UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
Commission File Number 0-21174
AVID TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2977748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
METROPOLITAN TECHNOLOGY PARK
ONE PARK WEST
TEWKSBURY, MA 01876
(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 640-6789
Indicate by check mark whether the registrant 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).
Yes X No _____
Indicate by check mark whether the registrant has been subject to such
filing requirements for the past 90 days.
Yes X No _____
The number of shares outstanding of the registrant's Common Stock as of July 29,
1996 was 21,157,664.
AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
a) Condensed Consolidated Statements of Operations for the
three months ended June 30, 1996 and 1995, and the six
months ended June 30, 1996 and 1995...........................1
b) Condensed Consolidated Balance Sheets as of
June 30, 1996 and December 31, 1995...........................2
c) Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1996 and 1995...............3
d) Notes to Condensed Consolidated Financial Statements..........4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................8
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.......................................15
ITEM 4. Submission of Matters to a Vote of Security-Holders.....16
ITEM 6. Exhibits and Reports on Form 8-K........................16
Signatures.........................................................18
EXHIBIT INDEX......................................................19
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
1996 1995 1996 1995
---------- --------- ---------- ----------
(unaudited)(unaudited)(unaudited)(unaudited)
Net revenues $109,095 $98,447 $201,134 $182,342
Cost of revenues 59,416 47,143 111,872 87,711
---------- --------- ---------- ----------
Gross profit 49,679 51,304 89,262 94,631
---------- --------- ---------- ----------
Operating expenses:
Research and development 16,637 13,141 34,253 25,350
Marketing and selling 33,088 25,449 63,521 47,107
General and administrative 6,081 4,110 11,579 8,344
Nonrecurring costs -- -- 20,150 5,456
---------- --------- ---------- ----------
Total operating expenses 55,806 42,700 129,503 86,257
---------- --------- ---------- ----------
Operating income (loss) (6,127) 8,604 (40,241) 8,374
Interest and other income, net 710 408 1,297 773
---------- --------- ---------- ----------
Income (loss) before income taxes (5,417) 9,012 (38,944) 9,147
Income taxes (1,760) 2,882 (12,489) 3,975
---------- --------- ---------- ----------
Net income (loss) $(3,657) $6,130 $(26,455) $5,172
========== ========= =========== =========
Net income (loss) per common share $(0.17) $0.31 $(1.26) $0.27
========== ========= =========== =========
Weighted average common and common
equivalent shares outstanding 21,104 19,989 21,062 19,059
========== ========= =========== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
1996 1995
--------------- ---------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $53,902 $32,847
Marketable securities 1,036 17,543
Accounts receivable, net of
allowances of $4,729 and $6,472
in 1996 and 1995, respectively 87,515 107,859
Inventories 65,357 63,387
Deferred tax assets 23,735 13,006
Other current assets 8,529 8,311
--------------- ---------------
Total current assets 240,074 242,953
Marketable securities 1,530 30,102
Property and equipment, net 56,663 48,992
Other assets 4,480 9,557
--------------- ---------------
Total assets $302,747 $331,604
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $25,605 $29,836
Current portion of notes payable 2,054 1,781
Accrued expenses 24,030 20,787
Income taxes payable 1,936 6,171
Deferred revenues 24,282 22,118
--------------- ---------------
Total current liabilities 77,907 80,693
--------------- ---------------
Long-term debt 2,038 2,945
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock -- --
Common stock 211 209
Additional paid-in capital 210,846 208,918
Retained earnings 13,040 39,495
Cumulative translation adjustment (1,296) (700)
Net unrealized gains (losses) on
marketable securities 1 44
--------------- ---------------
Total stockholders' equity 222,802 247,966
--------------- ---------------
Total liabilities and
stockholders' equity $302,747 $331,604
=============== ===============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Six Months Ended June 30,
---------------------------
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited) (unaudited)
Net income (loss) $(26,455) $5,172
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 14,089 7,090
Provision for doubtful accounts 3,236 2,649
Deferred tax assets (10,729) --
Provision for product transition costs,
non-cash portion 9,427 --
Provision for restructuring charge,
non-cash portion 1,764 --
Changes in operating assets and
liabilities, net of acquisition:
Accounts receivable 15,064 (16,705)
Inventories (12,368) (9,660)
Other current assets 18 (3,067)
Accounts payable (3,449) 997
Accrued expenses and income taxes payable (795) 639
Deferred revenues 2,507 852
------------ ------------
NET CASH (USED IN) OPERATING ACTIVITIES (7,691) (12,033)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs (1,176) (1,051)
Purchases of property and other assets, net (16,156) (19,509)
Purchases of marketable securities (10,684) (500)
Proceeds from sales of marketable securities 55,719 21,113
------------ ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 27,703 53
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit -- 5,000
Proceeds from long-term debt -- 218
Payments of long-term debt (820) (1,533)
Proceeds from issuance of common stock 1,929 5,386
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,109 9,071
Effects of exchange rate changes
on cash and cash equivalents (66) 259
------------- ------------
Net increase (decrease) in cash
and cash equivalents 21,055 (2,650)
Cash and cash equivalents at
beginning of period 32,847 23,255
------------ ------------
Cash and cash equivalents at end of period $53,902 $20,605
============ ============
Supplemental disclosure of non-cash transactions: For the six months ended June
30, 1996:
Transfer of demonstration equipment to
inventory from property and equipment at net book value....$1,695
Acquisition of equipment under capital lease obligations.....$186
The accompanying notes are an integral part of the condensed consolidated
financial statements.
PART I. FINANCIAL INFORMATION
ITEM 1D. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL INFORMATION
The accompanying condensed consolidated financial statements include the
accounts of Avid Technology, Inc. ("the Company") and its wholly-owned
subsidiaries. The interim financial statements are unaudited. However, in the
opinion of management, the condensed consolidated financial statements include
all adjustments, consisting of only normal, recurring adjustments, necessary for
their fair presentation. Interim results are not necessarily indicative of
results expected for a full year. The accompanying unaudited condensed financial
statements have been prepared in accordance with the instructions for Form 10-Q
and therefore do not include all information and footnotes necessary for a
complete presentation of operations, the financial position, and cash flows of
the Company, in conformity with generally accepted accounting principles. The
Company filed audited consolidated financial statements which included all
information and footnotes necessary for such presentation for the year ended
December 31, 1995 on Form 10-K. The Company's preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reported periods. The most significant estimates included in
these financial statements include accounts receivable and sales allowances,
inventory valuation and income tax valuation allowances. Actual results could
differ from those estimates. In January 1995, the Company completed a merger
with Digidesign, Inc. ("Digidesign"), accounted for as a pooling of interests.
The condensed consolidated financial statements for all periods presented herein
include the accounts of Avid Technology, Inc. and Digidesign. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995 as filed with
the Securities and Exchange Commission on April 1, 1996 (SEC File No. 0-21174).
2. NET INCOME (LOSS) PER COMMON SHARE
Net income per common share is based upon the weighted average number of common
and common equivalent shares outstanding during the period. Common equivalent
shares are included in the per share calculations where the effect of their
inclusion would be dilutive. Net loss per common share is based upon the
weighted average number of common shares outstanding during the period. Common
equivalent shares result from the assumed exercise of outstanding stock options,
the proceeds of which are then assumed to have been used to repurchase
outstanding common stock using the treasury stock method. Fully diluted net
income per share is not materially different from the reported primary net
income per share for all periods presented.
3. INVENTORIES
Inventories consist of the following (in thousands):
June 30, December 31,
1996 1995
-------------- --------------
Raw materials $53,609 $55,690
Work in process 2,936 1,355
Finished goods 8,812 6,342
-------------- --------------
$65,357 $63,387
============== ==============
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following (in thousands):
June 30, December 31,
1996 1995
-------------- --------------
Computer and video equipment $74,318 $61,085
Office equipment and furniture
and fixtures 9,980 9,401
Leasehold improvements 12,352 10,404
-------------- --------------
96,650 80,890
Less accumulated depreciation
and amortization 39,987 31,898
-------------- --------------
$56,663 $48,992
============== ==============
5. ACQUISITIONS
In January 1995, the Company completed a merger with Digidesign, a developer of
digital audio production software and systems. This transaction, which was
accounted for as a pooling of interests, was effected through the exchange of
approximately 6,000,000 shares of the Company's Common Stock for all the issued
and outstanding shares of Digidesign. The condensed consolidated financial
statements for all periods presented herein include the accounts of Avid
Technology, Inc. and Digidesign.
In March 1995, the Company acquired Parallax Software Limited and 3 Space
Software Limited, developers of paint and compositing software, and Elastic
Reality, Inc., a developer of digital image manipulation software. These
transactions, which were accounted for as poolings of interests, were effected
through the exchange of approximately 1,500,000 shares of the Company's Common
Stock for all of the issued and outstanding shares of these entities. The
operations of Parallax Software Limited, 3 Space Software Limited and Elastic
Reality, Inc. are not material to the Company's consolidated operations.
In connection with these acquisitions, the Company in the first quarter of 1995
provided for merger costs of approximately $5.5 million. Of this amount,
approximately $3.9 million represents provision for direct transaction expenses,
primarily professional fees, and $1.6 million consists of provision for various
restructuring charges.
6. LINE OF CREDIT
In 1995, the Company entered into an unsecured line of credit with a group of
banks which provided for up to $50,000,000 in revolving credit. The agreement
was to expire on June 30, 1996, but was amended as of June 28, 1996 to expire
June 28, 1997. Under the terms of the amendment, the Company may borrow up to
$35,000,000. The Company must pay a quarterly commitment fee, which will be
calculated based on the debt service ratio of the Company and will range from
.25% to .40%. The interest rate to be paid on any outstanding borrowings will
also be contingent upon the financial performance of the Company and will range
from the LIBOR rate plus 1.25% to the LIBOR rate plus 1.75%. Additionally, the
Company is required to maintain certain financial ratios and covenants over the
life of the agreement, including a restriction on the payment of dividends. The
Company had no borrowings against this facility as of June 30, 1996.
7. NONRECURRING COSTS
In the first quarter of 1996, the Company recorded a nonrecurring charge of
$20.2 million, consisting of $7.0 million associated with restructuring,
including the Company's costs related to staff reductions and the decision to
discontinue development of certain products and projects, and $13.2 million
related to product transition costs associated with the transition from NuBus to
PCI bus technology in some of the Company's product lines. The restructuring
charge includes approximately $5.0 million of costs related to a staff reduction
of approximately 70 employees and associated write-offs of fixed assets.
Approximately $2.0 million of the $7.0 million restructuring charge relates to
the cancellation of certain products and development projects. As of June 30,
1996, $5.3 million of the $7.0 million restructuring charge had been recorded
against the liability. Included in this $5.3 million were approximately $3.6
million of cash payments consisting of $2.1 million of salaries and related
severance costs and $1.5 million of other staff reduction and discontinued
development costs. The non-cash charges of $1.7 million recorded during 1996
consists primarily of $1.5 million for the write-off of fixed assets. The
Company expects that the restructuring actions will be completed by the end of
1996.
8. CONTINGENCIES
In December 1995, six purported shareholder class action complaints were filed
in the United States District Court for the District of Massachusetts naming the
Company and certain of its underwriters and officers and directors as
defendants. On July 31, 1996, the six actions were consolidated into two
lawsuits: one brought under the 1934 Securities Exchange Act (the "`34 Act
suit") and one under the 1933 Securities Act (the "`33 Act suit"). Principal
allegations contained in the two complaints include claims that the defendants
violated federal securities laws and state common law by allegedly making false
and misleading statements that were not true when made and by allegedly failing
to disclose material information that was required to be disclosed, purportedly
causing the value of the Company's stock to be artificially inflated. The `34
Act suit was brought on behalf of all persons who bought the Company's stock
between July 26, 1995 and December 20, 1995. The `33 Act suit was brought on
behalf of persons who bought the Company's stock in and pursuant to its
September 21, 1995 public offering. Both complaints seek unspecified damages for
the decline of the value of the Company's stock during the applicable period.
Although the Company believes that it and the other defendants have meritorious
defenses to the allegations made by the plaintiffs and intends to contest these
lawsuits vigorously, an adverse resolution of this litigation could have a
material adverse effect on the Company's consolidated financial position or
results of operations in the period in which the litigation is resolved. No
costs have been accrued for this possible loss contingency.
On March 11, 1996, the Company was named as defendant in a patent infringement
suit filed in the United States District Court for the Western District of Texas
by Combined Logic Company, a California partnership located in Beverly Hills,
California. On May 16, 1996, the suit was transferred to the United States
District Court for the Southern District of New York. The complaint alleges
infringement by Avid of U.S. patent number 4,258,385, issued in 1981, and seeks
injunctive relief, treble damages and costs and attorneys' fees. The Company
believes that it has meritorious defenses to the complaint and intends to
contest it vigorously. However, an adverse resolution of this litigation could
have an adverse effect on the Company's consolidated financial position or
results of operations in the period in which the litigation is resolved.
On April 23, 1996, the Company was named as defendant in a patent infringement
suit filed in the United States District Court for the District of Massachusetts
by Data Translation, Inc., of Marlboro, Massachusetts. The complaint alleges
infringement by the Company of U.S. patent number 5,488,695 and seeks injunctive
relief, treble damages and costs and attorneys' fees. The Company believes that
it has meritorious defenses to the complaint and intends to defend it
vigorously. However, an adverse resolution of this litigation could have an
adverse effect on the Company's consolidated financial position or results of
operations in the period in which the litigation is resolved.
9. STOCK OPTION PLANS
In February 1996, the 1994 Stock Option Plan was amended to increase the number
of shares authorized for issuance thereunder from 1,600,000 to 2,400,000 shares
of Common Stock. The 1993 Director Stock Option Plan was also amended, in April
1996, to increase the number of shares authorized for issuance thereunder from
120,000 shares of Common Stock to 220,000 shares.
10. SUBSEQUENT EVENT
On July 31, 1996, the 1993 Employee Stock Purchase Plan expired and was replaced
with the 1996 Employee Stock Purchase Plan. The 1996 Employee Stock Purchase
Plan authorizes the issuance of a maximum of 200,000 shares of Common Stock in
semi-annual offerings at a price equal to the lower of 85% of the closing price
on the applicable offering commencement date or 85% of the closing price on the
applicable offering termination date.
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The text of this document may include forward-looking statements. Actual
results may differ materially from those described herein, depending on such
factors as are described herein, including under "CERTAIN FACTORS THAT MAY
AFFECT FUTURE RESULTS."
The Company was founded in 1987 to develop and market digital video
editing systems for the production and post production markets. The Company
shipped its first product, the Avid/1 Media Composer system, in the fourth
quarter of 1989. The Company is currently selling Media Composer system version
6.1. In 1992, the Company began shipping its AudioVision product to the digital
audio editing segment of the post production market, and in 1993 introduced Film
Composer for the film editing market and a line of disk-based capture, editing
and playback products for the broadcast news industry. In 1994, the Company
acquired two businesses, SofTECH Systems, Inc. and the newsroom systems division
of Basys Automation Systems, Inc., to expand its presence in the newsroom
automation systems market. In January 1995, the Company completed its merger
with Digidesign, Inc. ("Digidesign"). The Digidesign merger added digital audio
production software and related application lines. Pro Tools, the most
significant product line acquired in the merger, is marketed to audio
professionals. The Media Composer and Pro Tools product lines, together with
add-on software, storage devices and associated maintenance fees, have accounted
for a substantial majority of the Company's revenues to date. In March 1995, the
Company acquired Elastic Reality, Inc., a developer of digital image
manipulation software, and Parallax Software Limited and 3 Space Software
Limited, together developers of paint and compositing software, all of whose
products are sold primarily to the film and video production and post-production
markets. In March 1996 and in May 1996, the Company began shipments of the Media
Composer and Pro Tools product lines, respectively, for use on PCI-based
computers.
RESULTS OF OPERATIONS
NET REVENUES. The Company's net revenues have been derived mainly from the
sales of disk-based digital, nonlinear media editing systems and related
peripherals, licensing of related software and sales of software maintenance
contracts. Net revenues increased by $10.6 million (10.8%) to $109.1 million in
the quarter ended June 30, 1996 from $98.4 million in the same quarter of last
year. Net revenues for the six months ended June 30, 1996 of $201.1 million
increased by $18.8 million (10.3%) from $182.3 for the six months ended June 30,
1995. The increase in net revenues was primarily the result of higher unit sales
of the Media Composer product line and of digital audio products. In March 1996
and in May 1996, the Company began shipments of the Media Composer and Pro Tools
product lines, respectively, for use on PCI-based computers. To date, product
returns have been immaterial.
International sales (sales to customers outside North America) accounted
for approximately 52.2% of the Company's 1996 second quarter net revenues
compared to approximately 45.0% for the same quarter in 1995. International
sales increased by 29.6% for the second quarter 1996 compared to the same
quarter in 1995. The increase in international sales in 1996 was attributable
primarily to higher unit sales of Media Composer and Pro Tools product lines in
Europe and the Asia Pacific region.
International sales accounted for approximately 51.0% and 47.0% of the
Company's net revenues for the first six months of 1996 and 1995, respectively.
International sales increased by 20.8% in the six-month period ended June 30,
1996 from the same period in 1995.
GROSS PROFIT. Cost of revenues consists primarily of costs associated with
the acquisition of components, the assembly, test and distribution of finished
products, provisions for inventory obsolescence, warehousing, shipping and
post-sales customer support costs. The resulting gross profit fluctuates based
on factors such as the mix of products sold, the cost and proportion of
third-party hardware included in the systems sold by the Company, the
distribution channels through which products are sold, the timing of new product
introductions, the offering of product upgrades, price discounts and other sales
promotion programs and sales of third-party computer hardware to its
distributors. Gross margin decreased to 45.5% in the second quarter of 1996
compared to 52.1% in the second quarter of 1995 and decreased to 44.4% for the
six-month period ended June 30, 1996 from 51.9% for the same period in 1995 due
to an increase in manufacturing overhead associated with higher facility costs
and increased provisions for inventory obsolescence, increased hardware sales,
as well as increased rebates and discounts to distributors on system sales,
greater use of discounts and other sales promotion programs, including upgrading
Media Composer systems for use on PCI-based computers and an increase in the
percentage of customer support costs allocated to cost of revenues. Gross
margins in the second quarter of 1996 were also negatively affected by the
recognition of the sale of certain server-based broadcast products at an
aggregate gross margin of approximately 20%. The Company recognized
approximately $2.4 million in revenues from two of these server-based broadcast
systems in the second quarter of 1996 and approximately $1.9 million of related
costs. The Company expects gross margins during the remainder of 1996 to be less
than gross margins in 1995 because of higher manufacturing overhead, increased
percentage of customer support costs allocated to post-sales support, higher
provisions for inventory obsolescence and increased sales of products bearing a
higher proportion of third-party hardware.
RESEARCH AND DEVELOPMENT. Research and development expenses for the second
quarter of 1996 increased $3.5 million (26.6%) from the second quarter of 1995.
For the six-month period ended June 30, 1996, research and development expenses
increased $8.9 million (35.1%) compared to the same period of 1995. These
increased expenditures were primarily due to additions to the Company's
engineering and product management staffs for the continued development of new
and existing products. Research and development expenses increased to 15.3% of
net revenues in the second quarter of 1996 compared to 13.3% in the same quarter
of 1995 due to significant resources required to develop and maintain various
products, including the PCI versions of the Media Composer and Pro Tools
products, SGI-based editing and image processing software, newsroom computer
systems, video processing hardware and the CamCutter product. The Company
capitalized software development costs of approximately $778,000 or 4.5% and
$1.2 million or 3.3% of total research and development costs during the second
quarter of 1996 and the six-month period ended June 30, 1996, respectively.
During the second quarter of 1995 and the six months ended June 30, 1995,
respectively, the Company capitalized approximately $722,000 or 5.2% and
$976,000 or 3.7% of total research and development costs. The capitalized
software development costs in the second quarter of 1996 were associated
primarily with enhancements to the Media Composer software and development of
SGI-based editing and image processing software, and, to a lesser extent, with
enhancements, initial development or purchase of software to be used in other
products. These costs will be amortized into cost of revenues over the estimated
life of the related products, generally 12 to 24 months. Amortization totaled
approximately $750,000 and $1.4 million during the second quarter of 1996 and
the six-month period ended June 30, 1996, respectively. For the three and six
month periods ended June 30, 1995, amortization totaled approximately $224,000
and $437,000, respectively.
MARKETING AND SELLING. Marketing and selling expenses for the second
quarter of 1996 increased by $7.6 million (30.0%) from the second quarter of
1995 and increased by $16.4 million (34.8%) for the six-month period ended June
30, 1996 compared to the same period in 1995, primarily due to expansion of the
Company's sales and pre-sales support organization and the opening of field
sales offices domestically and internationally during the later part of 1995.
Marketing and selling expenses increased as a percentage of net revenues from
25.9% and 25.8% in the second quarter of 1995 and the six-month period ended
June 30, 1995, respectively, to 30.3% and 31.6% in the corresponding periods in
1996 due primarily to expansion of the Company's field sales operations and to a
lesser extent, to higher costs associated with the Company's participation in
the National Association of Broadcasters trade show.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
second quarter of 1996 increased by $2.0 million (48.0%) from the second quarter
of 1995 and increased $3.2 million (38.8%) for the six-month period ended June
30, 1996, compared to the six-month period ended June 30, 1995. General and
administrative expenses increased as a percentage of net revenues from 4.2% in
the second quarter of 1995 to 5.6% in the second quarter of 1996 and from 4.6%
to 5.8% for the six-month period ended June 30, 1995 and the same period in
1996, respectively. These increased expenses were primarily due to increased
staffing and associated costs necessary to support the Company's growth, as well
as increased legal expenses associated with various litigation matters to which
the Company is a party.
NONRECURRING COSTS. In the first quarter of 1996, the Company recorded
charges for nonrecurring costs consisting of $7.0 million for restructuring
charges related to staffing reductions and the Company's decision to discontinue
certain products and development projects and $13.2 million for product
transition costs in connection with the transition from NuBus to PCI bus
technology in certain of its product lines. In the first quarter of 1995, the
Company acquired Digidesign, Inc., Parallax Software Limited, 3 Space Software
Limited and Elastic Reality, Inc. These transactions, accounted for as poolings
of interest, were effected through the exchange of approximately 7,500,000
shares of Common Stock for all of the issued and outstanding shares of these
entities. In connection with these acquisitions, the Company provided for merger
costs of approximately $5.5 million, of which $3.9 million represented direct
transaction expenses and $1.6 million consists of various restructuring charges.
INTEREST AND OTHER INCOME, NET. Interest and other income, net consists
primarily of interest income, interest expense and other income. Interest
income, net for the second quarter of 1996 increased $302,000 from the second
quarter of 1995 primarily due to a gain of $257,000 recorded in connection with
the sale of the VideoShop consumer video editing product line in the second
quarter of 1996. For the six months ended June 30, 1996 and 1995, interest
income, net increased $524,000 primarily due to higher cash and investment
balances in the first half of 1996 compared to the first half of 1995, and the
gain on sale of the VideoShop product line in the second quarter of 1996.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 32% for
both the second quarter of 1996 and 1995. The 1996 and 1995 second quarter
effective tax rates are less than the Federal statutory rate of 35% primarily
due to the impact of the Company's foreign subsidiaries. The Company's effective
tax rate was 32% and 43.5% for the six-month periods ended June 30, 1996 and
June 30, 1995, respectively. The 1995 provision included taxes of $4.6 million
at an effective rate of 32% on $14.6 million of earnings before merger charges.
The 1995 provision for the six-month period ended June 30, 1995 also included a
tax benefit of $640,000 on merger charges of $5.5 million, of which $1.6 million
were tax deductible.
LIQUIDITY AND CAPITAL RESOURCES.
The Company has funded its operations to date through private sales of
equity securities, public offerings of equity securities in 1993 and 1995 which
generated net proceeds to the Company of approximately $67 million and $88
million, respectively, as well as through cash flows from operations. As of June
30, 1996 the Company's principal sources of liquidity included cash, cash
equivalents and marketable securities of approximately $56.5 million.
The Company's operating activities used cash of $7.7 million in the
six-month period ended June 30, 1996 compared to $12.0 million in the six-month
period ended June 30, 1995. Cash was used primarily during the first half of
1996 to fund the Company's operating losses, decreases in accounts payable, and
increases in inventory.
The Company purchased $16.2 million of property and equipment and other
assets in the six months ended June 30, 1996, compared to $19.5 million in the
same period of 1995. These purchases included primarily the purchase of
equipment for demonstrating and supporting PCI-based and SGI-based products,
hardware and software for the Company's information systems and to support
research and development activities.
The Company has had an equipment-financing arrangement with a bank which
expired on March 31, 1996. In 1995 the Company entered into an unsecured line of
credit with a group of banks which provided for up to $50,000,000 in revolving
credit. The agreement was to expire on June 30, 1996, but was amended as of June
28, 1996 to expire June 28, 1997. Under the terms of the amendment, the Company
may borrow up to $35,000,000. The Company must pay a quarterly commitment fee,
which will be calculated based on the debt service ratio of the Company and will
range from .25% to .40%. The interest rate to be paid on any outstanding
borrowings will also be contingent upon the financial performance of the Company
and will range from the LIBOR rate plus 1.25% to the LIBOR rate plus 1.75%.
Additionally, the Company is required to maintain certain financial ratios and
covenants over the life of the agreement, including a restriction on the payment
of dividends. The Company has in certain prior periods been in default of
certain financial covenants. On these occasions the defaults have been waived by
the banks. There can be no assurance that the Company will not default in future
periods or that, if in default, it will be able to obtain such waivers. The
Company had no borrowings against either the original line of credit or the
amended line and was not in default of any financial covenants as of June 30,
1996. The Company believes existing cash and marketable securities, internally
generated funds and available borrowings under its bank credit line will be
sufficient to meet the Company's cash requirements, including capital
expenditures, at least through the end of 1996. In the event that the Company
requires additional working capital, or that the Company's net cash expenditures
continue at levels experienced in recent quarters, the Company would need to
seek additional sources of capital. While the Company believes that it would be
able to obtain such financing, there is no assurance that it would be successful
in doing so, or doing so on terms favorable to the Company.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, the following:
The Company's gross margin has fluctuated, and may continue to fluctuate,
based on factors such as the mix of products sold, cost and the proportion of
third-party hardware included in the systems sold by the Company, the
distribution channels through which products are sold, the timing of new product
introductions, the offering of product upgrade, price discount and other sales
promotion programs, the costs of swapping or fixing products released to the
market with errors or flaws, provisions for inventory obsolescence, sales of
third-party computer hardware to its distributors and competitive pressure on
selling prices of products. The Company's systems and software products
typically have higher gross margins than storage devices and product upgrades.
Gross profit varies from product to product depending primarily on the
proportion of third-party hardware included in each product. The Company, from
time to time, adds functionality and features to its systems. If such additions
are accomplished through the use of more, or more costly, third-party hardware,
and if the Company does not increase the price of such systems to offset these
increased costs, the Company's gross margins on such systems would be adversely
affected. The Company expects gross margins during the remainder of 1996 to be
less than gross margins in 1995 because of higher manufacturing overhead,
increased percentage of customer support costs allocated to post-sales support,
higher provisions for inventory obsolescence and increased sales of products
bearing a higher proportion of third-party hardware.
In 1995, the Company shipped server-based, all-digital broadcast newsroom
systems to a limited number of beta sites. These systems incorporate a variety
of the Company's products, as well as a significant amount of hardware purchased
from third parties, including computers purchased from Silicon Graphics, Inc.
("SGI"). Because some of the technology and products in these systems were new
and untested in live broadcast environments, the Company provided greater than
normal discounts to these initial customers. In addition, because some of the
technology and products in these systems were new and untested in live broadcast
environments, the Company has incurred unexpected delays and greater than
expected costs in completing and supporting these initial installations to
customers' satisfaction. As a result, the Company expects that it will report,
in the aggregate, a loss on these sales, when all revenues and costs are
recognized. The Company recognized approximately $2.4 million in revenues from
three of these systems in the second quarter of 1996 and approximately $1.9
million of related costs. In future quarters, the Company expects to recognize
an additional $6.0 million in revenues and incur $7.8 million in costs
associated with the remaining systems for which revenues will be recognized. The
Company has provided a reserve for this expected loss. Revenues and costs are
recognized upon acceptance of the systems by customers. The Company is unable to
determine the timing of this acceptance. There can be no assurance that the
remaining systems will be accepted by customers or that the Company will not
incur further costs in completing the installations. If customers do not accept
these systems, the Company could face additional costs associated with reducing
the value of the inventory included in the systems. The Company's overall gross
margin percentage will be reduced in any quarter or quarters in which the
remaining systems are recognized or written off. To the extent that the Company
sells such server-based, all-digital broadcast newsroom systems to other
customers in the future, the Company believes that such sales may be profitable.
However, the Company believes that because of the high proportion of third-party
hardware, including computers and storage devices, included in such systems,
that the gross margins on such sales would be lower than the gross margins
generally on the Company's other systems.
The Company's operating expense levels are based, in part, on its
expectations of future revenues. Therefore, if revenue levels fail to meet
internal expectations, the Company's operating results would be adversely
affected and there can be no assurance that the Company would be able to
maintain profitability.
The Company has expanded its product line to address the digital media
production needs of the television broadcast news market and the emerging market
for multimedia production tools. The Company has limited experience in serving
these markets, and there can be no assurance that the Company will be able to
develop such products successfully, or that such products will achieve
widespread customer acceptance. A significant portion of the Company's future
growth will depend on customer acceptance in these and other new markets. Any
failure of such products to achieve market acceptance, incurring by the Company
of additional costs and expenses to improve market acceptance of such products,
or the withdrawal of the Company from such new markets could have a material
adverse effect on the Company's business and results of operations.
The Company's products generally operate only on Apple computers. Apple
has recently been suffering business and financial difficulties. In
consideration of these difficulties, there can be no assurance that customers
will not delay purchases of Apple-based products, or purchase substitutable
products based on non-Apple computers, that Apple will continue to develop and
manufacture products suitable for the Company's existing and future markets or
that the Company will be able to secure an adequate supply of Apple computers,
the occurrence of any of which could have a material adverse effect on the
Company's business and results of operations.
In addition, Apple has adopted the PCI bus standard for data transfer for
its computers. The Company believes certain of its prospects and customers have
delayed purchases or have purchased PCI-based systems from competing vendors.
The Company began shipping Media Composer products based on the PCI bus standard
in March 1996 and began shipping Pro Tools products based on the PCI bus in May
of 1996. Any difficulty or delay by third-party developers in developing
applications for use on PCI bus based Pro Tools products, any failure of the Pro
Tools or Media Composer PCI bus products to obtain market acceptance, the delay
or deferral of customer purchase decisions, the cost of any upgrade programs to
PCI bus that have been or may be implemented by the Company, or the inability of
the Company to secure an adequate supply of PCI-compatible video processor
boards to include in its systems could have a material adverse effect on the
Company's business and results of operations.
The Company has from time to time developed new products, or upgraded
existing products that incorporate advances in enabling technologies such as PCI
bus. The Company believes that further advances will occur in bus architectures
and other enabling technologies, such as microprocessors, computers, operating
systems, storage devices and digital media formats. The Company may be required,
based on market demand, to upgrade existing products or develop other products
that incorporate these further advances. In particular, the Company believes
that it will be necessary to develop additional products which operate using the
Windows NT operating system. There can be no assurance that the Company will be
successful in developing NT-based or other new products, or that they will gain
market acceptance, if developed. Any failure to develop such products in a
timely way or to gain market acceptance for them could have a material adverse
effect on the Company's business and results of operations.
The Company has announced the introduction of several new products which
have been designed to operate on computers from SGI. The SGI products, which had
been expected to be released during the second quarter of 1996, are now expected
to be generally available for commercial sale during the second half of 1996.
Any further delay in the completion or introduction of the SGI products, the
failure of these products to achieve market acceptance, the delay or deferral of
customer purchase decisions, the cost of any upgrade programs that may be
implemented by the Company, or the inability of the Company or its dealers to
secure an adequate supply of SGI computer systems could have a material adverse
effect on the Company's business and results of operations.
The Company has experienced a period of rapid growth, which has placed a
significant strain on its resources. The Company has in the past experienced
personnel transitions among its senior managers and expects transitions from
time to time in the future as the Company's organizational structure continues
to evolve. In addition, many of the Company's senior management and other key
employees have not had experience in managing organizations of the Company's
size or larger. To manage effectively any future growth, the Company will be
required to continue to improve its operational and financial systems and to
expand, train and manage its employee base. Since the beginning of 1996, the
Company has incurred a higher rate of employee turnover than in prior years. The
loss of key employees, any delay or failure in attracting new employees or any
failure by the Company to manage any future growth effectively could have a
material adverse effect on the Company's business.
The Company is dependent upon sole source suppliers for certain key
components used in its products. Products purchased by the Company from sole
source vendors include computers from Apple and SGI; video compression chips
manufactured by C-Cube Microsystems; a small computer systems interface ("SCSI")
accelerator board from ATTO Technology; a 3D digital video effects board from
Pinnacle Systems; certain storage devices from Ciprico, Inc. and an application
specific integrated circuit ("ASIC") from AMI. The Company purchases these sole
source components pursuant to purchase orders placed from time to time. The
Company generally does not carry significant inventories of these sole source
components and has no guaranteed supply arrangements. These purchasing
arrangements can result in delays in obtaining products from time to time. No
assurance can be given that sole source suppliers will devote the resources
necessary to support the enhancement or continued availability of such
components or that any such supplier will not encounter financial difficulties.
While the Company believes that alternative sources of supply for its sole
source components could be developed, its business and results of operations
could be materially adversely affected if it were to encounter an interruption
in its sources of supply.
The markets for digital media editing and production systems are intensely
competitive and subject to rapid change. The Company encounters competition in
the film, video and audio production and post-production, television broadcast
news and multimedia tools markets. Many current and potential competitors of the
Company have substantially greater financial, technical and marketing resources
than the Company. Such competitors may use these resources to lower their
product costs and thus be able to lower prices to levels at which the Company
could not operate profitably. Further, such competitors may be able to develop
products comparable or superior to those of the Company or adapt more quickly
than the Company to new technologies or evolving customer requirements.
Accordingly, there can be no assurance that the Company will be able to compete
effectively in its target markets or that future competition will not adversely
affect its business and results of operations.
The Company converted on January 1, 1996 its core information systems to a
new system developed by Systems, Applications and Products ("SAP"). Any
difficulties in this system conversion could delay the shipment of orders, the
release of invoices or collection of receivables which could have an adverse
effect on the Company's operations and cash flows.
The Company is involved in various legal proceedings, and an adverse
resolution of any such proceedings could have a material adverse effect on the
Company's business and results of operations. See Note 8 to Condensed
Consolidated Financial Statements (unaudited) and Part II, Item 1, "Legal
Proceedings."
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1995, six purported shareholder class action complaints were filed
in the United States District Court for the District of Massachusetts naming the
Company and certain of its underwriters and officers and directors as
defendants. On July 31, 1996, the six actions were consolidated into two
lawsuits: one brought under the 1934 Securities Exchange Act (the "`34 Act
suit") and one under the 1933 Securities Act (the "`33 Act suit"). Principal
allegations contained in the two complaints include claims that the defendants
violated federal securities laws and state common law by allegedly making false
and misleading statements that were not true when made and by allegedly failing
to disclose material information that was required to be disclosed, purportedly
causing the value of the Company's stock to be artificially inflated. The `34
Act suit was brought on behalf of all persons who bought the Company's stock
between July 26, 1995 and December 20, 1995. The `33 Act suit was brought on
behalf of persons who bought the Company's stock in and pursuant to its
September 21, 1995 public offering. Both complaints seek unspecified damages for
the decline of the value of the Company's stock during the applicable period.
Although the Company believes that it and the other defendants have meritorious
defenses to the allegations made by the plaintiffs and intends to contest these
lawsuits vigorously, an adverse resolution of this litigation could have a
material adverse effect on the Company's consolidated financial position or
results of operations in the period in which the litigation is resolved. No
costs have been accrued for this possible loss contingency.
On March 11, 1996, the Company was named as defendant in a patent infringement
suit filed in the United States District Court for the Western District of Texas
by Combined Logic Company, a California partnership located in Beverly Hills,
California. On May 16, 1996, the suit was transferred to the United States
District Court for the Southern District of New York. The complaint alleges
infringement by Avid of U.S. patent number 4,258,385, issued in 1981, and seeks
injunctive relief, treble damages and costs and attorneys' fees. The Company
believes that it has meritorious defenses to the complaint and intends to
contest it vigorously. However, an adverse resolution of this litigation could
have an adverse effect on the Company's consolidated financial position or
results of operations in the period in which the litigation is resolved.
On April 23, 1996, the Company was named as defendant in a patent infringement
suit filed in the United States District Court for the District of Massachusetts
by Data Translation, Inc., of Marlboro, Massachusetts. The complaint alleges
infringement by the Company of U.S. patent number 5,488,695 and seeks injunctive
relief, treble damages and costs and attorneys' fees. The Company believes that
it has meritorious defenses to the complaint and intends to defend it
vigorously. However, an adverse resolution of this litigation could have an
adverse effect on the Company's consolidated financial position or results of
operations in the period in which the litigation is resolved.
OTHER
The Company has also received inquiries with regard to possible additional
patent infringement claims. These inquiries have been referred to counsel and
are in various stages of discussion. If any infringements are determined to
exist, the Company may seek licenses or settlements. In addition, from time to
time as a normal incidence of the nature of the Company's business, various
claims, charges and litigation are asserted or commenced against the Company
arising from or related to contractual or employee relations or product
performance. Management does not believe these claims would have a material
adverse effect on the financial position or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on June 5, 1996.
At the meeting, Messrs. William E. Foster, William S. Kaiser and William J.
Miller were elected as Class III Directors. The vote with respect to each
nominee is set forth below:
Total Vote For Total Vote Withheld
Each Director From Each Director
--------------------- ---------------------
Mr. Foster 16,762,118 1,558,903
Mr. Kaiser 17,354,421 966,600
Mr. Miller 17,355,792 966,229
Additional Directors of the Company are Charles T. Brumback, Peter C.
Gotcher, Robert M. Halperin, Paul A. Maeder, Curt A. Rawley, and William J.
Warner.
The stockholders also authorized the adoption of the Company's 1996
Employee Stock Purchase Plan and authorized the issuance of up to 200,000 shares
under the Plan by a vote of 14,983,508 shares for, 148,655 shares against,
31,647 shares abstaining, with 3,157,211 broker non-votes.
The stockholders also authorized the issuance of an additional 800,000 shares
(from 1,600,000 shares to 2,400,000 shares) of Common Stock by approving the
amendment to the Company's 1994 Stock Option Plan by a vote of 12,556,283 shares
for, 2,551,302 shares against, 56,225 shares abstaining, with 3,157,211 broker
non-votes.
The stockholders further authorized the issuance of an additional 100,000
shares (from 120,000 shares to 220,000 shares) of Common Stock by approving the
amendment to the Company's 1993 Director Stock Option Plan by a vote of
13,657,918 shares for, 1,425,714 shares against, 80,178 shares abstaining, with
3,157,211 broker non-votes.
In addition, the stockholders ratified the selection of Coopers & Lybrand
L.L.P. as the Company's independent auditors by a vote of 18,264,497 shares for,
32,062 shares against, and 24,462 shares abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
10.1 Second Amendment dated as of February 28, 1996 to Amended and
Restated Revolving Credit Agreement among Avid Technology,
Inc., The First National Bank of Boston, as agent, NationsBank
of Texas, N.A., BayBank and ABN AMRO Bank N.V. dated as of
June 30, 1995.
10.2 Third Amendment dated as of May 8, 1996 to Amended and
Restated Revolving Credit Agreement among Avid Technology,
Inc., The First National Bank of Boston, as agent, NationsBank
of Texas, N.A., BayBank and ABN AMRO Bank N.V.
dated as of June 30, 1995.
10.3 Fourth Amendment dated as of June 28, 1996 to Amended and
Restated Revolving Credit Agreement among Avid Technology,
Inc., The First National Bank of Boston, as agent, NationsBank
of Texas, N.A., BayBank and ABN AMRO Bank N.V.
dated as of June 30, 1995.
10.4 Fifth Amendment dated as of July 1, 1996 to Amended and
Restated Revolving Credit Agreement among Avid Technology,
Inc., The First National Bank of Boston, as agent, NationsBank
of Texas, N.A., BayBank and ABN AMRO Bank N.V.
dated as of June 30, 1995.
10.5 Amended and Restated Lease dated as of June 7, 1996 between
MGI One Park West, Inc. and Avid Technology, Inc.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. For the fiscal quarter ended June 30, 1996 the
Company filed no Current Reports on Form 8-K.
SIGNATURES
Pursuant to the requirements 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.
Avid Technology, Inc.
Date: August 14, 1996 By: /S/ JONATHAN H. COOK
Jonathan H. Cook,
Vice President, Finance and Administration
Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
10.1 - Second Amendment dated as of February 28, 1996 to Amended
and Restated Revolving Credit Agreement among Avid
Technology, Inc., The First National Bank of Boston,
as agent, NationsBank of Texas, N.A., BayBank and
ABN AMRO Bank N.V. dated as of June 30, 1995.
10.2 - Third Amendment dated as of May 8, 1996 to Amended
and Restated Revolving Credit Agreement among Avid
Technology, Inc., The First National Bank of Boston,
as agent, NationsBank of Texas, N.A., BayBank and
ABN AMRO Bank N.V. dated as of June 30, 1995.
10.3 - Fourth Amendment dated as of June 28, 1996 to Amended
and Restated Revolving Credit Agreement among Avid
Technology, Inc., The First National Bank of Boston,
as agent, NationsBank of Texas, N.A., BayBank and
ABN AMRO Bank N.V. dated as of June 30, 1995.
10.4 - Fifth Amendment dated as of July 1, 1996 to Amended
and Restated Revolving Credit Agreement among Avid
Technology, Inc., The First National Bank of Boston,
as agent, NationsBank of Texas, N.A., BayBank and
ABN AMRO Bank N.V. dated as of June 30, 1995.
10.5 - Amended and Restated Lease dated as of June 7, 1996
between MGI One Park West, Inc. and Avid Technology, Inc.
27 - Financial Data Schedule