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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 September 28, 1996
------------------
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 November 1,
1996 was 9,041,776.
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
INDEX TO FORM 10-Q
Page
----
Part I - Financial Information:
- -------------------------------
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of September 28,
1996 and December 30, 1995 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended September 28, 1996 and
September 30, 1995 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 28, 1996 and September 30, 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 16
Item 6 - Exhibits and Reports on Form 8-K 17
11 Statement Regarding Computation of Net Income (Loss)
per Share
27 Financial Data Schedule
SIGNATURE(S) 18
2
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 28, 1996 DECEMBER 30, 1995
------------------- ------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note B) $12,182 $ 5,235
Accounts receivable, trade, net of
allowances for doubtful accounts of
$246 and $878, at September 28, 1996
and December 30, 1995, respectively 19,962 27,646
Receivables from manufacturing
contractors and other 2,676 9,100
Related party notes receivable - 164
Inventories (Note C) 9,594 26,493
Prepaid expenses 198 2,147
Deferred tax assets 2,265 2,889
------- -------
Total current assets 46,877 73,674
Property and equipment, net 2,620 1,166
Capitalized software costs, net 860 940
Other assets 197 251
------- -------
TOTAL ASSETS $50,554 $76,031
======= =======
CURRENT LIABILITIES:
Revolving line of credit (Note D) $ 9,399 $ 8,733
Current portion of note payable - 19
Accounts payable 12,645 30,365
Accrued expenses and other current
liabilities 2,152 1,952
Current portion of capital lease obligations 83 100
------- -------
Total current liabilities 24,278 41,169
Capital lease obligations 9 67
Deferred taxes (Note F) 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;
9,020,441 shares issued and
outstanding at September 28, 1996;
8,757,781 shares issued and
outstanding at December 30, 1995 90 88
Additional paid-in capital 35,632 35,301
Accumulated deficit (9,881) (874)
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Total stockholders' equity (Note E) 25,841 34,515
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $50,554 $76,031
======= =======
</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 NINE MONTHS ENDED
SEPTEMBER 28, 1996 SEPTEMBER 30, 1995 SEPTEMBER 28, 1996 SEPTEMBER 30, 1995
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Net sales $29,375 $23,538 $94,952 $80,343
Cost of sales 23,672 19,861 85,243 65,984
------- ------- ------- -------
Gross profit 5,703 3,677 9,709 14,359
Operating expenses:
Selling, general, and administrative 3,596 3,695 12,379 9,437
Research and development 1,678 690 4,336 2,162
Settlement with subcontractor - - 1,959 -
------- ------- ------- -------
Total operating expenses 5,274 4,385 18,674 11,599
Income (loss) from operations 429 (708) (8,965) 2,760
Other income (expense):
Interest expense (230) (19) (675) (335)
Other income, net 127 266 338 477
------- ------- ------- -------
Income (loss) before income taxes 326 (460) (9,302) 2,902
Provision (benefit) for income taxes - (168) (295) 1,059
------- ------- ------- -------
Net income (loss) $ 326 $ (292) $(9,007) $ 1,843
======= ======= ======= =======
Net income (loss) per common and
common equivalent share $0.03 $(0.03) $(1.01) $0.22
======= ======= ======= =======
Weighted average number of
common and common equivalent
shares outstanding 9,805 8,599 8,945 8,441
======= ======= ======= =======
</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>
NINE MONTHS ENDED
SEPTEMBER 28, 1996 SEPTEMBER 30, 1995
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (9,007) $ 1,843
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation and amortization 620 401
Amortization of capitalized software co 546 275
Provision for bad debts (219) 327
Deferred taxes 770 -
Change in operating assets and
liabilities:
Accounts receivable 7,903 (7,474)
Receivable due from 6,424 (6,214)
manufacturing contractors
Inventories 16,899 (9,797)
Prepaids and other assets 2,003 (941)
Accounts payable (17,720) 5,963
Accrued expenses and other 199 (68)
current liabilities
Income taxes payable - (647)
-------- --------
Net cash provided by (used 8,418 (16,332)
for) operating activities -------- --------
Cash flows from investing activities:
Purchase of property and equipment (2,074) (599)
Capitalized software costs (466) (517)
-------- --------
Net cash used for investing (2,540) (1,116)
activities -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock - 32,963
Proceeds from exercise of stock options 333 106
Payments of issuance costs of
common stock - (3,475)
Advances (payments) on revolving
line of credit, net 666 (6,601)
Principal payments on note payable (19) (77)
Principal payments on capital
lease obligations (75) (74)
Proceeds on related party notes
receivable, net 164 71
-------- --------
Net cash provided by financing 1,069 22,913
activities -------- --------
Net change in cash and cash equivalents 6,947 5,465
Cash and cash equivalents, beginning
of period 5,235 3,057
-------- --------
Cash and cash equivalents, end of $ 12,182 $ 8,522
period ======== ========
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 $ 83 $ 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 Condensed 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 preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statments and the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates and would impact the
Company's financial position, results of operations and cash flows. 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 three and nine month periods ended September 28, 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 September 28, 1996, included in cash and cash equivalents is
approximately $9.8 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>
SEPTEMBER 28, 1996 DECEMBER 30, 1995
------------------ -----------------
<S> <C> <C>
Raw materials $3,812 $12,485
Work in process 4,870 11,418
Finished goods 912 2,590
------ -------
$9,594 $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.
The Company had outstanding at September 28, 1996 an approximate $2.5
million receivable due from a manufacturing contractor, related to components
sold by the Company to the contractor for assembly into finished goods.
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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 third quarter of 1996.
Pursuant to this agreement, the Company may borrow an amount equal to 75% of
qualified accounts receivable (as defined in the agreement) up to the maximum
amount at an interest rate per annum equal to either the prime rate (8.25% as of
September 28, 1996) plus 1.25% or at the Libor Rate (as defined in the
agreement) 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 condensed 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 management 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 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.
G. COMMITMENTS & CONTINGENCIES:
----------------------------
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 (the "Managing
Underwriters"). On or about July 17, 1996, a 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. On or about October
16, 1996, an additional complaint was filed in the United States District Court
for the District of Massachusetts by named plaintiff Robert Schoenhofer against
the Company, each member of the Company's Board of Directors, Mr. Hanks, and the
Managing Underwriters. 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
7
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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 alleged class period. 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.
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
original equipment manufacturers ("OEMs") 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 been shipping in volume 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 has also brought to market, an upgraded version of
its proprietary display control utilities and driver software suite, Hawkeye95,
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, 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 were 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 OEMs, which accounted for 52.8% of net
sales in 1995, 74.1% of net sales during the third quarter of 1996 and 32.3% of
net sales during the third 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 three lawsuits seeking class action
status on June 11, 1996, July 16, 1996 and October 16, 1996, respectively, filed
in the United States District Court for the District of Massachusetts naming as
defendants the Company, the members of the Board of Directors, the former Chief
Financial Officer and Treasurer of the
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Company, and the selling shareholders and Managing Underwriters of the Company's
1995 initial public offering. The alleged class of plaintiffs consists of all
persons who purchased shares of the Company's Common 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 and other public statements and
reports filed with the Securities and Exchange Commission during the class
period in question contained false and materially misleading statements. The
Company and the individual defendants believe the allegations are without merit
and intend to vigourously defend against plaintiffs' claims. If the lawsuits are
not resolved satisfactorily for the Company, there could be a material adverse
effect on the Company's future financial performance and results of operations
and, accordingly, income (loss).
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER
30, 1995
Net Sales: Net sales increased approximately 25%, to $29.4 million in the
third quarter of 1996 from $23.5 million in the third quarter of 1995. This
increase was primarily attributable to increased sales of higher-end VRAM
products, primarily to OEM customers. Net sales of higher-end 64-bit VRAM and
128-bit products increased approximately 33% to $18.7 million in the third
quarter of 1996 from $14.1 million in the third quarter of 1995, representing
63.8% of net sales in the third quarter of 1996 compared to 60.0% of net sales
in the third quarter of 1995. Sales to OEMs increased approximately 187%, to
approximately $21.8 million in the third quarter of 1996 from $7.6 million in
the third quarter of 1995, representing 74.1% of net sales in the third quarter
of 1996 compared to 32.3% in the third quarter of 1995. The increase in OEM
sales was primarily a result of increased sales to Dell Computer Corporation
("Dell"), and Unisys Corporation ("Unisys") and the addition of Micron
Electronics, Inc. ("Micron") as OEM customers. Sales to Dell represented 58.7%
of net sales in the third quarter of 1996 compared to 25.5% of net sales in the
third quarter of 1995. The lower sales during the third quarter of 1995 were
largely attributable to changes in Dell's product mix and marketing focus as
well as product shipment delays caused by delays in delivery to Number Nine of
VRAM memory components. Net sales to domestic two-tier distribution and retail
customers decreased 38% to $6.3 million in the third quarter of 1996 from $10.2
million in the third quarter of 1995. Total international sales decreased 8% to
$6.7 million in the third quarter of 1996 from $7.3 million in the third quarter
of 1995.
Gross Profit: Gross profit increased 54% to $5.7 million in the third
quarter of 1996 from approximately $3.7 million in the third quarter of 1995.
The Company's gross profit margin increased to 19.4% in the third quarter of
1996 from 15.6% in the third quarter of 1995, largely attributable to increased
sales of the Company's higher-end products, primarily the Company's proprietary
Imagine technology. These products generate higher gross profit than lower-end
merchant-based products. Additionally, the Company benefited from the
utilization of lower priced component costs, particularly memory, during the
third quarter of 1996 compared to the third quarter of 1995, which resulted in
lower cost of goods sold.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses decreased 3%, to $3.6 million in the third quarter of
1996 from $3.7 million in the third quarter of 1995, primarily related to
expense controls of discretionary costs during the 1996 period compared to the
1995 period. As a percentage of net sales, selling, general and administrative
expenses decreased to 12.2% in the third quarter of 1996 from 15.7% in the third
quarter of 1995. The Company currently expects that total selling, general and
administrative expenses will 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 143%, to approximately $1.7 million in the third quarter of 1996 from
$0.7 million in the third quarter of 1995, resulting primarily from increased
staffing to support continued development of both proprietary and merchant-based
video/graphics products, lower rate of capitalization of software, and
engineering expenses associated with the continued development of its next-
generation Imagine 128 Series 3 chip. During the third quarter of 1996, the
Company began volume production of its Imagine 128 Series 2e product based on
Number Nine's second generation Imagine 128 chip and continued the development
of additional products. As a
10
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percentage of net sales, research and development expenses increased to 5.8% in
the third quarter of 1996 from 3.0% in the third quarter of 1995.
Interest Expense: Interest expense for the third quarter of 1996 was
$230,000 compared to interest expense of $19,000 in the third quarter of 1995.
During the third quarter of 1996, the Company had balances outstanding against
its revolving line of credit, which it did not have during the third quarter of
1995.
Other Expense/Income: Other income totaled $127,000 in the third quarter of
1996 compared to other income of $266,000 in the third quarter of 1995. Other
income during the third quarter of 1996 was primarily attributable to interest
earned on cash and cash equivalents; other income during the third quarter of
1995 was primarily attributable to foreign currency gains, as well as interest
earned on cash and cash equivalents.
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 management 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 September 28, 1996, the Company did not utilize an
additional income tax benefit associated with the losses incurred during prior
periods. For the three month period ending September 30, 1995, the Company
provided a tax benefit for income taxes of $168,000.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER
30, 1995
Net Sales: Net sales increased 18%, to approximately $94.9 million in the
first nine months of 1996 from $80.3 million in the first nine months of 1995.
This increase was largely attributable to increased sales of higher-end
products. Net sales of higher-end 64-bit VRAM and 128-bit products increased 45%
to $66.2 million in the first nine months of 1996 from $45.7 million in the
first nine months of 1995, representing 69.8% of net sales in the first nine
months of 1996 compared to 56.9% of net sales in the first nine months of 1995.
Sales to OEMs increased 58%, to approximately $63.4 million in the first nine
months of 1996 from $39.9 million in the first nine months of 1995, representing
66.8% of net sales in the first nine months of 1996 compared to 49.7% in the
first nine months of 1995. The increase in OEM sales was primarily a result of
increased sales to Dell and Unisys and the addition of Micron as OEM customers.
Sales to Dell represented 51.0% of net sales in the first nine months of 1996
compared to 45.0% of net sales in the first nine months of 1995. Net sales to
international two-tier distribution customers decreased 26% to $10.5 million in
the first nine months of 1996 from $14.1 million in the first nine months of
1995. Net sales to domestic two-tier and retail customers decreased 20% to $20.9
million in the first nine months of 1996 from $26.2 million in the first nine
months of 1995. Total international sales increased 5% to $22.6 million in the
first nine months of 1996 from $21.6 million in the first nine months of 1995.
Gross Profit: Gross profit decreased 33%, to approximately $9.7 million in
the first nine months of 1996 from approximately $14.4 million in the first nine
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 10.2% in the first nine months of
1996 from 17.9% in the first nine months of 1995, principally due to these
inventory charges. The remaining decrease in gross profit during the first nine
months of 1996 was largely attributable to sales of excess finished goods and
use of higher cost component inventories, particularly memory. The Company
expects to continue to sell excess finished goods and obsolete inventory during
future periods at prices that may negatively impact gross margins.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased 32%, to $12.4 million in the first nine months
of 1996 from $9.4 million in the first nine months of 1995, primarily as a
result of increased expenses related to additional costs associated with
increased staffing, the hiring of new key personnel, legal expenses associated
with the pending securities litigation and additional
11
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advertising and channel promotion activities. As a percentage of net sales,
selling, general and administrative expenses increased to 13.1% in the first
nine months of 1996 from 11.7% in the first nine 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 95%, to $4.3 million in the first nine months of 1996 from $2.2
million in the first nine 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, 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 nine 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 4.5% in
the first nine months of 1996 from 2.7% in the first nine months of 1995.
Expenses Associated With Settlement With a Subcontractor: During the first
nine 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 2.1% of net sales during the first
nine months of 1996.
Interest Expense: Interest expense for the first nine months of 1996 was
$675,000 compared to interest expense of $335,000 in the first nine months of
1995. During the first nine months of 1996, the Company had higher average
balances outstanding against its revolving line of credit than during the first
nine months of 1995; in particular, during the third quarter of 1995 the Company
did not have any balances outstanding against its revolving line of credit.
Other Expense/Income: Other income totaled $338,000 in the first nine months
of 1996 compared to other income of $477,000 in the first nine months of 1995.
Other income during the first nine months of 1996 was primarily attributable to
interest earned on cash and cash equivalents; other income during the first nine
months of 1995 was primarily attributable to foreign currency gains, as well as
cash and cash equivalents during the third quarter of 1995.
Provision (Benefit) 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 management 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 nine months of 1996. For the nine month period ending September 30,
1995, the Company provided for income taxes of $1.1 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 both DRAM and VRAM
components. 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 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 or preferences for competing products, 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 product introductions. 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. For example, the Company received confirmation from Dell
that it would discontinue buying their entry-level graphics solution from the
Company in the subsequent quarter. 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. For example, during the third quarter of 1996, the Company experienced a
shortfall of orders and sales in Europe. 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 nine months of 1996 have had a significant impact on its balance sheet
and cash flows. During 1995, the 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 $8.4
million during the first nine months of 1996, compared to operating activities
which used cash of $16.3 million during the first nine months of 1995. During
the first nine months of 1996, net decreases in accounts receivable, receivable
due from a manufacturing contractor, and inventories provided cash of $7.9
million, $6.4 million and $16.9 million, respectively, which was offset by a
decrease of $17.7 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 62 days at the end of the third 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
September 28, 1996, the Company's principal sources of liquidity consisted of
approximately $12.2 million of cash and cash equivalents and approximately $5.6
million available under its revolving line of credit.
During the first nine months of 1996, investing activities used cash of
approximately $2.1 million for purchases of computer and office equipment and
$466,000 for capitalized software development costs compared to $599,000 and
$517,000 during the first nine months of 1995, respectively. Financing
activities provided cash of approximately $1.1 million during the first nine
months of 1996, primarily attributable to balances on the Company's revolving
line of credit which increased $666,000 during the first nine months of 1996.
During the first nine months of 1995, financing activities provided cash of
$22.9 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 its revolving
line of credit during the fourth quarter of 1995.
As of September 28, 1996, $9.3 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 third
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, if the line of credit is not
14
<PAGE>
available to 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 1997. 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 (the "Managing
Underwriters"). On or about July 17, 1996, a 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. On or about October
16, 1996, an additional complaint was filed in the United States District Court
for the District of Massachusetts by named plaintiff Robert Schoenhofer against
the Company, each member of the Company's Board of Directors, Mr. Hanks, and the
Managing Underwriters. 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 vigorously
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
Not Applicable
ITEM 5- OTHER INFORMATION
Not Applicable
16
<PAGE>
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
------ -----------
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 September
28, 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: November 12, 1996 /s/ John Thompson
-----------------------------------------------
John Thompson
President and Chief Operating Officer
Date: November 12, 1996 /s/ Daniel W. Muehl
-----------------------------------------------
Daniel W. Muehl
Corporate Controller and Acting Chief Financial
Officer
(Principal Financial and Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibits Page
- ------ ----------------------- ----
11 Statement Regarding Computation of Net Income (Loss) per Share 20
27 Financial Data Schedule
19
<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 NINE MONTHS ENDED
SEPTEMBER 28, 1996 SEPTEMBER 30, 1995 SEPTEMBER 28, 1996 SEPTEMBER 30, 1995
------------------- ------------------- ------------------- -------------------
HISTORICAL
<S> <C> <C> <C> <C>
Common Stock Outstanding, beginning of the period 9,006 8,513 8,758 5,490
Weighted average cheap stock - - - 792
Weighted average redeemable common stock - - - 385
Weighted average number of common stock issued 6 86 187 1,056
Weighted average of common stock equivalents 1,832 - - 782
Less: assumed purchase of treasury
shares (1,039) - - (64)
------- ------ -------- ------
Weighted average number of common and
common equivalent shares outstanding 9,805 8,599 8,945 8,441
======= ====== ======== ======
Net income (loss) $ 326 $ (292) $( 9,007) $1,843
======= ====== ======== ======
Net income (loss) per common and common
equivalent share outstanding $0.03 $(0.03) $ (1.01) $0.22
</TABLE>
(1) Primary and fully diluted calculation are substantially the same
(2) In accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 83, issuance's 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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000936448
<NAME> NUMBER NINE VISUAL TECHNOLOGY CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> SEP-28-1996
<CASH> 12,182
<SECURITIES> 0
<RECEIVABLES> 22,638
<ALLOWANCES> 246
<INVENTORY> 9,594
<CURRENT-ASSETS> 46,877
<PP&E> 2,620
<DEPRECIATION> 0
<TOTAL-ASSETS> 50,554
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 90
<OTHER-SE> 25,750
<TOTAL-LIABILITY-AND-EQUITY> 50,554
<SALES> 94,952
<TOTAL-REVENUES> 94,952
<CGS> 85,243
<TOTAL-COSTS> 104,254
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 675
<INCOME-PRETAX> (9,302)
<INCOME-TAX> (295)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,007)
<EPS-PRIMARY> (1.01)
<EPS-DILUTED> (1.01)
</TABLE>
