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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C., 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 1996
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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 0-25898
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2821358
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 HARTWELL AVENUE, LEXINGTON, MA 02173
- --------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 674-0009
--------------
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
--- ---
The number of shares outstanding of the registrant's common stock at August 1,
1996 was 9,007,281.
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information:
- -------------------------------
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of June 29, 1996
and December 30, 1995 3
Condensed Consolidated Statements of Operations for the
three months and six months ended June 29, 1996 and
July 1, 1995 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 29, 1996 and July 1, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II - Other Information:
- ----------------------------
Item 1 - Legal Proceedings 16
Item 2 - Changes in Securities 16
Item 3 - Defaults Upon Senior Securities 16
Item 4 - Submission of Matters to a Vote of Security Holders 16
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
10.1 Employment Separation Agreement, dated
April 10, 1996, between the Registrant
and Gregory C. McHale
10.2 Employment Letter Agreement, dated May 11, 1996,
between the Registrant and John Thompson
10.3 Employment Letter Agreement, dated
April 25, 1996,between the Registrant and
Beverly Schultz
11 Statement Regarding Computation of Net Income
(Loss) per Share
27 Financial Data Schedule
SIGNATURE(S) 18
</TABLE>
2
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
JUNE 29, 1996 DECEMBER 30, 1995
-------------- ------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,395 $ 5,235
Accounts receivable, trade, net of
allowances for doubtful accounts
of $541 and $878, at June 29, 1996
and December 30, 1995, respectively 24,599 27,646
Receivables from manufacturing
contractors 5,747 9,100
Related party notes receivable - 164
Inventories 10,926 26,493
Prepaid expenses 415 2,147
Deferred tax assets 2,520 2,889
-------- -------
Total current assets 51,602 73,674
Property and equipment, net 1,845 1,166
Capitalized software costs, net 1,061 940
Other assets 210 251
-------- -------
TOTAL ASSETS $ 54,718 $76,031
======== =======
CURRENT LIABILITIES:
Revolving line of credit $ 9,844 $ 8,733
Current portion of note payable - 19
Accounts payable 17,137 30,365
Accrued expenses and other current
liabilities 1,688 1,952
Current portion of capital lease 92 100
obligations -------- -------
Total current liabilities 28,761 41,169
Capital lease obligations 26 67
Deferred taxes 426 280
Commitments and contingencies (Note G) - -
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value;
5,000,000 shares
authorized; no shares issued or
outstanding - -
Common Stock, $.01 par value;
20,000,000 shares authorized;
9,005,681 shares issued and
outstanding at June 29, 1996;
8,757,781 shares issued and
outstanding at December 30, 1995 90 88
Additional paid-in capital 35,622 35,301
Accumulated deficit (10,207) (874)
-------- -------
Total stockholders' equity 25,505 34,515
-------- -------
TOTAL LIABILITIES AND $ 54,718 $76,031
STOCKHOLDERS' EQUITY ======== =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 29, 1996 JULY 1, 1995 JUNE 29, 1996 JULY 1, 1995
------------------ ----------------- --------------------- -----------------
<S> <C> <C> <C> <C>
Net sales $33,542 $31,101 $65,577 $56,805
Cost of sales 34,102 25,151 61,571 46,123
------- ------- ------- -------
Gross profit (560) 5,950 4,006 10,682
Operating expenses:
Selling, general, and administrative 4,416 2,987 8,783 5,742
Research and development 1,674 766 2,658 1,472
Settlement with subcontractor 1,959 - 1,959 -
------- ------- ------- -------
Total operating expenses 8,049 3,753 13,400 7,214
Income (loss) from operations (8,609) 2,197 (9,394) 3,468
Other income (expense):
Interest expense (241) (128) (445) (318)
Other income, net 87 82 211 212
------- ------- ------- -------
Income (loss) before income taxes (8,763) 2,151 (9,628) 3,362
Provision (benefit) for income taxes - 767 (295) 1,227
------- ------- ------- -------
Net income (loss) $(8,763) $ 1,384 $(9,333) $ 2,135
======= ======= ======= =======
Net income (loss) per common and
common equivalent share $(0.97) $0.17 $(1.05) $0.27
======= ======= ======= =======
Weighted average number of
common and common equivalent
shares outstanding 8,993 8,380 8,912 7,932
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 29, 1996 JULY 1, 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (9,333) $ 2,135
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation and amortization 381 236
Amortization of capitalized
software costs 345 182
Provision for bad debts (482) 229
Deferred taxes 515 -
Change in operating assets and
liabilities:
Accounts receivable 3,529 (7,068)
Receivable due from
manufacturing contractors 3,353 -
Inventories 15,567 (5,376)
Prepaids and other assets 1,773 (895)
Accounts payable (13,228) (308)
Accrued expenses and other
current liabilities (264) 45
Income taxes payable - 108
-------- --------
Net cash provided by (used
for) operating activities 2,156 (10,712)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (1,060) (412)
Capitalized software costs (466) (282)
-------- --------
Net cash used for investing
activities (1,526) (694)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common
stock - 32,963
Proceeds from exercise of stock
options 323 6
Payments of issuance costs of
common stock - (3,224)
Advances (payments) on revolving
line of credit, net 1,111 (6,601)
Principal payments on note payable (19) (50)
Principal payments on capital
lease obligations (49) (51)
Proceeds on related party notes
receivable, net 164 71
-------- --------
Net cash provided (used for)
by financing activities 1,530 23,114
-------- --------
Net change in cash and cash equivalents 2,160 11,708
Cash and cash equivalents, beginning
of period 5,235 3,057
-------- --------
Cash and cash equivalents, end of
period $ 7,395 $ 14,765
======== ========
Supplemental disclosure of non-cash
financing transactions:
Conversion of Series A Preferred
Stock to Common Stock $ - $ 5,597
Conversion of Class A voting and
Class B non-voting Common Stock
to Common Stock $ - $ 198
Interest paid $ 66 $ 317
Income taxes paid $ - $ 1,222
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Notes to Consolidated Financial Statements and other parts of this Form 10-Q
contain forward-looking statements involving risks and uncertainties as defined
in the Private Securities Litigation Reform Act of 1995. The Company's actual
results may differ significantly from the results discussed in the forward-
looking statements. Factors that might cause such a difference include, but are
not limited to, those discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and included in publicly
available filings with the Securities and Exchange Commission, such as this
report and the Company's Annual Report on Form 10-K for the year ended December
30, 1995.
A. Basis of Presentation:
-----------------------
The accompanying condensed unaudited consolidated financial statements have
been prepared by Number Nine Visual Technology Corporation (the "Company") in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the applicable rules and regulations of the
Securities and Exchange Commission. The condensed unaudited consolidated
financial statements include the accounts of the Company, its foreign sales
corporation and its wholly-owned German subsidiary. All material intercompany
accounts and transactions have been eliminated in consolidation. In the opinion
of management, the accompanying financial statements contain all adjustments
(consisting of normal and recurring accruals) necessary to present fairly all
financial statements. The financial statements herein should be read in
conjunction with the Company's consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for its fiscal
year ended December 30, 1995. Operating results for the second quarter 1996 and
six months ended June 29, 1996 may not necessarily be indicative of the results
to be expected for any other interim period or for the full year.
In 1995, the Company began operating under a 52-53 week fiscal year with
thirteen week quarters that end on the Saturday closest to the calendar quarter
end. Prior to 1995, the Company operated on a calendar quarter end.
B. Cash and Cash Equivalents:
--------------------------
As of June 29, 1996, included in cash and cash equivalents is approximately
$4.9 million invested in money market mutual funds comprised of obligations
which are issued or guaranteed as to principal and interest by the U.S.
government and thus constitute direct obligations of the United States of
America with a dollar-weighted average maturity of 90 days or less.
C. Inventories:
------------
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
JUNE 29, 1996 DECEMBER 30, 1995
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<S> <C> <C>
Raw materials $ 6,623 $12,485
Work in process 3,078 11,418
Finished goods 1,225 2,590
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$10,926 $26,493
======= =======
</TABLE>
The market for the Company's products is characterized by several factors,
including rapid technological advances, frequent new product life cycles,
product obsolescence, changes in customer requirements, evolving industry
standards, significant competition and rapidly changing prices.
6
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At June 29, 1996, a portion of inventory related to several of the Company's
products is in excess of current requirements or realizable value based on the
recent level of sales and prices. Accordingly, as a result of a number of events
that occurred during the second quarter of 1996, the Company wrote off
approximately $5.7 million of inventory related to these products. Management
has developed a program to reduce the remaining inventory to desired levels over
the near term and believes no loss will be incurred on its disposition. No
estimate can be made of a range of amounts of losses that are reasonably
possible should the program not be successful.
The Company had outstanding at June 29, 1996 an approximate $5.7 million
receivable due from a manufacturing contractor, related to components sold by
the Company to the contractor for assembly into finished goods.
D. Debt:
-----
The Company is party to an amended loan and security agreement with a
commercial bank providing for a revolving credit facility of $15 million.
The agreement contains financial covenants including, but not limited to, a
minimum current ratio, minimum tangible net worth, a maximum debt to tangible
net worth ratio, and minimum quarterly net loss. The agreement also gives the
lender the right to call the loan in the event of a material adverse change in
the Company's business and prohibits the Company from paying dividends without
the consent of the lender. The Company received a waiver for violations of
certain covenants of the lender at the conclusion of the second quarter of 1996.
Pursuant to this agreement, the Company may borrow an amount equal to 75% of
qualified accounts receivable (as defined) up to the maximum amount at an
interest rate per annum equal to either the prime rate (8.25% as of June 29,
1996) plus 1.25% or at the Libor Rate (as defined) plus 2.5%, plus an unused
line fee at a rate of 0.5% per annum on the unused portion of the maximum
borrowing amount. The agreement expires on December 2, 1998 and is renewable on
a yearly basis thereafter. The loan balance is collateralized by substantially
all of the Company's assets, except for certain fixed assets subordinated to the
Company's long-term debt agreement.
E. Stockholders' Equity:
---------------------
All share and per share data in the accompanying consolidated financial
statements reflect the 8-for-1 Common Stock split on April 5, 1995, the
reclassification of the Company's Class A and Class B Common stock into shares
of Common Stock on May 25, 1995 and the conversion of Series A Redeemable
Convertible Preferred Stock into Common Stock on June 2, 1995.
F. Income Taxes:
-------------
Realization of approximately $1.9 million of the net deferred tax asset is
dependent on generating sufficient taxable income in future periods. The amount
of this net deferred tax asset is considered realizable, however, it could be
reduced in the near term if estimates of future taxable income are reduced.
Although realization is not assured, management believes it is more likely than
not that the majority of the deferred tax asset will be realized. In addition,
the Company has recorded a valuation allowance of approximately $1.7 million
against other deferred tax assets, of which $1.2 million will be recorded as a
credit to additional paid-in capital upon realization or release of the
valuation allowance. During the second quarter of 1996, the Company received
tax refunds for its 1995 federal and state taxes, applicable to losses
associated with that period. This refund reduced the amount of prepaid expenses
the Company has remaining on the balance sheet associated with this expense.
7
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G. Commitments & Contingencies:
----------------------------
The Company was involved in a dispute with one of its sub-contractors with
respect to its commitment, if any, to purchase a quantity of DRAM memory chips
at prices significantly above current price levels. The Company has resolved
the dispute with this sub-contractor and paid the sub-contractor, during the
second quarter of 1996, approximately $2.0 million.
On June 11, 1996, a complaint was filed in the United States District Court
for the District of Massachusetts by named plaintiff RBI, an Alaskan limited
partnership, against the Company, Andrew Najda, Stanley W. Bialek and the
managing underwriters of the Company's initial public offering, Robertson,
Stephens & Company, Cowen & Company and Unterberg Harris. On or about July 17,
1996, an additional complaint was filed in the United States District Court for
the District of Massachusetts by named plaintiff John Foley against the Company,
each member of the Company's Board of Directors (Andrew Najda, Stanley W.
Bialek, Gill Cogan, Dr. Paul R. Low, Dr. Fouad H. Nader and William H.
Thalheimer), Kevin M. Hanks, former Chief Financial Officer and Treasurer of the
Company, and the managing underwriters of the Company's initial public offering,
Robertson, Stephens & Company, Cowen & Company and Unterberg Harris. Each of the
plaintiffs purports to represent a class of purchasers of the Common Stock of
the Company between and including May 26, 1995 through January 31, 1996. Each
complaint alleges that the named defendants violated the Securities Act of 1933
and the Securities Exchange Act of 1934 by, among other things, issuing to the
investing public false and misleading statements regarding the Company's
business, products, sales and earnings during the class period in question. The
plaintiffs seek unspecified damages, interest, costs and fees. It is possible
that other claims may be made against the Company or that there may be other
consequences from the lawsuits. The defendants deny any liability, believe they
have meritorious defenses, and intend to defend these and any similar lawsuits
that may be filed, although the ultimate outcome of these matters cannot yet be
determined. No provision for any liability that may result from the actions has
been recognized in the accompanying condensed consolidated financial statements.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its founding in 1982, Number Nine has introduced successive generations
of video/graphics subsystems providing advanced video/graphics performance in
desktop PCs. The Company has focused on providing a broad line of high-
performance hardware and software video/graphics solutions, targeting both OEM
and two-tier and retail distribution customers. The Company's 128-bit
proprietary Imagine 128 accelerator is recognized as one of the highest
performance graphics products available to the desktop PC market, and the
Company has begun shipping its second generation Imagine 128 accelerator based
on the Company's proprietary Imagine 128 Series 2 chip. This next-generation
accelerator chip is designed to increase 2-D graphics performance while
incorporating video acceleration, 3-D graphics and an architecture that enables
both VRAM and DRAM frame buffer implementations. The Company also recently
introduced HawkEye95, an upgraded version of its proprietary display control
utilities and driver software suite, which enhances user control over various
graphics functions and improves PC system graphics performance under Windows95.
In addition, the Company has begun to ship or has announced the introduction of
several new video/graphics products, including an Imagine 128 accelerator board
for Apple PowerMac PCI computers, 3-D products targeted at the desktop PC games
market, and next-generation merchant-silicon-based products in its Vision,
Motion, Media and Reality product families. During 1996, the Company currently
plans to market several different products with 3-D capabilities and anticipates
that most of its products will also incorporate motion video acceleration.
The Company's past operating results have been, and its future operating
results will continue to be, subject to fluctuations from quarter to quarter due
to a variety of factors, including: the gain or loss of significant customers;
changes in the mix of products sold and in the mix of sales by distribution
channels; the Company's ability to introduce new technologies and products on a
timely basis; availability and timing of component shipments and cost of
components obtained from the Company's suppliers; availability and cost of
manufacturing and foundry capacity; new product introductions by the Company's
competitors; delays in related product introductions by others; market
acceptance of the Company's products; product returns or price protection
charges from customers; reductions in sales of older generation products as
customers anticipate new products, giving rise to charges for obsolete or excess
inventory; and changes in product prices by the Company, its competitors and
suppliers, including possible decreases in unit average selling prices of the
Company's products caused by competitive pressures. In particular, in the
second quarter of 1996, the Company identified charges of approximately $5.7
million of obsolete and excess finished goods and component inventory. There
were a number of events during the second quarter of 1996 that are the primary
drivers for this provision. These include an acceleration of product
transitions, further deterioration of memory inventory value, continued pressure
on pricing of older products, lower than expected sales activity of certain
products and excess component inventories. Operating results can also be
adversely affected by general economic and other conditions affecting the timing
of customer orders, a downturn in the market for PCs, and order cancellations or
rescheduling. The Company's sales to original equipment manufacturers ("OEMs"),
which accounted for 52.8% of net sales in 1995, 67.7% of net sales during the
second quarter of 1996 and 53.7% of net sales during the second quarter of 1995,
are particularly susceptible to fluctuations.
The Company's sales to OEMs typically generate lower gross margins than
retail and distributor sales, but also generally entail lower marketing, sales
and product support costs. The Company's net sales, gross margins and profits
have in the past, and may in the future, vary significantly depending on the
proportion of its sales to OEMs and other distribution channels, as well as the
mix of products sold in each channel. The Company's sales of merchant-based
technology products are typically at a significantly lower margin than the sales
of its proprietary technology products. The gross margin on all of the
Company's products is significantly impacted by costs of components,
particularly memory costs, which have varied widely over the past several years.
The Company has been served notice of two lawsuits seeking class action
status on June 11, 1996 and July 16, 1996 respectively, in the United States
District Court of Massachusetts against it, selling shareholders and directors
of the Company, and the underwriters of the Company's 1995 initial public
offering. The alleged
9
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class of plaintiffs consists of all persons who purchased shares of the
Company's stock on the open market between and including May 26, 1995 and
January 31, 1996. The plaintiffs, who seek unspecified damages, allege that the
Company's Registration Statement and Prospectus in its initial public offering
contained false and materially misleading statements. The Company and the
individual defendants deny the plaintiffs' allegations and are vigorously
defending these actions. If the lawsuits are not resolved satisfactorily for the
Company, there could be a material adverse effect on future financial
performance and results of operations and, accordingly, income (loss).
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED JUNE 29, 1996 AND JULY 1, 1995
Net Sales: Net sales increased 7.7%, to $33.5 million in the second quarter
of 1996 from $31.1 million in the second quarter of 1995. This increase was
attributable to increased sales of higher-end VRAM products. Net sales of
higher-end VRAM products, 64-bit and 128-bit, increased 51% to $25.8 million in
the second quarter of 1996 from $17.1 million in the second quarter of 1995,
representing 77.0% of net sales in the second quarter of 1996 compared to 55.0%
of net sales in the second quarter of 1995. Sales to OEMs increased 36%, to
approximately $22.7 million in the second quarter of 1996 from $16.7 million in
the second quarter of 1995, representing 67.7% of net sales in the second
quarter of 1996 compared to 53.7% in the second quarter of 1995. The increase in
OEM sales was primarily a result of increased sales to Unisys Corporation and
the addition of Micron Electronics, Inc., as an OEM customer. Sales to Dell
Computer Corporation represented 49.2% of net sales in the second quarter of
1996 compared to 50.6% of net sales in the second quarter of 1995. Net sales to
domestic two-tier distribution and retail customers decreased 34.1% to $6.0
million in the second quarter of 1996 from $9.1 million in the second quarter of
1995. Total international sales increased 5% to $8.3 million in the second
quarter of 1996 from $7.9 million in the second quarter of 1995.
Gross Profit (Loss): Gross profit was a loss of $560,000 in the second
quarter of 1996 compared to a gross profit of $6.0 million in the second
quarter of 1995. This decrease was primarily attributable to inventory charges
incurred during the second quarter of 1996 that were a result of an acceleration
of product transitions, further deterioration of memory inventory value,
continued pressure on pricing of older generation products and lower than
expected sales activity of the Company's Macintosh based products. The
Company's gross profit margin decreased to -1.7% in the second quarter of 1996
from 19.1% in the second quarter of 1995, principally due to these inventory
charges. The remaining decrease in gross profit during the second quarter of
1996 is attributable to sales of excess finished goods and use of higher
cost component inventories, particularly memory. The Company expects to
continue to sell excess and obsolete finished goods during future periods at
prices which may impact gross margins. The Company is taking steps to control
its exposure to fluctuating memory costs, such as negotiating pricing
adjustments with customers, and negotiating volume and price commitments from
memory manufacturers. There can be no assurance that these steps will provide a
gross margin benefit.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased 47%, to $4.4 million in the second quarter of
1996 from $3.0 million in the second quarter of 1995, primarily related to
additional costs associated with increased staffing, costs associated with the
hiring of new key personnel, legal expenses associated with the pending
securities litigation and additional advertising and channel promotion
activities as compared to the 1995 period. As a percentage of net sales,
selling, general and administrative expenses increased to 13.1% in the second
quarter of 1996 from 9.6% in the second quarter of 1995. The Company currently
expects that total selling, general and administrative expenses will continue to
increase, although not necessarily as a percentage of net sales, primarily as a
result of additional infrastructure, as well as increased sales and marketing
expenses.
Research and Development Expenses: Research and development expenses
increased 113%, to approximately $1.7 million in the second quarter of 1996 from
$0.8 million in the second quarter of 1995, resulting primarily from increased
staffing to support continued development of both proprietary and merchant-based
video/graphics products, lower capitalization of software costs, as well as
engineering expenses associated with the completion of chip development and
subsequent production launch of the Company's Imagine 128 Series 2 products.
During the second quarter of 1996, the Company continued the development of its
next-generation Imagine 128 Series 3 chip, began volume
10
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production of its 9FX Reality 332 product based on S3's Virge chip and
continued development of some additional products. As a percentage of net
sales, research and development expenses increased to 4.8% in the second quarter
of 1996 from 2.5% in the second quarter of 1995.
Expenses Associated With Settlement With a Subcontractor: During the
second quarter of 1996, the Company incurred a charge of approximately $2.0
million related to the settlement of a dispute with one of its sub-contractors
with respect to the Company's commitment, if any, to purchase a quantity of DRAM
memory chips at prices significantly above current price levels. As a
percentage of net sales, this settlement was 6.0% of net sales during the second
quarter of 1996.
Interest Expense/Income: Interest expense for the second quarter of 1996 was
$241,000 compared to interest expense of $128,000 in the second quarter of 1995.
During the second quarter of 1996, the Company had higher average balances
outstanding against its revolving line of credit than during the second quarter
of 1995.
Other Expense/Income: Other income totaled $87,000 in the second quarter of
1996 compared to other income of $82,000 in the second quarter of 1995. Other
income during the second quarter of 1996 was primarily attributable to interest
earned on cash and cash equivalents; other income during the second quarter of
1995 was primarily attributable to foreign currency gains.
Provision (Benefit) for Income Taxes: The Company currently has
approximately $1.9 million of a net deferred tax asset and the realization is
dependent on generating sufficient taxable income in future periods. The amount
of this net deferred tax asset is considered realizable, however, it could be
reduced in the near term if estimates of future taxable income are reduced.
Although realization is not assured, management believes it is more likely than
not that the majority of the deferred tax asset will be realized. For the three
months ending June 29, 1996, the Company did not provide an additional income
tax benefit associated with the losses incurred during the period. For the
three month period ending July 1, 1995, the Company provided for income taxes of
$767,000.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 29, 1996 AND JULY 1, 1995
Net Sales: Net sales increased 15.5%, to approximately $65.6 million in the
first six months of 1996 from $56.8 million in the first six months of 1995.
This increase was attributable to increased sales of higher-end VRAM products.
Net sales of higher-end VRAM products, 64-bit and 128-bit, increased 50% to
$47.5 million in the first six months of 1996 from $31.6 million in the first
six months of 1995, representing 72.5% of net sales in the first six months of
1996 compared to 55.6% of net sales in the first six months of 1995. Sales to
OEMs increased 29%, to approximately $41.7 million in the first six months of
1996 from $32.4 million in the first six months of 1995, representing 63.6% of
net sales in the first six months of 1996 compared to 57.1% in the first six
months of 1995. The increase in OEM sales was primarily a result of increased
sales to Unisys Corporation and the addition of Micron Electronics, Inc., as an
OEM customer. Sales to Dell Computer Corporation represented 47.6% of net sales
in the first six months of 1996 compared to 52.9% of net sales in the first six
months of 1995. Net sales to international two-tier distribution customers
increased 10.8% to $9.2 million in the first six months of 1996 from $8.3
million in the first six months of 1995. Net sales to domestic two-tier and
retail customers decreased 9.3% to $14.6 million in the first six months of 1996
from $16.1 million in the first six months of 1995. Total international sales
increased 11.1% to $15.9 million in the first six months of 1996 from $14.3
million in the first six months of 1995.
Gross Profit: Gross profit decreased 62%, to $4.0 million in the first six
months of 1996 from $10.7 million in the first six months of 1995. This decrease
was primarily attributable to inventory charges incurred during the second
quarter of 1996 that were a result of an acceleration of product transitions,
further deterioration of memory inventory value, continued pressure on pricing
of older generation products and lower than expected sales activity of the
Company's Macintosh based products. The Company's gross profit margin decreased
to 6.1% in the first six months of 1996 from 18.8% in the first six months of
1995, principally due to these inventory charges. The remaining decrease in
gross profit during the first six months of 1996 can be attributable to sales of
excess finished goods and use of higher cost component inventories, particularly
11
<PAGE>
memory. The Company expects to continue to sell excess finished goods and
obsolete inventory during future periods at prices that may impact gross
margins.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased 54%, to $8.8 million in the first six months
of 1996 from $5.7 million in the first six months of 1995, primarily as a result
of increased expenses related to additional costs associated with increased
staffing, costs associated with the hiring of new key personnel, legal expenses
associated with the pending securities litigation and additional advertising and
channel promotion activities. As a percentage of net sales, selling, general
and administrative expenses increased to 13.4% in the first six months of 1996
from 10.1% in the first six months of 1995. The Company currently expects that
total selling, general and administrative expenses will continue to increase,
although not necessarily as a percentage of net sales, primarily as a result of
additional infrastructure as well as increased sales and marketing expenses.
Research and Development Expenses: Research and development expenses
increased 81%, to $2.7 million in the first six months of 1996 from $1.5 million
in the first six months of 1995, resulting primarily from increased staffing to
support continued development of both proprietary and merchant-based
video/graphics products, lower capitalization of software costs associated as
well as engineering expenses associated with the completion of chip development
and subsequent production launch of the Company's Imagine 128 Series 2 products.
During the first six months of 1996, the Company began the development of its
next-generation Imagine 128 Series 3 chip, released to production products based
on the Imagine 128 Series 2 chip and its 9FX Reality 332 product based on S3's
Virge chip, and continued development of some additional products. As a
percentage of net sales, research and development expenses increased to 4.1% in
the first six months of 1996 from 2.6% in the first six months of 1995.
Expenses Associated With Settlement With a Subcontractor: During the first
six months of 1996, the Company incurred a charge of approximately $2.0 million
related to the settlement of a dispute with one of its sub-contractors with
respect to the Company's commitment, if any, to purchase a quantity of DRAM
memory chips at prices significantly above current price levels. As a
percentage of net sales, this settlement was 3.0% of net sales during the first
six months of 1996.
Interest Expense/Income: Interest expense for the first six months of 1996
was $445,000 compared to interest expense of $318,000 in the first six months of
1995. During the first six months of 1996, the Company had higher average
balances outstanding against its revolving line of credit than during the first
six months of 1995.
Other Expense/Income: Other income totaled $211,000 in the first six months
of 1996 compared to other income of $212,000 in the first six months of 1995.
Other income during the first six months of 1996 was primarily attributable to
interest earned on cash and cash equivalents; other income during the first six
months of 1995 was primarily attributable to foreign currency gains.
Provision for Income Taxes: The Company currently has approximately $1.9
million of a deferred tax asset and the realization is dependent on generating
sufficient taxable income in future periods. The amount of this net deferred tax
asset is considered realizable, however, it could be reduced in the near term if
estimates of future taxable income are reduced. Although realization is not
assured, management believes it is more likely than not that the majority of the
deferred tax asset will be realized. The Company provided a deferred income tax
benefit in the amount of $295,000 for the first six months of 1996. For the six
month period ending July 1, 1995, the Company provided for income taxes of $1.2
million.
12
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
This report contains forward-looking statements as that term is defined in
the Private Securities Litigation Reform Act of 1995. Such statements are based
on management's current expectations and are subject to a number of factors and
uncertainties which could cause actual results to differ materially from those
described in the forward-looking statements. The Company cautions investors
that there can be no assurance that actual results or business conditions will
not differ materially from those projected or suggested in such forward-looking
statements as a result of various factors, including, but not limited to the
following:
The Company is dependent on sole or limited source suppliers for certain key
components and in 1995 experienced limited availability, delays in shipments and
unanticipated cost fluctuations related to the supply of memory components, both
DRAM and VRAM. The Company is actively working with memory component suppliers
to secure pricing and volume commitments for future production. However, there
can be no assurance that commitments will be secured in sufficient amounts to
meet the increasing needs of the Company or at prices that will enable the
Company to attain profitability. The Company currently has inventories of
components obtained at costs in excess of recent market costs, particularly
memory, the price of which has dropped significantly in recent months. These
inventories were written down to net realizable value during the second quarter
of 1996, and contributed to of the Company's loss during this period. The
Company was involved in a dispute with one of its sub-contractors with respect
to its commitment, if any, to purchase a quantity of DRAM memory chips at prices
significantly above current price levels. The Company has resolved the dispute
with this sub-contractor and has paid the sub-contractor, during the second
quarter of 1996, approximately $2.0 million.
The PC industry in general, and the market for the Company's products in
particular, are characterized by rapid technological advances, frequent new
product introductions, short product life cycles, product obsolescence, changes
in customer requirements, evolving industry standards, significant competition,
and rapidly changing pricing. In this regard, the life cycle of products in the
Company's markets can be as short as six to twelve months. Therefore, the
Company's future prospects will depend in part on its ability to enhance the
functionality of its existing products in a timely manner and to continue to
identify, develop and achieve market acceptance of products that incorporate new
technologies and standards and meet evolving customer needs. There can be no
assurance that the Company will be successful in managing product transitions,
including controlling inventory of older generation products as new products are
introduced. The Company could experience reductions in sales of older generation
products as customers anticipate new products. While the Company reserves for
anticipated returns based upon historical rates of product returns and other
factors, there can be no assurance that reductions in sales and returns of older
generation products by distributors, which are primarily attributable to
customer stock rotation, will not give rise to charges for obsolete or excess
inventory or substantial price protection charges.
The volume and timing of orders received during a particular quarter are very
difficult to forecast. The Company's customers can change delivery schedules or
cancel orders with limited or no penalties. Customers generally order on an as-
needed basis, and as a result, the Company has historically operated without
significant backlog. Moreover, as is often the case in the PC industry, a
disproportionate percentage of the Company's net sales in any quarter may be
generated in the final month or weeks of a quarter. Consequently, a shortfall in
sales in any quarter as compared to management expectations may not be
identifiable until the end of the quarter. Because a significant portion of
operating expense levels are relatively fixed, the timing of increases in
expense levels is based in large part on the Company's expectations of future
sales. As a result, if sales do not meet the Company's expectations, it may be
unable to quickly adjust spending, which could have a material adverse effect on
the Company's operating results.
Due primarily to industry seasonality, demand for the Company's products
historically has been strongest during the fourth calendar quarter, and sales in
the subsequent calendar quarter have tended to decline. Net sales decreased
12.2% in the first quarter of 1996 from the fourth quarter of 1995 and 8.7% in
the first quarter of 1995 from the fourth quarter of 1994, although period-to-
period comparisons of financial results should not be relied upon as an
indication of future performance. Quarterly peaks in sales also tend to coincide
with peak working capital requirements.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Several factors in the development of the Company's business during 1995 and
the first six months of 1996 have had a significant impact on its balance sheet
and cash flows. During 1995, Company experienced significantly higher sales to
two-tier and retail distribution channel customers. These customers tend to
order toward the end of each quarter and to pay more slowly than OEM customers.
In addition, the Company's manufacturing strategy has focused on purchasing a
higher proportion of components directly from manufacturers, which reduces
component costs but requires longer-term commitments and faster payment compared
to distributor suppliers. Finally, the increased cost of memory components has
resulted in lower gross and operating margins, and limited availability has
required the use of cash when necessary to secure supplies of memory. During the
fourth quarter of 1995 and second quarter of 1996, the Company recorded charges
of $8.0 million and $5.7 million, respectively, to cost of sales associated with
obsolete and excess inventory. The Company determined that the market value for
this material was substantially less than the cost to procure and build, and the
Company has written down the components to estimated net realizable value less
selling costs. In combination, these factors have resulted in the Company
requiring more working capital and generating less cash flow from operations
than anticipated.
The Company's operating activities provided cash of approximately $2.2
million during the first six months of 1996, compared to operating activities
which used cash of $10.7 million during the first six months of 1995. During the
first six months of 1996, net decreases in accounts receivable, receivable due
from a manufacturing contractor, and inventories provided cash of $3.5 million,
$3.3 million and $15.6 million, respectively, which was offset by a decrease of
$13.2 million in accounts payable. Decreases in accounts receivable have
primarily been attributable to the collection of receivables owed from two-tier
and retail distribution sales. As a result, days sales outstanding decreased to
61 days at the end of the second quarter of 1996 from 68 days at the end of the
fourth quarter 1995. The Company believes it can operate with lower levels of
working capital relative to net sales and has committed additional resources to
the management and control of its receivables and inventories. At June 29,
1996, the Company's principal sources of liquidity consisted of $7.4 million of
cash and cash equivalents and approximately $5.2 million available under its
revolving line of credit.
During the first six months of 1996, investing activities used cash of
approximately $1.1 million for purchases of computer and office equipment and
$466,000 for capitalized software development costs compared to $412,000 and
$282,000 during the first six months of 1995, respectively. Financing
activities provided cash of $1.5 million during the first six months of 1996,
primarily attributable to balances on the Company's revolving line of credit
which increased $1.1 million during the first six months of 1996. During the
first six months of 1995, financing activities provided cash of $23.1 million,
attributable to the Company's June 1995 initial public offering. This issuance
of common stock generated proceeds of approximately $29.5 million, net of
underwriting discounts and expenses. The Company used approximately $6.6 million
of the net proceeds of the offering to repay all outstanding amounts under its
revolving line of credit. The Company began to utilize it revolving line of
credit during the fourth quarter of 1995.
As of June 29, 1996, $9.8 million was outstanding under the Company's
revolving credit facility. The agreement contains financial covenants
including, but not limited to, a minimum current ratio, minimum tangible net
worth, a maximum debt to tangible net worth ratio, and maximum quarterly net
loss. The agreement also gives the lender the right to call the loan in the
event of a material adverse change in the Company's business and prohibits the
Company from paying dividends without the consent of the lender. The Company has
been out of compliance with certain terms of its Loan Agreement from time to
time and as a result has entered into amendments revising certain covenants in
such agreement or has required a waiver from its lender. The Company received
such a waiver for violating certain covenants at the conclusion of the second
quarter of 1996. There can be no assurance that the Company will not require
additional amendments and/or waivers from its lender in the future or, if
required, that the lender will grant them, nor can there be any assurance that
alternative financing will be available. Management believes that the Company
would be able to obtain such a waiver or alternative financing and/or reduce the
level of discretionary spending and other expenditures to provide the Company
with sufficient liquidity. However, it the line of credit is not available to
14
<PAGE>
the Company, or if alternative financing is not available to the Company, the
Company's liquidity could be adversely affected.
The Company believes that its existing cash balances plus additional funds
currently expected to be generated from product sales and available bank debt
are sufficient to fund operations at current levels through 1996. However,
future growth in sales, for example the addition of another significant OEM
customer, and/or continued increases in working capital required by the
Company's business could result in the need for the Company to seek additional
equity or debt financing. No assurances can be given that these funds will be
available to the Company on acceptable terms, if at all. In addition, because of
the Company's need for funds to support future operations, it may seek to obtain
funds when conditions are favorable, even if it does not have an immediate need
for additional capital at such time.
15
<PAGE>
PART II. OTHER INFORMATION:
- -------- ------------------
ITEM 1 - LEGAL PROCEEDINGS
On June 11, 1996, a complaint was filed in the United States District Court
for the District of Massachusetts by named plaintiff RBI, an Alaskan limited
partnership, against the Company, Andrew Najda, Stanley W. Bialek and the
managing underwriters of the Company's initial public offering, Robertson,
Stephens & Company, Cowen & Company and Unterberg Harris. On or about July 17,
1996, an additional complaint was filed in the United States District Court for
the District of Massachusetts by named plaintiff John Foley against the Company,
each member of the Company's Board of Directors (Andrew Najda, Stanley W.
Bialek, Gill Cogan, Dr. Paul R. Low, Dr. Fouad H. Nader and William H.
Thalheimer), Kevin M. Hanks, former Chief Financial Officer and Treasurer of the
Company, and the managing underwriters of the Company's initial public offering,
Robertson, Stephens & Company, Cowen & Company and Unterberg Harris. Each of the
plaintiffs purports to represent a class of purchasers of the Common Stock of
the Company between and including May 26, 1995 through January 31, 1996. Each
complaint alleges that the named defendants violated the Securities Act of 1933
and the Securities Exchange Act of 1934 by, among other things, issuing to the
investing public false and misleading statements regarding the Company's
business, products, sales and earnings during the class period in question. The
plaintiffs seek unspecified damages, interest, costs and fees. It is possible
that other claims maybe made against the Company or that there may be other
consequences from the lawsuits. The defendants deny any liability, believe they
have meritorious defenses, and intend to defend these and any similar lawsuits
that may be filed, although the ultimate outcome of these matters cannot yet be
determined. No provision for any liability that may result from the actions has
been recognized in the accompanying condensed consolidated financial statements.
ITEM 2 - CHANGES IN SECURITIES
Not Applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on May 16, 1996 at the
Atrium Conference Center, located on the second floor of One Financial Center,
Boston, Massachusetts at 10:00 a.m.
At the meeting, the Company's shareholders elected two directors to serve
until the 1999 annual meeting of shareholders. The vote counts were as follows:
Affirmative Against Withheld
----------- ------- --------
Dr. Paul R. Low 8,322,948 0 35,667
Dr. Fouad H. Nader 8,322,748 0 35,867
At the meeting, the Company's shareholders also ratified the appointment of
Coopers & Lybrand L.L.P. as the Company's independent public accountants for the
fiscal year ending December 28, 1996. The vote counts were as follows:
16
<PAGE>
Affirmative Against Withheld
----------- ------- --------
8,336,810 14,318 7,487
ITEM 5- OTHER INFORMATION
Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
The following is a list of exhibits filed as part of this Quarterly Report on
Form 10-Q.
Exhibit
Number Description
------ -----------
10.1 Employment Separation Agreement, dated April 10, 1996, between the
Registrant andGregory McHale
10.2 Employment Letter Agreement, dated May 11, 1996, between the
Registrant and John Thompson
10.3 Employment Letter Agreement, dated April 25, 1996, between the
Registrant andBeverly Schultz
11 Statement Regarding Computation of Net Income (Loss) per Share
27 Financial Data Schedule
______________________________________________
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarterly period ended June 29,
1996.
17
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
Date: August 13, 1996 /s/ Andrew Nojda
--------------------------------------
Andrew Nojda
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1996 /s/ Daniel W. Muehl
--------------------------------------
Daniel W. Muehl
Corporate Controller and Acting Chief
Financial Officer
(Principal Financial and Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibits Page
- -------------- ----------------------- ----
<S> <C> <C>
10.1 Employment Separation Agreement, dated
April 10, 1996, between the Registrant and
Gregory McHale
10.2 Employment Letter Agreement, dated
May 11, 1996,between the Registrant
and John Thompson
10.3 Employment Letter Agreement, dated
April 25, 1996, between the Registrant
and Beverly Schultz
11 Statement Regarding Computation of
Net Income (Loss) per Share 20
27 Financial Data Schedule
</TABLE>
19
<PAGE>
EXHIBIT 10.1
EMPLOYMENT SEPARATION AGREEMENT
-------------------------------
This EMPLOYMENT SEPARATION AGREEMENT ("Agreement"), effective as of the
10th day of April, 1996 (the "Effective Date"), by and among Number Nine Visual
Technology Corporation ("Number Nine"), a Massachusetts corporation located in
Lexington, Massachusetts, and Gregory McHale (the "Employee").
WHEREAS, Number Nine and Employee have enjoyed a mutually satisfactory
employment relationship;
WHEREAS, Number Nine has expressed a desire for career growth beyond which
he believes is presently available in connection with his employment with Number
Nine and, therefore, has resigned his employment with Number Nine;
WHEREAS, Number Nine desires to recognize Employee's contributions to
Number Nine by providing the pay and benefits more fully set forth below in this
Agreement;
WHEREAS, Employee affirms that he voluntarily has decided to accept the
severance pay and benefits, and sign this Agreement of his own free will;
NOW, THEREFORE, Number Nine and Employee hereby agree to the following:
1. The parties acknowledge and agree that the term "Number Nine" is
intended to include Number Nine, its respective officers, directors, employees,
agents, successors and assigns.
2. Employee's employment with Number Nine terminated effective April 10,
1996 (the "Separation Date"). Employee acknowledges from and after the
Separation Date, he shall have no authority to represent himself as an employee
or agent of Number Nine and that he shall not represent himself in the future as
an employee or agent of Number Nine.
3. In exchange for the mutual covenants set forth in this Agreement,
Number Nine agrees to provide Employee with a lump sum payment of Ten Thousand,
Four Hundred, Sixteen Dollars and Sixty-Eight Cents ($10,416.68), less state,
federal and other employment related deductions. Employee expressly
acknowledges and agrees that payment under this Section 3 of this Agreement is
not otherwise due or owing to Employee under any employment agreement (oral or
written) or Number Nine policy or practice. The parties further acknowledge and
agree that this Agreement and the monies and other economic benefits to be
provided to Employee are not intended to, and shall not constitute, a severance
plan, and shall confer no benefit on anyone other than the parties hereto.
4. Employee acknowledges that he was not a participant in Number Nine's
medical and dental insurance plans and, therefore, has no right to continued
coverage the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), as
amended.
5. Upon execution of this Agreement, Number Nine shall provide Employee
with (i) earned incentive pay equaling Four Thousand, Two Hundred Three Dollars
($4,203.00)(less state and federal employment related taxes), and (ii)
reimbursement for expenses in the amount of Four Thousand Two Hundred and
Ninety-Four Dollars and Twenty-Three Cents ($4,294.23). Employee expressly
acknowledges that except for the foregoing and
-1-
<PAGE>
any vested monies that may be due him pursuant to the Number Nine Computer
Corporation Profit Sharing and Savings Program, he otherwise has been paid and
provided all wages, commissions, incentive pay, bonuses, vacation pay, holiday
pay and any other form of compensation or benefit that either is due now or
otherwise would become due in the future in connection with his employment or
separation of employment with Number Nine.
6. Number Nine and Employee acknowledge that as of the Separation Date,
Employee has vested in Twenty-One Thousand, Three Hundred Thirty-Five (21,335)
shares of Number Nine stock at an option price of Five Dollars and Sixty-Three
Cents ($5.63) per share, pursuant to the terms of the Number Nine Stock Option
Plan, the terms and conditions of which are incorporated herein, except that the
shares exercisable under this Section shall remain exercisable until November
15, 1996. Number Nine and Employee acknowledge and agree that except for the
shares exercisable under this Section, Employee does not have, and shall not in
the future have, rights to vest in or exercise any stock or stock options under
any Number Nine stock or stock option plan (of whatever name or kind) that
Employee participated in or was eligible to participate in during his
employment.
7. Employee expressly acknowledges the following:
(i) that he shall cooperate fully with Number Nine in the defense or
prosecution of any claims or actions now in existence or which may be
brought or threatened in the future against or on behalf of Number Nine,
including any claims or action against its officers, directors and
employees. His cooperation in connection with such claims or actions shall
include, without limitation, his being reasonably available (and, to the
extent possible, outside of work obligations he may have) to meet with
Number Nine in connection with any regulatory matters, to prepare for any
proceeding (including, without limitation, depositions, consultation,
discovery or trial), to provide affidavits, to assist with any audit,
inspection, proceeding or other inquiry, and to act as a witness in
connection with any litigation or other legal proceeding affecting Number
Nine. Employee further agrees that should he be contacted (directly or
indirectly) by an party representing a party adverse to Number Nine, he
shall promptly (within 48 hours) notify Mike Albanese at Number Nine.
(ii) that he shall abide by any and all common law and/or statutory
obligations relating to protection and non-disclosure of Number Nine's
trade secrets and/or confidential and proprietary documents and information
and that he has and shall continue to abide by the covenants set forth in
the "Noncompete and Confidentiality Agreement" dated January 20, 1995
(which agreement is attached hereto as Exhibit A and incorporated herein by
reference).
(iii) that all information relating in any way to the subject matter of
this Agreement, including the terms and amount of this Agreement, shall be
held confidential by Employee and shall not be publicized or disclosed to
any person (other than an immediate family member, legal counsel or
financial advisor, provided that any such individual to whom disclosure is
made agrees to be bound by these confidentiality obligations), business
entity or government agency (except as mandated by state or federal law).
-2-
<PAGE>
(iv) that he will not make any statements that are disparaging about or
adverse to the business interests of Number Nine (including its officers,
directors and employees) or which are intended to harm the reputation of
Number Nine including, but not limited to, any statements that disparage
any product, service, finances, financial condition, capability or any
other aspect of the business of Number Nine.
(v) that the breach of any of the foregoing covenants by Employee shall
constitute a material breach of this Agreement and shall relieve Number
Nine of any further obligations hereunder and, in addition to any other
legal or equitable remedy available to Number Nine, shall entitle Number
Nine to recover any monies already paid to Employee pursuant to Section 3
of this Agreement.
8. Employee agrees and acknowledges that by signing this Agreement and
accepting the payments and other economic benefits to be provided to Employee,
and other good and valuable consideration provided for in this Agreement,
Employee is waiving his right to assert any form of legal claim against Number
Nine of any kind whatsoever from the beginning of time through the date of this
Agreement. Employee's waiver and release herein is intended to bar any form of
legal claim, charge, complaint or any other form of action (jointly referred to
as "Claims") against Number Nine seeking any form of relief including, without
limitation, equitable relief (whether declaratory, injunctive or otherwise), the
recovery of any damages or any other form of monetary recovery whatsoever
(including, without limitation, back pay, front pay, compensatory damages,
emotional distress damages, punitive damages, attorneys fees and any other
costs) against Number Nine, up through the Effective Date of this Agreement.
Without limiting the foregoing general waiver and release, Employee
specifically waives and releases Number Nine from any Claim arising from or
related to Employee's employment relationship with Number Nine or the
termination thereof, including, without limitation:
** Claims under any state or federal discrimination, fair employment practices
or other employment related statute, regulation or executive order (as they
may have been amended through the Effective Date of this Agreement)
prohibiting discrimination or harassment based upon any protected status
including, without limitation, race, national origin, age, gender, marital
status, disability, veteran status or sexual orientation. Without
limitation, specifically included in this paragraph are any Claims arising
under all Massachusetts employment related laws, the Federal Age
Discrimination in Employment Act, the Older Workers Benefit Protection Act,
the Civil Rights Acts of 1866 and 1871, Title VII of the Civil Rights Act
of 1964, the Civil Rights Act of 1991, the Equal Pay Act and the Americans
With Disabilities Act.
** Claims under any other state or federal employment related statute,
regulation or executive order (as they may have been amended through the
Effective Date of this Agreement) relating to wages, hours or any other
terms and conditions of employment. Without limitation, specifically
included in this paragraph are any Claims arising under the Fair Labor
Standards Act, the Family and Medical Leave Act of 1993, the National Labor
Relations Act, the Employee Retirement Income Security Act, the
Consolidated Omnibus Budget Reconciliation Act of 1985 and any similar
state statute.
-3-
<PAGE>
** Claims under any state or federal common law theory including, without
limitation, wrongful discharge, breach of express or implied contract,
promissory estoppel, unjust enrichment, breach of a covenant of good faith
and fair dealing, violation of public policy, defamation, interference with
contractual relations, intentional or negligent infliction of emotional
distress, invasion of privacy, misrepresentation, deceit, fraud or
negligence.
** Any other Claim arising under state or federal law.
Notwithstanding the foregoing, this Section shall not release Number Nine
from any obligation expressly set forth in this Agreement or with respect to
distributions to the extent that any are due Employee under the terms of Number
Nine Computer Corporation Profit Sharing and Savings Program.
9. Except for Employee's obligations pursuant to Noncompete and
Confidentiality Agreement attached hereto as Exhibit A, this Agreement
supersedes any and all prior oral and/or written agreements, and sets forth the
entire agreement between Number Nine and Employee. No variations or
modifications hereof shall be deemed valid unless reduced to writing and signed
by the parties hereto. This Agreement shall take effect as an instrument under
seal and shall be governed and construed in accordance with the laws of the
Commonwealth of Massachusetts. The terms of this agreement are severable, and
if for any reason any part hereof shall be found to be unenforceable, the
remaining terms and conditions shall be enforced in full.
10. Employee hereby acknowledges that he has read this Agreement
carefully, that he has been afforded sufficient time to understand the terms and
effects of this Agreement, that he has been given the opportunity and in fact
has consulted with legal counsel, that he voluntarily is entering into and
executing this Agreement and that neither Number Nine nor its agents or
representatives have made any representations inconsistent with the terms and
effects of this Agreement.
IN WITNESS WHEREOF, the parties have executed this agreement under seal as
of the date first written above.
Number Nine Visual Gregory McHale
Technology Corporation
/s/ Michael Albanese /s/ Gregory McHale
By:_________________________ ___________________________
August 1, 1996 August 1, 1996
Dated: _____________________ Dated: ____________________
-4-
<PAGE>
[NUMBER 9 LOGO APPEARS HERE]
May 11, 1996
Mr. John Thompson
1719 Apache Way
Ogden, Utah 84403
Dear John:
I am pleased to provide you with the terms and conditions of your anticipated
employment by Number Nine Visual Technology Corporation (the "Company").
Position Your initial position will be Chief Operating Officer. In addition,
upon your employment with the Company you will be elected to serve as a member
of the Board of Directors. In addition to performing duties and responsibilities
associated with this position, you will be expected to perform such other duties
and responsibilities that may be assigned to you by the Company from time to
time. As a full-time employee of the Company, you shall devote your full
business time and energies to the business and affairs of the Company.
Starting Date/Nature of Relationship Your employment with the Company shall
commence on May 15, 1996 and be on a part-time basis until June 1,1996 upon
which date your employment will be on a full-time basis. No provision of this
letter shall be construed to create an express or implied employment contract
for a specific period of time. Either you or the Company may terminate the
employment relationship at any time for any reason.
Salary/Rate of Pay Your initial salary will be $4,166.67 per pay period, paid
twice a month annualized at $100,000. Your base salary rate and your eligibility
to participate in the executive bonus program will remain in effect for a period
of 30 months following the date of your employment provided you remain in the
continuous employment of Number Nine during such period. At the end of this
period your base salary rate and bonus will be reviewed by the CEO, with
approval of the Board of Directors, in light of market conditions at that time
(it being understood that your initial base salary is lower than the current
market).
<PAGE>
BONUS You will be eligible to participate in an executive bonus program with the
opportunity to realize up to $100,000 annually. The bonus will be based on a
combination of the attainment of the Company's earnings goals and the attainment
of individual goals determined by the CEO. During your first fiscal year of
employment Number Nine will guarantee 80% of your prorated maximum bonus which
will equal $46,667 and be payable not later than January 15, 1997.
STOCK OPTIONS On the commencement of your employment, the Company will grant you
an option to purchase 250,000 shares of common stock at a purchase price equal
to the fair market value calculated on your first day of employment. The options
will vest over four years with 25% vesting at the end of each full year of
employment with the Company and will be subject to the terms of the Company's
standard option agreement. Should there be a sale of all or substantially all of
the outstanding capital stock or assets of the Company, or a merger or other
transaction involving a transfer of all or substantially all of the beneficial
ownership of the Company prior to the vesting of these options then all of these
unvested options will vest. In addition, if the Company terminates your
employment without cause, all of your unvested options up to a maximum of 50,000
of the then unvested options will vest.
In addition, on the commencement of your employment, the Company will grant you
an option to purchase 75,000 shares of common stock at a purchase price equal to
the fair market value calculated on your first day of employment. These options
will be 100% vested on June 1, 1996 and will be subject to the other terms of
the Company's standard option agreement.
The Company will also grant you, at the conclusion of fiscal 1997, an option to
purchase 50,000 shares of common stock at a purchase price equal to the fair
market value at the conclusion of fiscal 1997 provided the business plan for
1997 is met and provided you remain employed by Number Nine on that date. These
options will be 100% vested on the date of grant and be subject to the other
terms of the Company's standard option agreement.
BENEFITS During the first 90 days of employment, you will not be eligible to
participate in any benefits generally provided to employees except for health
and dental insurance, which will be provided subject to the terms and conditions
of that coverage. After the first 90 days of employment, you will be eligible to
receive such benefits as are generally provided to other employees in accordance
with Company policy as in effect from time to time. The Company retains the
right to change, add or cease any particular benefit.
RELOCATION Number Nine will pay to you $60,000 in two installments of $30,000
each for the purposes of reimbursing you for the expense of your relocation. The
first installment will be paid on the commencement of employment with the
Company and the second installment will be made on the date of the closing of
the purchase of your new home in the Greater Boston area. In addition we will
reimburse you for the reasonable expenses associated with the packing, loading,
transportation, insurance and unloading of your
<PAGE>
household goods following your reasonable substantiation of an itemized account
for such expenses.
CONFIDENTIALITY The Company considers the protection of its confidential
information and proprietary materials to be very important. Therefore, as a
condition of your employment, you and the Company will become parties to a
confidentiality agreement substantially in the form of Attachment A to this
letter (the "Confidentiality Agreement").
SEVERANCE Should Number Nine terminate you for reasons other than for cause we
will continue to pay you a base salary, annualized at $150,000, and medical and
dental benefits for a period of one year. In the event the Company terminates
your employment without cause, all of your unvested options up to a maximum of
50,000 unvested options granted to you on your first day of employment will vest
as set forth above. Except for the foregoing, you shall have no rights to
continued pay, benefits or any other compensation beyond the termination date.
GENERAL This letter, together with the Confidentiality Agreement, will
constitute our entire agreement as to your employment by the Company and will
supersede any prior agreements or understandings, either in writing or oral.
This agreement is contingent on the successful completion of references. This
letter shall be governed by the laws of the Commonwealth of Massachusetts.
You may accept this offer of employment and the terms and conditions thereof by
signing the enclosed additional copy of this letter and the Confidentiality
Agreement, which execution will evidence your agreement with the terms and
conditions set forth herein and therein, and returning them to the Company.
This offer will expire on May 16, 1996, unless accepted by you prior to such
date.
Sincerely,
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
/s/ Michael Albanese, Human Resources Director
______________________________________________
NAME, TITLE
ACCEPTED AND AGREED:
/s/ John Thompson May 13, 1996
__________________________________ Date: ___________________
<PAGE>
EXHIBIT 10.3
[LETTERHEAD OF NUMBER 9 APPEARS HERE]
April 25, 1996
Ms. Beverly Schultz
3 Sandas Point Road
Ayer, MA 01432
Dear Beverly:
I am pleased to provide you with the terms and conditions of your anticipated
employment by Number Nine Visual Technology Corporation (the "Company").
POSITION Your initial position will be Vice President of Engineering. In
addition to performing duties and responsibilities associated with this
position, you will be expected to perform such other duties and responsibilities
that may be assigned to you by the Company from time to time. As a full-time
employee of the Company, you shall devote your full business time and energies
to the business and affairs of the Company.
STARTING DATE/NATURE OF RELATIONSHIP Your employment with the Company shall
commence on May 28, 1996. No provision of this letter shall be construed to
create an express or implied employment contract for a specific period of time.
Either you or the Company may terminate the employment relationship at any time
for any reason.
SALARY/RATE OF PAY Your initial salary will be $5,416.67 per pay period, paid
twice a month annualized at $130,000.
BONUS You will be eligible to participate in an executive bonus program with
the opportunity to realize up to $45,000 annually. Bonus is based on a
combination of the attainment of the Company's earnings goals and the attainment
of personal goals determined by the CEO.
<PAGE>
STOCK OPTIONS The Company will grant you an option to purchase 50,000 shares of
common stock at a purchase price equal to the fair market value calculated on
your first day of employment. The options will vest over four years with 25%
vesting at the end of each full year of employment with the Company and will be
subject to the terms of the Company's option agreement.
BENEFITS During the first 90 days of employment, you will not be eligible to
participate in any benefits generally provided to employees except for health
and dental insurance, which will be provided subject to the terms and conditions
of that coverage. After the first 90 days of employment, you will be eligible to
receive such benefits as are generally provided to other employees in accordance
with Company policy as in effect from time to time. The Company retains the
right to change, add or cease any particular benefit. Beverly will be eligible
to accrue 3 weeks vacation beginning in the first year of employment.
CONFIDENTIALITY The Company considers the protection of its confidential
information and proprietary materials to be very important. Therefore, as a
condition of your employment, you and the Company will become parties to a
confidentiality agreement substantially in the form of Attachment A to this
letter (the "Confidentiality Agreement").
GENERAL This letter, together with the Confidentiality Agreement, will
constitute our entire agreement as to your employment by the Company and will
supersede any prior agreements or understandings, either in writing or oral.
This letter shall be governed by the laws of the Commonwealth of Massachusetts.
You may accept this offer of employment and the terms and conditions thereof by
signing the enclosed additional copy of this letter and the Confidentiality
Agreement, which execution will evidence your agreement with the terms and
conditions set forth herein and therein, and returning them to the Company.
This offer will expire on May 11, 1996, unless accepted by you prior to such
date.
Sincerely,
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
/s/ Michael Albanese, Human Resources Director
______________________________________________
NAME, TITLE
ACCEPTED AND AGREED:
/s/ Beverly Schultz May 3, 1996
__________________________________ Date: ___________________
<PAGE>
EXHIBIT 11
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE (1)(2)
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 29, 1996 JULY 1, 1995 JUNE 29, 1996 JULY 1, 1995
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
HISTORICAL
Common Stock Outstanding, beginning of
the period 8,940 5,490 8,758 5,490
Weighted average cheap stock - 875 - 1,188
Weighted average redeemable common stock - 340 - 170
Weighted average number of common stock
issued 53 877 154 438
Weighted average of common stock
equivalents - 854 - 682
Less: assumed purchase of treasury
shares - (55) - (36)
------- ------ -------- ------
Weighted average number of common and
common equivalent shares outstanding 8,993 8,380 8,912 7,932
======= ====== ======== ======
Net income (loss) $(8,763) $1,384 $( 9,333) $2,135
======= ====== ======== ======
Net income (loss) per common and common
equivalent share outstanding $ (0.97) $0.17 $ (1.05) $0.27
</TABLE>
(1) Primary and fully diluted calculation are substantially the same
(2) In accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 83, issuances of common stock and common stock
equivalents, within the one year prior to the initial filing of the
Company's registration statement, at share prices below the assumed
mid-point of the initial public offering price of $11.00 per share,
are considered to have been made in anticipation of the Company's
public offering. Accordingly, these stock issuances are treated as if
issued and outstanding, using the treasury stock method, since the
inception of the Company, for all reporting periods prior to the
effective date of the public offering.
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000936448
<NAME> NUMBER NINE VISUAL TECHNOLOGY CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> JUN-29-1996
<CASH> 7,395
<SECURITIES> 0
<RECEIVABLES> 30,346
<ALLOWANCES> 541
<INVENTORY> 10,926
<CURRENT-ASSETS> 2,935
<PP&E> 1,845
<DEPRECIATION> 0
<TOTAL-ASSETS> 54,718
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 25,415
<TOTAL-LIABILITY-AND-EQUITY> 54,718
<SALES> 65,577
<TOTAL-REVENUES> 65,577
<CGS> 61,571
<TOTAL-COSTS> 74,971
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 445
<INCOME-PRETAX> (9,628)
<INCOME-TAX> (295)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,333)
<EPS-PRIMARY> (1.05)
<EPS-DILUTED> (1.05)
</TABLE>
