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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C., 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1997
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or
--
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 0-25898
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2821358
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 HARTWELL AVENUE, LEXINGTON, MA 02173
--------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 674-0009
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
--- ---
The number of shares outstanding of the registrant's common stock at
July 23, 1997 was 9,109,848.
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
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Part I - Financial Information:
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<S> <C>
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of June 28, 1997 and
December 28, 1996 3
Condensed Consolidated Statements of Operations for the three months and
six months ended June 28, 1997 and June 29, 1997 4
Condensed Consolidated Statements of Cash Flows for the six months ended
June 28, 1997 and June 29, 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
11 Statement Regarding Computation of Net Income (Loss) per Share
27 Financial Data Schedule
SIGNATURE(S) 18
</TABLE>
2
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NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
JUNE 28, 1997 DECEMBER 28, 1996
<S> -------------- ------------------
<C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,981 $13,895
Accounts receivable, trade, net of allowances for doubtful accounts
of $112 and $364, at June 28, 1997 and December 28, 1996 4,352 11,584
Receivables from manufacturing contractor 3,020 2,324
Inventories 2,795 9,422
Prepaid expenses 278 612
Deferred tax assets - 1,839
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Total current assets 20,426 39,676
Property and equipment, net 3,171 2,671
Capitalized software costs, net 263 648
Other assets 173 185
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TOTAL ASSETS $ 24,033 $43,180
======== =======
CURRENT LIABILITIES:
Revolving line of credit $ 2,000 $ 8,500
Accounts payable 6,025 5,848
Accrued expenses and other current liabilities 1,564 2,506
-------- -------
Total current liabilities 9,589 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;
9,109,848 shares issued and outstanding at June 28, 1997;
9,053,256 shares issued and outstanding at December 28, 1996 91 91
Additional paid-in capital 35,864 35,760
Accumulated deficit (21,511) (9,525)
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Total stockholders' equity 14,444 26,326
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,033 $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 SIX MONTHS ENDED
JUNE 28, 1997 JUNE 29, 1996 JUNE 28, 1997 JUNE 29, 1996
-------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 7,094 $33,542 $ 21,058 $65,577
Cost of sales 8,293 34,102 19,843 61,571
------- ------- ------- -------
Gross margin (1,199) (560) 1,215 4,006
Operating expenses:
Selling, general, and administrative 3,927 4,416 7,225 8,783
Research and development 2,712 1,674 4,193 2,658
Settlement with subcontractor - 1,959 - 1,959
------- ------- ------- -------
Total operating expenses 6,639 8,049 11,418 13,400
Income (loss) from operations (7,838) (8,609) (10,203) (9,394)
Other income (expense):
Interest expense (76) (241) (183) (445)
Other income, net 123 87 238 211
------- ------- ------- -------
Income (loss) before income taxes (7,791) (8,763) (10,148) (9,628)
Provision (benefit) for income taxes 1,838 - 1,838 (295)
------- ------- ------- -------
Net income (loss) $(9,629) $(8,763) $(11,986) $(9,333)
======= ======= ======== =======
Net income (loss) per common and common equivalent share $(1.06) $ (0.97) $ (1.32) $ (1.05)
======= ======= ======== =======
Weighted average number of common and common equivalent
shares outstanding 9,101 8,993 9,089 8,912
======= ======= ======== =======
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
SIX MONTHS ENDED
JUNE 28, 1997 JUNE 29, 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(11,986) $ (9,333)
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 571 381
Amortization of capitalized software costs 385 345
Provision for bad debts (243) (482)
Deferred taxes 1,838 515
Change in operating assets and liabilities:
Accounts receivable 7,475 3,529
Receivable due from manufacturing contractors (696) 3,353
Inventories 6,627 15,567
Prepaids and other assets 347 1,773
Accounts payable 177 (13,228)
Accrued expenses and other current liabilities (901) (264)
Income taxes payable - -
-------- --------
Net cash provided by (used for) operating activities 3,594 2,156
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Cash flows from investing activities:
Purchase of property and equipment (1,070) (1,060)
Capitalized software costs - (466)
-------- --------
Net cash used for investing activities (1,070) (1,526)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock - -
Proceeds from exercise of stock options 104 323
Payments of issuance costs of common stock - -
Advances (payments) on revolving line of credit, net (6,500) 1,111
Principal payments on note payable - (19)
Principal payments on capital lease obligations (42) (49)
Proceeds on related party notes receivable, net - 164
-------- --------
Net cash provided (used for) (6,438) 1,530
by financing activities -------- --------
Net change in cash and cash equivalents (3,914) 2,160
Cash and cash equivalents, beginning 13,895 5,235
of period -------- --------
Cash and cash equivalents, end of $ 9,981 $ 7,395
period ======== ========
</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 and six month
periods ended June 28, 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 June 28, 1997, cash and cash equivalents were substantially invested in
money market mutual funds comprised of obligations which are issued or
guaranteed as to principal and interest by the U.S. government and thus
constitute direct obligations of the United States of America with a dollar-
weighted average maturity of 90 days or less.
C. Inventories:
------------
Inventories consisted of (in thousands):
<TABLE>
<CAPTION>
JUNE 28, 1997 DECEMBER 28, 1996
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<S> <C> <C>
Raw materials $ 575 $2,733
Work in process 720 57
Finished goods 1,500 6,632
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$2,795 $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 June 28, 1997 a $3.0 million receivable due
from a manufacturing contractor, related to components sold by the Company at
cost to the contractor for assembly into finished goods.
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D. Debt:
-----
The Company is party to an amended loan and security agreement with a
commercial bank providing for a revolving credit facility of $15 million.
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
June 28, 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 and is seeking a waiver at the conclusion of the second quarter
of 1997. The Company anticipates that it will violate certain covenants of the
lender at the conclusion of the third quarter of 1997. If certain covenants of
the lender are violated, 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 $(1.06) and $(0.97) for the three month
periods and $(1.32) and $(1.05) for the six month periods ended June 28, 1997
and June 29, 1996, respectively. Diluted EPS would have been equivalent to the
earnings per share amount reported.
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F. Income Taxes:
-------------
At the conclusion of the second quarter of 1997, the Company increased its
valuation allowance against the remainder of its net deferred tax asset,
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 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.
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 has been recognized as one of the highest
performance graphics products available to the desktop PC market. The Company
is currently in the final stages of development of its third generation
proprietary 128-bit graphics accelerator chip technology, Ticket to Ride.
Although there can be no assurance, the Company anticipates that the new
product, Revolution3D, utilizing this chip technology, will begin shipping
during the third quarter of fiscal 1997. 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 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 47.9% of net sales in the second 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 sales
of its proprietary technology products. The gross margin on all of the
Company's products is
9
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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 JUNE 28, 1997 AND JUNE 29, 1996
Net Sales: Net sales decreased 79%, to approximately $7.1 million in the
second quarter of 1997 from $33.5 million in the second 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 85%, to approximately $3.4 million in the
second quarter of 1997 from approximately $22.7 million in the second quarter of
1996, representing 47.9% of net sales in the second quarter of 1997 compared to
67.7% in the second 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. Sales to
Dell Computer Corporation represented 1.4% of net sales in the second quarter of
1997 compared to 49.2% of net sales in the second quarter of 1996. Net sales to
domestic two-tier distribution and retail customers decreased 69% to
approximately $1.9 million in the second quarter of 1997 from approximately $6.0
million in the second quarter of 1996. Total international sales decreased 56%
to approximately $3.7 million in the second quarter of 1997 from approximately
$8.3 million in the second quarter of 1996. Sales of the Company's proprietary
based 128-bit products represented 67.6%, or approximately $4.8 million, of net
sales for the second quarter of 1997 compared to 36.1%, or approximately $12.1
million, of net sales for the second quarter of 1996.
Gross Margin: Gross margin was a loss of $1.2 million in the second
quarter of 1997 compared to a gross margin loss of $560,000 in the second
quarter of 1996. This decrease was primarily attributable to the reduction in
net sales and significant pricing pressure in the quarter on sales of older
technology products resulting in unit prices of products below the cost to build
the products. During the second quarter of 1996, the Company incurred inventory
charges that were a result of an acceleration of product transitions, further
deterioration of memory inventory value, continued pressure on pricing of older
generation products and lower than expected sales activity of the Company's
Macintosh based products. The 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 13%, to $3.9 million in the second quarter of
1997 from $4.4 million in the second 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 increased to 54.9% in the second quarter of 1997 from
13.1% in the second 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.
Research and Development Expenses: Research and development expenses
increased 59%, to approximately $2.7 million in the second quarter of 1997 from
$1.7 million in the second quarter of 1996, resulting primarily from increased
staffing to support continued development of both proprietary and merchant-based
video/graphics products, lower capitalization of software, as well as non-
recurring engineering expenses associated with the completion of chip
development of the Company's Revolution3D products, based on the Company's third
generation 128-bit graphics accelerator chip, Ticket-2-Ride. During the second
quarter of 1997, the Company began the development of its next-generation
proprietary 128-bit graphics accelerator chip. As a percentage of net sales,
research and development expenses increased to 38.0% in the second quarter of
1997 from 4.8% in the second quarter of 1996.
Expenses Associated With Settlement With a Subcontractor: During the second
quarter of 1996, the Company incurred a charge of approximately $2.0 million
related to the settlement of a dispute with one of its sub-contractors with
respect to the Company's commitment, if any, to purchase a quantity of DRAM
memory chips at prices significantly above current price levels. As a
percentage of net sales, this settlement was 6.0% of net sales during the second
quarter of 1996.
10
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Interest Expense/Income: Interest expense for the second quarter of 1997 was
$76,000 compared to interest expense of $241,000 in the second quarter of 1996.
During the second quarter of 1997, the Company had lower average balances
outstanding against its revolving line of credit than during the second quarter
of 1996.
Other Expense/Income: Other income totaled $123,000 in the second quarter of
1997 compared to other income of $87,000 in the second quarter of 1996. Other
income during the second quarters of 1997 and 1996 were primarily attributable
to interest earned on cash and cash equivalents.
Provision (Benefit) for Income Taxes: At the conclusion of the second quarter
of 1997, the Company increased its valuation allowance against the remainder of
its net deferred tax asset, 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 SIX MONTHS ENDED JUNE 28, 1997 AND JUNE 29, 1996
Net Sales: Net sales decreased 68%, to approximately $21.1 million in the
first six months of 1997 from approximately $65.6 million in the first six
months of 1996. This decrease was primarily attributable to a decrease in net
sales to the Company's OEM customers. Sales to OEMs decreased 71%, to $12.1
million in the first six months of 1997 from approximately $41.7 million in the
first six months of 1996, representing 57.3% of net sales in the first six
months of 1997 compared to 63.6% in the first six 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 $5.1 million, or 24.2%, of net sales during the first
six months of 1997 compared to $31.2, or 47.6%, of net sales during the first
six months of 1996. Net sales to international two-tier distribution customers
decreased 51% to approximately $4.5 million in the first six months of 1997 from
approximately $9.2 million in the first six months of 1996. Total international
sales decreased 51.3% to $7.9 million in the first six months of 1997 from
approximately $15.9 million in the first six months of 1996. Sales of the
Company's proprietary based 128-bit products represented approximately $15.1
million or 71.6% of net sales during the first six months of 1997, compared to
$17.3 million or 26.4% during the first six months of 1996.
Gross Margin: Gross margin decreased 70%, to $1.2 million in the first six
months of 1997 from $4.0 million in the first six months of 1996. This decrease
was primarily attributable to product pricing pressures incurred during the
first six months of 1997 that were a result of an acceleration of product
transitions, continued pressure on pricing of older generation products and
lower than expected sales activity of the Company's second generation
proprietary based 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 18%, to $7.2 million in the first six months
of 1997 from $8.8 million in the first six 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 increased to 34.1% in
the first six months of 1997 from 13.4% in the first six 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 cost controls in sales and marketing
expenses.
Research and Development Expenses: Research and development expenses
increased 52%, to $4.1 million in the first six months of 1997 from $2.7 million
in the first six months of 1996, resulting primarily from increased staffing to
support continued development of both proprietary video/graphics products, lower
capitalization of software costs, as well as engineering expenses associated
with the completion of chip development of the Company's third generation
proprietary based 128-bit graphics accelerator product Revolution3D products.
During the first six months of 1997, the Company began the development of its
next-
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generation chip, and continued development of some additional products. As
a percentage of net sales, research and development expenses increased to 19.9%
in the first six months of 1997 from 4.1% in the first six months of 1996.
Expenses Associated With Settlement With a Subcontractor: During the first
six months of 1996, the Company incurred a charge of approximately $2.0 million
related to the settlement of a dispute with one of its sub-contractors with
respect to the Company's commitment, if any, to purchase a quantity of DRAM
memory chips at prices significantly above current price levels. As a
percentage of net sales, this settlement was 3.0% of net sales during the first
six months of 1996.
Interest Expense/Income: Interest expense for the first six months of 1997
was $183,000 compared to interest expense of $445,000 in the first six months of
1996. During the first six months of 1997, the Company had lower average
balances outstanding against its revolving line of credit than during the first
six months of 1996.
Other Expense/Income: Other income totaled $238,000 in the first six months
of 1997 compared to other income of $211,000 in the first six months of 1996.
Other income during the first six months of 1997 and 1996 was primarily
attributable to interest earned on cash and cash equivalents; other income
during the first six months of 1996 was primarily attributable to foreign
currency gains.
Provision (Benefit) for Income Taxes: At the conclusion of the second quarter
of 1997, the Company increased its valuation allowance against the remainder of
its net deferred tax asset, 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 six months ending
June 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.
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
12
<PAGE>
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.
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 third 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 third quarter of 1997 compared
to the third 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. 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 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 person 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, 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's operating activities provided cash of approximately $3.6
million during the first six months of 1997, compared to operating activities
which provided cash of approximately $2.2 million during the first six months of
1996. During the first six months of 1997, net decreases in accounts receivable,
and inventories provided cash of approximately $7.5 million and $6.6 million,
respectively, which was offset by a net loss from operations of approximately
$12.0 million. Decreases in accounts receivable have primarily been attributable
to lower sales levels during the first six 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 June 28, 1997, the Company's principal sources
of liquidity consisted of approximately $10.0 million of cash and cash
equivalents and approximately $13.0 million available under its revolving line
of credit, pending approval of the debt covenant waivers described below.
During the first six months of 1997, investing activities used cash of
approximately $1.1 million for purchases of computer and office equipment
compared to $1.1 million for purchases and office equipment and $466,000 of
capitalized software costs during the first six months of 1996. Financing
activities used cash of $6.4 million during the first six months of 1997,
attributable to the reduction of the outstanding balance of the revolving credit
facility by $6.5 million. During the first six months of 1996, financing
activities provided cash of $1.5 million, attributable to increasing the balance
outstanding on the Company's revolving credit facility by $1.1 million.
As of June 28, 1997, $2.0 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 is seeking
a waiver for violating certain covenants at the conclusion of the second quarter
of 1997, and as such remains out of compliance with certain terms of its Loan
Agreement. Should the lender grant a waiver for violating certain covenants at
the conclusion of the second quarter of 1997, the Company anticipates that it
will require an additional waiver from its lender at the conclusion of the third
quarter of 1997. Should the lender refuse to grant such a waiver or amendment,
and
14
<PAGE>
the line of credit is not available to the Company, Management anticipates that
it would require alternative financing, and/or reduce the level of discretionary
spending and other expenditures to provide the Company with additional
liquidity. However, if the Company is not able to secure alternative financing,
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 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, for example, the addition of another significant OEM customer, and/or
continued increases in working capital required by the Company's business could
result in the need for the Company to seek additional equity or debt financing.
No assurances can be given that these funds will be available to the Company on
acceptable terms, if at all. In addition, because of the Company's need for
funds to support future operations, it may seek to obtain funds when conditions
are favorable, even if it does not have an immediate need for additional capital
at such time.
15
<PAGE>
PART II. OTHER INFORMATION:
- ----------------------------
ITEM 1 - LEGAL PROCEEDINGS
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 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. However, this matter is at a preliminary stage and the Company is
investigating the allegations.
ITEM 2 - CHANGES IN SECURITIES
On April 4, 1997, the Company issued and sold 6,000 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 promulgated under the Securities Act of 1933,
as amended.
16
<PAGE>
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on May 15, 1997 at the
Atrium Conference Center, located on the second floor of One Financial Center,
Boston, Massachusetts at 10:00 a.m. There were 9,085,068 shares outstanding as
of the April 4, 1997, the record date for the Company's annual meeting of
shareholders. Of the 9,085,068 shares eligible to vote, 7,769,641 shares were
voted.
At the meeting, the Company's shareholders elected two directors to serve
until the 2000 annual meeting of shareholders. The vote counts were as follows:
<TABLE>
<CAPTION>
Affirmative Withheld
----------- --------
<S> <C> <C>
Mr. Gill Cogan 5,800,872 1,968,769
Mr. William H. Thalheimer, CPA 5,798,372 1,971,269
</TABLE>
At the meeting, the Company's shareholders also ratified the appointment of
Coopers & Lybrand L.L.P. as the Company's independent public accountants for the
fiscal year ending December 27, 1997. The vote counts were as follows:
<TABLE>
<CAPTION>
Affirmative Against Abstain
----------- ------- -------
<S> <C> <C>
7,713,831 49,825 5,985
</TABLE>
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.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<C> <S>
11 Statement Regarding Computation of Net Income (Loss) per Share
27 Financial Data Schedule
</TABLE>
______________________________________________
(B) REPORTS ON FORM 8-K
-------------------
No reports on Form 8-K were filed during the six month period ended June 28,
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: July 25, 1997 /s/ John G. Thompson .
----------------------------------------------
John G. Thompson
President and Chief Operating Officer
(Principal Executive Officer)
Date: July 25, 1997 /s/ Daniel W. Muehl .
- ----- ------------- ----------------------------------------------
Daniel W. Muehl
Corporate Controller and Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibits Page
- -------------- ----------------------- ----
<C> <S> <C>
11 Statement Regarding Computation of
Net Income (Loss) per Share 19
27 Financial Data Schedule
</TABLE>
<PAGE>
Exhibit 11
NUMBER NINE VISUAL TECHNOLOGY CORPORATION
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE (1)(2)
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 28, 1997 JUNE 29, 1996 JUNE 28, 1997 JUNE 29, 1996
-------------- -------------- -------------- --------------
HISTORICAL
<S> <C> <C> <C> <C>
Common Stock Outstanding, beginning of 9,081 8,940 9,053 8,758
the period
Weighted average cheap stock - - - -
Weighted average redeemable common stock - - - -
Weighted average number of common stock 20 53 36 154
issued
Weighted average of common stock - - - -
equivalents
Less: assumed purchase of treasury - - - -
shares ------- ------- --------- --------
Weighted average number of common and
common
equivalent share outstanding 9,101 8,993 9,089 8,912
======= ======= ========= ========
Net income (loss) $(9,629) $(8,763) $( 11,986) $( 9,333)
======= ======= ========= ========
Net income (loss) per common and common
equivalent share outstanding $ (1.06) $ (0.97) $ (1.32) $ (1.05)
</TABLE>
(1) Primary and fully diluted calculations are substantially the same.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000936448
<NAME> NUMBER NINE VISUAL TECH. CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> DEC-28-1997
<CASH> 9,981
<SECURITIES> 0
<RECEIVABLES> 7,372
<ALLOWANCES> 0
<INVENTORY> 2,795
<CURRENT-ASSETS> 20,426
<PP&E> 3,171
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,033
<CURRENT-LIABILITIES> 9,589
<BONDS> 0
0
0
<COMMON> 91
<OTHER-SE> 14,353
<TOTAL-LIABILITY-AND-EQUITY> 24,033
<SALES> 21,058
<TOTAL-REVENUES> 21,058
<CGS> 19,843
<TOTAL-COSTS> 31,261
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 183
<INCOME-PRETAX> (10,148)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,986)
<EPS-PRIMARY> (1.32)
<EPS-DILUTED> (1.32)
</TABLE>
