $15,000 in
the second quarter of 1999. The increase in expense is primarily due to interest
expense calculated on higher borrowings during the period.
Benefit from Income Taxes. During the first six months of 2000 and
1999, the Company maintained a 100% valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets. If it
is determined that it is more likely than not that the deferred tax assets are
realizable, the valuation allowance will be reduced.
Factors That May Affect Future Results of Operations: The Company
believes that in the future its results of operations could be impacted by
factors such as delays in development and shipment of the Company's new products
and major new versions of existing products, market acceptance of new products
and upgrades, growth in the marketplace in which it operates, competitive
product offerings, and adverse changes in general economic conditions in any of
the countries in which the Company does business. The Company's results in prior
years have been affected by these factors, particularly with respect to
developing and introducing new products such as MXPro, Effetto Pronto and
MXProDV in 1997, 1998 and 1999.
Due primarily to the factors noted above, the Company has experienced
substantial volatility in its operations. The Company's future earnings and
stock price may continue to be subject to significant volatility, particularly
on a quarterly basis. Any shortfall in revenue or earnings from levels expected
by securities analysts or anticipated by the Company based upon product
development and introduction schedules could have an immediate and significant
adverse effect on the trading price of the Company's common stock in any given
period. Additionally, the Company may not learn of such shortfalls until late in
the fiscal quarter, which could result in an even more immediate and adverse
effect on the trading price of the Company's common stock. Finally, the Company
participates in a highly dynamic industry, which often results in significant
volatility of the Company's common stock price. See the Company's Form 10-K for
the period ended December 31, 1999 section entitled "Business - Research and
Development".
Liquidity and Capital Resources
Net cash used by operations was $499,000 in the first six months of
2000 compared to $216,000 for the same period last year. The use of cash from
operating activities during the first six months of 2000 is due to a net loss
before depreciation and an increase in accounts receivable, offset by an
increase in accounts payable. The use of cash from operating activities during
the first six months of 1999 is due to a net loss before depreciation and an
increase in accounts receivable, substantially offset by a decrease in
inventories and an increase in accounts payable. Net cash used by investing
activities in the first six months of 2000 was $159,000, due to property and
equipment expenditures primarily for computers, software and engineering
equipment used in research and development and other activities. Net cash
provided by investing
10
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activities in the first six months of 1999 was $2,000, as the Company received
$52,000 in connection with the sale of Nova, offset partially by property and
equipment expenditures primarily for computers, software and engineering
equipment used in research and development and other activities. Net cash
provided by financing activities during the first six months of 2000 was
$273,000, as the Company borrowed $250,000 from its bank line of credit and
received cash of $23,000 from the exercise of the stock options issued under the
Company's Stock Option Plans. Net cash provided by financing activities during
the first six months of 1999 was $40,000, primarily due to an increase in
shareholder loans and the receipt of cash from the exercise of the stock options
issued under the Company's Stock Option Plans.
The Company has incurred losses and negative cash flows from operations
for each of the two years in the period ended June 30, 2000 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. During 1999, management of the Company continued to take steps to
further reduce costs, including the sale of its Nova Systems Division, and its
German subsidiary, both of which had incurred losses in the two years
immediately preceding their sale. The Company is assessing its product lines to
identify how to enhance existing or create new distribution channels. During the
first quarter of 2000, the Company introduced three new products. Two of those
products began shipping late in the first quarter with the third shipping in
July. The Company is currently developing and expects to introduce two more
products during 2000.
As described in the notes to the consolidated financial statements, the
Company has obtained a $1.0 million asset based line of credit from Venture
Banking Group, a division of Cupertino National Bank, secured by substantially
all of the Company's assets. Interest on any advances will be calculated at a
rate of 1.5% above prime. Under the terms of the credit agreement, the Company
is required to maintain certain financial ratios and meet other covenants,
including those related to net worth, profitability and indebtedness. The
Company obtained a waiver of the profitability covenant for the quarter ending
June 30, 2000. The maturity date of the line of credit is August 25, 2001. As of
August 10, 2000, an aggregate of $250,000 is outstanding under the line of
credit.
The Company believes that its current cash, borrowings from both a
shareholder and its bank line of credit, 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 2000.
11
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Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's market risk disclosures pursuant to Item 3 are not
material and are therefore not required.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Document
----------- -----------------------
4.01A Warrant to Purchase Stock
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended June 30,
2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
August 14, 2000 VIDEONICS, INC.
--------------------------- -----------------
Date Registrant
By: /s/ Gary L. Williams
------------------------
Gary L. Williams
Vice President of Finance,
Chief Financial Officer and
Assistant Secretary
(Principal Financial and Accounting
Officer and Authorized Signer)
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