UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------ 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ________________ TO _________________ COMMISSION FILE NUMBER: 0-11552 TELEVIDEO, INC. -------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2383795 ------------------------------- ------------------- (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2345 HARRIS WAY, SAN JOSE, CALIFORNIA 95131 ------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 954-8333 --------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE --------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.01 PAR VALUE ----------------------------- (TITLE OF CLASS) ------------------ 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 NO X --- --- THE APPROXIMATE AGGREGATE MARKET VALUE OF REGISTRANT'S COMMON STOCK HELD BY NON-AFFILIATES ON JANUARY 12, 2000 (BASED UPON THE CLOSING SALES PRICE OF SUCH STOCK AS REPORTED IN THE OVER THE COUNTER MARKET AS OF SUCH DATE) WAS $5,948,750. AS OF JANUARY 12, 2000, 11,271,085 SHARES OF REGISTRANT'S COMMON STOCK WERE OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the Registrant's Definitive Proxy Statement to be used in connection with Registrant's Annual Meeting of Stockholders to be held on April 18, 2000 have been incorporated by reference into Part III of this Annual 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. [ ] 1 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K for the fiscal year ended October 31, 1999 includes 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 Annual Report 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 kinds of statements are signified by words such as "believes," "anticipates," "expects," "intends," "may," "will" and other similar expressions. However, these words are not the exclusive means of identifying such 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. 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. (Remainder of this page was intentionally left blank) 2 INTRODUCTORY 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 performance terminal and network computer products to the business and consumer markets. The Company markets its products worldwide primarily through distributors, value-added resellers ("VARs"), systems integrators and original equipment manufacturers ("OEMs"). The Company first became a leader in the video display terminal industry by introducing a new generation of "smart" terminals based on the Intel microprocessor at a time when dumb terminals were the industry standard. TeleVideo holds a number of proprietary terminal emulations, including the TV910 and TV9425, which have been an industry standard for more than 15 years and are currently used in millions of terminals worldwide. Today, TeleVideo is utilizing its expertise in server-based network computing to forge new ground in delivering thin-client solutions. TeleVideo operates in one industry segment. PRODUCTS TeleCLIENT Family TeleVideo's TeleCLIENT products consist of a family of thin-client Windows-based terminals. The TC7000 is a stand alone design that can be connected to a variety of monitors to meet specific needs. The TC7150 and TC7170 are integrated units with 15 and 17 inch color CRT monitors, respectively. The TeleCLIENT TC7300 Series is a fully-integrated Windows-based thin-client with a built-in high resolution TFT LCD screen. Bundled as an all-in-one design, the TC7300 Series is designed for use in limited workspaces. The TeleCLIENT family of products is designed for use in the healthcare, government, education, retail and other task-oriented client/server based computing environments. TeleVideo's thin-clients are accelerated by a Pentium-class 233MHz microprocessor. TeleCLIENT thin-clients are powered by Windows CE, enabling fast and easy access to business-critical applications. The TeleCLIENT family of products also provides flexibility to choose the Remote Desktop Protocol that executes either the Windows NT 4.0 Terminal Server Edition, or the Citrix ICA protocol through Citrix MetaFrame or WinFrame. Windows CE gives the TC7000, TC7150, TC7170 and the TC7300 Series server-side access to popular Windows-based business applications such as the Microsoft Office suite and Java, as well as the Internet. Video Display Terminals 3 The 990 is a general purpose terminal with ASCII, ANSI and PC TERM operating modes. For maximum versatility and flexibility, the terminal is compatible with a wide variety of keyboard styles and allows users to interface to a bar code scanner, wand reader, credit card reader, electronic scale or other specialized keyboards for point-of-sale or point-of-transaction processing. The TeleVideo 995-65 14-inch monochrome 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. iTelePC Televideo's iTelePC iT2000 is an "internet appliance," a new and relatively low-cost PC designed for Internet access and specialized business use, but without the full capabilities of a personal computer. The iT2000 comes integrated with a 15-inch monitor that brings the Internet to the household or business in a small, easy-to-use design. Powered by Microsoft Windows CE, the 233 MHz iT2000 comes with no set-up required. PRODUCT DEVELOPMENT TeleVideo serves markets that are characterized by rapid technological change and the Company has continuous ongoing programs to develop new products. Although the Company's research and development staff consists of 10 employees as of January 12, 2000, various joint projects of the Company are supported by engineers from participating companies. During fiscal 1999, TeleVideo spent approximately $0.6 million on Company-sponsored research and development. Company-sponsored research and development expenses for fiscal 1998 and 1997 were approximately $0.4 million and $0.8 million, respectively. The Company did not engage in any customer-sponsored research and development program during such years. Because of the fast pace of technological advances, 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, including its iTelePC and TeleCLIENT family of products, that respond to the rapid changes in the marketplace. SALES, MARKETING AND CUSTOMERS North American sales are handled from TeleVideo sales offices located in San Jose, California; Lake Forest, California; Wharton, New Jersey; Hoffman Estates, Illinois; Gainsville, Georgia; and Dallas, Texas. 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 office in San Jose, California through distributors, OEMs and international representatives. The Company also appointed an agent in the United Kingdom in fiscal 1999 to manage existing customer relationships and to build new ones throughout Europe. TeleVideo distributors generally do not have exclusive geographic territories. Distributor contracts can generally be terminated by either party without cause upon advanced written notice of 30 days or 60 days. TeleVideo's distributors typically handle a variety of computer-related products, including products competitive with those of TeleVideo. The typical distribution 4 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, continues to work closely with its distributors, mass merchants, retail stores, VARs, systems integrators and original OEMs. TeleVideo's marketing staff also provides the customers with training, sales and promotional materials, cooperative advertising programs, trade show participation and sales leads. The marketing organization also leads the product marketing role giving direction to product management and competitive positioning. The Company spent approximately 9% ($0.7 million), 7% ($1.1 million) and 7% ($1.3 million) of its net revenues on advertising in fiscal 1999, 1998 and 1997, 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. 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." For the fiscal year ended October 31, 1999, TeleVideo's largest customer (Savior, Inc.) accounted for 10% of the Company's sales, while another customer accounted for 9%. TeleVideo's sales terms are primarily cash in advance or upon delivery, or on credit terms that are typically net 30 or net 45 days. INTERNATIONAL SALES The Company had export sales (primarily to Europe, Asia and Latin America) of approximately $1.6 million in fiscal 1999 (representing 19.8% of total net sales), $2.1 million in fiscal 1998 (14.2% of total sales) and $2.7 million in fiscal 1997 (13.6% of total net sales). In fiscal 1999, the Company appointed an agent in the United Kingdom to manage existing customer relationships and to build new ones throughout Europe. The Company is evaluating the feasibility of establishing a fully equipped TeleVideo presence in Europe but has made no commitments in this regard. 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 generally 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 TELEVIDEO-RUS In January 1996, TeleVideo established a company called "TeleVideo-RUS" in the Commonwealth of Independent States with an initial investment of $150,000. In fiscal 1997, the Company sold this investment for $250,000 and recognized a profit of $100,000. THREE H 5 Three H Partners, owned equally by TeleVideo and a Russian entity, was formed in fiscal 1991. The Company invested a total of $76,000 into Three H. The Company wrote off this investment in fiscal year 1996. 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 wrote off this investment in fiscal year 1997. KORAM, INC. On March 3, 1997, the Company deposited $224,820 in escrow in Korea, which amount was 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. The Company accounts for this investment on the equity basis of accounting. 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 substantially all of the manufacture of its products to manufacturers in Taiwan, The People's Republic of China and South Korea. 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. The Company generally uses standard parts and components for its products, although certain components are presently available and secured only from a single source. The Company's largest supplier accounted for approximately 61% (approximately $3.2 million) of net purchases in fiscal 1999. Loss of this supplier 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 significant difficulties or delays in production of its terminal 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 6 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. 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 19, 1999, the Company's full-time employees totaled 43, as compared with 41 reported at the end of fiscal 1998. Of the total number of employees, 20 are engaged in product research, engineering, development and manufacturing; 14 in marketing and sales; and 9 in general management and administration. 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 was owned by the Company. On December 28, 1998, the Company sold the building and has leased it back. The aggregate monthly lease amounts to $104,000. Please refer to Note 6 of the financial statements ("Sale and Leaseback of Building") for additional details. The lease expires on December 31, 2013. The Company leases domestic sales offices in Hoffman Estates, Illinois; Lake Forest, California; Wharton, New Jersey; Gainsville, Georgia; and Dallas, Texas. The lease terms range from month-to-month tenancy to a term of three years. Management believes that the Company would be able to secure an extension to the leases if such an extensions are deemed necessary in the future. All of the leases are operating leases. 7 ITEM 3. LEGAL AND OTHER PROCEEDINGS TAX AUDITS On July 14, 1997, the State of Massachusetts issued to the Company a certificate of withdrawal to do business in the state. Consequently, $250,000 was removed from deferred taxes and was recognized as other income. OTHER LEGAL PROCEEDINGS None 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 1999. EXECUTIVE OFFICERS The following sets forth certain information with regard to executive officers of TeleVideo (ages are as of January 19, 2000): Executive Officer Age Position - ----------------- --- -------- Dr. K. Philip Hwang 64 Chairman of the Board and Chief Executive Officer TeleVideo, Inc. Jun Keun Yum 48 Vice President of Operations, Chief Technology Officer and Director of TeleVideo, Inc. James D. Wheat 42 Vice President of Finance and Chief Financial Officer TeleVideo, Inc. Joseph Burroughs 61 Vice President of Worldwide Sales TeleVideo, Inc. - ---------------- Dr. K. Philip Hwang, age 64, is the founder of the Company and has been Chairman of the Board and Chief Executive Officer since October 1976. From August 1990 to April 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. Jun Keun Yum, age 48, joined TeleVideo in January 1999 as Vice President of Operations and Chief Technology Officer. Prior to that, Mr. Yum was a General Manager and Executive Director of Samsung Electronics Co., Ltd., Seoul, Korea from January 1993 to December 1998. Previously from October 1986 to December 1992, he was co-founder and President of Pixelab, Inc. of Lisle, Illinois. Mr. Yum has a BS degree in Electrical Engineering from Han Yang University of Seoul, Korea and an MS degree in Electrical Engineering from Illinois Institute of Technology. James D. Wheat, age 42, joined TeleVideo in March 1999 as Vice President of Finance and Chief Financial Officer. Prior thereto, from November 1997 to February 1999, Mr. Wheat served as Vice President and Corporate Controller of Sunterra, a public timeshare company. From 1991 to November 1997, Mr. Wheat served as internal auditor, division controller and external reporting manager of Raychem Corporation, a materials manufacturing company. Mr. Wheat is a Certified Public Accountant, Certified Management Accountant, Certified Internal Auditor and is a licensed real estate broker in California. He received a B.B.A. degree from the University of Michigan and an M.B.A. degree from The Wharton School of Business at the University of Pennsylvania. Joseph Burroughs, age 61, joined TeleVideo in July 1999 as Vice President of Worldwide Sales. Prior to joining TeleVideo, beginning in January 1997, Mr. Burroughs was President of B&A Channel Consultants, San Ramon, California, a consulting company owned by Mr. Burroughs. From February 1997 to October 1998, he served as channel manager with Meridian Data, Inc., Scotts Valley, California, a networking storage company. From August 1995 to September 1996, Mr. Burroughs served as Channel Marketing and Sales Director for SBE, San Ramon, California, a networking products company. From July 1993 to August 1995, Mr. Burroughs served as Channel Marketing Manager for Networth, Inc., Irving, Texas, a networking products company. Mr. Burroughs received a B.S. in marketing from the Rochester Institute of Technology. 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 quoted on the NASD electronic bulletin board under the symbol "TELV". The following table sets forth for the periods indicated the high and low last sales prices for the Common Stock. The prices quoted below reflect inter-dealer prices, without retail mark-ups, markdowns or commissions and may not necessarily represent actual transactions. High Low -------- ------- FISCAL 1998: First Quarter $3.3750 $1.7500 Second Quarter 3.1250 1.3750 Third Quarter 2.0625 0.9688 Fourth Quarter 1.0313 0.7188 FISCAL 1999: 8 First Quarter $1.0000 $0.6250 Second Quarter 1.0938 0.3750 Third Quarter 1.0312 0.3750 Fourth Quarter 0.8125 0.5625 There were 746 holders of record of the Company's Common Stock at January 12, 2000. On January 12, 2000, the closing price of the Company's Common Stock in the over-the-counter market, was $1.4375 per share. 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. (The remainder of this page was left blank intentionally.) ITEM 6. SELECTED FINANCIAL DATA The following selected financial data reflect 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, --------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- --------- -------- STATEMENT OF OPERATIONS DATA: Net sales $ 8,070 $14,751 $19,884 $21,576 $16,914 Income (loss) from continuing operations (4,570) (4,727) (3,115) (4,638) (4,741) Net (loss) income (3,707) (8,881)(1) (3,444)(2) (2,993)(3) 415(4) Net (loss) income (per share), Basic and diluted (0.33) (0.79) (0.31) (0.26) 0.04 BALANCE SHEET DATA: Cash and cash equivalents $ 4,487 $ 1,640 $ 3,604 $ 4,496 $5,145 Working capital 5,596 2,533 9,208 13,239 13,035 Total assets 18,317 10,433 17,692 23,014 24,600 Stockholders' equity 2,504 6,211 15,062 18,468 21,435 See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the accompanying Notes to Consolidated Financial Statements for a discussion of operating results, liquidity needs and acquisitions and dispositions during the periods. (1) Includes net loss from investment in APT venture of $4,076,903. 9 (2) 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) (E) Loss from write-off of TLK (150) ----- $ (538) ------ ------ (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) 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 ------ ------ ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company continues to focus its efforts toward providing high-performance Windows-based terminals to the business and consumer markets. In recent years, the Company has phased out the sale of multimedia products and monitors to focus on utilizing its expertise in server-based network computing to forge new ground in delivering thin-client solutions. In November 1998, the Company launched its Windows-based terminal products. The Company has strengthened its sales organization in fiscal 1999 to provide more efficient geographical coverage and market penetration for its thin-client products. The Company faces strong competition in the marketplace and continues to look for ways to improve operating efficiency. In order to lower the production costs, the Company has continued to negotiate with its suppliers and has also shifted many production processes overseas. RESULTS OF OPERATIONS FISCAL 1999 COMPARED TO FISCAL 1998 Net sales for fiscal year 1999 were approximately $8.1 million, compared with $14.8 million in fiscal 1998, a decrease of $6.7 million, or 45%. The decrease in net sales reflects the Company's continued shift away from the sale of monitors and multimedia products. In fiscal 1999, monitor and multimedia sales totaled $1.0 million as compared with fiscal 1998, when sales 10 of monitors and multimedia products totaled $6.3 million. Sales of terminals decreased in fiscal 1999 to $6.0 million from $7.5 million in fiscal 1998. Cost of sales for fiscal year 1999 was approximately $8.1 million, compared with $13.4 million in fiscal 1998, a decrease of $5.3 million, or 40%. However, cost of sales as a percentage of net sales increased from 90.7% in 1998 to 100.1% in 1999. The increase in cost of sales as a percentage of sales in 1999 is due in part to royalty payments that the Company began making in fiscal 1999 under a licensing agreement for the operating system software used in the Company's TeleCLIENT products, which the Company began selling in fiscal 1999. For accounting purposes, the royalty expense is being amortized on a straight line basis over the life of the licensing agreement which results in a larger proportion of expense, relative to sales, during the initial months when the TeleCLIENT product is being introduced into the marketplace. The Company also recorded a provision for obsolescence in the fourth quarter of fiscal 1999 for multimedia products and monitors, which the Company is in the process of phasing out. Sales and marketing expenses for fiscal year 1999 were approximately $2.2 million, compared with $2.4 million in fiscal 1998, a decrease of $0.2 million, or 8%. As a percentage of net sales, sales and marketing expenses increased to 27% in fiscal 1999 from 16% in fiscal 1998. The increase primarily represents costs incurred by the Company to launch its TeleCLIENT product line in fiscal 1999. Research and development expenses were $0.6 million in fiscal 1999, compared with $0.4 million in fiscal 1998. As a percentage of net sales, research and development expenses increased to 7% in fiscal 1999 compared with 3% in fiscal 1998. The increase represents increased costs associated with the continued development of new products, including the Company's TeleCLIENT product line. General and administrative expenses were $1.8 million in fiscal 1999, compared with $3.3 million in fiscal 1998, a decrease of $1.5 million or 45%. As a percentage of net sales, general and administrative expenses were 22% in fiscal 1999 and 1998. In fiscal 1999, the Company began incurring lease expenses in accordance with the sale and leaseback of the Company's headquarters facility. Additional details about the sale and leaseback transaction can be found in "Liquidity and Capital Resources" and in Note 6 to the financial statements, "Sale and Leaseback of Building." In fiscal 1998, the Company incurred a charge of approximately $2.0 million to reflect a write-off of its accounts and notes receivable from Applied Computer Technology, Inc. The Company's loss from operations was approximately $4.6 million in fiscal 1999 as compared with $4.7 million in fiscal 1998. Interest income, net of interest expense, was $30,000 in fiscal 1999, as compared with $77,000 in fiscal 1998. Other income was $0.5 million in fiscal 1999 as compared with none in fiscal 1998. Other income represents primarily the amortization of the deferred gain on the December 1998 sale of the Company's building. The net loss for fiscal year 1999 was approximately $3.7 million, compared with a net loss of $8.9 million in fiscal 1998, a decrease of $5.2 million, or 58%. In fiscal 1998, the Company recorded a loss of approximately $4.1 million from its equity investment in Applied Photonics Technology, Inc. Net loss per share in fiscal 1999 was $0.33 based on 11,271,085 weighted average shares outstanding, compared to a net loss per share in fiscal 1998 of $0.79 based on 11,267,685 weighted average shares outstanding. 11 An income tax credit of 0.4 million was recorded in fiscal 1999 as the Company reduced its tax liability originally set up for various tax exposure. The Company has approximately $102 million in federal net operating loss and credit carryovers and approximately $34 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 1998 COMPARED TO FISCAL 1997 Net sales for fiscal year 1998 were approximately $14.8 million, compared with $19.9 million in fiscal 1997, a decrease of $5.1 million, or 26%. The decrease in net sales reflects the decrease in the sale of multimedia products, which the Company is gradually phasing out, from approximately $6.5 million in 1997 to approximately $1.9 million in 1998, a decrease of 71%. Additionally, there were decreases in the sales of OMTI boards, spares, repairs and miscellaneous products from approximately $2.3 million in 1997 to $1.2 million in 1998, or 48%. Sales of OMTI boards have decreased as demand from customers has shifted toward newer technologies. Sales of spares, repairs and miscellaneous products decreased in 1998 as price decreases made it more cost effective for customers to replace, rather than to repair, their related equipment. However, net sales of monitors increased from $3.5 million in 1997 to $4.4 million in 1998, an increase of 26%, to partially offset the decrease in net sales of multimedia and other products. Cost of sales for fiscal year 1998 were approximately $13.4 million, compared with $17.8 million in fiscal 1997, a decrease of $4.4 million, or 25%. Cost of sales as a percentage of net sales increased from 89.5% in 1997 to 90.7% in 1998, due primarily to lower profit margins on sales of both multimedia products and monitors. During 1998, the Company phased out its multimedia product lines and sold most of its multimedia inventory at below average gross margins to reduce its excess stock. The Company's net inventory level decreased by 21% in 1998, to $2.3 million, from $2.9 million at October 31, 1997. The Company also experienced competitive pricing pressure on the sale of monitors, leading to lower gross margins in fiscal 1998 as compared with fiscal 1997. Manufacturing expenses (which are included in cost of sales) decreased from approximately $1.3 million in fiscal 1997 to approximately $1.1 million in fiscal 1998, a decrease of $0.2 million or 15%. The decrease was mainly due to the decrease in number of employees from 27 in 1997 to 17 in 1998. Sales and marketing expenses for fiscal year 1998 were approximately $2.4 million, compared with $3.0 million in fiscal 1997, a decrease of $0.6 million, or 20%. As a percentage of net sales, sales and marketing expenses increased slightly to 16% in fiscal 1998 from 15% in fiscal 1997. The decrease in actual expenses was primarily due to a decrease in employee headcount in the sales and marketing departments and a reduction in advertising expenses. Research and development expenses were $0.4 million in fiscal 1998, compared with $0.8 million in fiscal 1997. As a percentage of net sales, research and development expenses decreased to 3% in fiscal 1998 compared with 4% in fiscal 1997. The decrease was due mainly to a reduction in engineering headcount in fiscal 1998. General and administrative expenses were $3.3 million in fiscal 1998, compared with $1.5 million in fiscal 1997, an increase of $1.8 million or 120%. As a percentage of net sales, general and administrative expenses increased to 22% in fiscal 1998 compared with 7% in fiscal 1997. The increase was due primarily to the increase in bad debts from approximately $293,000 in fiscal 1997 to approximately $2.3 million in 1998. This increase reflected the Company's write-off of its accounts and notes receivable balance from Applied Computer Technology, Inc., of approximately $2.0 million in fiscal 1998. 12 The Company's loss from operations was approximately $4.7 million in fiscal 1998 as compared with $3.1 million in fiscal 1997. The increase was primarily due to the increase in general and administrative expenses resulting from the increase in bad debt expense, and the decrease in net sales from $19.9 million in fiscal 1997 to $14.8 million in fiscal 1998. The net loss for fiscal year 1998 was approximately $8.9 million, compared with a net loss of $3.4 million in fiscal 1997, an increase of $4.5 million, or 55%. In fiscal 1998, the Company recorded a loss of approximately $4.1 million from its equity investment in Applied Photonics Technology, Inc. Net loss per share in fiscal 1998 was $0.79 based on 11,267,685 weighted average shares outstanding, compared to a net loss per share in fiscal 1997 of $0.31 based on 11,254,810 weighted average shares outstanding. No income tax expense or credit was provided for in fiscal 1998. At October 31, 1998, the Company had approximately $98 million in federal net operating loss and credit carryovers and approximately $32 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. LIQUIDITY AND CAPITAL RESOURCES At October 31, 1999, the Company had $4.5 million in cash and cash equivalents, an increase of approximately $2.9 million over the balance of $1.6 million at October 31, 1998. This includes a $1.0 million certificate of deposit which the Company purchased in fiscal 1999. Approximately $1.0 million in certificates of deposit were pledged as collateral for comparable amounts of stand-by and sight letters of credit. At October 31, 1999, the Company had no outstanding letters of credit which were secured by the pledged deposits under this agreement. In December 1998, the Company sold its 69,360 square foot headquarters building in San Jose, California, including land and improvements, to TVCA, LLC, an unaffiliated Delaware limited liability company ("TVCA") for $11.0 million. The nature of the consideration was $8.25 million in cash and a $2.75 million promissory note. The note bears interest at 7.25% per annum. Principal and accrued interest are payable in equal monthly installments of $21,735 on the first day of each month, commencing January 1, 1999. If not earlier paid in full, any unpaid principal and all accrued interest is due and payable to the Company on December 1, 2013. In December 1998, the Company sold its main facility (land and building) for approximately $11.0 million and concurrently leased back this facility over a 15 year lease term expiring in December 2013. The land component has been recorded as an operating leaseback. The building component has been accounted for as a capital lease, whereby a leased building asset and capital lease obligation were recorded at the fair value of approximately $6.27 million. As a result of the sale for $11.0 million (which includes a $2.75 million note receivable), a deferred gain of approximately $8.0 million was recorded. The deferred gain attributable to the land element, which approximates $3.44 million, is being amortized over the 15 year lease life on a straight line method. The deferred gain attributable to the building element, which approximates $4.56 million, is being amortized over leased building asset life, which has been determined to be the 15 year lease term, on a straight line method. Net accounts receivable were $1.5 million at October 31, 1999, compared with $2.4 million at October 31, 1998, a decrease of $0.9 million, or 38% while net inventories were $1.5 million 13 at October 31, 1999, as compared with $2.3 million at October 31, 1998, a decrease of $0.8 million. Working capital at the end of the fiscal 1999 was approximately $5.6 million, an increase of $3.1 million, or 124%, from the fiscal 1998 year-end level of approximately $2.5 million, primarily as a result of the proceeds from the sale of the Company's headquarters facility. The Company believes that, with respect to its current operations, the Company's cash balance of approximately $4.5 million at October 31, 1999, which includes its $1.0 million certificate of deposit, plus revenues from operations and other non-operating cash receipts, will be sufficient to meet the Company's working capital and capital expenditure needs for the next twelve months. FACTORS THAT MAY AFFECT FUTURE RESULTS COMPETITIVE MARKETS The terminal market is 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. PRODUCT DEVELOPMENT The computer 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. SINGLE SOURCED PRODUCTS 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. RELIANCE ON FORECASTS 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 14 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. FACTORS THAT COULD AFFECT STOCK PRICE 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. FOREIGN CURRENCY AND POLITICAL RISK 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. (Remainder of this page was intentionally left blank) ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company believes that its exposure to market risk for changes in interest rates is not significant because the Company's investments are limited to highly liquid instruments with maturities of three months or less. At October 31, 1999, the Company has approximately $4.5 million of short-term investments classified as cash and equivalents. All of the Company's transactions with international customers and suppliers are denominated in US dollars. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE NO. IN 10-K --------- Report of Independent Certified Public Accountants.................. 16 Consolidated Balance Sheets - October 31, 1999 and 1998................................................................ 17 Consolidated Statements of Operations for the Years Ended October 31, 1999, 1998 and 1997..................................... 18 Consolidated Statement of Stockholders' Equity for the Years Ended October 31, 1999, 1998 and 1997..................................... 19 Consolidated Statements of Cash Flows for the Years Ended October 31, 1999, 1998 and 1997..................................... 20 Notes to Consolidated Financial Statements ......................... 21 (Remainder of page left blank intentionally) 15 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, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended October 31, 1999. 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, 1999 and 1998, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended October 31, 1999, in conformity with generally accepted accounting principles. /s/ GRANT THORNTON LLP - ----------------------- Grant Thornton LLP San Jose, California December 10, 1999 16 TELEVIDEO, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) October 31, ---------------------------- ASSETS 1999 1998 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents (including restricted cash of $1,000 in 1999 and 1998) $ 4,487 $ 1,640 Accounts receivable, less allowance of $1,383 in 1999 and $1,352 in 1998 1,523 2,420 Inventories 1,464 2,275 Prepayments and other 987 420 Notes receivable - current 67 0 ----------- ----------- Total current assets 8,528 6,755 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT: Land 0 890 Building 0 1,035 Production equipment 624 530 Office furniture and equipment 1,152 1,146 Building improvements 0 1,105 Leased property under capital lease 6,270 0 ----------- ----------- 8,046 4,706 Less accumulated depreciation and amortization 2,010 2,138 ----------- ----------- Property, plant and equipment, net 6,036 2,568 INVESTMENTS IN AFFILIATES 1,117 1,110 NOTE RECEIVABLE, LESS CURRENT PORTION 2,636 0 ----------- ----------- Total assets $ 18,317 $ 10,433 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Obligation under capital lease - current $ 270 $ 0 Accounts payable 964 541 Notes payable 0 2,500 Accrued liabilities 1,160 820 Income taxes - 361 Deferred gain on sale of land and building - current 538 0 ----------- ----------- Total current liabilities 2,932 4,222 ----------- ----------- Obligation under capital lease, less current portion 5,812 0 Deferred gain on sale of land and building, less current portion 7,069 0 ----------- ----------- Total liabilities 15,813 4,222 ----------- ----------- ----------- ----------- STOCKHOLDERS' EQUITY: Common stock, $.01 par value; Authorized--75,000,000 shares Outstanding--11,271,085 shares at October 31, 1999 and 1998, respectively (net of 120,000 treasury shares) 453 453 Additional paid-in capital 95,703 95,703 Accumulated deficit (93,652) (89,945) ----------- ----------- Total stockholders' equity 2,504 6,211 ----------- ----------- Total liabilities and stockholders' equity $ 18,317 $ 10,433 ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these financial statements. 17 TELEVIDEO, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Year Ended October 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- NET SALES $ 8,070 $ 14,751 $ 19,884 COST OF SALES 8,082 13,381 17,785 -------- -------- -------- GROSS PROFIT (LOSS) (12) 1,370 2,099 OPERATING EXPENSES: Sales and marketing 2,183 2,438 2,995 Research and development 598 370 762 General and administrative 1,777 3,289 1,457 -------- -------- -------- Total operating expenses 4,558 6,097 5,214 -------- -------- -------- Loss from operations (4,570) (4,727) (3,115) EQUITY IN GAIN/(LOSS) OF AFFILIATES 7 (4,077) (888) INTEREST AND OTHER INCOME (EXPENSE), net 495 (77) 559 -------- -------- -------- Loss before income taxes $ (4,068) $ (8,881) $ (3,444) Benefit for income taxes 361 -- -- Net Loss $ (3,707) $ (8,881) $ (3,444) -------- -------- -------- -------- -------- -------- Net loss per share, Basic and diluted $ (0.33) $ (0.79) $ (0.31) -------- -------- -------- -------- -------- -------- Shares used in computing basic and diluted net loss per share 11,271 11,268 11,255 -------- -------- -------- -------- -------- -------- The accompanying notes are an integral part of these financial statements. 18 TELEVIDEO, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS) THREE YEARS ENDED OCTOBER 31, 1999, OCTOBER 31, 1998, OCTOBER 31, 1997 Common Stock Additional Total ------------------- Paid in Accumulated Srockkholders' Shares Amount Capital Deficit Equity -------- -------- ---------- - ------------ ------------- Balance - October 31, 1996 11,230 $ 449 $95,639 $ (77,620) $ 18,468 Exercise of employee stock options 25 1 37 - 38 Net loss - - - (3,444) (3,444) -------- -------- -------- --------- -------- Balance - October 31, 1997 11,255 450 95,676 (81,064) 15,062 Exercise of employee stock options 16 3 27 - 30 Net loss - - - (8,881) (8,881) -------- -------- -------- ---------- -------- Balance - October 31, 1998 11,271 453 95,703 (89,945) 6,211 Net loss - - - (3,707) (3,707) -------- -------- -------- ---------- -------- Balance - October 31, 1999 11,271 $453 $95,703 $(93,652) $ 2,504 -------- -------- -------- ---------- -------- -------- -------- -------- ---------- -------- The accompanying notes are an integral part of this financial statement. 19 TELEVIDEO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Year Ended October 31, ------------------------------ 1999 1998 1997 ------ ------ ------- INCREASE (DECREASE) IN CASH: CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(3,707) $(8,881) $(3,444) Charges (credits) to operations not affecting cash: Provision for bad debts on receivables 572 2,300 293 Amortization of deferred gain (470) - - Provision for excess and obsolete inventories 680 123 (379) Net loss on sales of property and investment - - 12 Loss on investment in unconsolidated affiliates - 4,077 888 Depreciation and amortization 370 204 362 Income tax settlement - - (250) Changes in operating assets and liabilities: Accounts receivable 323 564 (697) Inventories 131 524 3,290 Prepayments and other (567) (200) (159) Accounts payable 423 (998) (1,540) Accrued liabilities 342 90 (126) Income taxes (361) - - ------- ------- ------- Net cash used in operating activities (2,264) (2,197) (1,750) ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sale of land and building 7,859 - - Additions to property, plant and equipment (100) (12) (55) Loans to affiliate and other (7) (1,700) (2,300) Increase in investments in affiliates 0 (1,000) (3,225) Payments received on notes receivable from affiliate and other 47 415 6,400 ------- ------- ------- Net cash provided by (used in) investing activities 7,799 (2,297) 820 ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 0 30 38 Proceeds from note payable - affiliate 0 500 - Proceeds from note payable - other 0 2,000 - Payments on notes payable and lease obligations (2,688) 0 - ------- ------- ------- Net cash (used in) provided by financing activities (2,688) 2,530 38 ------- ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,847 (1,964) (892) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 1,640 3,604 4,496 ------- ------- ------- CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 4,487 $ 1,640 $ 3,604 ------- ------- ------- ------- ------- ------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Income taxes - $ - $ - Interest $ 444 $ 98 $ - The accompanying notes are an integral part of these financial statements. 20 TELEVIDEO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1999, 1998 AND 1997 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. INVESTMENTS IN AFFILIATES All of the Company's unconsolidated affiliates are accounted for using either the equity or the cost method. REVENUE RECOGNITION The Company recognizes revenue when products are shipped. The Company performs periodic evaluations of its customers' financial condition and 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. BASIC AND DILUTED NET LOSS PER SHARE The Company adopted SFAS No. 128 "Earnings per Share" during the year ended October 31, 1998. Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of the incremental common shares issuable upon conversion of convertible securities (using the if-converted method) and shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Common equivalent shares are excluded from the computation if their effect is anti-dilutive. 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. ADVERTISING COSTS 21 Advertising costs are expensed as incurred. Advertising expense totaled approximately $0.7 million in fiscal 1999, approximately $1.1 million in fiscal 1998 and $1.3 million in fiscal 1997. RESEARCH AND DEVELOPMENT COSTS Costs incurred for the development and enhancement of new products and services are charged to expense as incurred. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of cash and cash equivalents, accounts receivable, trade payables and notes payable approximates carrying value due to the short term nature of such instruments. 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. Amounts shown are net of reserves for obsolescence of $1.0 million and $0.6 million as of October 31, 1999 and 1998, respectively (in thousands): October 31, ------------------- 1999 1998 ------ ------ Purchased parts and subassemblies $ 216 $1,196 Work-in-process 313 91 Finished goods 935 988 ------ ------ $1,464 $2,275 ------ ------ ------ ------ PROPERTY, PLANT AND EQUIPMENT, INCLUDING LEASED PROPERTY 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 Leased property 15 years RECLASSIFICATIONS Certain reclassifications have been made to conform to the 1999 presentation, including changes which effect comparability of the annual financial information to previously filed quarterly information. None of such reclassifications are material to the financial statements taken as a whole. 22 2. ACQUISITIONS AND DIVESTITURES MYSIMON, INC. In September 1998, the Company invested $1 million in the online comparison shopping Internet company, mySimon, Inc., receiving convertible preferred stock. Televideo's investment in mySimon currently represents an ownership interest of between 3% and 4%. The investment has been accounted for on the cost method. mySimon, Inc. uses proprietary intelligent agent technology called Virtual Learning Agent (VLA) to assist online shoppers by searching the Internet to find the best prices on products from among thousands of online merchants. 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. In February 1998, the Company completed its purchase of a 50% interest in Koram, Inc. The Company's investment has been written down to $109,820 due to the devaluation of the Korean won. This investment is accounted for under the equity method of accounting. 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 markets for APT's outdoor media display system include the billboard and illuminated sign markets, sports stadiums and arenas, transportation terminals, volume retailers and malls, and safety/public information displays. The Company accounts for its investment in APT using the equity method of accounting. During the fiscal year ended October 31, 1998, the Company wrote off its equity investment, related goodwill, and note receivable of approximately $4.1 million. In December 1998, the Company loaned APT $176,000. In September 1999, the Company loaned APT $125,000. The $125,000 note bears interest at the rate of 6% per annum and was due on December 1, 1999. As of January 19, 2000, the Company has not yet received payment on the note, nor has APT received financing. In September 1999, the Company entered into a consulting agreement with APT in which APT agreed to undertake two engineering development projects for the Company. The Company made an advance payment of $125,000 under the Agreement, which is the entire amount of the Company's obligation. The Company has written off the $426,000 in loans and advances to APT as of October 31, 1999. The Company has not guaranteed any obligations of APT and has made no commitments to provide additional financial support to APT. 23 3. LETTER OF CREDIT AGREEMENT The Company has one letter of credit agreement with the bank whereby the bank will issue up to a total of $1.0 million of standby and sight letters of credit. These agreements are contingent upon the Company maintaining time deposits (CD's) at the bank as collateral in a total amount no less than the outstanding borrowings. At October 31, 1999, the Company had no letters of credit outstanding. 4. RELATED PARTY TRANSACTIONS During 1999, 1998, and 1997 the Company has had transactions with its affiliates as follows (in thousands): 1999 1998 1997 --------- --------- --------- Note receivable at October 31: AdMOS (1) $ 4 $ 4 $ 4 AdMOS (1) 180 180 4 Interest receivable at October 31: AdMOS (1) 69 69 68 AdMOS (1) 94 77 60 (1) Amounts are fully reserved. The Company acquired a 20% interest in AdMOS Technologies in fiscal 1991 and the investment was written off in fiscal 1992. The Company also borrowed $500,000 from Gem Management, Inc., a company owned by the majority shareholder's spouse, on September 15, 1998. The unsecured loan bears annual interest at a prime rate with principal and interest due on demand. On February 16, 1999, the outstanding loan principal and interest was paid in full. 24 5. TRANSACTIONS WITH MAJOR CUSTOMERS The Company has entered into the following transactions with one of its major customers, Applied Computer Technology, Inc., (ACT). 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. Since then the loan has been paid down to $485,000, which was the loan balance at October 31, 1998 prior to the write-off discussed below. 2) At October 31, 1997, ACT had owed the Company approximately $2.1 million in trade receivables, which represented approximately 41% of net trade receivables. Subsequently, 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 were 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. The conversion rate was subsequently changed. ACT had the obligation to register the shares by filing a registration statement with the Securities and Exchange Commission (SEC) and the preferred shares would have been automatically converted once the registration statement became effective. However, ACT failed to register the shares with SEC. The preferred shares were issued in December 1997. As of October 31, 1997, the Company had reflected the $900,000 as a long term receivable and had 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. Additionally, $864,620 was outstanding as trade receivables due from ACT at October 31, 1998. ACT has experienced a significant downturn in its business and the Company has written off a total amount of $1,957,120 as uncollectible receivables as of October 31, 1998, which includes $864,620 trade receivables, $607,500 long term note receivable and $485,000 note receivable. 6. SALE AND LEASEBACK OF BUILDING In December 1998, the Company sold its main facility (land and building) for approximately $11.0 million and concurrently leased back this facility over a 15 year lease term expiring in December 2013. The land component has been recorded as an operating leaseback. The building component has been accounted for as a capital lease, whereby a leased building asset and capital lease obligation were recorded at the fair value of approximately $6.27 million. As a result of the sale for $11.0 million (which includes a $2.75 million note receivable), a deferred gain of approximately $8.0 million was recorded. The deferred gain attributable to the land element, which approximates $3.44 million, is being amortized over the 15 year lease life on a straight line method. The deferred gain attributable to the building element, which approximates $4.56 million, is being amortized over leased building asset life, which has been determined to be the 15 year lease term, on a straight line method. The aggregate monthly lease amounts to $104,000. These payments escalate to $126,000 through 2013. Future aggregate minimum lease payments are as follows October 31, $ ---------- ----------- 2000 $ 1,231,774 2001 1,241,628 2002 1,241,628 2003 1,293,358 2004 1,303,704 Thereafter 12,958,068 ----------- $19,270,160 The $2.75 million note receivable bears interest at 7.25% per annum. Principal and accrued interest is payable in equal monthly installments of $21,735 each on the first day of each month, which the Company began receiving on January 1, 1999. If not earlier paid in full, any unpaid principal and all accrued interest shall be due and payable to TeleVideo, Inc. on December 1, 2018. 25 7. CAPITAL STOCK The Company effected a 4-for-1 reverse stock split of its outstanding common stock on April 23, 1998. All shares and per share amounts have been retroactively adjusted for such reverse stock split. 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 options to employees, including officers, for up to 4,000,000 shares. The outstanding options have a term of ten years when issued. The exercise price of each option equals the 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 1998 and 1997 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, ---------------------- 1999 1998 ------- ------- Net loss (in thousands) As reported ($3,707) ($8,881) Pro forma ($3,826) ($8,987) Loss per share, basic and diluted As reported ($0.33) ($0.79) Pro forma ($0.34) ($0.80) 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 1999 and 1998 respectively: no expected dividends; weighted average risk-free interest rate of 6.00% and 6.69%; stock volatility 219% in 1999 and 164% in 1998; and expected lives of 10 years. The weighted average fair value of options granted were $0.84, $1.49 and $1.24 in 1999, 1998 and 1997, respectively. 26 A summary of the status of the Company's stock option plans as of October 31, 1999, and changes during the three years ending October 31, 1999 is presented below: OPTIONS OUTSTANDING OCTOBER 31, 1999 OUTSTANDING EXERCISABLE --------------------------------------- --------------------------- WTD AVG. WTD AVG. WTD AVG. RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING CONT. LIFE PRICE EXERCISABLE PRICE --------------- ----------- ---------- -------- ----------- -------- 1991 ISO PLAN $0.75 - $0.84 205,500 9.42 $0.84 - - $0.88 - $1.32 61,750 5.36 $0.98 54,438 $0.99 $1.52 - $2.12 17,375 5.79 $1.72 13,562 $1.67 $2.64 - $2.88 2,875 5.56 $2.77 2,031 $2.78 ------- ---- ----- ------ ----- Totals 287,500 8.29 $1.06 70,031 $1.18 ------- ---- ----- ------ ----- ------- ---- ----- ------ ----- 1981 SUPPLEMENTAL PLAN $0.88 37,500 2.06 $ 0.88 37,500 $ 0.88 1981 ISO PLAN $0.88 250 2.06 $ 0.88 750 $ 0.88 Summary of Changes: 1981 ISO PLAN WEIGHTED AVERAGE OUTSTANDING EXERCISE PRICE ------------ -------------- Balance, October 31, 1996 3,156 $0.88 Granted - - Exercised (844) $0.88 Canceled (1,083) $0.88 ------ Balance, October 31, 1997 1,250 $0.88 Granted - - Exercised (500) $0.88 Canceled - - ------ Balance, October 31, 1998 750 $0.88 Granted - Exercised (500) $0.88 Canceled - - -------- 27 Balance, October 31, 1999 250 $0.88 ------ ------ 1981 SUPPLEMENTAL PLAN WEIGHTED AVERAGE OUTSTANDING EXERCISE PRICE ----------- -------------- Balance, October 31, 1996 37,500 $0.88 Exercised - - Canceled - - ------ Balance, October 31, 1997 37,500 $0.88 Exercised - - Canceled - - ------ Balance, October 31, 1998 37,500 $0.88 Exercised - - Canceled - - ------ Balance, October 31, 1999 37,500 $0.88 ------ ------ 1991 ISO PLAN WEIGHTED AVERAGE AVAILABLE OUTSTANDING EXERCISE PRICE --------- ----------- -------------- Balance, October 31, 1996 575,219 332,750 $2.08 Granted (12,250) 12,250 $1.24 Exercised - (23,688) $1.58 Terminated/Canceled 110,125 (110,125) $2.20 -------- -------- Balance, October 31, 1997 673,094 211,187 $1.96 Granted (111,875) 111,875 $1.37 Exercised - (10,775) $1.64 Terminated/Canceled 128,288 (128,288) $2.43 -------- -------- Balance, October 31, 1998 688,507 184,000 $1.27 Granted (205,500) 205,500 $0.84 Exercised - - - Terminated/Canceled 102,000 (102,000) $1.37 -------- -------- Balance, October 31, 1999 585,007 287,500 -------- -------- -------- -------- 28 8. INCOME TAXES At October 31, 1999, the Company had tax loss carryforwards of approximately $97 million for federal income tax and approximately $15.5 million for state income tax reporting purposes, respectively. The net operating loss carryforwards expire through fiscal 2013. The Tax Reform Act of 1986 contains provisions which may limit the net operating loss carryforwards to be used in any given year upon occurrence of certain events, including significant changes in ownership interests. 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. No deferred tax asset or benefit was recorded at October 31, 1999, as all amounts have been fully reserved. The valuation allowance increased by $1,488 in fiscal 1999 and increased by $3,823 in fiscal 1998. The components are as follows (in thousands): 1999 1998 -------- -------- Net operating loss $ 36,192 $ 35,168 Other 1,350 1,328 -------- -------- 37,542 36,496 Less valuation allowance (37,542) (36,496) -------- -------- Net benefit $ - $ - -------- -------- -------- -------- The following is a reconciliation of expected tax expense (benefit) to actual for each of the years ended October 31 (in thousands): 1999 1998 1997 --------- --------- --------- Book loss $(3,707) $(8,881) $(3,444) ------- ------- ------- Expected tax benefit 1,353 3,020 1,170 ------- ------- ------- Adjustments to reconcile expected to actual benefit: Reduction of estimated tax liability 361 - - Effect of change in valuation allowance (net) (1,353) (3,020) (1,170) ------- ------- ------- Actual tax benefit $ 361 $ - $ - ------- ------- ------- ------- ------- ------- The Company had pending a California Franchise tax exposure estimate of $361,000 resulting from previous income tax audits. The Company believes that no further liability exists at October 31, 1999. This amount has been recorded as a tax benefit in the accompanying statement of operations. 29 9. CONCENTRATIONS The Company, which operates in a single industry segment, designs, produces and markets high performance terminals and monitors designed for office and home automation both domestically and internationally. The Company had export sales primarily to Europe, Asia and Latin America of approximately 19.8% ($1.6 million), 14.2% ($2.1 million) and 13.5% ($2.7 million) of net sales during fiscal 1999, 1998, and 1997, respectively. For the fiscal year ended October 31, 1999, one customer accounted for 10% of the Company's sales (Savoir, Inc.), while another customer accounted for 9%. For the fiscal year ended October 31, 1998, one customer accounted for 12% and another customer accounted for 11% of net sales. For the fiscal year ended October 31, 1997, one customer accounted for 17% and another customer accounted for 16% of net sales. Information about the Company's operations in different geographic locations is as follows: ---------------------------------------------------------------------------- United Europe Other Total (in thousands) States ---------------------------------------------------------------------------- 1999 Total revenues $ 6,503 $1,023 $ 544 $ 8,070 Operating (Loss)/income (5,024) 253 201 (4,570) Identifiable assets 18,317 0 0 18,317 1998 Total revenues $12,681 $1,685 $ 385 $14,751 Operating (Loss)/income (5,188) 354 107 (4,727) Identifiable assets 10,433 0 0 10,433 1997 30 Total revenues $17,197 $2,242 $ 445 $19,884 Operating (Loss)/income (3,657) 408 134 (3,115) Identifiable assets 17,692 0 0 17,692 10. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS In the fourth quarter of fiscal 1999, the Company wrote off $426,000 in loans and advances to APT (refer to Note 2). The Company also recorded a $353,000 expense for inventory obsolescence for certain of its computer monitors in inventory at October 31, 1999. The Company has reduced its estimated tax liability of $361,000 as any such tax exposure has been reduced to zero. 11. ACCRUED LIABILITIES Accrued liabilities consist of the following at October 31: (in thousands) 1999 1998 -------- -------- Employee compensation and benefits $ 209 $173 Warranty 169 169 Legal reserve 200 200 Accrued sales and use tax 0 1 Professional fees 77 60 Royalties 175 0 Other 330 217 ------ ---- $1,160 $820 ------ ---- ------ ---- 12. VALUATION AND QUALIFYING ACCOUNTS The Company's reserves for doubtful accounts receivable 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, 1997: Reserve for doubtful accounts $1,280 $ 293 $(530)(1) $ 1,043 Reserve for inventory obsolescence $ 663 $ 379 $(519)(2) $ 523 YEAR ENDED OCTOBER 31, 1998: Reserve for doubtful accounts $1,043 $2,300 $(1,991)(1) $ 1,352 Reserve for inventory obsolescence $ 523 $ 813 $ (690)(2) $ 646 YEAR ENDED OCTOBER 31, 1999: Reserve for doubtful accounts $1,352 $ 572 $ (541)(1) $ 1,383 Reserve for inventory obsolescence $ 646 $ 680 $ (289)(2) $ 1,037 (1) Deductions represent write-offs of fully reserved receivables. (2) Reductions due to sales or scrap of fully reserved inventory. 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE. PART III The following items included in the Company's Definitive Proxy Statement dated February 28, 2000 used in connection with the Company's Annual Meeting of Stockholders to be held on April 18, 2000 are incorporated herein by reference: PAGES IN PROXY STATEMENT --------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 4 ITEM 11. EXECUTIVE COMPENSATION 8 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 3 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 10 (The remainder of this page was left blank intentionally.) 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. The following exhibits have been or are being filed herewith and are numbered in accordance with Item 601 of Regulation S-K: EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------------------------------------------------------------------------------- 3.1 (1) Restated Certificate of Incorporation of Registrant, as amended and currently in effect 3.2 (2) Bylaws of the Registrant 10.1 (3) TeleVideo, Inc. 1991 Incentive Stock Option Plan and form of Incentive Stock Option Agreement 10.2 (3) TeleVideo, Inc. 1992 Outside Directors' Stock Option Plan+ 10.3 (4) Management Bonus Plan effective fiscal 1984, as amended 10.4 (2) Form of Distributor and Licensing Agreement 10.5 (2) Form of Original Equipment Manufacturer Agreement 10.6 (5) Real Estate Purchase Agreement dated December 28, 1998 and accompanying Lease and Agreement of Lease, Escrow Agreement, Pledge and Security Agreement and Assignment between the Registrant and TVCA, LLC, dated December 28, 1998 10.7 (1) Continuing Letter of Credit Agreement with Comerica Bank 21.1 (1) Subsidiaries 23.1 (1) Consent of Grant Thornton LLP 27.1 (1) Financial Data Schedule + Denotes a management contract or compensatory plan or arrangement. - --------------- (1) Filed herewith. (2) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1987, filed on January 29, 1988. (3) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1991, filed January 27, 1992. (4) Incorporated by reference from the Registrant's Annual Report on Form 10-K, filed January 29, 1985 and Annual Report on Form 10-K, filed January 28, 1986. (5) Incorporated by reference from the Registrant's Current Report on Form 8-K, filed on January 2, 1999. 32 (b) Reports on Form 8-K. No report on Form 8-K was filed by the Company with respect to the quarter ended October 31, 1999. 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: January 31, 2000 By: /s/ K. Philip Hwang ----------------------------------- K. Philip Hwang Chairman of the Board and Chief Executive Officer 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 and January 31, 2000 - --------------------------- Chief Executive Officer K. Philip Hwang (Principal Executive Officer) /s/ James D. Wheat Chief Financial Officer January 31, 2000 - -------------------------- (Principal Financial and James D. Wheat Accounting Officer) /s/ Robert E. Larson Director January 31, 2000 - ------------------------------ Robert E. Larson /s/ Woo K. Kim Director January 31, 2000 - ------------------------------ Woo K. Kim 33