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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 March 29, 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
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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 Identification No.)
incorporation or organization)
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 May 2, 1997
was 9,098,468.
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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 March 29, 1997 and
December 28, 1996 3
Condensed Consolidated Statements of Operations for the three
months ended March 29, 1997 and March 30, 1996 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 29, 1997 and March 30, 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: 16
- ----------------------------
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6(a) - Exhibits
11 Statement Regarding Computation of Net Income (Loss) per Share
27 Financial Data Schedule
Item 6(b) - Reports on Form 8-k
SIGNATURE(S) 19
</TABLE>
2
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
MARCH 29, 1997 DECEMBER 28, 1996
--------------- ------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,175 $13,895
Accounts receivable, trade, net of
allowances for doubtful accounts
of $88 and $364, at March 29, 1997
and December 28, 1996 8,191 11,584
Receivables from manufacturing
contractor 1,143 2,324
Inventories 6,440 9,422
Prepaid expenses 771 612
Deferred tax assets 1,839 1,839
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Total current assets 28,559 39,676
Property and equipment, net 2,686 2,671
Capitalized software costs, net 447 648
Other assets 218 185
-------- -------
TOTAL ASSETS $ 31,910 $43,180
======== =======
CURRENT LIABILITIES:
Revolving line of credit $ 3,000 $ 8,500
Accounts payable 3,355 5,848
Accrued expenses and other current
liabilities 1,460 2,439
Current portion of capital lease 46 67
obligations -------- -------
Total current liabilities 7,861 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;
9,080,968 shares issued and
outstanding at March 29, 1997;
9,053,256 shares issued and
outstanding at December 28, 1996 91 91
Additional paid-in capital 35,840 35,760
Accumulated deficit (11,882) (9,525)
-------- -------
Total stockholders' equity 24,049 26,326
-------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 31,910 $43,180
======== =======
</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
MARCH 29, 1997 MARCH 30, 1996
------------------ ------------------
<S> <C> <C>
Net Sales $13,964 $32,035
Cost of sales 11,550 27,470
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Gross profit 2,414 4,565
Operating expenses:
Selling, general, and administrative 3,299 4,367
Research and development 1,481 984
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Total operating expenses 4,780 5,351
Income (loss) from operations (2,366) (786)
Other expense (income):
Interest expense 106 204
Other expense (income) (115) (124)
------- -------
Income (loss) before income taxes (2,357) (866)
Provision (benefit) for income taxes - (296)
------- -------
Net income (loss) $(2,357) $ (570)
======= =======
Net income (loss) per common
and common equivalent share $ (0.26) $(0.06)
======= =======
Weighted average number of
common and common equivalent
shares outstanding 9,077 8,832
======= =======
</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 FLOW
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 29, 1997 MARCH 30, 1996
--------------- ---------------
Cash flows provided by (used for)
operating activities:
<S> <C> <C>
Net income (loss) $(2,357) $ (570)
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation and amortization 265 166
Amortization of capitalized
software costs 201 150
Provision for bad debts 361 2
Deferred taxes - (296)
Change in operating assets and
liabilities:
Accounts receivable 3,032 7,122
Receivable due from
manufacturing contractor 1,181 1,757
Inventories 2,982 2,034
Prepaids and other assets (192) 1,243
Accounts payable (2,493) (12,442)
Accrued expenses and other
current liabilities (979) (348)
------- -------
Net cash provided by (used
for) operating activities 2,001 (1,182)
Cash flows provided by (used for)
investing activities:
Purchase of property and equipment (280) (409)
Capitalized software costs - (414)
------- -------
Net cash used for investing
activities (280) (823)
Cash flows provided by (used for)
financing activities:
Proceeds from issuance of common
stock and exercise of common
stock options 80 84
Proceeds (payments) from revolving
line of credit, net (5,500) 870
Principal payments on note payable - (19)
Principal payments on capital
lease obligations (21) (24)
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Net cash provided by (used
for) financing activities (5,441) 911
------- -------
Net change in cash and cash equivalents (3,720) (1,094)
Cash and cash equivalents, beginning 13,895 5,235
of period ------- -------
Cash and cash equivalents, end of
period $10,175 $ 4,141
======= =======
Supplemental disclosures of cash flow
information:
Interest paid: $ 146 $ 5
</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
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 month period
ended March 29, 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 March 29, 1997, included in cash and cash equivalents is approximately
$10.2 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>
MARCH 29, 1997 DECEMBER 28, 1996
-------------- -----------------
<S> <C> <C>
Raw materials $3,000 $2,733
Work in process 720 57
Finished goods 2,720 6,632
------ ------
$6,440 $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 outstanding at March 29, 1997 a $1.1 million receivable due
from a manufacturing contractor, related to components sold by the Company at
cost to the contractor for assembly into finished goods.
6
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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.
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 (8.50% as of
March 29, 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
violations of certain covenants in the agreement at the conclusion of the first
quarter of 1997.
E. Recently Issued Accountant Standard:
------------------------------------
In February 1997, The Financial Accounting Standards Board issued on
Financial Accounting Standards Statement 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
SAS 128 basic EPS would have been $(0.26) and $(0.06) for the three month
periods ended March 30, 1997 and March 31, 1996, respectively. Diluted EPS would
have been equivalent to the earnings per share amount reported.
F. Income Taxes:
-------------
Realization of approximately $1.8 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. 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.
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 other than John G. Thompson, (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
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District Court for the District of Massachusetts by named plaintiff Robert
Schoenhofer against the Company, each member of the Company's Board of Directors
(other than Mr. Thompson), 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
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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 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 its second generation Imagine 128 accelerator based on
the Company's proprietary Imagine 128 Series 2 chip. This next-generation
accelerator chip was 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 is currently in the
final stages of development of its third generation proprietary 128-bit graphics
accelerator chip technology, which, although there can be no assurance is
currently anticipated to begin shipping during the third quarter of fiscal 1997.
The Company also markets Hawkeye95, an upgraded version of its proprietary
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 or has
announced the introduction of 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, 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 62.9% of net sales in the first 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,
9
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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.
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 29, 1997 AND MARCH 30, 1996
Net Sales: Net sales decreased 56%, to approximately $14.0 million in the
first quarter of 1997 from $32.0 million in the first quarter of 1996. This
decrease was primarily attributable to lower sales of 64-bit products to the
Company's OEM customers, and pricing pressure across its remaining particularly
those at end of life. Net sales of 64-bit products decreased 86% to
approximately $3.7 million in the first quarter of 1997 from $26.5 million in
the first quarter of 1996, representing 26.4% of net sales in the first quarter
of 1997 compared to 82.8% of net sales in the first quarter of 1996. This
decline was partially offset by an increase in net sales of the Company's
proprietary 128-bit products. Net sales of the Company's 128-bit products
increased 98% to $10.3 million during the first quarter of 1997 compared to $5.2
million during the first quarter of 1996, representing 73.6% of net sales during
the first quarter of 1997 and 16.3% of net sales during the first quarter of
1996. Sales to OEMs decreased 54%, to approximately $8.8 million in the first
quarter of 1997 from approximately $19.0 million in the first quarter of 1996,
representing 62.9% of net sales in the first quarter of 1997 compared to 59.4%
in the first quarter of 1996. The decrease in OEM sales was primarily a result
of decreased sales to Dell Computer Corporation. Sales to Dell Computer
Corporation represented 35.7% of net sales in the first quarter of 1997 compared
to 46.0% of net sales in the first quarter of 1996. Sales to Micron
Electronics, Inc. represented 12.9% of net sales in the first quarter of 1997
compared to 3.4% in the first quarter of 1996. Net sales to the Company's
retail and two-tier distribution customers decreased 70%, to $2.6 million during
the first quarter of 1997 compared to approximately $8.7 million during the
first quarter of 1996. Total international sales decreased 43% to $4.3 million
in the first quarter of 1997 from $7.6 million in the first quarter of 1996.
This retail decrease was partially offset by an increase in sales to
customers in Japan. Net sales to Japan comprised 10.7% of net sales during the
first quarter of 1997 compared to 2.1% during the first quarter of 1996.
Gross Profit: Gross profit decreased 48%, to $2.4 million in the first
quarter of 1997 from $4.6 million in the first quarter of 1996. The decrease in
gross profit during the first quarter of 1997 was largely attributable to the
significantly lower net sales level compared to the first quarter of 1996. The
Company's gross profit margin increased to 17.2% in the first quarter of 1997
from 14.3% in the first quarter of 1996, due primarily to increased net sales of
the Company's proprietary 128-bit products which tend to generate higher gross
margins than products utilizing merchant 64-bit chip technology. The Company's
future prospects will depend in part on its ability to successfully manage its
products transitions and fluctuating component costs, particularly memory, and
control inventory as new products are introduced. There can be no assurance that
the Company will be successful in managing these changes. While the Company
reserves for anticipated charges based on historical rates of product returns,
component cost fluctuations, and other factors, there can be no assurance that
the reductions in sales and returns of older generation products will not give
rise to charges for obsolete or excess inventory or substantial price protection
charges.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses decreased 24%, to $3.3 million in the first quarter of
1997 from $4.4 million in the first quarter of 1996, primarily as a result of
decreased marketing costs as the Company controlled variable discretionary
spending during this period of lower net sales. As a percentage of net sales,
selling, general and administrative expenses increased to 23.6% in the first
quarter of 1997 from 13.8% in the first quarter of 1996, primarily attributable
to lower sales in the recent quarter. The Company currently expects that
selling, general and administrative expenses will increase during subsequent
quarters, although not necessarily as a percentage of net sales, as the Company
begins to market and sell its newer technology.
Research and Development Expenses: Research and development expenses
increased 50%, to $1.5 million in the first quarter of 1997 from $1.0 million in
the first quarter of 1996, resulting primarily from increased staffing to
support continued development of both proprietary and merchant-based
video/graphics products. During the first quarter of 1997, the Company began the
development of its fourth generation proprietary 128-bit video/graphics
accelerator chip, continued to develop products utilizing its third generation
proprietary 128-bit video/ graphics accelerator chip, and released to production
two 8MB products based on the Company's proprietary 128-bit video/graphics
accelerator chip, the Imagine 128 Series 2. As a percentage of net sales,
research and development expenses increased to 10.7% in the first
10
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quarter of 1997 from 3.1% in the first quarter of 1996, primarily attributable
to lower sales in the recent quarter and increased expenditures on research and
development. The Company currently expects that research and development
expenses will continue to increase, although not necessarily as a result of net
sales, primarily as a result of continued investment in the Company's
proprietary technology efforts.
Interest Expense/Income: Net interest expense for the first quarter of 1997
was $106,000 compared to interest expense of $204,000 in the first quarter of
1996, primarily as a result of lower average balances outstanding on the
Company's revolving credit facility during the first quarter of 1997 compared to
the first quarter of 1996.
Other Expense/Income: Other income totaled $115,000 in the first quarter of
1997 compared to other income of $124,000 in the first quarter of 1996. Other
income during the first quarter of 1997 and the first quarter of 1996 was
primarily attributable to interest earned on cash and cash equivalents.
Provision (Benefit) for Income Taxes: During the first quarter of 1997, the
Company did not provide an income tax benefit due to the uncertainty of
realizing the benefit from future taxable income. During the first quarter of
1996, the Company provided an income tax benefit of $296,000. The Company
expects to recover from future tax returns based on future taxable income. The
amount of the Company's 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.
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.
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 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 is currently completing its
development efforts on its third generation proprietary 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
third generation proprietary-based 128-bit products 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.
11
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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 net sales to Dell during the second quarter 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 increases in 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 second quarter compared to the
first quarter of 1997. 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. For example, during 1996, the Company's reliance on
its proprietary products increased as a percentage of net sales and gross profit
throughout 1996. 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's realization of approximately $1.8 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.
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, interests, 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 question
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).
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 final quarter of 1997 from the fourth quarter of 1996, 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.
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 business, 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's operating activities provided cash of approximately $2.0
million during the first quarter of 1997, compared to operating activities which
used cash of approximately $1.2 million during the first quarter of 1996. During
the first quarter of 1997, net decreases in accounts receivable, a receivable
due from a manufacturing contractor, and inventories provided cash of
approximately $3.0 million, $1.2 million and $3.0 million, respectively, which
was offset by a net loss from operations of approximately $2.4 million, a
decrease
12
<PAGE>
of $3.5 million in accounts payable, accrued expenses and other current
liabilities. Decreases in accounts receivable have primarily been attributable
to lower sales levels during the first quarter 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 March 29, 1997, the Company's principal sources of liquidity
consisted of approximately $10.2 million of cash and cash equivalents and
approximately $12.0 million available under its revolving line of credit.
During the first quarter of 1997, investing activities used cash of
approximately $280,000 for purchases of computer and office equipment compared
to $409,000 for purchases and office equipment and $414,000 of capitalized
software costs during the first quarter of 1996. Financing activities used cash
of $5.4 million during the first quarter of 1997, attributable to the reduction
of the outstanding balance of revolving credit facility by $5.5 million. During
the first quarter of 1996, financing activities provided cash of $911,000,
attributable to increasing the balance outstanding on the Company's revolving
credit facility by $870,000.
As of March 29, 1997, $3.0 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 an amendment
for violating certain covenants at the conclusion of the first quarter of 1997.
The Company currently anticipates that it will require a waiver from its lender
at the conclusion of the second quarter of 1997. There can be no assurance that
the Company will not incur significant losses, and therefore require additional
amendments and/or waivers from its lender in the future or, if required, that
the lender will grant any waiver, 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 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 the first quarter of
1998. 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.
13
<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 other than John G. Thompson, (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 (other than Mr.
Thompson), 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 theses 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. However, this matter is at a preliminary stage and the Company is
investigating the allegations.
Item 2 - Changes in Securities
On February 28, 1997, the Company issued and sold 3,000 shares of Common
Stock to one person pursuant to the exercise of an option granted under its 1989
Stock Option Plan. The purchase price paid upon the exercise of this option was
$0.27 per share. These shares were issued in reliance upon the exemption from
registration set forth in Rule 701 promulated under the Securities Act of 1933
as amended.
Item 3 - Defaults Upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the first
quarter ending March 29, 1997.
14
<PAGE>
Item 5- Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
--------
The following is a list of exhibits filed as part of this Quarterly Report on
Form 10-Q.
Exhibit
Number Description
------ -----------
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 March 29,
1997.
15
<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: May 13, 1997 /s/ John G. Thompson .
-------------------------------------
John G. Thompson
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 1997 /s/ Daniel W. Muehl .
------------------------------------
Daniel W. Muehl
Corporate Controller and Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
16
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Exhibits Page
- -------------- ----------------------- ----
11 Statement Regarding Computation
of Net Income (Loss) per Share 19
27 Financial Data Schedule
17
<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
MARCH 29, 1997 MARCH 30, 1996
--------------- ---------------
HISTORICAL
<S> <C> <C>
Common Stock Outstanding, beginning of
the period 9,053 8,758
Weighted average cheap stock - -
Weighted average redeemable common stock - -
Weighted average number of common stock
issued 23 74
Weighted average of common stock
equivalents - -
Less: assumed purchase of treasury
shares - -
------- ------
Weighted average number of common and
common equivalent shares outstanding 9,077 8,832
======= ======
Net income (loss) $(2,358) $ (570)
======= ======
Net income (loss) per share $ (0.26) $(0.06)
</TABLE>
(1) Primary and fully diluted calculation are substantially the same.
(2) In accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 83, issuances of common stock and common stock
equivalents, within one year prior to the initial filing of the
registration statement, at share prices below the assumed mid-point of
the initial public offering price of $11 per share (cheap stock), are
considered to have been made in anticipation of the Company's initial
public offering. Accordingly, these stock issuances are treated as if
issued and outstanding, using the treasury stock method for stock
options, since the inception of the Company.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000936448
<NAME> NUMBER NINE VISUAL TECH. CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> MAR-29-1997
<CASH> 10,175
<SECURITIES> 0
<RECEIVABLES> 9,334
<ALLOWANCES> 88
<INVENTORY> 6,440
<CURRENT-ASSETS> 28,559
<PP&E> 2,686
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,910
<CURRENT-LIABILITIES> 7,861
<BONDS> 0
0
0
<COMMON> 91
<OTHER-SE> 23,958
<TOTAL-LIABILITY-AND-EQUITY> 31,910
<SALES> 13,964
<TOTAL-REVENUES> 13,964
<CGS> 11,550
<TOTAL-COSTS> 16,330
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106
<INCOME-PRETAX> (2,357)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,357)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
