SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 2000, there were 5,902,550 shares of the Registrant's
Common Stock outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
VIDEONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 3,096 $ 3,842 $ 9,087 $ 10,901
Cost of revenues 1,885 2,196 5,538 6,333
-------- -------- -------- --------
Gross profit 1,211 1,646 3,549 4,568
-------- -------- -------- --------
Operating expenses:
Research and development 543 629 1,619 2,252
Selling and marketing 747 1,017 2,275 3,166
General and administrative 261 245 758 1,011
-------- -------- -------- --------
1,551 1,891 4,652 6,429
-------- -------- -------- --------
Operating loss (340) (245) (1,103) (1,861)
-------- -------- -------- --------
Interest expense, net (38) (16) (91) (44)
-------- -------- -------- --------
Net loss $ (378) $ (261) $ (1,194) $ (1,905)
======== ======== ======== ========
Net loss per common share - basic
and diluted $ (0.06) $ (0.04) $ (0.20) $ (0.32)
======== ======== ======== ========
Shares used in computing net loss per
common share - basic and diluted 5,901 5,869 5,896 5,865
======== ======== ======== ========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
VIDEONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
----------- --------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 474 $ 715
Accounts receivable, net 975 886
Inventories 3,506 3,785
Prepaids and other current assets 176 145
-------- --------
Total current assets 5,131 5,531
Property and equipment, net 299 513
Other assets 42 45
-------- --------
Total assets $ 5,472 $ 6,089
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 1,177 $ 974
Accrued expenses 683 734
Notes Payable 400 --
-------- --------
Total current liabilities 2,260 1,708
-------- --------
Long term liabilities:
Loan payable to shareholder 1,035 1,035
-------- --------
Total liabilities 3,295 2,743
-------- --------
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized: 30,000 shares
Issued and outstanding: 5,903 shares at
September 30, 2000 and 5,874 shares at
December 31, 1999 20,725 20,700
Accumulated deficit (18,548) (17,354)
-------- --------
Total shareholders' equity 2,177 3,346
-------- --------
Total liabilities and shareholders' equity $ 5,472 $ 6,089
======== ========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
3
<PAGE>
VIDEONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
-----------------
2000 1999
----- -----
Cash flows from operating activities:
Net cash used in operating activities (499) (198)
----- -----
Cash flows from investing activities:
Proceeds from disposition of Nova Systems -- 52
Purchase of property and equipment (167) (92)
----- -----
Net cash used in investing activities (167) (40)
----- -----
Cash flows from financing activities:
Proceeds from short term borrowings 400 --
Proceeds from issuance of loans payable to shareholder -- 35
Proceeds from issuance of common stock 25 5
----- -----
Net cash provided by financing activities 425 40
----- -----
Decrease in cash and cash equivalents (241) (198)
Cash and cash equivalents at beginning of year 715 837
----- -----
Cash and cash equivalents at end of period $ 474 $ 639
===== =====
The accompanying notes are an integral
part of these financial statements.
4
<PAGE>
VIDEONICS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed financial statements at September 30, 2000 and for the nine
month period then ended for Videonics Inc. (the "Company") 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 nine month period
ended September 30, 2000 are not necessarily indicative of the results for
the year ending December 31, 2000, or any future interim period.
2. On August 30, 2000 the Company entered into an Agreement and Plan of Merger
with Focus Enhancements, Inc., Wilmington, Massachusetts and its wholly
owned subsidiary PC Video Conversion (collectively, "Focus"), whereby Focus
will acquire all of the outstanding stock of the Company (the "Merger").
The agreement is subject to, among other things, approval by the
shareholders of the Company and Focus. Upon completion of the Merger, each
share of the Company's common stock would be exchanged for .87 shares of
Focus common stock.
3. Inventories comprise (in thousands):
Sept. 30, Dec. 31,
2000 1999
--------- --------
(unaudited)
Raw materials $ 2,651 $3,179
Work in process 687 302
Finished goods 168 304
---- -----
$ 3,506 $3,785
======= ======
4. 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
<PAGE>
VIDEONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. 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 September 30, 2000, royalties of $387,000 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.
6. 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
<PAGE>
VIDEONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The table below presents information about reported segments for the
nine months ending September 30, 2000 and 1999 (in thousands):
2000 1999
------ ------
Video Production
Sales $9,087 $10,810
Operating loss (1,103) (1,825)
Signal Processing
Sales - 91 (1)
Operating loss - (36)(1)
(1) Results presented are through January 29, 2000, the date the
Company completed its sale of Nova.
7. 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 fully-vested 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. At September 30,
2000 Videonics was in default respect to with a certain covenants under the
line of credit with Venture Banking Group. As of November 13, 2000,
Videonics and Pacific Business Funding, an affiliate of Venture Banking
Group, had signed an agreement to repay Venture Banking Group and in turn
loan Videonics $400,000 on a fully secured basis. Interest will be
calculated at a rate of 12%. The loan will be due and payable at the
earlier of the completion of the proposed merger with Focus Enhancements,
Inc., or February 5, 2001. As of November 13, 2000, an aggregate of
$400,000 is outstanding under the line of creidt with Venture Banking
Group.
8. Comprehensive Loss
There are no differences between net loss for the three and nine months
ended September 30, 1999 and 2000 and the comprehensive loss for the these
periods.
7
<PAGE>
VIDEONICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. 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. 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.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion in this section "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, particularly statements regarding market
opportunities, market share growth, competitive growth, new product
introductions, success of research and development expenses, customer
acceptance of new products, gross margin and selling, general and
administrative expenses. These forward-looking statements involve risks and
uncertainties, and the cautionary statements set forth below, specifically
those contained in "Factors That May Affect Future Results of Operations,"
identify important factors that could cause actual results to differ
materially from those predicted in any such forward-looking statements.
Such factors include, but are not limited to, adverse changes in general
economic conditions, including adverse changes in the specific markets for
the Company's products, adverse business conditions, decreased or lack of
growth in the market for video post-production equipment, adverse changes
in customer order patterns, increased competition, lack of acceptance of
new products, pricing pressures, lack of success in technological
advancements, risks associated with foreign operations, and other factors.
Recent Events
On August 30, 2000 the Company entered into an Agreement and Plan of
Merger with Focus Enhancements, Inc., Wilmington, Massachusetts and its wholly
owned subsidiary PC Video Conversion (collectively, "Focus"), whereby Focus will
acquire all of the outstanding stock of the Company (the "Merger"). The
agreement is subject to, among other things, approval by the shareholders of the
Company and Focus. Upon completion of the Merger, each share of the Company's
common stock would be exchanged for .87 shares of Focus common stock.
Results of Operations
Net Revenues. Net revenues decreased approximately 19% in the third
quarter of 2000 compared to the third quarter of 1999 and 17% in the first nine
months of 2000 compared to the first nine 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 26% in the third
quarter of 2000 compared to the third quarter of 1999 and 22% in the first nine
months of 2000 compared to the first nine months of 1999. Gross profit, as a
percentage of net revenues, was approximately 39% in the third quarter of 2000
compared to approximately 43% in the third quarter of 1999 and approximately 39%
in the first nine months of 2000 compared to approximately 42% in the first nine
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 14%
and 28%, respectively, between the quarterly and nine-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 27%
between the third quarter of 1999 and the third quarter of 2000 and decreased
28% between the first nine months of 1999 and the first nine months of 2000. The
decrease is primarily due to a decrease in personnel and reduced advertising
expenses.
9
<PAGE>
General and Administrative. General and administrative expenses increased
7% between the third quarter of 1999 and the third quarter of 2000 and decreased
25% between the first nine months of 1999 and the first nine months of 2000. The
increase between quarterly periods is primarily due to a legal expense related
to the merger. The decrease between nine month period is primarily due to a
decrease in personnel, a delay in the timing of the annual shareholders meeting
partially offset by an increase in legal expenses.
Other Income/Expense, net. The Company recorded interest expense of
$38,000 in the third quarter of 2000 compared to interest expense of $16,000 in
the third quarter of 1999. The increase in expense is primarily due to interest
expense calculated on higher borrowings during the period.
Income Taxes. During the first nine 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. The Company may also
require additional financing which may not be available at all or only upon
terms that are not acceptable to the Company. 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 1999 Form 10-K section
entitled "Business - Research and Development".
10
<PAGE>
Liquidity and Capital Resources
Net cash used by operations was $499,000 for the nine months ended
September 30, 2000 compared to net cash used in operations of $198,000 for the
same period in 1999. The use of cash from operating activities during the first
nine months of 2000 is primarily due to a net loss before depreciation, offset
partially by a decrease in inventory and an increase in accounts payable. The
use of cash from operating activities during the first nine months of 1999 is
primarily due to a net loss before depreciation, an increase in accounts
receivable, offset partially by a decrease in inventory and an increase in
accounts payable. Net cash used by investing activities for the first nine
months ended September 30, 2000 was $167,000 due to property and equipment
expenditures, primarily for computers, software and engineering equipment used
in research and development and other activities. Net cash used by investing
activities for the first nine months ended September 30, 1999 was $40,000, as
the Company received $52,000 in connection with the sale of Nova, offset 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 nine months of 2000 was
$425,000, as the Company borrowed $ 400,000 from its bank line of credit and
received cash of $25,000 from the exercise of stock options issued under the
Company's Stock Option Plans. Net cash provided by financing activities during
the nine months of 1999 was $40,000, primarily due to the receipt of cash from
the exercise of the stock options issued under the Company's Stock Option Plans
and an increase in shareholder loans.
Videonics 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, a line of credit from a bank and
upon generating sufficient revenues from existing and soon to be released
products in order to fund operations. During 1999, management took 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. Videonics is assessing its product lines to
identify how to enhance existing or create new distribution channels. During the
first quarter of 2000, Videonics introduced three new products. Two of those
products began shipping late in the first quarter with the third product
shipping in July. Although there can be no assurances, Videonics is currently
developing and expects to introduce two more products during the first half of
2001.
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. At
September 30, 2000 Videonics was in default with respect to certain covenants
under the line of credit with Venture Banking Group. As of November 13, 2000,
Videonics and Pacific Business Funding, an affiliate of Venture Banking Group,
had signed an agreement to repay Venture Banking Group and in turn loan
Videonics $400,000 on a fully secured basis. Interest will be calculated at a
rate of 12%. The loan will be due and payable at the earlier of the completion
of the proposed merger with Focus Enhancements, Inc., or February 5, 2001. As of
November 13, 2000, an aggregate of $400,000 is outstanding under the line of
creidt with Venture Banking Group.
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. However, if the Company does
require additional financing there can be no assurances that such additional
financing will be available at all or on terms that are acceptable to the
Company.
11
<PAGE>
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's market risk disclosures pursuant to Item 3 are not
material and are therefore not required.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated August 30, 2000 with
respect to the announcement of its signing an Agreement and Plan of
Merger with Focus Enhancements, Inc., and its wholly-owned subsidiary,
PC Video Conversion.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
November 13, 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)
13
<PAGE>
INDEX OF EXHIBITS
Exhibits:
27.1 Financial Data Schedule
14
