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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED: OCTOBER 31, 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
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COMMISSION FILE NUMBER: 0-11552
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TELEVIDEO, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2383795
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2345 HARRIS WAY, SAN JOSE, CALIFORNIA 95131
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 954-8333
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
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(TITLE OF CLASS)
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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
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1
THE APPROXIMATE AGGREGATE MARKET VALUE OF REGISTRANT'S COMMON STOCK HELD
BY NON-AFFILIATES ON FEBRUARY 9, 1998 (BASED UPON THE CLOSING SALES PRICE OF
SUCH STOCK AS REPORTED IN THE NASDAQ NATIONAL MARKET AS OF SUCH DATE) WAS
$35,553,102.
AS OF FEBRUARY 9, 1998, 45,507,970 SHARES OF REGISTRANT'S COMMON STOCK
WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
PARTS OF THE DEFINITIVE PROXY STATEMENT FOR REGISTRANT'S 1998 ANNUAL
MEETING OF STOCKHOLDERS (TO BE HELD APRIL 7, 1998) ARE INCORPORATED BY
REFERENCE INTO PART III OF THIS REPORT ON FORM 10-K.
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE
CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM
10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ]
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus and the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1997, which is incorporated by reference
herein, include certain statements that may be deemed to be "forward-looking
statements" within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. All statements, other than statements of
historical facts, included in this Prospectus that address activities, events
or developments that the Company expects, believes or anticipates will or may
occur in the future, including, but not limited to, such matters as future
product development, business development, marketing arrangements, future
revenues from contracts, business strategies, expansion and growth of the
Company's operations and other such matters are forward-looking statements.
These statements are based on certain assumptions and analyses made by the
Company in light of its experience and perception of historical trends,
current conditions, expected future developments and other factors it
believes are appropriate in the circumstances. Such statements are subject to
a number of assumptions, risks and uncertainties, including the risk factors
discussed below, general economic and business conditions, the business
opportunities (or lack thereof) that may be presented to and pursued by the
Company, changes in law or regulations and other factors, many of which are
beyond control of the Company. Prospective investors are cautioned that any
such statements are not guarantees of future performance and that actual
results or developments may differ materially from those projected in the
forward-looking statements.
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2
INTRODUCTORY STATEMENT
This Report on Form 10-K of TeleVideo, Inc. incorporates by reference,
pursuant to Rule 12b-23 under the general rules and regulations of the
Securities Exchange Act of 1934, as amended, certain information contained in
the definitive Proxy Statement to be filed for the Annual Meeting of
Stockholders to be held on April 7, 1998 (herein the "Proxy Statement").
References in this Form 10-K to "TeleVideo," the "Registrant" or the
"Company" refer to TeleVideo, Inc. and its subsidiaries unless the context
indicates otherwise. This report contains registered and unregistered
trademarks of other companies.
PART I
ITEM 1. BUSINESS
THE COMPANY
Founded in 1975, TeleVideo is a market leader providing innovative
high-end PC and Mac compatible monitor and terminal display products;
graphics boards, sound boards and multilingual multimedia upgrade kits. The
Company markets its products worldwide through distributors, mass merchants,
retail stores, value-added resellers ("VARs"), systems integrators and
original equipment manufacturers ("OEMs").
TeleVideo operates in one industry segment.
PRODUCTS
COMPUTER MONITORS
Drawing on its heritage, TeleVideo announced in November 1996, two
premier lines of quality PC and Mac compatible color monitors, the SuperView
Pro Series and SuperView Series. These finely crafted monitors allow a
variety of utilization - home, business, the ever-evolving digital world of
Internet, DVD, sophisticated point-oriented desktop publishing, CAD/CAM
applications and more.
The high quality SuperView Pro Series monitors include the SVP350
21-inch monitor (19.9" diagonal viewable area), the SVP300 19-inch monitor
(18.0" diagonal viewable area), the SVP270 17-inch monitor (15.8" diagonal
viewable area) and the SVP260 17-inch monitor (16.0" diagonal viewable area).
These monitors feature high resolutions, advanced On Screen Display (OSD)
and wide range of scanning frequency. The SVP260, SVP270 and SVP350 monitors
feature Mitsubishi's award winning Diamondtron Aperture Grille technology
which delivers flicker-free, sharp, and crystal-clear images for graphic
designers and engineers for rendering intricate images as in CAD/CAM design
work.
The SVP350 features an Aperture Grille pitch of 0.28mm and a maximum
resolution of 1600 x 1200 at an exceptional 85Hz refresh rate. Horizontal
scanning frequencies range from 30 to 107KHz and vertical frequencies of 50 to
160Hz. The SVP270 has an Aperture Grille pitch of 0.25mm and a maximum
resolution of 1600 x 1200 at 75Hz refresh rate for flicker-free display. It's
horizontal scanning frequency range from 30 to 95KHz and vertical frequencies
from 50 to 160Hz. The SVP260 features an Aperture Grille pitch of 0.25mm and a
maximum resolution of 1600 x 1200 at 65Hz refresh rate, rising to a flicker-free
77Hz refresh rate at 1280 x 1024 resolution. Horizontal scanning frequencies
are from 24 to 82KHz and vertical frequencies from 50 to 120Hz.
3
The SuperView Series offers affordable, high-capability monitors
designed primarily for conventional business use, home office, games,
entertainment and education. The SV210 17-inch color monitor (16.0" diagonal
viewable area) is a flat-screen monitor featuring a dot pitch of 0.26mm, a
maximum resolution of 1280 x 1024 at 65Hz refresh rate, scanning frequencies
of 30 to 70KHz horizontal and 50 to 120Hz vertical for flicker-free
operation. The SV200 17-inch color monitor (16.0" diagonal viewable area)
features a small footprint with a 0.28mm dot pitch, maximum resolution of
1280 x 1024 with a 65Hz refresh rate, and scanning frequencies of 30 to 70KHz
horizontal and 50 to 120Hz vertical for flicker-free display. The SV100 15"
(13.8" diagonal viewable area) has a fine 0.28mm dot pitch with resolution
reaching 1280 x 1024 at 65Hz refresh rate. All three SuperView Series
monitors feature Shadow Mask technology producing vivid images needed for a
full range of applications.
All TeleVideo monitors include TELEXPRES (TeleVideo Exchange Program for
Resellers and End-User Service, the most comprehensive "hassle free" 3 year
warranty and DOA replacement policy in the industry. All TeleVideo monitors
come with a 3-year CRT, parts and labor warranty, unlimited technical
support, BBS and Internet access to customers. Suggested retail prices range
from $224 to $1,399.
These products collectively accounted for approximately 18% of the total
revenues in fiscal 1997.
MULTIMEDIA PRODUCTS
TeleVideo develops and markets an array of video graphics cards, sound
boards and multilingual multimedia kit products for the personal computer
(PC) market. The current products include the:
TeleSOUND 3D, a plug-and-play 16-bit sound board for PC audio systems
and delivers true CD-quality stereophonic sound. It features 32 polyphony,
16 MIDI channels, 4 operator, 20-voice FM synthesis, and a General MIDI all
in one board. Based on an OPL3 FM synthesis device, the TeleSOUND 3D is
compatible with existing multimedia sound standards including the Sound
Blaster Pro, Ad Lib, Windows Sound System, MPU-40, and Windows 3.1 and
Windows 95. All kits are MPC compliant.
TeleWAVE Q32/3D featuring surround sound, 32 polyphony, 16 MIDI
channels, 4 operator, 22-voice FM music synthesizer, a General MIDI and 100
MIPs DSP wavetable power all in one board. It provides professional music
studio quality stereophonic sound of real musical instruments. Using
advanced DSP technology, the TeleWAVE Q32/3D allows users to turn their PC
into a professional PC audio system with 128 general MIDI musical instrument
sounds.
TeleGRAPHICS SX64V+, the next-generation ultra fast graphics and video
accelerator board. It utilizes a 64-bit graphics engine with unique stream
processor technology, enhanced 2D graphics acceleration and hardware assisted
video playback. Features include 64-bit graphics and video co-processor,
integrated 24-bit RAM-DAC with 135 MHz output pixel rate and dual clock
synthesizer for true color (up to 32-bit per pixel) acceleration. It
supports high resolution of up to 1600 x 1200 at color depth of 256 and 800 x
600 with 16.7 million colors.
The TeleGRAPHICS 3D, a high performance plug-and-play 3D graphics
accelerator board designed for high resolution true color and multimedia
capabilities on PC hardware and software platforms. It features an advanced
64-bit PCI video graphics accelerator designed to give realistic 3
dimensional graphics for educational, entertainment and other multimedia
applications. This highly advanced video processor with hardware-assisted
video playback is capable of scaling full-screen MPEG video clips up to 30
frames-per-second. It is also capable of full-screen display resolutions up
to 1600 x 1200 with high picture quality.
TeleVideo also bundles CD-ROM drives with TeleVideo sound boards and
other multimedia products to meet the needs and requirements of OEMs,
distributors, Resellers and systems integrators. CD-ROM bundles are
configured according to customer needs and requirements.
Multimedia products retail from $25 to $190. These products
collectively accounted for approximately 35%, 48% and 23% of the total
revenues in fiscal 1997, 1996 and 1995, respectively.
4
VIDEO DISPLAY TERMINALS
TeleVideo designs, manufactures, markets and supports a broad range of
industry standard, high performance character-based Windows, Point-of-Sale,
ASCII, ANSI and PC TERM video display terminals and terminal boxes which
feature high quality, low flicker, high contrast, high resolution and
non-glare screens. Current terminal series include:
The TeleVideo 9099 color terminal box, a high-performance and low-cost
ASCII, ANSI, PC terminal is designed to meet productivity goals into the 21st
century. It features an IBM-compatible keyboard interface for wedge type bar
code scanners, wand readers, credit card readers, and/or specialized
keyboards for point-of-sale, bank teller, and similar applications. The 9099
also supports standard ANSI color commands and MicroColor (color substitution
for visual attributes) for legacy software with 64 colors available for both
foreground and background. In addition, the 9099 offers increased
flexibility by allowing user to select any monitor size for particular
application.
The TeleVideo 9089, a high-resolution, color windows terminal box that
provides 64 colors for both foreground and background selections in each of
the six windows. The 9089 allow the user to work in multiple applications
and toggle or copy and paste between the applications in different windows or
hosts. It also offers flexibility by allowing user to select any monitor size
for particular application.
The TeleVideo 9060 high-performance 9-inch display terminal is a
multi-session, multi-personality terminal with ASCII, ANSI and PC TERM
operating modes. It can function as an independent terminal in single or
dual host computer environments. It can also connect to light pen, bar code
scanner and magnetic strip readers for point-of-sale, financial and similar
applications.
The TeleVideo 995 14-inch monochrome AlphaWindow terminal allows the
user AlphaWindowing capability at a non-windowing price for new or existing
software applications. The windows capability provides increased
productivity for applications running on UNIX. The 995 also has a power
management screen saver which protects the environment and promotes energy
conservation.
The TeleVideo 995-65 14-inch terminal is specifically designed to
address the needs of customers who require a powerful, yet versatile solution
which can emulate a wide range of industry-standard terminals. It features
multi-session, multi-personality emulation of over 34 terminals, and is
capable of operating as an independent terminal in single or dual-host
computer environments.
The TeleVideo 990 terminal is a general purpose terminal with ASCII,
ANSI and PC TERM operating modes. For maximum versatility and flexibility,
the terminal provides a choice of ASCII, AT or DEC style keyboards. The
990's mini-DIN keyboard connector permits connection to low-cost industry
standard wedge type devices. This allows the user to interface to a bar code
scanner, wand reader, credit card reader, electronics scale or a variety of
specialized keyboards for point-of-sale or point-of-transaction processing.
The video display terminal products retail from $200 to $430. These
products collectively accounted for approximately 38%, 34% and 44% of the
total revenue in fiscal 1997, 1996 and 1995, respectively.
COMPUTER ENHANCEMENT PRODUCTS
The Company, through its OMTI product line, manufactures and markets
multi-function data storage products for various bus architectures. These
products generally retail for $80 to $270, and collectively accounted for
approximately 4%, 6% and 9% of total revenues in fiscal 1997, 1996 and 1995,
respectively.
5
PRODUCT DEVELOPMENT
Markets that TeleVideo serves are characterized by rapid technological
change. TeleVideo has an ongoing program to develop new products. The
Company's research and development staff consists of 7 employees as of
January 21, 1998. During fiscal 1997, TeleVideo spent approximately $.8
million on company-sponsored research and development. Company-sponsored
research and development expenses for fiscal 1996 and 1995 were approximately
$1.1 million and $1.8 million, respectively. The Company did not engage in
any customer-sponsored research and development during such years.
Because of the fast pace of technological advances, particularly for
multimedia products, the Company must be prepared to design, develop and
manufacture new and more powerful low-cost products in a relatively short
time. TeleVideo believes it has had mixed success to date in accomplishing
these goals simultaneously. Like other companies in the computer industry,
it will continue to experience delays in completing new product design and
tooling. There is no assurance that the Company will be able to design and
manufacture new products that respond to the rapid changes in the market
place.
SALES, MARKETING AND CUSTOMERS
North American sales are handled from TeleVideo sales offices located in
San Jose, CA; Morristown, New Jersey and Hoffman Estates, Illinois. Products
are sold through distributors, mass merchants, retail stores, VARs, systems
integrators and OEMs.
Products sold in Europe, Asia Pacific, Africa and Latin America are
handled by the Company's San Jose, California office through distributors,
OEMs and international representatives.
TeleVideo distributors generally do not have exclusive geographic
territories. Distributor contracts can be terminated by either party without
cause upon 30 days or 60 days' written notice. TeleVideo's distributors
typically handle a variety of computer-related products, including products
competitive with those of TeleVideo. The typical distribution arrangement
requires the distributor to purchase TeleVideo products with certain limited
stock rotation rights. Distributors may also exercise price protection
rights should the Company's product price be reduced.
TeleVideo, through its headquarters' marketing and supporting staff,
plans to continue to work closely with its distributors, mass merchants,
retail stores, value-added VARs, systems integrators and original OEMs.
TeleVideo marketing staff also provide the customers with training, sales and
promotional materials, cooperative advertising programs, trade show
participation and sales leads. The marketing organization also lead the
product marketing role giving direction to product management, direction and
competitive positioning. The Company spent approximately 6.6%, 2.4% and 4.6%
of its revenues on advertising in fiscal 1997, 1996 and 1995, respectively.
TeleVideo's customers typically purchase the Company's products on an
as-needed basis. Therefore, the Company will continue to manufacture its
products based on sales forecasts and upon customer orders. As a result of
this strategy, the Company believes that backlog is not material to its
business taken as a whole. The Company's order backlog as of October 31,
1997 was approximately $1.4 million, as compared with approximately $2.8
million at October 31, 1996, and approximately $3.0 million at October 31,
1995. TeleVideo's order backlog includes orders with a specified delivery
schedule within twelve months. Because of the possibility of customer
changes in delivery schedules or cancellation of orders, which is not
uncommon in the computer industry, the Company's backlog as of any particular
date may not be indicative of actual net sales for any succeeding period.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
6
TeleVideo's largest customer accounted for approximately 16.6% ($3.3
million) of net sales in fiscal 1997. Another customer accounted for 16%
($3.2 million) of net sales in fiscal 1997. The Company believes that loss
of either or both of these customers could have a material adverse effect on
the net sales of the Company.
TeleVideo's product sales are primarily made for cash, due net 30, 45 or
60 days, or in the case of some foreign sales, payment by letter of credit
is required.
INTERNATIONAL SALES
International sales of TeleVideo's products constituted approximately
$2.7 million (13.7%) of net sales for fiscal 1997, approximately $3.41
million (15.8%) of net sales for fiscal 1996 and approximately $4.13 million
(24%) of net sales for fiscal 1995.
TeleVideo's international sales are subject to certain risks common to
non-United States operations, including but not limited to governmental
regulations, import restrictions and export control regulations, changes in
demand resulting from fluctuations in exchange rates, as well as risks such
as tariff regulations. TeleVideo's international sales are U.S.
dollar-denominated and, therefore, are not directly subject to international
currency fluctuations. The strength of the dollar in relation to certain
international currencies may, however, adversely affect the Company's sales
to international customers.
FOREIGN JOINT VENTURE ACTIVITY
COMMONWEALTH OF INDEPENDENT STATES
TeleVideo continues to pursue business opportunities in the former
Soviet Union, now referred to as the Commonwealth of Independent States.
These may or may not involve sale or production of the Company's products,
and TeleVideo may invest cash in these ventures.
THREE H
Three H Partners (owned equally by TeleVideo and a Russian entity) was
formed in fiscal 1991 and the initial investment was $16,000. In July 1996,
the Company further invested $60,000 in the joint venture.
In February 1993, the Company loaned the Three H joint venture $1.0
million as working capital for the purpose of conducting short term
commodities trading. The loan was unsecured and bears interest at 20% per
annum. In fiscal 1994, a total amount of $800,000 was repaid to the Company.
The remaining balance of $200,000 was received in fiscal 1996.
INTERTERMINAL
In April 1994, the Company acquired a 51% ownership of the
"InterTerminal" joint venture in exchange for a $5,100 cash investment and a
commitment to fund a $3.65 million loan, at a 20% interest rate, interest
free for one year, to the venture. The main purpose of the joint venture was
the construction of a truck terminal (approximately 100,000 square feet)
approximately 25 miles outside of Moscow, and the construction was complete
in early 1995. TeleVideo sold its 51% ownership in May 1995. The $3.65
million loan was repaid to the Company in fiscal 1995. An additional amount
of $1,369,500 was received and recognized as a gain in fiscal 1996.
7
TELEVIDEO-RUS
In January 1996, TeleVideo set up a company called "TeleVideo-RUS" in
the Commonwealth of Independent States with an initial investment of
$150,000. The main purpose of this company is to act as a liaison between
TeleVideo and the authorities in the CIS. One of the projects that the
Company is anticipating will be the construction of truck terminals similar
to the "InterTerminal" joint venture.
In October 1997, the Company received $250,000 from the sale of
TeleVideo-RUS. The Company recognized a $100,000 profit during fiscal 1997.
RISKS OF OPERATIONS IN THE COMMONWEALTH OF INDEPENDENT STATES
There are a number of risks involved in TeleVideo's participation in
foreign joint ventures located in the Commonwealth of Independent States.
These risks include the ability to execute and enforce the agreements, the
future regulations governing the repatriation of funds, the political and
economic instability and the dependence on future events which can influence
the success or failure of the ventures and, thus, may affect the
recoverability of the amounts invested by TeleVideo. Management of the
Company is aware of the attendant risks relating to these ventures and
continually monitors the conditions in the CIS and the activities of the
joint ventures. Management further believes the investments to be secure and
thus no reserves were required as of October 31, 1997. However, there can be
no assurance that conditions in the CIS will not deteriorate and place the
Company's investments in jeopardy.
KABIL ELECTRONICS COMPANY, LTD.
The Company owned a 35% interest in Kabil Electronics Company, Ltd. of
South Korea and the total investments were approximately $3.3 million. Since
Kabil continued to sustain losses from operations, the Company wrote off its
investments in fiscal 1990 and fiscal 1993. In December 1994, the Company
accepted an offer to sell its 35% interest in Kabil to the majority owners
for $1.5 million, less expenses, which was paid in installments over the 1995
and 1996 fiscal years. Approximately $555,000 was received in fiscal 1995.
An additional $866,652 was received in January of 1996 and had been accrued
as income for the year ended October 31, 1995.
TLK, INC.
In November 1996, the Company invested $150,000 in exchange for a 20%
ownership in TLK, Inc. for the China Power Plant projects in Lin Zhang, Quin
Yuan and Henan Provinces in China. The Company expects to have a return on
investment within the next twelve months. However, there can be no assurance
that this will materialize.
KORAM, INC.
On March 3, 1997, the Company deposited $224,820 in escrow in Korea,
which amount is to be used to purchase a 50% interest in a restaurant venture
in Seoul, Korea. The amount deposited has been written down to $109,820 due
to the devaluation of the Korean won.
8
COMPETITION
TeleVideo believes that brand recognition, product quality,
availability, extensive standard product features, service and price are
significant competitive factors in the Company's markets. In addition to the
factors listed above, the principal considerations for distributors and
resellers in determining which products to offer include profit margins,
immediate delivery, product support and credit terms. TeleVideo has
continued and in the future will likely continue to face significant
competition, with respect to these factors, particularly from the large
international manufacturers. Most of these companies have significantly
greater financial, marketing and technological resources than the Company,
and may be able to command better terms with their suppliers due to higher
purchasing volumes. Therefore, there is no assurance that the Company will
be able to successfully compete in the future.
PRODUCTION
The Company subcontracts all of the manufacture of its terminal, monitor
and multimedia products to manufacturers in Japan, Taiwan, The People's
Republic of China and South Korea. TeleVideo does not have any long term
contracts with its overseas manufacturers. The testing, inspection and some
minor assembly work are done at its California headquarters. The Company
believes its current manufacturing facilities in California will continue to
be adequate for its purposes for the foreseeable future.
Although for the most part, the Company generally uses standard parts
and components for its products, certain components are presently available
and secured only from a single source. The Company's largest suppliers
accounted for approximately 25.1% (approximately $3.9 million), 18.8%
(approximately $2.9 million), 7.9% (approximately $1.2 million) and 4.6%
(approximately $0.7 million), respectively, of net purchases in fiscal 1997.
Loss of one of these suppliers might have an adverse effect on the product
supply of the Company. The Company believes, however, that in most cases,
alternative sources of supply could be arranged as and when needed by the
Company. To date, TeleVideo has not experienced any material difficulties or
delays in production of its monitor, terminal and multimedia products.
PRODUCT SERVICE AND WARRANTY
TeleVideo's products are serviced worldwide primarily by distributors
and OEMs.
The Company provides end-user customers with a one-year factory warranty
on terminal products and a three-year factory warranty on monitor and
multimedia products.
PROPRIETARY RIGHTS
The Company regards certain aspects of its products as proprietary and
relies upon a combination of trademark and copyright laws, trade secrets,
confidentiality procedures and contractual provisions to protect its
proprietary rights. The Company has registered trademarks in the United
States and in over 20 foreign countries for "TeleVideo" and the TeleVideo
logo.
9
The continuing development of the Company's products and business is
dependent, primarily, on the knowledge and skills of certain of its
employees. To protect its rights to its proprietary information, the Company
requires all employees and consultants to enter into confidentiality
agreements that prohibit the disclosure of confidential information to
persons unaffiliated with the Company. There can be no assurance, however,
that these agreements will provide meaningful protection for the Company's
technology or other confidential information in the event of any unauthorized
use or disclosure. There also can be no assurance that third parties will
not independently develop products similar to or duplicative of products of
the Company. The Company believes that due to the rapid pace of
technological change in its industry, the Company's success is likely to
depend more upon continued innovation, technical expertise, marketing skill
and customer support than on legal protection of the Company's proprietary
rights.
GOVERNMENT REGULATIONS
Most of the Company's products are subject to regulations adopted by the
Federal Communications Commission ("FCC"), which establishes radio frequency
emanation standards for computing equipment. TeleVideo believes that all of
the Company's products that are subject to such regulations comply with these
regulations. Although there can be no assurance, the Company has no reason
to believe that new products will not also be approved. Failure to comply
with the FCC specifications could preclude the Company from selling
non-complying systems in the United States until appropriate modifications
are made. To date, the Company has not encountered any FCC compliance
problems.
EMPLOYEES
As of January 26, 1998, the Company's full-time employees totaled 47, a
decrease of approximately 19% of the total number of employees (58) reported
at the end of fiscal 1996. Of the total number of employees, 23 are engaged
in product research, engineering, development and manufacturing; 14 in
marketing and sales; and 10 in general management and administration. The
decrease in the number of employees from the 1996 fiscal year end was the
result of the reorganization of the sales and marketing departments for the
multimedia products. As a result, a higher sales volume was achieved with a
smaller work force. The Company believes that its future success will
depend, in part, on its ability to continue to attract and retain highly
skilled technical, marketing and management personnel.
None of the Company's employees is subject to a collective bargaining
agreement or represented by a union, and the Company has never experienced a
work stoppage. The Company believes that its employee relations are good.
ITEM 2. PROPERTIES
The Company's headquarters, research and development and administrative
operations are housed in a 69,630 square foot building located on 2.5 acres
in San Jose, California, which is owned by the Company. The Company's
operations use approximately 80% of the building. Management believes these
facilities will be adequate for its anticipated growth for the foreseeable
future.
The Company leases a domestic sales office in Hoffman Estates, Illinois.
The lease is on a monthly basis with a monthly rental rate of $716.23.
Management believes that the Company would be able to secure extension to the
lease if such extension is deemed necessary in the future. In May 1997, the
Company open an eastern regional sales office in Morristown, NJ. The office
is currently located at the residence of the employee until such time that an
appropriate site is located. During fiscal 1997, the Company closed its
domestic sales office in Newport Beach, California.
10
ITEM 3. LEGAL AND OTHER PROCEEDINGS
TAX AUDITS
On July 14, 1977, the State of Massachusetts issued a certificate of
withdrawal to do business in the state to the Company. Consequently,
$250,000 was removed from deferred taxes and was recognized as other income.
The only issue pending is the California Franchise Tax exposure resulting
from the previous Federal Income Tax audits. The Company believes that a
resolution of this audit could occur in fiscal 1998 and its maximum exposure
will not exceed $350,000. The Company has accrued this full amount at
October 31, 1997.
OTHER LEGAL PROCEEDINGS
The Company has been named, along with dozens of other manufacturers,
designers, and distributors of computer equipment, as a defendant in several
lawsuits regarding product liability in connection with the alleged defective
design of computer terminal keyboards and the size of the computer monitor
screens. The first issue alleges that the various plaintiffs have suffered
some form of severe wrist injury from the use of these keyboards. The second
issue alleges that there was false advertising which claimed that the video
screens were 17 inches in size, when in reality they were only 15 inches.
The Company's attorneys have prepared a defense for these cases and the
Company's insurance carriers are informed of the plaintiffs' claims. The
Company intends to vigorously defend against the allegations of these suits.
Management believes that the ultimate outcome of these lawsuits will not have
a material adverse effect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded in the over-the-counter market and
prices are quoted on the Nasdaq National Market under the symbol "TELV." The
following table sets forth for the periods indicated the high and low last
sales prices for the Common Stock as reported by Nasdaq. The prices quoted
below reflect inter-dealer prices, without retail mark-ups, mark-downs or
commissions and may not necessarily represent actual transactions.
FISCAL 1996: High Low
------- --------
First Quarter $0.7500 $ 0.6563
Second Quarter 0.6250 0.5000
Third Quarter 0.5000 0.4688
Fourth Quarter 0.4375 0.40631
FISCAL 1997:
First Quarter $0.5625 $0.3438
Second Quarter 0.4375 0.2188
Third Quarter 0.4688 0.2813
Fourth Quarter 1.0313 0.3125
11
There were 2,645 holders of record of the Company's Common Stock at
February 9, 1998.
On February 9, 1998, the closing price of the Company's Common Stock in
the over-the-counter market, as reported on the Nasdaq National Market, was
$0.78125 per share. The Company expects to effect a 4-for-1 reverse stock
split of its outstanding common stock during February 1998 in order to meet
the Nasdaq National Market maintenance criteria. Stock prices after the
effective date of the reverse split will reflect the reverse stock split.
The Company has never paid cash dividends on its Common Stock and does
not anticipate paying cash dividends in the foreseeable future. The Company
presently intends to retain any earnings for use in its business.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data reflects the continuing operations
of TeleVideo. The data below has been derived from the Company's audited
consolidated financial statements for the fiscal years presented and should
be read in conjunction with such audited financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" presented elsewhere herein.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended October 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ---------- -------- -----------
STATEMENT OF OPERATIONS DATA:
Net sales $19,884 $21,576 $16,914 $13,232 $15,251
Income (loss) from continuing
operations (3,294)(4) (2,917)(3) 415(2) (907) (9,618)(1)
Net income (loss) (3,294)(4) (2,917)(3) 415(2) (907) (9,618)(1)
Income (loss) from continuing
operations (per share) (0.07) (0.06) 0.01 (0.02) (0.22)
Net income (loss) (per share) (0.07) (0.06) 0.01 (0.02) (0.22)
BALANCE SHEET DATA:
Cash and cash equivalents $ 3,604 $ 4,496 $5,145 $ 2,131 $ 3,148
Working capital 9,207 15,239 13,035 7,246 8,479
Total assets 17,918 23,090 24,600 26,045 26,479
Stockholders' equity 15,287 18,544 21,345 20,832 21,738
12
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to Consolidated Financial
Statements for a discussion of operating results, liquidity needs and
acquisitions and dispositions during the periods.
(1) Including a charge of $9,531,000 to write down the cost of property
to estimated fair market value.
(2) Includes net gains (loss) from the following (in thousands):
(A) Sale of building $1,350
(B) Disposition of Russian joint venture interest 1,910
(C) Sale of interest in Kabil Electronics 1,422
(D) Disposal of SMS product line (346)
------
$4,336
------
------
(3) Includes net gain from the sale of InterTerminal joint venture
interest of $1,370,000.
(4) Includes net gains (loss) from the following (in thousands):
(A) Loss from investment in APT venture $ (623)
(B) Gain from Russian investment 100
(C) Gain from tax settlement 250
(D) Korean currency valuation adjustment (115)
-------
$ (388)
-------
-------
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The forward-looking statements contained herein are
based on current expectations, and actual results may differ materially.
Factors that might cause such differences include, but are not limited to,
those discussed under "Factors that may Affect Future Results," below.
GENERAL
The Company completely phased-out its personal computer product line in
fiscal year 1993 and focused its resources on the terminal and multimedia
product lines. In November 1996, the Company announced its entry into the
computer monitors market. Efforts continued to expand in the development of
new multimedia products and upgrade kits in fiscal 1996. Results in fiscal
1997 were additionally impacted by a continued shift in product mix, with the
Company's multimedia and terminal products contributing approximately 72% of
the total sales.
The Company has reduced its marketing and sales force from 21 employees at
October 31, 1996 to 15 employees at October 31, 1997, primarily the result of
its continuing effort to reduce operating costs and to improve operating
efficiency. In order to lower the production costs, the Company has
continued to negotiate with its suppliers and has also shifted its production
process from in-house to overseas manufacturing.
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for fiscal year 1997 were approximately $19.88 million, a
decrease of approximately 7.8% from approximately $21.58 million in net sales
reported in fiscal 1996. The decrease in net sales in fiscal 1997 was mainly
due to the decrease in the sale of multimedia products from approximately
$10.35 million in 1996 to approximately $6.5 million in 1997, a decrease of
$3.85 million or 37.2%. However, the launching of computer monitor products
starting in November 1996 offset the decrease in multimedia sales. Computer
monitor sales for fiscal 1997 were approximately $3.55 million or 17.9% of
net sales.
Cost of sales decreased from approximately $20.63 million in fiscal 1996
to approximately $17.79 million in fiscal 1997, resulting in a decrease in
the percentage of sales from approximately 95.6% to 89.4% during the same
period. The percentage decrease in cost of sales and the corresponding
increase in gross margin in fiscal 1997 (an increase from approximately 4.4%
to 10.6%) were primarily the results of lower multimedia sales which
historically has a lower profit margin.
Inventory reserves were decreased by approximately $140,000 for fiscal
1997. The Company reduced the reserve during the year by $519,000 reflecting
reductions in ending reserved inventory and increased the reserve by $379,000
reflecting additional charges to cost of goods sold for obsolete and slow
moving inventory.
Manufacturing expenses increased from $1,150,000 in fiscal 1996 to
$1,263,000 in fiscal 1997, an increase of $113,000 or 9.8%. The increase was
mainly due to the increase in depreciation of production equipment and
outside consulting.
Marketing expenses increased as a percentage of sales in fiscal 1997 from
approximately 11.3% in fiscal 1996 to 15.1% in fiscal 1997, while actual
expenses also increased from $2.4 million in fiscal 1996 to $3.0 million in
1997, a 23.3% increase. The increase in marketing expenses was due primarily
to the increase in advertising expenses incurred in connection with the
launching of high-end PC and Mac compatible monitor introduced in fiscal 1997
and an increase in outside consulting. These increases were offset by
reductions in other expense categories.
14
Research and development expenses decreased as a percentage of sales from
approximately 5.1% in fiscal 1996 to 3.8% in fiscal 1997, while actual
research and development expenses also decreased from $1.1 million in fiscal
1996 to $0.8 million in fiscal 1997, a 30.5% decrease. The decrease in
actual expenses was due mainly to the further reduction in employee headcount
from 7 in fiscal 1996 to 5 in fiscal 1997.
General and administrative expenses decreased as a percentage of sales
from approximately 9.6% in fiscal 1996 to approximately 7.8% in fiscal 1997,
while actual expenses also decreased from $2.1 million in fiscal 1996
compared to $1.55 million in fiscal 1997, a 26% decrease. The decrease was
due primarily to the reduction in the provision for doubtful accounts from
$760,000 in 1996 to $292,500 in 1997.
The loss from operations reported in fiscal 1997 decreased approximately
$1.4 million or approximately 30.7%, from $4.6 million in fiscal 1996 to $3.2
million in fiscal 1997. The decrease was due primarily to the decrease in
cost of sales and to the decrease in operating expenses in research and
development and general and administration, partially offset by the increase
in sales and marketing due to the increase in advertising expense.
The Company recognized a net gain from the sale of TeleVideo-RUS in the
amount of $100,000 in fiscal 1997. A loss of $390,000 is also recognized
representing 30% equity interest in Advanced Photonics Technology, Inc. and
$115,000 due to currency devaluation of the Korean won in the Company
investment with Koram.
Interest income earned in fiscal 1997 decreased from $697,000 in fiscal
1996 to $410,000 in fiscal 1996, a 41.2% decrease compared to prior year.
The decrease was primarily due to lower cash level in 1997 than in 1996.
Net loss for fiscal year 1997 was approximately $3.3 million, compared
with $2.9 million net loss for fiscal 1996. The loss in fiscal 1997 was a
result of the various factors noted above.
Net loss per share in fiscal 1997 was $0.07 based on 45,420,308 weighted
average shares outstanding, compared to a net loss per share in fiscal 1996
of $0.06 based on 45,328,368 weighted average shares outstanding.
No income tax expense or credit was provided for in fiscal 1997. The
Company has approximately $89.9 million in federal net operating loss and
credit carryovers and approximately $27.4 million in state net operating loss
carryovers to offset future federal and state corporate income tax
liabilities. No net deferred tax asset has been recognized by the Company for
any future tax benefit to be provided from the loss carry forwards since
realization of any such benefit is not assured.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales for fiscal 1996 were approximately $21.58 million, or an
increase of approximately 27.6% from the approximately $16.91 million in net
sales reported in fiscal 1995. The increase in net sales in fiscal 1996 was
principally generated from the sale of the multimedia products (approximately
$10.35 million) which accounted for approximately 48% of the total sales
revenue in fiscal 1996, compared to approximately 23% and 0.2% of total sales
revenue in fiscal 1995 and 1994, respectively.
Cost of sales increased from approximately $14.77 million in fiscal 1995
to approximately $20.63 million in fiscal 1996, and increased as a percentage
of sales from approximately 87.3% to approximately 95.6% during the same
period. The percentage increase in cost of sales and the corresponding
decrease in gross margins in fiscal 1996 (a decrease from approximately 12.7%
to 4.4%) were primarily the results of the lower profit margin and intensive
price competition on multimedia products, a trend that the Company expects to
continue, coupled with the increase in the inventory reserve on multimedia
inventory noted below.
15
Inventory reserves were increased in the aggregate by $50,000 for fiscal
1996. The increase resulted from the Company scrapping approximately
$868,000 of fully reserved inventory during the year (which reduced the
inventory reserve on a dollar for dollar basis, resulting in no net impact on
cost of sales), and at the same time, recording an additional reserve of
$918,000 in the fourth quarter of fiscal 1996 to cover existing inventory on
hand at year end. The additional reserve increased cost of goods sold by a
like amount.
Manufacturing expenses increased from $1,098,000 in fiscal 1995 to
$1,151,000 in fiscal 1996, an increase of $53,000 (approximately 4.8%) from
the prior year. The increase was primarily due to the increase in the actual
compensation expense from $667,000 in fiscal 1995 to $789,000 in fiscal 1996,
an increase of $122,000 (approximately 18.3%) from the prior year while the
workforce for manufacturing, assembling and inspecting remained at the same
level of 18 employees for both years. This increase was offset by
miscellaneous reductions in other expense categories.
Marketing expenses decreased as a percentage of sales in fiscal 1996 from
approximately 18.8% in fiscal 1995 to 11.3% in fiscal 1996, while actual
marketing expenses decreased from $3.2 million in fiscal 1995 to $2.4 million
in fiscal 1996, a decrease of 23.8% from the prior year. The decrease in
marketing expenses was due primarily to decreased expenditures resulting from
the decrease in employee staffing levels and purchased services and
advertising expenses. The number of sales and marketing employees decreased
from 27 in fiscal 1995 to 21 in fiscal 1996, while actual compensation
expense decreased from $1.84 million in fiscal 1995 to $1.44 million in
fiscal 1996. Total advertising expense decreased from $0.79 million in
fiscal 1995 to $0.52 million in fiscal 1996.
Research and development expenses decreased as a percentage of sales from
approximately 10.8% in fiscal 1995 to 5.1% in fiscal 1996, while actual
research and development expenses decreased from $1.8 million in fiscal 1995
to $1.1 million in fiscal 1996, a decrease of 39.8% from the fiscal 1995
levels. The decrease in actual research and development expenses in fiscal
1996 compared to the same period in the prior year was primarily a result of
the decrease in employee staffing levels from 14 in fiscal 1995 to 7 in
fiscal 1996 while actual compensation expense decreased from $1.2 million in
fiscal 1995 to $0.8 million in fiscal 1996.
General and administrative expenses decreased as a percentage of sales
from approximately 11.1% in fiscal 1995 to 9.6% in fiscal 1996, while actual
expenses increased from $1.9 million in fiscal 1995 to $2.1 million in fiscal
1996, an increase of 9.9% from fiscal 1995 levels. The higher expense level
in fiscal 1996 was primarily due to the increase in the reserve for accounts
and notes receivable of approximately $760,000 in the fourth quarter of
fiscal 1996.
The loss from operations reported in fiscal 1996 decreased approximately
2.2%, from $4.7 million in fiscal 1995 to $4.6 million in fiscal 1996. This
decrease was primarily due to the decrease in operating expenses but was
partially offset by the increase in cost of sales of multimedia products and
the decrease in the net sales of the terminal and other computer enhancement
products which historically provide higher profit margins.
The Company recognized a net gain from the sale of InterTerminal joint
venture interest of $1,370,000 in fiscal 1996 which offset the loss from
operations.
Interest income earned in fiscal 1996 decreased from $810,000 in fiscal
1995 to $697,000 in fiscal 1996, a 14.0% decrease from the prior year. Such
decrease was primarily due to the lower cash levels and the retirement of
various notes receivable principally with respect to joint venture activities
in the Commonwealth of Independent States.
Net loss for the fiscal year of 1996 was approximately $2.9 million,
compared with a net gain of $0.4 million in fiscal 1995. The loss in fiscal
1996 was a result of the various factors noted above.
16
As a result of the foregoing, net loss per share in fiscal 1996 was $0.06,
based on 45,328,368 weighted average shares outstanding, compared to a net
income per share in fiscal 1995 of $0.01, based on 44,878,339 weighted
average shares outstanding.
No income tax expense or credit was provided for in fiscal 1996. The
Company has approximately $86 million in federal net operating loss and
credit carryovers and approximately $26 million in state net operating loss
carryovers to offset future federal and state corporate income tax
liabilities. No net deferred tax asset has been recognized by the Company
for any future tax benefit to be provided from the loss carry forwards since
realization of any such benefit is not assured.
Inflation had no significant impact on the Company's business or results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled approximately $3.6 million at October
31, 1997, down $892,000 (approximately 19.8%) from fiscal 1996 year-end
levels of $4.5 million. The decrease in the cash and cash equivalents
resulted primarily from the net cash used in operating activities of
$1,750,000 while partially offset by the net cash provided by investing
activities of $820,000.
Approximately $3.0 million in certificates of deposit were pledged as
collateral for comparable amounts of stand-by and sight letters of credit
under the letter of credit agreements as of the end of fiscal 1997. At
October 31, 1997, the Company had approximately $1.1 million in outstanding
letters of credit which were secured by the pledged deposits under this
agreement.
Net accounts receivable of $4.2 million at the end of fiscal 1997 were
down approximately 4.6% from the 1996 year-end level of $4.39 million. Days
sales outstanding in accounts receivable decreased from 89 days in fiscal
1996 to 72 days in fiscal 1997.
Net inventories of approximately $2.92 million at the end of fiscal 1997
were down approximately 50% from the 1996 year-end level of $5.83 million.
Working capital at the end of fiscal 1997 was approximately $9.2 million,
down approximately 39.6% from the fiscal 1996 year-end level of approximately
$15.2 million.
At the current consumption rate, the Company's cash balance of
approximately $3.6 million at October 31, 1997 (which includes $3.0 million
pledged as security for stand-by and sight letters of credit) was anticipated
to be adequate to fund the Company's fiscal 1998 operations at projected
levels.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The terminal, monitor and multimedia product markets are intensely
competitive. The principal elements of competition are pricing, product
quality and reliability, price/performance characteristics, compatibility,
marketing and distribution capability, service and support, and reputation of
the manufacturer. TeleVideo competes with a large number of manufacturers,
most of which have significantly greater financial, marketing and
technological resources than TeleVideo. There can be no assurance that the
Company will be able to continue to compete effectively.
17
The Company markets its products worldwide. In addition, a large portion
of the Company's part and component manufacturing, along with key suppliers,
are located outside the United States. Accordingly, the Company's future
results could be adversely affected by a variety of factors, including
without limitation, fluctuation in foreign currency exchange rates, changes
in a specific country's or region's political or economic conditions, trade
protection measures, import or export licensing requirements, unexpected
changes in regulatory requirements and natural disasters.
The computer market, particularly the multimedia product market, is
characterized by rapid technological change and product obsolescence, often
resulting in short product life cycles and rapid price declines. The
Company's success will continue to depend primarily on its ability to
continue to reduce costs through manufacturing efficiencies and price
negotiation with suppliers, the continued market acceptance of its existing
products and its ability to develop and introduce new products. There can be
no assurance that TeleVideo will successfully develop new products or that
the new products it develops will be introduced in a timely manner and
receive substantial market acceptance. There can also be no assurance that
product transitions will be managed in such a way to minimize inventory
levels and product obsolescence of discontinued products. The Company's
operating results could be adversely affected if TeleVideo is unable to
manage all aspects of product transitions successfully.
The Company generally utilizes standard parts and components available
from multiple suppliers. However, certain parts and components used in the
Company's products are available from a single source. If, contrary to its
expectations, the Company is unable to obtain sufficient quantities of any
single-sourced components, the Company will experience delays in product
shipments.
The Company offers its products through various channels of distribution.
Changes in the financial condition of, or in the Company's relationship with,
its distributors could cause actual operating results to vary from those
expected. Also, the Company's customers generally order products on an
as-needed basis. Therefore, virtually all product shipments in a given fiscal
quarter result from orders received in that quarter. The Company anticipates
that the rate of new orders will vary significantly from month to month. The
Company's manufacturing plans and expenditure levels are based primarily on
sales forecasts. Consequently, if anticipated sales and shipments in any
quarter do not occur when expected, expenditure and inventory levels could be
disproportionately high and the Company's operating results for that quarter,
and potentially future quarters, would be adversely affected.
The market price of TeleVideo's common stock could be subject to
fluctuations in response to quarter to quarter variations in operating
results, changes in analysts' earnings estimates, market conditions in the
computer technology industry, as well as general economic conditions and
other factors external to the Company.
SUBSEQUENT EVENTS
None.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE NO.
IN 10-K
--------
Report of Independent Certified Public Accountants................... 20
Consolidated Balance Sheets - October 31, 1997 and 1996.............. 21
Consolidated Statements of Operations for the Years Ended
October 31, 1997, 1996 and 1995...................................... 22
Consolidated Statement of Stockholders' Equity for the Years
Ended October 31, 1997, 1996 and 1995................................ 23
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1997, 1996 and 1995...................................... 24
Notes to Consolidated Financial Statements........................... 25
(Remainder of page left blank intentionally)
19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
TeleVideo, Inc.
We have audited the accompanying consolidated balance sheets of TeleVideo,
Inc. and Subsidiaries as of October 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended October 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TeleVideo, Inc.
and Subsidiaries as of October 31, 1997 and 1996, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended October 31, 1997, in conformity with
generally accepted accounting principles.
/s/ GRANT THORNTON LLP
- -------------------------
Grant Thornton LLP
San Jose, California
February 3, 1998
20
TELEVIDEO, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
October 31,
----------------------
1997 1996
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (including restricted cash of
$3,000 in 1997 and $2,500 in 1996) $ 3,604 $ 4,496
Accounts receivable, less allowance of $438 in
1997 and $891 in 1996 4,191 4,394
Inventories 2,923 5,834
Prepayments and other 220 62
Loan receivable from major customer 900 --
Note receivable from sale of building -- 5,000
------ ------
Total current assets 11,838 19,786
------ ------
PROPERTY, PLANT AND EQUIPMENT:
Land 890 890
Building 1,035 1,035
Production equipment 524 1,263
Office furniture and equipment 1,140 1,753
Building improvements 1,105 1,105
------ ------
4,694 6,046
Less accumulated depreciation and amortization 1,934 2,968
------ ------
Property, plant and equipment, net 2,760 3,078
Long term receivable from major customer 608 --
INVESTMENTS IN AFFILIATES 2,712 226
------ ------
Total assets $17,918 $23,090
------ ------
------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,539 $ 3,080
Accrued liabilities 730 855
Income taxes 361 611
------ ------
Total current liabilities 2,630 4,546
------ ------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value;
Authorized--75,000,000 shares
Outstanding--45,500,370 shares in 1997 and 45,402,245
shares in 1996 455 454
Additional paid-in capital 95,671 95,634
Accumulated deficit (80,838) (77,544)
------ ------
Total stockholders' equity 15,288 18,544
------ ------
Total liabilities and stockholders' equity $17,918 $23,090
------ ------
------ ------
The accompanying notes are an integral part of these financial statements.
21
TELEVIDEO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended October 31,
--------------------------------------
1997 1996 1995
--------- -------- --------
NET SALES $19,884 $21,576 $16,914
COST OF SALES 17,785 20,627 14,773
------- ------- -------
GROSS PROFIT 2,099 949 2,141
OPERATING EXPENSES:
Marketing 2,995 2,428 3,185
Research and development 762 1,097 1,821
General and administration 1,557 2,062 1,876
------- ------- -------
Total operating expenses 5,314 5,587 6,882
------- ------- -------
Loss from operations (3,215) (4,638) (4,741)
GAIN ON SALE OF BUILDING -- -- 1,350
GAIN ON SALES OF INVESTMENTS IN
UNCONSOLIDATED AFFILIATES -- 1,369 3,329
LOSS FROM SALE OF SMS PRODUCT LINE -- -- (346)
EQUITY IN LOSS OF AFFILIATE (638) (33) --
INTEREST AND OTHER INCOME, net 559 385 823
------- ------- -------
Net income (loss) $(3,294) $(2,917) $ 415
------- ------- -------
------- ------- -------
Net income (loss) per share $ (0.07) $ (0.06) $ 0.01
------- ------- -------
------- ------- -------
Weighted average shares outstanding 45,420 45,328 44,878
------- ------- -------
------- ------- -------
The accompanying notes are an integral part of these financial statements.
22
TELEVIDEO, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
THREE YEARS ENDED
OCTOBER 31, 1997
Common Stock Additional Total
------------------- Paid in Other (Accumulated Stockholders'
Shares Amount Capital Adjustment Deficit) Equity
-------- -------- ---------- ---------- ------------ -------------
Balance - October 31, 1994 44,641 $ 446 $ 95,428 $ -- $ (75,042) $ 20,832
Unrealized loss from marketable securities -- -- -- (39) -- (39)
Exercise of employee stock options 507 5 132 -- -- 137
Net income -- -- -- -- 415 415
------ ----- -------- ----- --------- --------
Balance - October 31, 1995 45,148 451 95,560 (39) (74,627) 21,345
Unrealized gain from marketable securities -- -- -- 39 -- 39
Exercise of employee stock options 254 3 74 -- -- 77
Net loss -- -- -- -- (2,917) (2,917)
------ ----- -------- ----- --------- --------
Balance - October 31, 1996 45,402 454 95,634 -- (77,544) 18,544
Exercise of employee stock options 98 1 37 -- -- 38
Net loss -- -- -- -- (3,294) (3,294)
------ ----- -------- ----- --------- --------
Balance - October 31, 1997 45,500 $ 455 $ 95,671 $ -- $ (80,838) $ 15,288
------ ----- -------- ----- --------- --------
------ ----- -------- ----- --------- --------
The accompanying notes are an integral part of this financial statement.
23
TELEVIDEO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended October 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
INCREASE (DECREASE) IN CASH:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(3,294) $(2,917) $415
Charges (credits) to operations not affecting cash:
Provision for bad debts (293) 410 383
Provision for excess and obsolete inventories (379) 50 610
Net loss (gain) on sales of property and investment 12 44 (1,350)
Loss on investment in unconsolidated affiliates 738 -- --
Depreciation and amortization 362 275 320
Interest income accrued -- -- (77)
Accrued profit on sale of foreign investment -- -- (866)
Loss on write off of foreign investments and loans -- 95 403
Income tax settlement (250) -- --
Changes in operating assets and liabilities:
Accounts receivable (111) (1,211) (1,810)
Inventories 3,290 (149) (588)
Prepayment and other (159) 274 (128)
Accounts payable (1,540) 1,418 299
Accrued liabilities (126) (126) (257)
-------- -------- --------
Net cash used in operating activities (1,750) (1,837) (2,646)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (55) (98) 3,286)
Reduction (investment) in marketable securities -- 35 (11)
Loans to affiliate and other (2,300) -- (184)
Reduction (increase) in investments in affiliates (3,225) (205) 187
Payments received on notes receivable from affiliate and other 6,400 513 3,321
Proceeds from sales of property and investment -- 866 5,496
-------- -------- --------
Net cash provided by investing activities 820 1,111 5,523
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 38 77 137
-------- -------- --------
Net cash provided by financing activities 38 77 137
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (892) (649) 3,014
CASH AND CASH EQUIVALENTS AT THE BEGINNING
OF THE YEAR 4,496 5,145 2,131
-------- -------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $3,604 $4,496 $5,145
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ -- $ -- $ --
The accompanying notes are an integral part of these financial statements.
24
TELEVIDEO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and certain of its majority owned subsidiaries, after elimination
of inter-company accounts and transactions. The Company's investments in
joint ventures in the Commonwealth of Independent States, some of which
represent a majority interest in the joint venture, are not consolidated
due to the lack of reliable financial information from the entity. Such
investments are carried at cost. (See "Joint Ventures.")
REVENUE RECOGNITION
The Company recognizes revenue when products are shipped. The Company
performs periodic evaluations of its customers' financial condition and
generally, no collateral is required under normal sales terms. TeleVideo
maintains a reserve for potential credit losses and adjusts the reserve
periodically to reflect both actual and potential credit losses. Product
warranties are based on the ongoing assessment of actual warranty expenses
incurred. Reserves for product warranties were $169,000, $169,000 and
$169,000 as of October 31, 1997, 1996 and 1995, respectively.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of
common shares and dilutive common share equivalents outstanding during each
period.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
USE OF ESTIMATES
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
financial statements, as well as revenues and expenses during the reporting
period. Actual results could differ from those estimates.
25
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
computed on a currently adjusted standard basis (which approximates average
cost) for both finished goods and work-in-process and includes material,
labor and manufacturing overhead costs. The cost of purchased parts is
determined on a first-in, first-out basis. Amounts shown are net of
reserves for obsolescence of $523,000 and $663,000 in 1997 and 1996,
respectively:
OCTOBER 31,
--------------------
1997 1996
--------- --------
Purchased parts and subassemblies $ 1,075 $ 4,040
Work-in-process 459 422
Finished goods 1,389 1,372
--------- --------
$ 2,923 $ 5,834
--------- --------
--------- --------
PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization are provided over the estimated useful
lives of the assets using both straight-line and accelerated methods.
Building 40 years
Production equipment 1-10 years
Office furniture 1-10 years
2. ACQUISITIONS AND DIVESTITURES:
KABIL ELECTRONICS COMPANY, LTD.
The Company owned a 35% interest in Kabil Electronics Company, Ltd. of
South Korea and the total investments were approximately $3.3 million.
Since Kabil continued to sustain losses from operations, the Company wrote
off its investments in fiscal 1990 and fiscal 1993. In December 1994, the
Company accepted an offer to sell its 35% interest in Kabil to the majority
owners for $1.5 million, less expenses, which was paid in installments over
the 1995 and 1996 fiscal years. Approximately $555,000 was received in
fiscal 1995. An additional $866,652 was received in January of 1996 and
had been accrued as income for the year ended October 31, 1995.
ADMOS TECHNOLOGIES INC.
During fiscal 1991, the Company acquired through its wholly owned
subsidiary, Silicon Logic, Inc., a 20% equity interest in a chip
engineering firm (AdMOS Technologies Inc.) in exchange for certain assets
and a nominal cash payment, the total value of which was $145,000. The
acquisition of this interest had been accounted for on the cost method.
This investment was written off in fiscal 1992 due to the continued
economic difficulties experienced by AdMOS.
In fiscal 1991 and 1992, the Company loaned AdMOS a total of $470,000,
which has been partially repaid. The outstanding balance at October 31,
1996 was $104,000. The repayment of a portion of this loan is personally
guaranteed by the President and controlling shareholders of AdMOS. Due to
the economic difficulties AdMOS is currently experiencing, the principal
and interest balances due on this note have been fully reserved.
In February 1995, the Company further loaned AdMOS $384,000 at an
interest rate of 10% per annum. Approximately $104,000 was repaid to the
Company in August 1995. In November 1995, the Company received another
$100,000 from AdMOS. The Company has fully reserved the unpaid balance of
$184,000 plus accrued interest as of October 31, 1997.
26
TLK, INC.
On November, 1996, the Company invested $150,000 in exchange for a 20%
ownership in TLK, Inc. for the China Power Plant projects in Lin Zhang,
Quin Yuan and Henan Provinces in China. The Company expects to have a
return on investment within the next twelve months. The investment is
accounted for using the cost method.
KORAM, INC.
On March 3, 1997, the Company deposited $224,820 in escrow in Korea
which amount is to be used to purchase a 50% ownership in a restaurant
venture in Seoul, Korea. The amount deposited has been written down to
$109,820 due to the devaluation of the Korean won.
APPLIED PHOTONICS TECHNOLOGY, INC.
On April 16, 1997, the Company entered into a Common Stock Purchase
agreement with Applied Photonics Technology, Inc. (APT), a California
corporation, whereby the Company purchased a 30 % interest in APT for $3.0
million.
Founded in October 1996, APT is a developmental stage enterprise
specializing in the development of electronics display technology. The
anticipated market for APT's outdoor media display system include the high
end of billboard and illuminated sign markets, sports stadiums and arenas,
transportation terminals, volume retailers and malls, and safety/public
information displays. APT has not recorded any sales to date. APT
estimates its first sales to commence towards the end of fiscal 1998.
The Company accounts for its investment in APT using the equity method
of accounting. The excess of the cost of the investment over the book
value of the 30% interest acquired totaled $2,054,366 and is being
amortized to operations over a 5 year period. For the year ended October
31, 1997, the Company recorded a loss from this investment of $623,097 of
which $233,079 represented amortization of the excess investment cost over
book value. Condensed audited financial information of APT follows:
Balance Sheet:
October 31, 1997
----------------
Current assets $ 1,632
Other assets 669
-------
$ 2,301
-------
-------
Liabilities $ 321
Common stock 3,626
Accumulated deficit (1,646)
-------
$ 2,301
-------
-------
Statement of operations
Operating expenses ($1,515)
Interest income 37
-------
Net loss ($1,478)
-------
-------
27
RUSSIAN JOINT VENTURES
In fiscal 1994, 1995 and 1996, the Company acquired interests in
various joint ventures, primarily in the Commonwealth of Independent
States. These investments are accounted for on the cost method.
THREE H
Three H Partners (owned equally by TeleVideo and a Russian entity) was
formed in fiscal 1991 and the initial investment was $16,000. In July
1996, the Company further invested $60,000 in the joint venture.
In February 1993, the Company loaned the Three H joint venture $1.0
million as working capital for the purpose of conducting short term
commodities trading. The loan was unsecured and bore interest at 20% per
annum. In fiscal 1994, a total amount of $800,000 was repaid to the
Company. The remaining balance of $200,000 was received in fiscal 1996.
INTERTERMINAL
In April 1994, the Company acquired a 51% ownership of the
"InterTerminal" joint venture in exchange for a $5,100 cash investment and
a commitment to fund a $3.65 million loan, 20% interest rate, interest free
for one year, to the venture. The main purpose of the joint venture was the
construction of a truck terminal (approximately 100,000 square feet)
approximately 25 miles outside of Moscow, and the construction was
completed in early 1995. TeleVideo sold its 51% ownership in May 1995.
The $3.65 million loan was repaid to the Company in fiscal 1995. An
additional $1,369,500 was received and recognized as a gain in fiscal 1996.
TELEVIDEO-RUS
In January 1996, TeleVideo set up a company called "TeleVideo-RUS" in
the Commonwealth of Independent States with an initial investment of
$150,000. The main purpose of this company is to act as a liaison between
TeleVideo and the authorities in the CIS.
In October 1997, the Company received $250,000 from the sale of
Televideo-RUS. The Company recognized a $100,000 profit during fiscal
1997.
3. LETTER OF CREDIT AGREEMENT:
The Company has two letter of credit agreements with the banks whereby
the banks will issue up to a total of $3.0 million of standby and sight
letters of credit. These agreements are contingent upon the Company
maintaining cash deposits at the banks as collateral in a total amount no
less than the outstanding borrowings. At October 31, 1997, the Company had
letters of credit outstanding of approximately $1.1 million which were
secured by cash deposits of $3.0 million. These deposits earn interest at
the rate of approximately 5.25% per annum.
28
4. RELATED PARTY TRANSACTIONS:
During 1997, 1996, and 1995 the Company has had transactions with its
affiliates as follows (in thousands):
1997 1996 1995
---- ---- ----
Note receivable at October 31:
AdMOS (1) $ 4 $104 $104
AdMOS (1) 180 180 280
Kabil -- -- 866
Three H Joint Venture -- -- 200
InterTerminal -- -- 213
Interest receivable at October 31:
AdMOS (1) 68 65 55
AdMOS (1) 60 42 24
Three H Joint Venture -- -- 62
(1) Amounts are fully reserved.
5. TRANSACTIONS WITH MAJOR CUSTOMER
The Company has entered into the following transactions with one of
its major customers, Applied Computer Technology, Inc., (ACT). Sales to
ACT for the year ended October 31, 1997 aggregated approximately $3,308,000
or 16.6% of net sales.
1) In June, 1997, the Company loaned ACT $2,300,000. Interest on the
loan accrues at 2% per month. All interest income accrued on the loan
is being deferred by the Company until the amounts are received. As
of October 31, 1997, the loan principal balance was $900,000. The
loan has since been paid down to $500,000. Management expects full
repayment of principal and accrued interest in March, 1998.
2) At October 31, 1997, ACT owed the Company approximately $2.1 million
in trade receivables, which represented approximately 41% of net trade
receivables. Subsequent to year end, the Company agreed to exchange
$900,000 of outstanding trade receivables for $900,000 of Series A
convertible preferred stock of ACT. The preferred shares are
convertible into common stock at the option of the holder, based on
the 5 day average closing bid price of ACT common stock prior to
conversion, subject to a floor of $2.50 per share and a ceiling of
$4.25 per share. ACT has the obligation to register the shares by
filing a registration statement with the Securities and Exchange
Commission and the preferred shares will be automatically converted
once the registration statement becomes effective.
The preferred shares were issued in December, 1997. As of October 31,
1997, the Company has reflected the $900,000 as a long term receivable and
has further provided a reserve of $292,500 against the $900,000 to reflect
the fair value of the preferred shares ultimately issued, taking into
consideration the lack of liquidity of the securities.
In summary, at October 31, 1997, the Company's balance sheet reflects net
assets of $2,704,000 from ACT, $1,196,000 in trade receivables, $900,000 in
current loans receivable and $608,000 in a net long term receivable
subsequently converted into preferred stock.
29
6. CAPITAL STOCK:
PREFERRED STOCK
The Company has authorized 3,000,000 shares of preferred stock. No
preferred stock has been issued to date.
STOCK OPTION PLANS
The Company has three stock option plans, the 1991 ISO Plan ("1991 ISO
Plan"), the 1981 ISO Plan ("1981 ISO Plan") and the 1981 Supplemental
Plan (the Supplemental Plan) accounted for under the APB Opinion 25 and
related interpretations. The 1991 ISO Plan provides for the granting of
incentive and non-statutory options to employees including officers and
directors who are employees for up to 4,000,000 shares. The options,
which have a term of ten years when issued, vest over five years. The
exercise price of each option equals to market price of the Company's
stock on the date of grant. Both the 1981 ISO Plan and the Supplemental
Plan expired in October 1991 and the exercise price for options granted
under those plans was re-priced at $0.22 per share in November 1991, the
market price of the Company's common stock at that date. Accordingly,
no compensation cost has been recognized for any of the plans. Had
compensation cost for the plans been determined based on the fair value
of the options at the grant dates consistent with the method of
Statement of Financial Accounting Standards 123, Accounting for
Stock-Based Compensation ("SFAS 123"), the Company's net loss and loss
per share would have been changed to the pro forma amounts indicated
below. Pro forma results for 1997 and 1996 may not be indicative of the
pro forma results in the future periods because the pro forma amounts
do not include pro forma compensation cost for options granted prior to
November 1, 1995.
October 31,
-----------
1997 1996
---- ----
Net loss (in thousands)
As reported ($3,294) ($2,917)
Pro forma ($3,394) ($2,979)
Loss per share
As reported ($0.07) ($0.06)
Pro forma ($0.07) ($0.06)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996 respectively: no expected
dividends; weighted average risk-free interest rate of 6.69% and 6.05%; and
expected lives of 10 years.
A summary of the status of the Company's stock option plans as of October
31, 1997, and changes during the three years ending October 31, 1997 is
presented below:
30
Options Outstanding
October 31, 1997
----------------
Outstanding Excercisable
----------------------------------- ----------------------
Wtd Avg. Wtd Avg. Wtd Avg.
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Cont. Life Price Exercisable Price
--------------- ----------- ---------- -------- ----------- --------
1991 ISO PLAN
$0.22 - $0.33 256,000 7.02 $ 0.25 165,125 $0.25
$0.38 - $0.50 296,250 7.73 $ 0.42 105,125 $0.42
$0.56 - $0.72 155,500 8.20 $ 0.58 23,375 $0.68
$0.88 - $1.03 137,000 7.47 $ 0.99 76,000 $0.98
Totals 844,750 7.56 $ 0.49 369,625 $0.48
------- ---- ------ ------- -----
------- ---- ------ ------- -----
1981 SUPPLEMENTAL PLAN
$0.22 150,000 4.06 $ 0.22 150,000 $0.22
1981 ISO PLAN
$0.22 5,000 4.06 $ 0.22 5,000 $0.22
Summary of Changes:
1981 ISO PLAN
Weighted
Average
Outstanding Exercise Price
----------- --------------
Balance, October 31, 1994 420,000 $ 0.22
Granted -- --
Exercised (379,125) $ 0.22
Canceled (19,250) $ 0.22
--------
Balance at October 31, 1995 21,625 $ 0.22
Granted -- --
Exercised (9,000) $ 0.22
Canceled -- --
--------
Balance at October 31, 1996 12,625 $ 0.22
Granted -- --
Exercised (3,375) $ 0.22
Canceled (4,250) $ 0.22
--------
Balance at October 31, 1997 $ 5,000 $ 0.22
--------
31
1981 SUPPLEMENTAL PLAN
Weighted
Average
Outstanding Exercise Price
----------- --------------
Balance, October 31, 1994 205,000 $ 0.21
Exercised (5,000) $ 0.19
Canceled (50,000) $ 0.22
--------
Balance at October 31, 1995 150,000 $ 0.22
Exercised -- --
Canceled -- --
--------
Balance at October 31, 1996 150,000 $ 0.22
Exercised -- --
Canceled -- --
--------
Balance at October 31, 1997 150,000 $ 0.22
--------
1991 ISO PLAN
Weighted
Average
Available Outstanding Exercise Price
---------- ----------- --------------
Balance, October 31, 1994 2,903,500 1,096,500 $ 0.38
Granted (1,823,500) 1,823,500 $ 0.65
Exercised -- (123,000) $ 0.44
Terminated/Canceled 133,875 (133,875) $ 0.41
---------- -----------
Balance at October 31, 1995 1,213,875 2,663,125 $ 0.56
Granted (829,000) 829,000 $ 0.62
Exercised -- (245,125) $ 0.31
Terminated/Canceled 1,916,000 (1,916,000) $ 0.65
---------- -----------
Balance at October 31, 1996 2,300,875 1,331,000 $ 0.52
Granted (49,000) 49,000 $ 0.31
Exercised -- (94,750) $ 0.39
Terminated/Canceled 440,500 (440,500) $ 0.55
---------- -----------
Balance at October 31, 1997 2,692,375 844,750 $ 0.49
---------- -----------
---------- -----------
7. INCOME TAXES:
At October 31, 1997, the Company had tax loss carry forwards of
approximately $89 million for federal income tax and approximately $27
million for state income tax reporting purposes, respectively. The net
operating loss carry forwards expire through fiscal 2011. The Tax Reform
Act of 1986 contains provisions which may limit the net operating loss
carry forwards to be used in any given year upon occurrence of certain
events, including significant changes in ownership interests.
The Company adopted, effective November 1, 1993, Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes," issued in February 1992. Under the liability method specified by
SFAS 109, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense is the result of
changes in deferred tax assets and liabilities.
32
No deferred tax asset or benefit was recorded at October 31, 1997, as
all amounts have been fully reserved. The components are as follows: (in
thousands). The valuation allowance decreased by $2,977 in fiscal 1997 and
increased by $6,780 in fiscal 1996.
1997 1996
------- -------
Net operating loss $ 31,844 $ 34,500
Other 829 1,150
-------- --------
32,673 35,650
Less valuation allowance (32,673) (35,650)
-------- --------
Net benefit $ -- $ --
-------- --------
-------- --------
The following is a reconciliation of expected tax expense (benefit) to
actual for each of the three years ended October 31 (in thousands):
1997 1996 1995
------- ------- ----
Book income (loss) $(3,294) $(2,917) $415
------- ------- ----
Expected tax expense (benefit) (1,120) (1,160) 167
Adjustments to reconcile expected to actual
expense (benefit):
Effect of change in valuation allowance (net) 1,120 1,160 (167)
------- ------- ----
Actual tax expense (benefit) $ -- $ -- $ --
------- ------- ----
------- ------- ----
The Company has been in various stages of federal and state income and
sales tax audits for the past several years. The federal income tax audit
for the taxable years of 1982 through 1985 were finalized in fiscal 1994.
The total tax liability, plus interest and penalty, aggregated $1.53
million, and the total payment was made by the Company in November 1993.
The California Sales and Use Tax audit for the period of April 1990 through
June 1994 was also finalized. In fiscal 1995, tax payments including
penalty and interest of approximately $270,000 were made, all of which had
been accrued by the Company in prior years.
As of October 31, 1997, the only issue pending is California Franchise
Tax exposure resulting from the previous Federal Income Tax audits. The
Company believes that a resolution of this audit could occur in fiscal 1998
and its maximum exposure will not exceed $350,000. The Company has accrued
this full amount at October 31, 1997.
8. LITIGATION AND OTHER:
The Company has been named, along with dozens of other manufacturers,
designers, and distributors of computer equipment, as a defendant in
several lawsuits regarding product liability in connection with the alleged
defective design of computer terminal keyboards and the size of the
computer monitor screens. The first issue alleges that the various
plaintiffs have suffered some form of severe wrist injury from the use of
said keyboards. The second issue alleges that there was false advertising
which claimed that the video screens were 17 inches in size, when in
reality they were only 15 inches. The Company's attorneys have prepared a
defense for these cases and the Company's insurance carriers are informed
of the plaintiff's claims. The Company intends to vigorously defend
against the allegations of these suits. Management believes that the
ultimate outcome of these lawsuits will not have a material adverse effect
on the Company's financial position.
33
9. SEGMENT INFORMATION:
The Company, which operates in a single industry segment, designs,
produces and markets video display terminals, computer monitors and
multimedia products designed for office and home automation both
domestically and internationally. The Company had export sales primarily
to Europe, Asia and Latin America of approximately $2.7 million, $3.4
million and $4.1 million during fiscal 1997, 1996, and 1995, respectively.
For the fiscal year ended October 31, 1997, one customer accounted for
16.6% and another customer accounted for 16.1% of net sales. For the
fiscal year ended October 31, 1996, one customer accounted for 10.2% and
another customer accounted for 8.8% of net sales. For the fiscal year
ended October 31, 1995, one customer accounted for 6.6% and another
customer accounted for 6.0% of net sales.
10. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS:
The Company recorded the following significant adjustments in the
fourth quarter of fiscal 1997: (in thousands)
Effect on Net Income
Increase (Decrease)
--------------------
Reserve for obsolete inventory $ (260)
Loss from investment in subsidiary (623)
---------
$ (883)
---------
---------
The above adjustments affected the fourth quarter results of
operations as follows: increased cost of goods sold by $260, increased
loss in investments on unconsolidated subsidiaries by $623, for a total
increase in net loss from operations of $883.
11. NOTE RECEIVABLE:
The $5.0 million note receivable from the sale of the Company's former
headquarters was collateralized by a first deed of trust on the building.
The interest was payable monthly at 9.5% per annum and the principal was
paid in full on December 12, 1996.
12. ACCRUED LIABILITIES:
Accrued liabilities consist of the following at October 31: (In
thousands)
1997 1996
----- -----
Employee compensation and benefits $ 212 $ 288
Warranty 169 169
Legal reserve 200 200
Accrued sales and use tax 0 11
Professional fees 57 81
Other 92 106
----- -----
$ 730 $ 855
----- -----
----- -----
34
13. VALUATION AND QUALIFYING ACCOUNTS:
The Company's reserves for doubtful accounts and inventory obsolescence
consist of the following:
(In thousands)
Charged
Balance at (Credited) Balance at
Beginning to Costs & End of
of Period Expense Deductions Period
---------- ---------- ---------- ----------
YEAR ENDED OCTOBER 31, 1995
Reserve for doubtful accounts $ 530 $ 383 $ (72)(1) $ 841
Reserve for inventory obsolescence $ 762 $ 610 $(759)(2) $ 613
YEAR ENDED OCTOBER 31, 1996:
Reserve for doubtful accounts $ 841 $ 760 $(321)(1) $1,280
Reserve for inventory obsolescence $ 613 $ 918 $(868)(2) $ 663
YEAR ENDED OCTOBER 31, 1997:
Reserve for doubtful accounts $1,280 $ 292 $(529)(1) $1,043
Reserve for inventory obsolescence $ 663 $ 379 $(519)(2) $ 523
(1) Deductions represent write-offs of fully reserved receivable.
(2) Reductions due to sales or scrap of fully reserved inventory.
14. CHANGES IN ACCOUNTING POLICIES
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" ("SFAS 128"). SFAS 128 simplifies the standards for
computing earnings per share and is effective for financial statements for
both interim and annual periods ending after December 15, 1997. Earlier
application is not permitted. The adoption of SFAS 128 is not expected to
have a material impact on the Company's previously reported loss per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in the financial
statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The adoption of
SFAS No. 130 will have no impact on the Company's consolidated results of
operations, financial position or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for
financial statements for fiscal years beginning after December 15, 1997.
Financial statement disclosures for prior periods are required to be
restated. The adoption of SFAS No. 131 will have no impact on the Company's
consolidated results of operations, financial position or cash flows.
35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and executive officers of the Company as of January 26, 1997,
are as follows:
Name Age Title
--------------- ---- -----------------------------------------------
K. Philip Hwang 61 Chairman of the Board and Chief Executive
Officer
Ken Ho Chong 56 Vice President and Chief Financial Officer
Kristine Kim 33 Vice President of Sales
Anthony Thia 31 Vice President of Marketing
Robert E. Larson 59 Director
Stephen S. Kahng 48 Director
Dr. K. Philip Hwang is the founder of the Company and has been Chairman
of the Board and Chief Executive Officer since October 1976. From August 8,
1990 to April 6, 1991, he served as the Acting Chief Financial Officer.
Since 1992, Dr. Hwang has also served as Chairman of AdMOS (Advanced MOS
Systems), an engineering firm specializing in ASIC chip design. ADMOS is a
private corporation in which TeleVideo holds a 20% interest.
Mr. Ken Ho Chong has more than 12 years of executive level experience at
companies in a variety of industries. He was most recently president of
Enviroflex, Inc., an engineering and manufacturing company in Anaheim, CA.
He previously was vice president and CFO of Binggrae Company Ltd., a publicly
held $500 million food processing company based in Korea, and past president
of Union Foods of Costa Mesa, CA.
Ms. Kristine Kim has been serving TeleVideo since January 1988 and has
successfully managed various Sales and Marketing Departments. She was
promoted to Vice President of Sales and was elected as a member of the Board
in February 1996. In May 1992, she achieved her MBA degree in International
Corporate Management and Professional Export Management at Golden Gate
University of California. Ms. Kim also has a BA degree in Economics and
International Relations from UC Davis.
36
Mr. Anthony Thia joined TeleVideo as VP of Marketing in August 1996.
Prior to coming to TeleVideo, Mr. Thia was the Director of Marketing at ASI
(Asia Source Inc.), a national PC distributor headquartered in California,
from 1994 to 1996. From 1990 to 1994, Mr. Thia was the Sales and Marketing
Manager at ASI. Mr. Thia holds a B.S. in Computer Science from Iowa State
University.
Dr. Robert E. Larson joined the Company as a member of the Board of
Directors effective December 1, 1989. Since September 1983, he has served as
General Partner of Woodside Fund, a venture capital fund, and since September
1985, he has been a member of the Board of Directors of Skye Investment
Advisers, a registered investment advisor firm. Since 1973, Dr. Larson has
been a Consulting Professor in the Engineering-Economic Systems Department at
Stanford University.
Mr. Stephen S. Kahng joined the Company as a member of the Board of
Directors effective November 28, 1994. Since November 1993, Mr. Kahng has
been the President and Chief Executive Officer of Power Computing Corporation
which manufactures Power PC-based workstations. From December 1991 to
November 1993, he served as the President of Up To Date Technology, Inc.
which is a system design consulting company to the personal computer
industry. Prior thereto, from September 1987 until December 1991, Mr. Kahng
was the Senior Vice President and General Manager of Chips and Technologies,
Inc. which was a supplier of ASICs to the personal computer industry.
There are no family relationships among any of the Company's officers
and directors.
The following items included in the Company's Definitive Proxy Statement
dated February 17, 1997 to be used in connection with the Company's Annual
Meeting of Stockholders to be held on March 24, 1997 are incorporated herein
by reference:
Pages in
Proxy Statement
---------------
ITEM 11. EXECUTIVE COMPENSATION 8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 5
AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 10
(The remainder of this page was left blank intentionally.)
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report.
1. FINANCIAL STATEMENTS.
The Consolidated Financial Statements, Notes thereto and the Report of
Grant Thornton LLP, Independent Public Accountants, thereon are included in Part
II of this Report on Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES.
All schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule, or because
the information required is included in the accompanying Consolidated Financial
Statements.
3. EXHIBITS. See Exhibit Index, below.
(b) Reports on Form 8-K. NONE
(The remainder of this page was left blank intentionally.)
38
EXHIBIT INDEX
EXHIBIT
NUMBER FOOTNOTE
3.1 Restated Certificate of Incorporation of the Company...........(1)
3.2 Bylaws of the Company..........................................(1)
10.1 TeleVideo, Inc. 1991 Incentive Stock Option Plan...............(2)
10.2 Form of Stock Option Agreement for TeleVideo, Inc.
1991 Incentive Stock Option Plan...............................(2)
10.3 Televideo, Inc. 1992 Outside Directors' Stock Option Plan......(2)
10.4 Management Bonus Plan effective fiscal 1984....................(3)
10.5 Form Distributor and Licensing Agreement.......................(2)
10.6 Form Original Equipment Manufacturer Agreement.................(2)
10.8 Three H Promissory Notes.......................................(4)
10.9 InterTerminal Agreements and Promissory Notes..................(5)
21.0 Subsidiaries
23.1 Consent of Grant Thornton LLP, Independent Certified Public
Accountants
27.0 Financial Data Schedule
______________________________________
FOOTNOTES TO EXHIBIT INDEX
(1) Incorporated by reference from the corresponding exhibit description
in the Company's annual report on Form 10-K for the fiscal year ended
October 31, 1987, filed January 29, 1988.
(2) Incorporated by reference from the corresponding exhibit description
in the Company's annual report on Form 10-K for the fiscal year ended
October 31, 1991, filed January 27, 1992.
(3) Incorporated by reference from the corresponding exhibit description
in the Company's annual reports on Form 10-K, filed January 29, 1985
and January 28, 1986, respectively.
(4) Incorporated by reference from the corresponding exhibit description
in the Company's annual report on Form 10-K for the fiscal year ended
October 31, 1993, filed February 10, 1994.
(5) Incorporated by reference from the corresponding exhibit description
in the Company's annual report on Form 10-K for the fiscal year ended
October 31, 1994, filed February 10, 1995.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TELEVIDEO, INC.
-------------------------------
(REGISTRANT)
DATE: FEBRUARY 9, 1998 BY: /s/ KEN HO CHONG
-------------------------------
KEN HO CHONG
VICE PRESIDENT & CFO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the dates indicated.
SIGNATURE TITLE DATE
------------------------ --------------------- --------------------
/s/ K. PHILIP HWANG CHAIRMAN OF THE BOARD FEBRUARY 9, 1998
- ---------------------- AND CHIEF EXECUTIVE
K. Philip Hwang OFFICER
/s/ KEN HO CHONG VICE PRESIDENT AND CHIEF FEBRUARY 9, 1998
- ---------------------- FINANCIAL OFFICER
K. David Kim
/s/ KRISTINE KIM VICE PRESIDENT OF SALES FEBRUARY 9, 1998
- ----------------------
Kristine Kim
/s/ ROBERT E. LARSON DIRECTOR FEBRUARY 9, 1998
- ----------------------
Robert E. Larson
/s/ STEPHEN S. KAHNG DIRECTOR FEBRUARY 9, 1998
- ----------------------
Stephen S. Kahng
40