10-Q 1 a2059309z10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: July 31, 2001 ---------------- 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 ----------------------------- 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 number of shares outstanding of registrant's Common Stock, as of August 31, 2001 is 11,307,000. ----------- DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q for TeleVideo Inc. (the "Company") for the third quarter ended July 31, 2001, 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 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 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. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS [The remainder of this page is intentionally left blank.] TELEVIDEO, INC. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
July 31, October 31, ASSETS 2001 2000 ----------- ----------- (Unaudited) (Audited) CURRENT ASSETS: Cash and cash equivalents $ 762 $ 3,261 Accounts receivable, net 1,250 1,560 Inventories, net 2,772 1,239 Marketable Securities 357 1,259 Prepayments and other 246 761 Notes receivable - current 73 73 ----------- ----------- Total current assets 5,460 8,153 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT: Production equipment 671 669 Office furniture and equipment 1,140 1,128 Leased property under capital lease 6,270 6,270 ----------- ----------- 8,081 8,067 Less accumulated depreciation 2,743 2,401 ----------- ----------- Property, plant and equipment, net 5,338 5,666 ----------- ----------- OTHER ASSETS 0 166 INVESTMENTS IN AFFILIATES 2,843 6,807 NOTE RECEIVABLE, LESS CURRENT PORTION 2,503 2,557 ----------- ----------- Total assets $ 16,144 $ 23,349 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Obligation under capital lease - current $ 296 $ 296 Accounts payable 891 808 Notes Payable 1,000 0 Accrued liabilities 1,196 1,238 Income taxes (351) 85 Deferred gain on sale of land and building - current 845 845 ----------- ----------- Total current liabilities 3,877 3,272 ----------- ----------- Obligation under capital lease - long-term 5,516 5,516 Deferred gain on sale of land and building - long-term 5,822 6,245 ----------- ----------- Total liabilities 15,215 15,033 ----------- ----------- STOCKHOLDERS' EQUITY: Common stock, $.01 par value: Authorized--20,000,000 shares Outstanding--11,307,000 shares at August 31, 2001 and 11,307,000 shares at October 31, 2000 454 454 Additional paid-in capital 95,736 95,734 Accumulated other comprehensive income, net (6,235) 1,153 Accumulated deficit (89,026) (89,025) ----------- ----------- Total stockholders' equity 929 8,316 ----------- ----------- Total liabilities and stockholders' equity $ 16,144 $ 23,349 =========== ===========
The accompanying notes are an integral part of these financial statements. TELEVIDEO, INC. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2001 AND JULY 31, 2000 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (Unaudited)
Three Months Ended Nine Months Ended July 31, July 31, -------------------- -------------------- 2001 2000 2001 2000 -------- -------- -------- -------- NET SALES $ 1,644 $ 1,729 $ 4,624 $ 4,946 COST OF SALES 1,320 1,614 4,261 4,622 -------- -------- -------- -------- GROSS PROFIT 324 115 363 324 OPERATING EXPENSES: Sales and marketing 388 545 1,491 1,996 Research and development 182 266 713 740 General and administration 536 512 1,713 1,546 -------- -------- -------- -------- Total operating expenses 1,106 1,323 3,917 2,959 -------- -------- -------- -------- Loss from operations (782) (1,208) (3,554) (3,958) INTEREST INCOME, net 42 146 147 285 OTHER INCOME, net 391 80 1,069 549 GAIN FROM SALE OF SECURITIES 0 4,161 240 5,696 AFFILIATES EQUITY LOSS (203) 0 (930) 0 UNREALIZED LOSS ON SECURITIES (778) 0 (3,831) 0 -------- -------- -------- -------- (Loss) income before income tax (1,330) 3,103 (6,859) 2,572 Income Tax Expenses 3 4 3 172 -------- -------- -------- -------- Net (loss) income $ (1,333) $ 3,099 $ (6,862) $ 2,400 ======== ======== ======== ======== Net (loss) income per share, basic and diluted $ (.12) $ .27 $ (.61) $ .21 ======== ======== ======== ======== Weighted average shares outstanding 11,307 11,310 11,307 11,299 ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. TELEVIDEO, INC. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE NINE MONTHS ENDED JULY 31, 2001 AND JULY 31, 2000 (IN THOUSANDS) (Unaudited)
Nine Months Ended July 31, ------------------ 2001 2000 ------- ------- CASH FLOW FROM OPERATING ACTIVITIES: Net cash used in operating activities $(3,495) $(2,172) ------- ------- CASH FLOW FROM INVESTING ACTIVITIES: Net proceeds from sale of land and building -- -- Net additions to property, plant and equipment -- (27) Net cash used in investments (2,000) (5,040) Proceeds from Ningbo China 1,280 -- Proceeds from sales of CNET stock 87 4,368 Note receivable 54 56 ------- ------- Net cash (used in) provided by investing activities (579) (643) ------- ------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock -- 32 Loans 1,575 -- Payments on lease obligations -- (176) ------- ------- Net cash provided by (used in) financing activities 1,575 (98) ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,499) (2,959) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 3,261 4,487 ------- ------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 762 $ 1,528 ======= =======
Non cash investing/financing activities: In February 2001, the Company borrowed approximately $375,000 from Salomon Smith Barney, a member of Citigroup, money used for regular operations expenses. This loan was secured with the 39,508 Company's CNET shares of stock. In April 2001, due to the decrease in stock price, the Company was requested to pay off a portion of the loan and, consequently, we sold approximately 7,000 of shares of CNET stock. Because the stock price decreased again, we were required to pay off another portion of this loan. The Company decided not to sell shares, and we loaned approximately $200,000 from Gem Management, Inc., a company owned by the majority shareholder's spouse, Gemma Hwang. The unsecured loan bears annual interest at a prime rate with principal and interest due when the Company will receive the next payment of $450,000 from the contract with Ningbo China. In May 2001 the Company obtained a line of credit from Gemma Hwang in amount of $3.5 million, including the previous loan of $199,500. The Company can borrow money under this line of credit when there will be financial difficulties, in order to assure the continuity of the operations. In consideration of Gemma Hwang loan to the Company, the Company pleads and grants to Gemma Hwang a secured interest in the following described property: a) 15,278 shares of the common stock of Xeline (Keyin Telecom); b) 45,000 shares of the common stock of Biomax; c) 285,714 shares of the common stock of Synertech; d) 30% from the TeleVideo Ningbo China equity, equivalent to 30% of the outstanding shares of this company; e) any and all intellectual property of TeleVideo, including but not limited to patents, hardware and software engineering documents; f) any and all trademarks, trade names and intangible assets of TeleVideo. Under this line of credit, which bears interest at 8% per annum, payable monthly, the Company received $300,000 in June 2001, and $500,000 in July 2001. On August 31, 2001 the outstanding balance for this loan were $999,500. 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 element 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 $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 commencing on January 1, 1999. If not earlier paid in full, any unpaid principal and all accrued interest is due and payable to TeleVideo, Inc. on December 1, 2013. The accompanying notes are an integral part of these financial statements. TELEVIDEO, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS July 31, 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. The information at July 31, 2001 and for the nine months ended July 31, 2001 and 2000 include all adjustments that the management of the company believes are necessary for fair presentation for the results of the periods presented. Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company's annual report on Form 10-K. PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiaries, after elimination of inter-company accounts and transactions. All of the Company's unconsolidated affiliates are accounted for using the equity or the cost method. USE OF ESTIMATES In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, 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. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Costs are computed on a currently adjusted standard basis (which approximates average cost) or 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 $0.5 million at both July 31, 2001 and October 31, 2000, respectively:
July 31, October 31, 2001 2000 ----------- ----------- Purchased parts and subassemblies $ 83 $ 98 Work-in-process 308 314 Finished goods 2,381 827 ----------- ----------- $ 2,772 $ 1,239 =========== ===========
PROPERTY, PLANT AND EQUIPMENT Depreciation and amortization are provided over the estimated useful lives of the assets using both straight line and accelerated methods. Production equipment 1-10 years Office furniture 1-10 years Leased property 15 years LOSS PER SHARE Loss per share is based on the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share are computed using the weighted average number of common and common equivalent shares outstanding during the period. RECLASSIFICATIONS Certain reclassifications have been made to conform to the 2001 presentation. None of such reclassifications are material to the financial statements taken as a whole. 2. ACQUISITIONS AND DIVESTITURES EQUITY METHOD 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. 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. During 1999, the Company granted and wrote off loans and advances to APT totaling $426,000. The Company has not guaranteed any obligations of APT and has made no commitments to provide additional financial support to APT. Mulix, Inc. On February 2000, the Company purchased for $1,000,000 in cash an aggregate of 14,269,230 shares of unregistered Series A Convertible Preferred Stock of Mulix, Inc., a Delaware corporation. The Company's investment in Mulix represents a 35% interest in this privately held corporation. The investment is accounted for on the equity method of accounting. Mulix was dissolved effective November 30, 2000. Thus, the entire investment was written off as of October 31, 2000. K&T Telecom, Inc. In July 2000, the Company purchased for $600,000 in cash an aggregate of 9,608 shares of stock of K&T Telecom, Inc, a Korean company. Its main activity is manufacturing telecommunication and electronics devices, including hands-free accessories and collision sensors. The Company's investment in K&T Telecom, Inc. represents a 49% interest in this privately held corporation. The investment is accounted for on the equity method of accounting. If K&T Telecom, Inc. subsequently increases its capital, TeleVideo will be given the opportunity to participate in the stock issuance in order to maintain the percentage of stock currently held by TeleVideo. During the second and third quarters of fiscal 2001, due to the change in financial position of K&T Telecom, the Company adjusted the carrying value of this investment on the financial statements from $600,000 to $274,230. Also, the Company is considering the possibility to withdraw from this joint venture in the next period. Alpha Technology, Inc. In August 2000, the Company purchased for $650,000 in cash an aggregate of 9,608 shares of stock of Alpha Technology, Inc. Alpha Technology, Inc. is a Korean company manufacturing electronic and car accessories, including two way car alarm systems. The Company's investment in Alpha Technology, Inc. represents a 49% interest in this privately held corporation. The investment is accounted for on the equity method of accounting. TeleVideo has the right to participate in future sales of Alpha Technology, Inc. securities to maintain its proportionate interest in this company. If Alpha Technology, Inc. increases its capital thereafter, TeleVideo will be given the opportunity to participate in the stock issuance in order to maintain the percentage of stock currently held by TeleVideo. During the second and third quarters of fiscal 2001, due to the change in financial position of Alpha Technology, the Company adjusted the carrying value of this investment on the financial statements from $600,000 to $418,033. Also, the Company is considering the possibility to withdraw from this joint venture in the next period. Ningbo China In October 2000, the Company invested $1,000,000 in Televideo (China) Co., Ltd. (Ningbo China) for a 10% interest. The Company has agreed to invest an additional $2,000,000 in December 2000. The total investment will represent a 30% interest in this company, which will manufacture computer terminals and monitors. This investment is currently accounted for using the equity method. The investment agreement also provides for the use of TeleVideo's technical production skill of terminal products. For the use of this technology Ningbo China will pay the Company $2.5 million dollars over two years as follows: $1.2 million is to be received in December 2000 and the remaining $1.3 million in two installments of $650 thousand in June 2001 and June 2002. For this money, TeleVideo will give Ningbo China the right to use its technology and provide professional training for the use of this technology. The most important technology is related to the processor used for TeleCLIENT. During December 2000, the Company invested $2,000,000 in Ningbo China for an additional 20% ownership interest. Accordingly, in December 2000, the Company changed its method of accounting for this investment to the equity method. During December 2000, the Company received approximately $960,000 from Ningbo China. In January 2001 and April 2001, the Company received additional $120,000 and $200,000, respectively. The Company is in process to reschedule the payment for the difference of $450,000 from $650,000 for the year 2001, and, probably, it will be received at the beginning of the next year. In the third quarter of fiscal 2001, because a couple of investors have withdrew from this joint venture, the capital of Ningbo was decreased to around $5.0 million, from an initial amount of 10.0 million. Due to this fact, the Chinese government asked Ningbo to change the initial agreement with TeleVideo and to record the payments made by Ningbo to TeleVideo as withdraw of investment, instead payments for the technology and training. The Company agreed with this change, and, consequently, we reduced the amount showed as investment on the financial statements from $3.0 million to $1.7 million. Also, due to the change in financial position of Ningbo, the Company adjusted the carrying value of this investment on the financial statements from $1.7 million to $1.5 million. COST METHOD mySimon, Inc. In September 1998, the Company invested $1 million in the online comparison shopping Internet company, mySimon, Inc., receiving convertible preferred stock. On February 29, 2000, CNET Networks, Inc. (formerly, CNET, Inc. or CNET) completed the acquisition of mySimon, Inc. As a result of this acquisition, the Company received 375,108 shares of common stock of CNET in exchange for 100% of its interest in mySimon, Inc. During the same period of time, the Company also adjusted its balance sheet to reflect the conversion to a marketable security. The cost method used to book the investment in mySimon was changed to market value method in accordance with SFAS 115 to record the investment in CNET stock. During the fiscal year 2000, the Company recognized gains from the sales of CNet stocks of $10.1 million. On August 31, 2001, the Company owned approximately 32,500 shares of CNET common stock and the market value was approximately $9.18 per share. Koram, Inc. In February 1998, the Company purchased a 50% interest in Koram, Inc, a Korean restaurant venture. This investment was accounted for under the equity method of accounting. During 2000, the Company decided to discontinue its participation in this joint venture. The Company's venture partner agreed to transfer the funds for its participation into the TeleVideo account when the exchange rate for the Korean Won and US Dollar will be the most advantageous. As such, the Company accounts for this investment under the cost method of accounting. In April 2001, the Company has withdrawn from this joint venture and, consequently, we received approximately 120,000,000 Korean Won. The money were deposited into a bank in Korea, following to be converted in US dollars when the exchange rate will be more advantageous. Also, the Company wrote off $30,780 representing the difference between the original investment in amount of $116,817 and the proceeds from withdrawing in amount of $86,037. Biomax Co, Ltd. On May 12, 2000, the Company purchased for a cash investment of $917,431 an aggregate of 45,000 ordinary shares of Biomax Co., Ltd. (Biomax). Biomax is a startup company, with its principal offices located in Seoul, Korea, engaged in developing an herbal product to help lower cholesterol levels in humans. Its existing technology was developed by and obtained from the Korea Research Institute of Bioscience and Biotechnology. The Company's investment in Biomax represents a 15% interest in this privately held corporation. The investment is accounted for on the cost method of accounting. The agreement gives the Company the right to nominate one member to the Biomax Board of Directors. Dr. K. Philip Hwang, the Company's Chairman of the Board and Chief Executive Officer, was nominated and elected to the Biomax board. The Company has the right to participate in future sales of Biomax securities to maintain its proportionate interest in Biomax. In the event the Company wants to sell all or a portion of its shares, it has given Biomax and Biomax's President, who is its controlling shareholder, a right of first refusal to purchase the shares. The controlling shareholder also must obtain the Company's prior written consent in order to sell over 10% of Biomax. Biomax also agreed to discuss with the Company certain specified kinds of events and transactions that could materially impact Biomax's business, capital structure and financial condition. The agreement further prohibits Biomax from sharing its technology with third parties or assisting with research and development efforts of third parties without the prior written consent of the Company, other than in the normal course of business, and further prohibits the controlling shareholder from engaging in businesses that could compete with Biomax. The restrictions and promises in the agreement will terminate at such time as the Company has sold at least 70% of the shares it acquired under the agreement. During the second quarter of fiscal 2001, due to the change in financial position of Biomax, the Company adjusted the carrying value of this investment on the financial statements from $917,431 to $109,781. Xeline (Keyin Telecom) Co. Ltd. On May 12, 2000, the Company purchased for $2,522,972 an aggregate of 15,278 ordinary shares of Xeline Co. Ltd. Xeline is a private company located in Seoul, Korea, engaged in developing power line technology for electricity transportation. The Company's investment in Xeline represents a 5.75% interest in this corporation. The investment is accounted for on the cost method of accounting. The Company has the right to participate in future sales of Xeline securities to maintain its proportionate interest in Xeline. In the event the Company wants to sell all or a portion of its shares, it has given Xeline (Keyin) and its controlling shareholder, who is also its President and Chief Executive Officer, a right of first refusal to purchase the shares. Xeline also agreed to keep the Company expressly advised regarding certain specified events and transactions that could materially impact Xeline's business, capital structure and financial condition. Xeline has agreed that it will not transfer its power line communications (PLC) technology to a third party without the prior written consent of the Company, except in the context of a strategic technology transfer agreement approved by the Xeline Board. The restrictions and promises in the agreement will terminate at such time when the Company sells at least 70% of the shares it acquired under the agreement. The investment agreement also contemplates that TeleVideo will participate in a strategic alliance with Xeline under the terms of which TeleVideo will support Xeline in its overseas marketing and sales activities related to Xeline's PLC technology. In addition, TeleVideo and Xeline will cooperate to incorporate Xeline's PLC technology into TeleVideo's computer products, including the TeleCLIENT series. The parties contemplate entering into a separate sale and marketing agreement to fully document the terms and conditions of the strategic relationship. During the second quarter of fiscal 2001, due to the change in financial position of Xeline, the Company adjusted the carrying value of this investment on the financial statements from $2,522,972 to $277,058. Synertek, Inc. In June 2000, the Company purchased for $1,000,000 in cash an aggregate of 285,714 shares of common stock of Synertek, Inc., a Nevada corporation, representing an 8% interest in this company. Synertek, Inc. manufactures and sells handheld digital multimedia and communications appliances. The cash investment is accounted for on the cost method of accounting. During the third quarter of fiscal 2001, due to the change in financial position of Synertek, the Company adjusted the carrying value of this investment on the financial statements from $1,000,000 to 221,203. 3. LETTER OF CREDIT AGREEMENT At August 31, 2001, the Company had no letters of credit agreements. 4. 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 element 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 $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 commencing on January 1, 1999. If not earlier paid in full, any unpaid principal and all accrued interest is due and payable to TeleVideo, Inc. on December 1, 2013. 5. SUBSEQUENT EVENTS None ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. COMPARISON OF THE THREE MONTHS ENDED JULY 31, 2001 TO THE THREE MONTHS ENDED JULY 31, 2000 Net sales for the third quarter of fiscal 2001 were $1.6 million, as compared with $1.7 million in the third quarter of fiscal 2000, a decrease of $0.1 million, or 6%. The decrease in net sales is due in principal to the economic slowdown recorded in the last period. Subsequently, some of our large customers went out of business during this period. Cost of sales was $1.3 million in the third quarter of fiscal 2001, compared with $1.6 million in the third quarter of fiscal 2000, a decrease of $0.3 million, or 19%. The principal reason for the decrease in cost of sales is that in the third quarter of 2001, the Company restructured its manufacturing facility and approximately 50% from production workforce was laid-off. Also, the decrease in the cost of sales is the result of the Company's efforts to promote products with the most profitable costs and prices. Consequently, the gross margin reported to net sales was 19% in the third quarter of 2001, compared with 6% in the third quarter of 2000. Sales and marketing expenses were $0.4 million in the third quarter of fiscal 2001, compared with $0.5 million in the third quarter of fiscal 2000, a decrease of $0.1 million or 20%. As a percentage of net sales, sales and marketing expenses decreased to 25% in the third quarter of fiscal 2001 compared with 29% in the third quarter of fiscal 2000. The decrease of marketing expenses is the direct result of the Company's efforts to lower its overall costs. Research and development expenses were $0.2 million in the third quarter of fiscal 2001, compared with $0.3 in the third quarter of fiscal 2000. As a percentage of net sales, research and development expenses decreased to 13% in the third quarter of fiscal 2001 compared with 18% in the third quarter of fiscal 2000. The decrease is due in principal to the decrease in salary expenses for research and development, after a restructuring process in the third quarter of 2001. General and administrative expenses were $0.5 million in the third quarter of fiscal 2001, same as in the third quarter of fiscal 2000. As a percentage of net sales, general and administrative expenses increased to 31% in the third quarter of fiscal 2001 compared with 29% in the third quarter of fiscal 2000. The increase is due primarily to the decrease in the net sales. The Company's loss from operations was approximately $0.8 million in the third quarter of fiscal 2001 as compared with approximately $1.2 million in the third quarter of fiscal 2000. Interest income, net of interest expense, was $39,000 in the third quarter of fiscal 2001, compared with $146,000 in the third quarter of fiscal 2000, a decrease of $85,000. Other incomes, net of other expenses, were $0.4 million in the third quarter of 2001, compared with $0.1 million in the same period of fiscal 2000. The increase primarily reflects rental income resulting from the sublease of a headquarters space in January 2001, for a period of three years. In the third quarter of fiscal 2000, the Company sold a portion of its shares of CNET Networks stock and the Company recorded a gain of approximately $4.0 million from the sale of these shares. In the third quarter of 2001, the Company didn't record any gain from the sale of stocks. In the third quarter of 2001, the Company adjusted the carrying value of its investments in affiliates, and recorded a loss from investments in amount of approximately $1.0 million. Net loss for the third quarter of fiscal 2001 was $1.3 million as compared with a net income of $3.1 million in the third quarter of fiscal 2000. COMPARISON OF THE NINE MONTHS ENDED JULY 31, 2001 TO THE NINE MONTHS ENDED JULY 31, 2000 Net sales for the first nine months of fiscal 2001 were $4.6 million, as compared with $4.9 million in the first nine months of fiscal 2000, a decrease of $0.3 million, or 6%. The decrease in net sales is due in principal to the economic slowdown recorded in the last year. Cost of sales was $4.3 million in the first nine months of fiscal 2001, compared with $4.6 million in the first nine months of fiscal 2000, a decrease of $0.3 million, or 7%. As a percentage of net sales, gross margin was 8% in the first nine months of fiscal 2001, compared with 6% in the first nine months of fiscal 2000. The increase in gross margin, as a percentage of sales, primarily reflects a bigger decrease in cost of sales compared with the decrease in net sales, as percent. Sales and marketing expenses were $1.5 million in the first nine months of fiscal 2001, compared with $2.0 million in the first nine months of fiscal 2000. As a percentage of net sales, sales and marketing expenses decreased to 33% in the first nine months of fiscal 2001 compared with 41% in the first nine months of fiscal 2000. The decrease reflects the closing of three sales offices in 2000, and the results of the Company's efforts to reduce all categories of expenses. Research and development expenses were $0.7 million in the first nine months of fiscal 2001, same as in the first nine months of fiscal 2000. As a percentage of net sales, research and development expenses increased to 15% in the first nine months of fiscal 2001 compared with 14% in the first nine months of fiscal 2000. The increase is due to the decrease in net sales. General and administrative expenses were $1.7 million in the first nine months of fiscal 2001, compared with $1.5 million in the first nine months of fiscal 2000. As a percentage of net sales, general and administrative expenses increased to 40% in the first nine months of fiscal 2001 compared with 31% in the first nine months of fiscal 2000. The increase is due primarily to the expenses of approximately $0.3 million incurred by operations of the new Mobile Electronics Division, which started its activity at the end of the year 2000. The Company's loss from operations was approximately $3.6 million in the first nine months of fiscal 2001 compared with approximately $4.0 million in the first nine months of fiscal 2000. Other incomes, net of other expenses, were $1.2 million in the first nine months of fiscal 2001, compared with $0.8 million in the first nine months of fiscal 2000, an increase of $0.4 million. The increase primarily reflects rental income resulting from the sublease of a headquarters space in January 2001, for a period of three years. In the first nine months of fiscal 2001, the Company sold shares of CNET stock and recorded a gain in amount of approximately $0.2 million, compared with a gain in amount of approximately $5.7 million in the first nine months of fiscal 2000. In the second and the third quarter of 2001, the Company adjusted the carrying value of its investments in affiliates, and recorded a loss from investments in amount of approximately $3.8 million and $1.0 million, respectively. Net loss for the first nine months of fiscal 2001 was $6.9 million compared with a net income of $2.4 million in the first nine months of fiscal 2000. LIQUIDITY AND CAPITAL RESOURCES At July 31, 2001, the Company had $0.8 million in cash and cash equivalents, a decrease of approximately $2.5 million over the same balances at the end of fiscal 2000 of approximately $3.3 million. Net cash used in operating activities increased from $2.2 million used in the nine months ended July 31, 2000 to $3.5 million used for the same period in fiscal 2001. This increase is due primarily to the loss from operations. In December 2000, the Company subleased a part of its headquarter space. The leasing agreement is for a period of three years, beginning January 2001, and this will bring a monthly income of approximately $81,000. This sublease will not affect the company manufacturing facilities. 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 shall be due and payable to TeleVideo, Inc. on December 1, 2013. In December 1998, the Company leased back this facility over a 15 year lease term expiring in December 2013. The land 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 result of the sale for $11.0 million, 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 on a straight line basis over the leased building asset life, which has been determined to be the 15 year lease term. Net accounts receivable were $1.3 million at July 31, 2001, compared with $1.6 million at October 31, 2000, a decrease of $0.3 million, or 19%, while net inventories were $2.8 million at July 31, 2001, as compared with $1.2 million at October 31, 2000, an increase of $1.6 million. The decrease in accounts receivable reflects large collections in the first six months of fiscal 2001 and the write off of approximately $50,000 bad debts. The increase in inventory reflects the purchase of additional terminal and TeleCLIENT products during the period, and also the purchase of the inventory of Mobile Electronics Division products, in total amount of over $1.0 million. 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 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. INVESTMENTS IN AFFILIATES Investments in affiliates represent approximately 18% of the Company's total assets at July 31, 2001. As a result, the Company's success will be adversely affected if the investees fail to execute their business plans. If there is impairment in the carrying value of the affiliate investments the Company will reduce the carrying of such investments. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. As of July 31, 2001, the Company had a long-term note receivable (the "Note") of $2.6 million. The Company received the Note, which bears interest at a fixed rate of 7.25% per annum, as partial consideration for the sale of the Company's headquarters facility in December 1998. The interest rate on the Note is fixed over the life of the Note, with principal and interest payable in equal monthly installments of $21,735 each on the first day of each month commencing 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, 2013. Because the interest rate on the Note is fixed for the term of the Note, any change in interest rates would not affect the Company's earnings or cash flows if it chose to hold onto the note, although a change in interest rates could affect the market value of the Note if the Company chose to sell the note prior to maturity. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 5. OTHER INFORMATION At the end of May 2001, after analyzing the objectives and performance for the last 6 months and the objectives for the next 6-12 months, the Company decided that it was necessary to reorganize personnel, and 9 employees, or 23% from the total personnel, were laid-off. The departments affected in principal were production, engineering and the Mobile Electronics Division. In the future, the Company will concentrate its efforts on sales, marketing and customer support. ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K. (a) EXHIBIT(S). None (b) REPORTS ON FORM 8-K. None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized. TELEVIDEO, INC. ------------------------------ (REGISTRANT) DATE: September 14, 2001 BY: /s/ K.PHILIP HWANG ------------------------------ K.PHILIP HWANG CHAIRMAN AND C.E.O. AND ACTING CHIEF FINANCIAL OFFICER