<PAGE>
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 27, 1997
------------------
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
-------
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: (781) 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 October 20,
1997 was 9,166,173.
<PAGE>
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
Part I - Financial Information:
- -------------------------------
<S> <C>
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of September 27, 1997 and
December 28, 1996 3
Condensed Consolidated Statements of Operations for the three months and
nine months ended September 27, 1997 and September 28, 1996 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 27, 1997 and September 28, 1996 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 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
10 Employment Separation Agreement, dated October 6, 1997,
between the Registrant and John G. Thompson
11 Statement Regarding Computation of Net Income
(Loss) per Share
27 Financial Data Schedule
SIGNATURES 18
</TABLE>
2
<PAGE>
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997 DECEMBER 28, 1996
------------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,613 $13,895
Accounts receivable, trade, net of allowances for doubtful accounts
of $147 and $364, at September 27, 1997 and December 28, 1996 9,211 11,584
Receivables from manufacturing contractor 2,374 2,324
Inventories 3,709 9,422
Prepaid expenses 406 612
Deferred tax assets - 1,839
-------- -------
Total current assets 19,313 39,676
Property and equipment, net 3,860 2,671
Capitalized software costs, net - 648
Other assets 164 185
-------- -------
TOTAL ASSETS $ 23,337 $43,180
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 5,150 $ 8,500
Accounts payable 5,887 5,848
Accrued expenses and other current liabilities 1,170 2,506
-------- -------
Total current liabilities 12,207 16,854
Commitments and contingencies - -
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;
9,166,173 shares issued and outstanding at September 27, 1997;
9,053,256 shares issued and outstanding at December 28, 1996 92 91
Additional paid-in capital 35,987 35,760
Accumulated deficit (24,949) (9,525)
-------- -------
Total stockholders' equity 11,130 26,326
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,337 $43,180
======== =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
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 27, 1997 September 28, 1996 September 27, 1997 September 28, 1996
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $11,526 $29,375 $ 32,584 $94,952
Cost of sales 9,521 23,672 29,364 85,243
------- ------- -------- -------
Gross margin 2,005 5,703 3,220 9,709
Operating expenses:
Selling, general, and 3,270 3,596 10,495 12,379
administrative
Research and development 2,193 1,678 6,387 4,336
Settlement with subcontractor - - - 1,959
------- ------- -------- -------
Total operating expenses 5,463 5,274 16,882 18,674
Income (loss) from operations (3,458) 429 (13,662) (8,965)
Other income (expense):
Interest expense (46) (230) (229) (675)
Other income, net 66 127 305 338
------- ------- -------- -------
Income (loss) before income taxes (3,438) 326 (13,586) (9,302)
Provision (benefit) for income taxes - - 1,838 (295)
------- ------- -------- -------
Net income (loss) $(3,438) $ 326 $(15,424) $(9,007)
======= ======= ======== =======
Net income (loss) per common and
common equivalent share $(0.38) $0.03 $(1.69) $(1.01)
======= ======= ======== =======
Weighted average number of
common and common equivalent
shares outstanding 9,132 9,805 9,103 8,945
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 27, 1997 SEPTEMBER 28, 1996
--------------------------- ------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(15,424) $ (9,007)
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 928 620
Amortization of capitalized software costs 648 546
Provision for bad debts (266) (219)
Deferred taxes 1,839 770
Change in operating assets and liabilities:
Accounts receivable 2,639 7,903
Receivable due from manufacturing contractors (50) 6,424
Inventories 5,713 16,899
Prepaids and other assets 227 2,003
Accounts payable 39 (17,720)
Accrued expenses and other current liabilities (1,278) 199
-------- --------
Net cash provided by (used for) operating activities (4,985) 8,418
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (2,117) (2,074)
Capitalized software costs - (466)
-------- --------
Net cash used for investing activities (2,117) (2,540)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 110 -
Proceeds from exercise of stock options 118 333
Advances (payments) on revolving line of credit, net (3,350) 666
Principal payments on note payable - (19)
Principal payments on capital lease obligations (58) (75)
Proceeds on related party notes receivable, net - 164
-------- --------
Net cash provided by (used for) financing activities (3,180) 1,069
-------- --------
Net change in cash and cash equivalents (10,282) 6,947
Cash and cash equivalents, beginning of period 13,895 5,235
-------- --------
Cash and cash equivalents, end of period $ 3,613 $ 12,182
======== ========
Supplemental disclosure of non-cash financing transactions:
Interest paid $ 270 $ 83
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 28, 1996. Operating results for the three and nine month
periods ended September 27, 1997 may not necessarily be indicative of the
results to be expected for any other interim period or for the full year.
B. Cash and Cash Equivalents:
--------------------------
As of September 27, 1997, cash and cash equivalents were substantially
invested in the Company's operating account. Additionally, the Company had cash
and cash equivalents 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 27, 1997 DECEMBER 28, 1996
------------------ -----------------
<S> <C> <C>
Raw materials $ 940 $2,733
Work in process 1,401 57
Finished goods 1,368 6,632
------ ------
$3,709 $9,422
====== ======
</TABLE>
The market for the Company's products is characterized by 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 a receivable of approximately $2.4 million outstanding at
September 27, 1997 due from a manufacturing contractor, related to components
sold by the Company at cost to the contractor for assembly into finished goods.
6
<PAGE>
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.
Pursuant to this agreement, the Company may borrow an amount equal to 65% 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 (8.50% as of
September 27, 1997) plus 1% 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.
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 from the lender for non
compliance with certain covenants in the agreement at the conclusions of the
first and second quarters of 1997 and is currently seeking a waiver at the
conclusion of the third quarter of 1997. The Company anticipates that it will
not be in compliance with certain covenants of the lender at the conclusion of
1997. If the Company is not in compliance with all of the covenants of the
lender, there can be no assurance that the lender will grant additional waivers
and/or amendments, nor can there be any assurance that alternative financing
will be available.
E. Recently Issued Accounting Standard
-----------------------------------
In February 1997, The Financial Accounting Standards Board issued Statement
on Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). This
statement attempts to simplify current standards used in the United States for
computing earnings per share and make them more comparable with international
standards. SFAS 128 replaces APB Opinion 15 and related interpretations (APB
15). APB 15 requires the dual presentation of primary and fully diluted
earnings per share. Primary EPS shows the amount of income attributed to each
share of common stock. Fully diluted EPS considers common stock equivalents and
all other securities that could have been converted into common stock.
SFAS 128 simplifies the computation of EPS by replacing the presentation of
primary EPS with a presentation of basic EPS. Basic EPS includes no dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted EPS. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods, and earlier application is not permitted. SFAS 128
requires restatement of all prior period earnings per share data.
Had the Company computed earnings per share consistent with the provisions
of SFAS 128 basic EPS would have been $(0.38) and $0.03 for the three month
periods and $(1.69) and $(1.01) for the nine month periods ended September 27,
1997 and September 28, 1996, respectively. Diluted EPS would have been
equivalent to the earnings per share amount reported.
7
<PAGE>
F. Income Taxes:
-------------
In the second quarter of 1997, the Company increased its valuation allowance
against the remainder of its net deferred tax asset, of approximately $1.8
million. Valuation of the net deferred tax asset was dependent upon generating
sufficient taxable income in near-term periods. Principally as a result of the
net losses incurred through the second quarter of 1997, management estimates of
future taxable income have been reduced. As a result, management believes it is
less likely than not that the remaining net deferred tax asset will be realized.
G. 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 and Stanley W. Bialek (the
"Selling Stockholders") 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, Dr. Fouad H. Nader and
William H. Thalheimer), former members of the Company's Board of Directors,
(Gill Cogan, Dr. Paul R. Low), 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
(during the period in question), 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.
By order of the District Court, these actions have been consolidated into a
single action. 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 vigorously
defend these and any similar lawsuits that may be filed, although the ultimate
outcome of these matters cannot yet be determined. If the lawsuits are not
resolved satisfactorily for the Company, there could be a material adverse
effect on the Company's future financial condition and results of operations
and, accordingly, income (loss). The Company does not believe that the ultimate
liability, if any, is estimable or probable, and therefore no provision for any
liability that may result from the actions has been recognized in the
accompanying condensed consolidated financial statements.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" 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 here and included in the Company's publicly available filings
with the Securities and Exchange Commission, such as this report.
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
OEMs and two-tier and retail distribution customers. The Company's series of
128-bit proprietary accelerators have been recognized as some of the highest
performance graphics products available to the desktop PC market. During the
third quarter of 1997, the Company began shipping products utilizing its
third generation proprietary 128-bit graphics accelerator chip technology,
Ticket to Ride. Additionally, the Company began development of its fourth
generation 128-bit graphics accelerator chip technology. There can be no
assurance that the Company's new product, Revolution3D, utilizing the Ticket to
Ride chip will be successful or that the fourth generation product will be
completed and marketed successfully. The Company also markets Hawkeye95, a
display control utilities and driver software suite, which enhances user control
over various graphics functions and is designed to improve PC system graphics
performance under Windows95. In addition, the Company has begun to ship several
new video/graphics products, including the second generation of its Imagine 128
accelerator board for Apple PowerMac PCI computers, and the Imagine 128 Series 2
8MB H-VRAM, 3-D products targeted at the desktop PC games market, and next-
generation merchant accelerator chip based products in its Vision, Motion and
Reality product families. During 1997 and 1998, the Company currently plans to
develop 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 original equipment manufacturers ("OEMs"),
which accounted for 39.1% of net sales in the third quarter of 1997, 68.3% of
net sales in 1996, and 52.8% of net sales during 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
9
<PAGE>
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.
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER
28, 1996
Net Sales: Net sales decreased approximately 61%, to $11.5 million in the
third quarter of 1997 from approximately $29.4 million in the third quarter of
1996. This decrease was primarily attributable to a decrease of net sales to the
Company's OEM customers, as well as significant pricing pressure on all of the
Company's products. Sales to OEMs decreased 79%, to $4.5 million in the third
quarter of 1997 from approximately $21.8 million in the third quarter of 1996,
representing 39.1% of net sales in the third quarter of 1997 compared to 74.1%
in the third quarter of 1996. The decrease in OEM sales was primarily a result
of the discontinuation of sales of the Company's proprietary based 128-bit
products and merchant based products to Dell Computer Corporation ("Dell").
There were no sales to Dell in the third quarter of 1997 compared to 58.7% of
net sales in the third quarter of 1996. Net sales to domestic two-tier
distribution and retail customers decreased approximately 37% to approximately
$4.0 million in the third quarter of 1997 from approximately $6.3 million in the
third quarter of 1996. Total international sales decreased 52% to $3.2 million
in the third quarter of 1997 from $6.7 million in the third quarter of 1996.
Sales of the Company's proprietary based 128-bit products represented 82.6%, or
approximately $9.5 million, of net sales for the third quarter of 1997 compared
to 55.4%, or approximately $16.3 million, of net sales for the third quarter of
1996.
Gross Margin: Gross profit decreased to $2.0 million in the third quarter of
1997 compared to gross profit of $5.7 million in the third quarter of 1996. This
decrease was primarily attributable to the reduction in net sales, particular
lower sales of the Company's proprietary products to its OEM customers, as well
as significant pricing pressure in the quarter on sales of older technology
products. The effects of planned new product introductions, anticipated stock
rotations and sales activity during future periods, as further described in
"Certain Factors That May Affect Future Results of Operations" may have a
negative impact on gross margin.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses decreased 8%, to approximately $3.3 million in the third
quarter of 1997 from approximately $3.6 million in the third quarter of 1996,
primarily related to expense control of the Company's advertising and channel
promotion activities as compared to the 1996 period. As a percentage of net
sales, selling, general and administrative expenses were 28.7% in the third
quarter of 1997 compared to 12.2% in the third quarter of 1996. The Company
currently expects that total selling, general and administrative expenses will
decrease, although not necessarily as a percentage of net sales, primarily as a
result of additional expense controls and headcount reductions.
Research and Development Expenses: Research and development expenses
increased approximately 29%, to approximately $2.2 million in the third quarter
of 1997 from approximately $1.7 million in the third quarter of 1996, resulting
primarily from increased staffing to support continued development of both
proprietary and merchant-based video/graphics products, as well as non-recurring
engineering expenses associated with the completion of the development effort of
the Company's Revolution3D products, based on the Company's third generation
128-bit graphics accelerator chip, Ticket-2-Ride, as well as associated graphic
boards utilizing this chip, such as Revolution 3D. During the third quarter of
1997, the Company continued the development of its next-generation, which is the
fourth generation, proprietary 128-bit graphics accelerator chip. As a
percentage of net sales, research and development expenses increased to 19.1% in
the third quarter of 1997 from 5.8% in the third quarter of 1996
Interest Expense/Income: Interest expense for the third quarter of 1997 was
$46,000 compared to interest expense of $230,000 in the third quarter of 1996.
During the third quarter of 1997, the Company had lower average balances
outstanding against its revolving line of credit than during the third quarter
of 1996.
Other Expense/Income: Other income totaled $66,000 in the third quarter of
1997 compared to other income of $127,000 in the third quarter of 1996. Other
income during the third quarters of 1997 and 1996 was primarily attributable to
interest earned on cash and cash equivalents.
10
<PAGE>
Provision (Benefit) for Income Taxes: In the second quarter of 1997, the
Company increased its valuation allowance against the remainder of its net
deferred tax asset, of approximately $1.8 million. Valuation of the net deferred
tax asset was dependent upon generating sufficient taxable income in near-term
periods. Principally as a result of the net losses incurred through the second
quarter of 1997, management estimates of future taxable income have been
reduced. As a result, management believes it is less likely than not that the
remaining net deferred tax asset will be realized.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER
28, 1996
Net Sales: Net sales decreased 66%, to approximately $32.6 million in the
first nine months of 1997 from approximately $95.0 million in the first nine
months of 1996. This decrease was primarily attributable to a decrease in net
sales to the Company's OEM customers. Sales to OEMs decreased 74%, to $16.6
million in the first nine months of 1997 from $63.4 million in the first nine
months of 1996, representing 50.9% of net sales in the first nine months of 1997
compared to 66.7% in the first nine months of 1996. The decrease in sales to
OEMs was primarily a result of discontinuation of the sales of the Company's
products to Dell during the second quarter of 1997. Sales to Dell represented
approximately $4.9 million, or 15.0%, of net sales during the first nine months
of 1997 compared to $48.4 million, or 50.9%, of net sales during the first nine
months of 1996. Total international sales decreased 50% to approximately $11.2
million in the first nine months of 1997 from approximately $22.6 million in the
first nine months of 1996. Sales of the Company's proprietary based 128-bit
products represented approximately $24.6 million or 75.5% of net sales during
the first nine months of 1997, compared to $33.6 million or 35.4% during the
first nine months of 1996.
Gross Margin: Gross margin decreased 67%, to $3.2 million in the first nine
months of 1997 from $9.7 million in the first nine months of 1996. This
decrease was primarily attributable to the reduction in net sales, particular
lower sales of the Company's proprietary products to its OEM customers, as well
as significant pricing pressure in the first nine months of 1997 on sales of
older technology products. The effects of planned new product introductions,
anticipated stock rotations and sales activity during future periods, as further
described in "Certain Factors That May Affect Future Results of Operations" may
have a negative impact on gross margin.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses decreased 15%, to $10.5 million in the first nine months
of 1997 from $12.4 million in the first nine months of 1996, primarily as a
result of a reduction of advertising and channel promotion activities. As a
percentage of net sales, selling, general and administrative expenses were 32.2%
in the first nine months of 1997 compared to 13.1% in the first nine months of
1996. The Company currently expects that total selling, general and
administrative expenses will continue to decrease although not necessarily as a
percentage of net sales, primarily as a result of expense controls and headcount
reductions.
Research and Development Expenses: Research and development expenses
increased 49%, to approximately $6.4 million in the first nine months of 1997
from $4.3 million in the first nine months of 1996, 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 nonrecurring expenses associated with the completion of
chip development of the Company's third generation proprietary based 128-bit
graphics accelerator product Revolution3D. During the first nine months of 1997,
the Company began the development of its next-generation, which is the fourth
generation, proprietary 128-bit chip, and continued development of some
additional products. As a percentage of net sales, research and development
expenses increased to 19.6% in the first nine months of 1997 from 4.5% in the
first nine months of 1996.
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 the then 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/Income: Interest expense for the first nine months of 1997
was $229,000 compared to interest expense of $675,000 in the first nine months
of 1996. During the first nine months of 1997, the
11
<PAGE>
Company had lower average balances outstanding against its revolving line of
credit than during the first nine months of 1996.
Other Expense/Income: Other income totaled $305,000 in the first nine months
of 1997 compared to other income of $338,000 in the first nine months of 1996.
Other income during the first nine months of 1997 and 1996 was primarily
attributable to interest earned on cash and cash equivalents; other income
during the first nine months of 1996 was primarily attributable to foreign
currency gains.
Provision (Benefit) for Income Taxes: In the second quarter of 1997, the
Company increased its valuation allowance against the remainder of its net
deferred tax asset, of approximately $1.8 million. Valuation of the net deferred
tax asset was dependent upon generating sufficient taxable income in near-term
periods. Principally as a result of the net losses incurred through the second
quarter of 1997, management estimates of future taxable income have been
reduced. As a result, management believes it is less likely than not that the
remaining net deferred tax asset will be realized. For the nine months ending
September 29, 1996, the Company provided an additional income tax benefit of
$295,000 associated with the losses incurred during the period.
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 has experienced limited availability, delays in shipments and
unanticipated cost fluctuations related to the supply of components,
particularly memory chips. The Company is actively working with memory component
suppliers to secure pricing and volume commitments for future production.
Additionally, the Company's suppliers could impact the availability of key
components, particularly memory and graphics accelerator chips, to the extent
that they reduce the Company's lines of credit and payment terms. In such an
event, the Company could have difficulty securing sufficient supply to meet
customer requirements. There can be no assurance that commitments will be
secured in sufficient amounts to meet the needs of the Company or at prices that
will enable the Company to attain profitability.
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 is often 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 has in the past experienced and could in the future experience
reductions in sales of older generation products as customers anticipate new
product introductions. For example, the Company has completed its development
efforts on its Ticket to Ride 128-bit video/graphics accelerator chip, while its
second generation proprietary 128-bit video/graphics accelerator chip is nearing
the end of its product life cycle. The Company's ability to successfully
transition its Imagine 128 Series 2 products to its Revolution3D products, based
on its third generation proprietary-based 128-bit product, will depend on such
factors. 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.
12
<PAGE>
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. For example, in
September 1996 the Company received notice from Dell that Dell would discontinue
buying its merchant graphics solution from the Company in the fourth quarter of
1996. In addition, during the first quarter of 1997, Dell reduced its purchases
of the Company's proprietary Imagine 128 Series 2 4MB VRAM product. As a result,
the Company does not expect that net sales to Dell during the remainder of 1997
will be significant. Future sales to Dell are uncertain and depend upon the
performance and pricing of new Company products and their acceptance by Dell.
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 expense levels is based in large part on the Company's expectations of
future sales. As a result of the decline in net sales to the Company's OEM
customers, primarily Dell, and product transitions, the Company expects that net
sales will decline during the fourth quarter of 1997 compared to the fourth
quarter of 1996. 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.
The Company's products have historically been based both on merchant and
proprietary-based video/graphic accelerator chips. The Company's contribution
from these product lines has been equally important during the last few years.
However, the Company believes that over the long-term, its proprietary-based
products will become an increasingly more important factor in determining
success for the Company. During 1996 and 1997 the Company's reliance on its
proprietary products has increased as a percentage of net sales and gross
profit. As a result, if sales of its proprietary-based products do not meet the
Company's expectations, or if the Company experiences delays in the completion
and availability of these proprietary-based products, it may be unable to
quickly develop merchant-based products, which could have a material adverse
effect on the Company's operating results.
The Company has been served notice of three lawsuits seeking class action
status on or about 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 during the period in question, the former Chief Financial Officer and
Treasurer of the 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 through January 31, 1996. The
plaintiffs, who seek unspecified damages, interest, costs and fees, allege,
among other things, 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 questions
contained false and materially misleading statements. The defendants deny
liability, believe they have meritorious defenses and intend to vigorously
defend against these and any similar lawsuits that may be filed, although the
ultimate outcome of these matters cannot yet be determined. 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).
13
<PAGE>
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
40.7% in the first quarter of 1997 from the fourth quarter of 1996, and 12.2% in
the first quarter of 1996 from the fourth quarter of 1995, 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.
LIQUIDITY AND CAPITAL RESOURCES
Several factors in the development of the Company's business during 1995 and
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. The Company has since
shifted its emphasis, increasing its reliance on sales to its 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 fluctuating cost of memory components has
resulted in variable gross and operating margins, and limited availability at
times has required the use of cash when necessary to secure supplies of memory.
The Company incurred valuation adjustments for inventory during the fourth
quarter of 1995 and second quarter of 1996, and recorded charges to cost of
sales associated with obsolete and excess inventory of $8.0 million and $5.7
million, respectively. 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 resulted in the Company requiring
more working capital and generating less cash flow from operations than
anticipated.
The Company continued to incur losses in 1997, revenue has dropped, and
marketplace pricing has increased. The Company's operating activities used cash
of approximately $5.0 million during the first nine months of 1997, compared to
operating activities which provided cash of approximately $8.4 million during
the first nine months of 1996. During the first nine months of 1997, net
decreases in accounts receivable, and inventories provided cash of approximately
$2.6 million and $5.7 million, respectively, which was offset by a net loss from
operations of approximately $15.4 million. Decreases in accounts receivable have
primarily been attributable to lower sales levels during the first nine months
of 1997. 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 27,
1997, the Company's principal sources of liquidity consisted of approximately
$3.6 million of cash and cash equivalents and approximately $9.8 million
available under its revolving line of credit, pending approval of the debt
covenant waivers and subject to the Company receivables described below.
During the first nine months of 1997, investing activities used cash of
approximately $2.1 million for purchases of computer and office equipment
compared to $2.1 million for purchases and office equipment and $466,000 of
capitalized software costs during the first nine months of 1996. Financing
activities used cash of approximately $3.2 million during the first nine months
of 1997, attributable to the reduction of the outstanding balance of the
revolving credit facility by $3.3 million. During the first nine months of 1996,
financing activities provided cash of $1.1 million, primarily attributable to
increasing the balance outstanding on the Company's revolving credit facility by
$666,000.
As of September 27, 1997, approximately $5.2 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 is seeking a waiver for compliance with certain covenants at the
conclusion of the third quarter of 1997, and as such remains out of compliance
with certain terms of its Loan Agreement. Should the lender grant a waiver for
such noncompliance at the conclusion of the third quarter of 1997, the Company
anticipates that it will require an additional waiver from its lender at the
conclusion of the fourth
14
<PAGE>
quarter of 1997. Should the lender refuse to grant such a waiver or amendment,
and the line of credit is not available to the Company, management anticipates
that it would require alternative financing. However, if the Company is not able
to secure alternative financing, the Company's liquidity would be adversely
affected.
The Company believes that its existing cash balances plus additional funds
currently expected to be generated from product sales and the existing bank debt
or alternative financing if available to the Company would be sufficient to fund
operations at current levels through the end of 1997. However, future growth in
sales, significant losses and limitations of credit/terms by suppliers, and/or
continued increases in working capital required by the Company's business would
result in the need for the Company to obtain additional equity or debt
financing. Additionally, the Company believes that working capital requirements
for future product releases, as well as continued investments in operations,
particularly research and development will require additional equity or debt
financing during 1998. As a result, the Company is exploring strategic and
financing alternatives. No assurances can be given that these funds will be
available to the Company on acceptable terms, if at all. The Company believes it
is prudent to evaluate opportunities to enhance its competitive position and
financing requirements in the technology marketplace.
15
<PAGE>
PART II. OTHER INFORMATION:
- -------- ------------------
ITEM 1 - LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operation in the normal course of business. Other than the
securities litigation discussed below, the Company is currently not a party to
any additional legal proceeding the adverse outcome of which, individually or in
the aggregate, management believes would have a material adverse effect on the
financial position or results of operations of the Company.
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 and Stanley W. Bialek (the
"Selling Stockholders") 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, , Dr. Fouad H. Nader and
William H. Thalheimer), former members of the Company's Board of Directors,
(Gill Cogan, Dr. Paul R. Low), 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
(during the period in question), 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.
By order of the District Court, these actions have been consolidated into a
single action. 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 vigorously
defend these and any similar lawsuits that may be filed, although the ultimate
outcome of these matters cannot yet be determined. If the lawsuits are not
resolved satisfactorily for the Company, there could be a material adverse
effect on the Company's future financial condition and results of operations
and, accordingly, income (loss). The Company does not believe that the ultimate
liability, if any, is estimable or probable, and therefore no provision for any
liability that may result from the actions has been recognized in the
accompanying condensed consolidated financial statements.
A foreign inventor has asserted claims against several PC manufacturers,
including customers of the Company, that the graphics technology included in
their systems infringes the inventor's patents. Certain of the Company's
customers have notified the Company of these assertions and their intent to seek
indemnification from the Company in the event these claims are successful and
the infringing technology was included in products sold by the Company. The
Company believes there are meritorious defenses to these claims and that if the
technology in fact infringes the inventor's rights, the Company would have
rights of indemnification from its suppliers. While there can be no assurance,
the Company does not expect this matter to have a material adverse effect on the
Company.
ITEM 2 - CHANGES IN SECURITIES
Not Applicable
16
<PAGE>
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
During the quarter ended September 27, 1997, Dr. Paul R. Low and Mr.
Gill Cogan resigned as members of the Company's Board of Directors. On October
6, 1997, the Company entered into an Employment Separation Agreement with John
G. Thompson pursuant to which Mr. Thompson resigned as the President and Chief
Operating Officer and as Director of the Company.
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 Employment Separation Agreement, dated October 6, 1997, between
the Registrant and John G. Thompson
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 quarter ended September 27,
1997.
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: October 30, 1997 /s/ Andrew Najda
------------------------------------------
Andrew Najda
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: October 30, 1997 /s/ Daniel W. Muehl
------------------------------------------
Daniel W. Muehl
Chief Operating Officer
and Chief Financial Officer
(Principal Financial and Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibits Page
- -------------- ----------------------- ----
<S> <C> <C>
10 Employment Separation Agreement, dated October 6, 1997,
between the Registrant and John G. Thompson
11 Statement Regarding Computation of Net Income
(Loss) per Share 20
27 Financial Data Schedule
</TABLE>
<PAGE>
Number Nine Visual Technology Corporation
18 Hartwell Avenue
Lexington, MA 01273
October 6, 1997
John G. Thompson
10 Gilboa Lane
Nashua, NH 03062
Dear John:
The purpose of this Letter Agreement is to confirm the terms of your
separation from Number Nine Visual Technology Corporation ("Number Nine"), a
Delaware corporation. The severance pay and benefits described below are
contingent on your agreement to and compliance with the terms of this Letter
Agreement. Based upon your stated willingness to enter into such an agreement,
this Letter Agreement has been prepared which sets forth the specific
understandings between you and Number Nine.
1. Resignation: You hereby resign as the President, Chief Operating
------------
Officer, member of the Board of Directors and any other position with Number
Nine effective October 6, 1997 (the "Separation Date"). You acknowledge that
from and after the Separation Date, you shall have no authority to represent
yourself as an employee or agent of Number Nine and that you shall not represent
yourself in the future as an employee or agent of Number Nine.
2. Severance Pay and Benefits: In exchange for the mutual covenants set
---------------------------
forth in this Letter Agreement, and commencing on the eighth (8th) day following
your execution of this Letter Agreement (the "Effective Date") Number Nine
agrees to provide you with continuation at Number Nine's expense of your
participation in Number Nine's medical and dental insurance programs to the same
extent that such insurance is provided to persons employed by Number Nine until
August 30, 1998. You shall have the right to continue your medical and dental
insurance after such date pursuant to the provisions of the Consolidated Omnibus
Budget Reconciliation Act of 1985 ("COBRA"); provided, however, the COBA period
shall be deemed to have commenced on October 6, 1997.
In recognition of the services you have provided to Number Nine, Number
Nine agrees that prior to December 31, 1997 it will make a contribution of
$40,000 to Monroe Community College Scholarship Foundation. Number Nine will
make not less than $20,000 of this contribution on or before October 15, 1997,
an additional $10,000 on or before November 15, 1997 and an additional $10,000
on or before December 15, 1997. Number Nine will make the checks payable to
Monroe Community College Scholarship Foundation and will deliver them to you for
delivery to Monroe Community College Scholarship Foundation.
You expressly acknowledge and agree that the Severance Pay and Benefits
provided for herein are not otherwise due or owing to you under any employment
agreement (oral or written) or Number Nine policy or practice. You further
acknowledge that you have been paid and provided all wages, commissions,
bonuses, vacation pay, holiday pay and any other form of compensation, benefit
or reimbursement that may be due to you now or which would have become due in
the future in connection with your employment with or separation of employment
from Number Nine.
<PAGE>
Without limiting the generality of the foregoing, you expressly acknowledge
and agree that the terms and conditions set forth in this Letter Agreement
superceed the terms of that certain Letter Agreement between you and Number Nine
dated May 11, 1996, and that this Letter Agreement, together with that certain
Non-Compete and Confidentiality Agreement dated May 15, 1996 between you and the
Company shall constitute the sole agreement between you and Number Nine.
You further agree that through December 31, 1997 you shall be available,
upon reasonable notice, either by telephone or, if Number Nine believes
necessary, in person to assist Number Nine in any matter relating to the
services performed by you during your employment with Number Nine. You further
agree that through such date and thereafter that you 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 actions against its officers,
directors and employees. Your cooperation in connection with such claims or
actions shall include, without limitation, your being reasonably available (and,
to the extent possible, outside of work obligations you 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. You further agree
that should you be contacted (directly or indirectly) by any party representing
a party adverse to Number Nine, you shall promptly (within 48 hours) notify
Michael Albanese at Number Nine.
3. Property: Number Nine acknowledges that you have in your possession
--------
two chairs which are the property of Number Nine. Effective on the eighth (8th)
day following your execution of this Letter Agreement, Number Nine transfers to
you such chairs. Except for such chairs, you represent that you have returned
to Number Nine all property of every kind and nature belonging to Number Nine in
your possession.
4. Stock Rights: The parties hereby incorporate by reference the terms
------------
and conditions of the Stock Options granted to you under the Number Nine
Computer Corporation 1996 Employee, Director and Consultant Stock Option Plan
(the "1996 Options"). The parties further agree that as of the date hereof, a
total of 137,500 options are vested and that you may exercise such options at a
price of $3.07 per share only on or after December 31, 1997 and that all of such
options will terminate on January 6, 1998, and that from and after the date
hereof, and notwithstanding any of the terms of the option agreements to the
contrary, no further options shall vest. You acknowledge and agree that you
shall not buy or sell any shares of Number Nine stock including, but not limited
to, any shares acquired by you upon exercise of options that you may exercise
under the 1996 Options, until the November 1997 trading window. Except for the
foregoing, you acknowledge and agree that you do not have now, and shall not in
the future have, any rights in, including any rights to vest in, any stock
options under any Number Nine stock or stock option plan (of whatever name or
kind) that you participated in or were eligible to participate in during your
employment.
5. Confidentiality/Non-Competition/Non-Solicitation: You hereby agree and
------------------------------------------------
acknowledge the following:
(i) that you 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
-2-
<PAGE>
confidential and proprietary documents and information (including, but not
limited to, any information regarding Number Nine's financial conditions,
products, product development, sales and any other similar information, but
excluding information that is publicly available, and that you have and
shall continue to abide by the convenants set forth in the "Noncompete and
Confidentiality Agreement" dated May 15, 1996 (which agreement is attached
hereto as Exhibit A and incorporated herein by reference).
(ii) 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 you 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).
(iii) that you shall 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.
(iv) that the breach of any of the foregoing covenants by you 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 you pursuant to paragraph 2 of
this Agreement.
6. Release of Claims: You hereby agree and acknowledge that by signing
------------------
this Letter Agreement and accepting the Severance Pay and Benefits, and other
good and valuable consideration provided for in this Letter Agreement, you are
waiving any right to assert any form of legal claim against Number Nine (which
term shall be deemed to include its divisions, affiliates and subsidiaries and
all related entities, and its and their officers, directors, employees, agents,
attorneys, contractors, successors and assigns) of any kind whatsoever arising
from the beginning of time through the Effective Date. Your waiver and release
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. You understand that there could be unknown or unanticipated
claims resulting from your employment with Number Nine and the termination
thereof and agree that such claims are intended to be and are included in this
waiver and release. Furthermore, you agree not to participate in any Claims,
and waive any recovery for any Claims, brought on your behalf by a third party
against Number Nine.
Without limiting the foregoing general waiver and release, you specifically
waive and release Number Nine from any Claim arising from or related to your
employment relationship with Number Nine or the termination thereof, including,
without limitation:
-3-
<PAGE>
** Claims under any state or federal discrimination related statute,
regulation or executive order, fair employment practices or other
employment related statute, regulation or executive order (as they may
have been amended through the Effective Date) prohibiting
discrimination or harassment based upon any protected status
including, without limitation, race, national origin, age, gender,
marital status, mental or physical disability, veteran status or
sexual orientation. Without limitation, specifically included in this
paragraph are any Claims arising under the Massachusetts Fair
Employment Practices Statute, the Massachusetts Civil Rights Acts, the
Massachusetts Equal Protection Act, the Federal Age Discrimination in
Employment Act, the Older Workers Benefit Protection Act, 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) 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 Medical Leave Act of 1993, the National Labor
Relations Act, the Employee Retirement Income Security Act of 1974,
the Consolidated Omnibus Budget Reconciliation Act of 1985 and any
similar state statute.
** 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 or emotional distress, invasion of privacy,
misrepresentation, deceit, fraud or negligence.
** Any other Claim arising under state or federal law, including, without
limitation, unfair and deceptive trade practices statutes.
Nothwithstanding the foregoing, this paragraph shall not release Number
Nine from any obligation expressly set forth in this Letter Agreement, nor
shall it release Number Nine from the ongoing indemnification obligations set
forth in the Certificate of Incorporation or Bylaws of Number Nine.
You acknowledge and agree that, but for providing this waiver and release,
you would not be receiving the Severance Pay and Benefits. You further
acknowledge and agree that the provision to you of the Severance Pay and
Benefits is not, and is not intended to be, an admission of any liability on the
part of the parties hereby released or an indication that they expect any
liability to hereafter arise, and that such releases deny any liability.
Number Nine and you hereby acknowledge that because you are over 40 years
of age, you are granted specific rights under the Older Workers Benefit
Protection Act ("OWBPA"), which prohibits discrimination on the basis of age,
and that the release set forth in this section is intended to release any right
that you have to file a claim against Number Nine alleging discrimination on the
basis of age. Consistent with the provisions of OWBPA, Number Nine is providing
you with twenty-one (21) days in which to consider and accept the terms of this
Letter
-4-
<PAGE>
Agreement by signing below. In addition, you may rescind your assent to this
Agreement if, within seven (7) days after the date you sign this Letter
Agreement, you deliver a notice of recision to Michael Albanese at Number Nine.
To be effective, such recision must be hand delivered or postmarked within the
seven (7) day period and sent by certified mail, return receipt requested, to
Michael Albanese, Human Resources, Number Nine Visual Technology Corporation at
18 Hartwell Avenue, Lexington, MA 02173.
7. Entire Agreement/Choice of Law/Full Agreement: Except as expressly
---------------------------------------------
provided for in this Letter Agreement (e.g., your obligations set forth in the
---
your Confidentiality and Noncompetition Agreement), this Letter Agreement
supersedes any and all prior oral and/or written agreements, and sets forth the
entire agreement between you and Number Nine. No variations or modifications
hereof shall be deemed valid unless reduced to writing and signed by the parties
hereto. This Letter Agreement shall take effect as an instrument under seal
and shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts. The provisions of this Letter Agreement are
severable, and if for any reason any part hereof shall be found to be
unenforceable, the remaining provisions shall be enforced in full.
It is Number Nine's desire and intent to make certain that you fully
understand the provisions and effects of this Letter Agreement. To that end,
you have been encouraged and given the opportunity to consult with legal
counsel. By executing this Letter Agreement, you are acknowledging that you
have been afforded sufficient time to understand the terms and effects of this
Letter Agreement, that your agreements and obligations hereunder are made
voluntarily, knowingly and without duress and that neither Number Nine nor its
agents or representatives have made any representations inconsistent with the
provisions of this Letter Agreement.
If the foregoing correctly sets forth our understanding, please sign, date
and return the enclosed copy of this Letter Agreement to Mike Albanese at Number
Nine.
Very truly yours,
Number Nine Visual Technology
Corporation
By: /s/ Michael Albanese
-------------------------
Michael Albanese
Confirmed and Agreed:
John G. Thompson
/s/ John G. Thompson
- --------------------
Dated: 10/6/97
-------
<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 27, 1997 SEPTEMBER 28, 1996 SEPTEMBER 27, 1997 SEPTEMBER 28, 1996
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
HISTORICAL
Common Stock Outstanding, beginning of the period 9,110 9,006 9,053 8,758
Weighted average cheap stock - - - -
Weighted average redeemable common stock - - - -
Weighted average number of common stock issued 22 6 50 187
Weighted average of common stock equivalents - 1,832 - -
Less: assumed purchase of treasury shares - (1,039) - -
------- ------- --------- --------
Weighted average number of common and common
equivalent shares outstanding 9,132 9,805 9,103 8,945
======= ======= ========= ========
Net income (loss) $(3,438) $ 326 $( 15,424) $( 9,007)
======= ======= ========= ========
Net income (loss) per common and common
equivalent share outstanding $ (0.38) $0.03 $ (1.69) $ (1.01)
</TABLE>
(1) Primary and fully diluted calculations are substantially the same.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000936448
<NAME> NUMBER NINE VISUAL TECHNOLOGY CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> SEP-27-1997
<CASH> 3,613
<SECURITIES> 0
<RECEIVABLES> 11,585
<ALLOWANCES> 266
<INVENTORY> 3,709
<CURRENT-ASSETS> 19,313
<PP&E> 3,860
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,337
<CURRENT-LIABILITIES> 12,207
<BONDS> 0
0
0
<COMMON> 92
<OTHER-SE> 11,038
<TOTAL-LIABILITY-AND-EQUITY> 23,337
<SALES> 32,584
<TOTAL-REVENUES> 32,584
<CGS> 29,564
<TOTAL-COSTS> 46,246
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 206
<INCOME-PRETAX> (13,586)
<INCOME-TAX> 1,838
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,424)
<EPS-PRIMARY> (1.69)
<EPS-DILUTED> (1.69)
</TABLE>
