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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 SEPTEMBER 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 November
4, 1996 was 21,281,420.
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AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 September 30, 1996 and 1995, and the nine
months ended September 30, 1996 and 1995..............................1
b) Condensed Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995..............................2
c) Condensed Consolidated Statements of Cash Flows
for the nine months ended September 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...............................................16
ITEM 6. Exhibits and Reports on Form 8-K................................17
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 Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1996 1995 1996 1995
--------- ---------- --------- ----------
(unaudited) (unaudited) (unaudited) (unaudited)
Net revenues $114,664 $114,377 $315,798 $296,719
Cost of revenues 60,670 56,408 172,542 144,119
--------- ---------- --------- ----------
Gross profit 53,994 57,969 143,256 152,600
--------- ---------- --------- ----------
Operating expenses:
Research and development 17,569 12,834 51,822 38,184
Marketing and selling 31,303 27,747 94,823 74,854
General and administrative 6,767 4,459 18,346 12,803
Nonrecurring costs 8,800 -- 28,950 5,456
--------- ---------- --------- ----------
Total operating expenses 64,439 45,040 193,941 131,297
--------- ---------- --------- ----------
Operating income (loss) (10,445) 12,929 (50,685) 21,303
Interest and other income
(expense), net 523 (53) 1,820 720
---------- ---------- --------- ----------
Income (loss) before income
taxes (9,922) 12,876 (48,865) 22,023
Provision (benefit) for income
taxes (3,164) 4,122 (15,652) 8,097
---------- ---------- ---------- ----------
Net income (loss) $(6,758) $8,754 $(33,213) $13,926
========== ========== ========== ==========
Net income (loss) per common
share $(0.32) $0.43 $(1.57) $0.71
========== ========== ========== ==========
Weighted average common and
common equivalent shares
outstanding 21,224 20,344 21,116 19,487
========== ========== ========= ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
1996 1995
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $72,986 $32,847
Marketable securities 2,663 17,543
Accounts receivable, net of
allowances of $5,058 and $6,472
in 1996 and 1995, respectively 83,563 107,859
Inventories 51,667 63,387
Deferred tax assets 23,735 13,006
Other current assets 9,241 8,311
------------- ------------
Total current assets 243,855 242,953
Marketable securities -- 30,102
Property and equipment, net 53,023 48,992
Other assets 2,850 9,557
------------- ------------
Total assets $299,728 $331,604
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $23,123 $29,836
Current portion of long term debt 1,923 1,781
Accrued expenses 29,765 20,787
Income taxes payable -- 6,171
Deferred revenues 25,748 22,118
------------- ------------
Total current liabilities 80,559 80,693
------------- ------------
Long-term debt 1,501 2,945
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock -- --
Common stock 213 209
Additional paid-in capital 212,352 208,918
Retained earnings 6,282 39,495
Cumulative translation adjustment (1,180) (700)
Net unrealized gains (losses)
on marketable securities 1 44
------------- ------------
Total stockholders' equity 217,668 247,966
------------- ------------
Total liabilities and
stockholders' equity $299,728 $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) Nine Months Ended September 30,
1996 1995
---------- ----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(33,213) $13,926
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 21,527 13,475
Provision for doubtful accounts 4,370 2,561
Deferred tax assets (10,729) --
Tax benefit of stock option exercises 97 4,856
Provision for product transition costs,
non-cash portion 13,150 --
Provision for nonrecurring costs, non-cash
portion 6,394 --
Changes in operating assets and liabilities, net
of acquisition:
Accounts receivable 18,570 (40,412)
Inventories (2,978) (21,118)
Other current assets (711) (4,625)
Accounts payable (5,940) 5,941
Accrued expenses and income taxes payable 2,092 3,863
Deferred revenues 4,008 4,216
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 16,637 (17,317)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs (1,296) (2,235)
Purchases of property and equipment and other
assets, net (21,966) (36,123)
Purchases of marketable securities (13,311) (16,641)
Proceeds from sales of marketable securities 58,250 27,812
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 21,677 (27,187)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit -- 15,000
Proceeds from long-term debt -- 2,733
Payments of long-term debt (1,488) (2,274)
Proceeds from issuance of common stock 3,339 93,564
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,851 109,023
Effects of exchange rate changes
on cash and cash equivalents (26) (30)
---------- ----------
Net increase in cash and cash equivalents 40,139 64,489
Cash and cash equivalents at beginning of period 32,847 23,255
---------- ----------
Cash and cash equivalents at end of period $72,986 $87,744
========== ==========
Supplemental disclosure of non-cash transactions: For the nine months ended
September 30, 1996:
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):
September 30, December 31,
1996 1995
-------------- --------------
Raw materials $42,747 $55,690
Work in process 1,768 1,355
Finished goods 7,152 6,342
============== ==============
$51,667 $63,387
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4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following (in thousands):
September 30, December 31,
1996 1995
-------------- --------------
Computer and video equipment $75,148 $61,085
Office equipment and furniture
and fixtures 10,674 9,401
Leasehold improvements 12,377 10,404
-------------- --------------
98,199 80,890
Less accumulated depreciation
and amortization 45,176 31,898
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$53,023 $48,992
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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.
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.
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 direct transaction expenses, primarily
professional fees, and $1.6 million consists of 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% on the $35,000,000 line. 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 September 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 cancelation of certain products and development projects. As of September
30, 1996, $6.0 million of the $7.0 million restructuring charge had been
recorded against the liability. Included in this $6.0 million were approximately
$4.3 million of cash payments consisting of $2.9 million of salaries and related
severance costs and $1.4 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 related restructuring actions will be completed by the
end of 1996.
In September, 1996 the Company recorded a nonrecurring charge of $8.8 million,
associated primarily with the Company's decision not to release the Avid Media
Spectrum product line. This charge includes costs to write-off inventory, fixed
assets, capitalized software and various other costs associated with the
canceled product line. Approximately $5.6 million of the $8.8 million
nonrecurring charge relates to non-cash items associated with the write-off of
assets. The Company expects that these restructuring actions will be completed
by March 31, 1997.
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. No
costs have been accrued for this possible loss contingency.
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. No costs have been
accrued for this possible loss contingency.
9. EMPLOYEE BENEFIT 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.
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 computer
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. In June 1996 the Company began selling MCXpress for Macintosh and for
Windows NT.
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 $287,000 (.3%) to $114.7 million in the quarter ended September 30,
1996 from $114.4 million in the same quarter of last year. Net revenues for the
nine months ended September 30, 1996 of $315.8 million increased by $19.1
million (6.4%) from $296.7 million for the nine months ended September 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. In June 1996 the
Company began selling MCXpress for Macintosh and for Windows NT. To date,
product returns of all products have been immaterial.
International sales (sales to customers outside North America) accounted for
approximately 47.7% of the Company's 1996 third quarter net revenues compared to
approximately 46.0% for the same quarter in 1995. International sales increased
by 5.2% for the third quarter of 1996 compared to the same quarter in 1995. The
increase in international sales in the third quarter of 1996 was attributable
primarily to higher unit sales of Media Composer and Pro Tools product lines in
Europe.
International sales accounted for approximately 49.8% and 46.0% of the Company's
net revenues for the nine months ended September 30, 1996 and 1995,
respectively. International sales increased by 15.2% in the nine-month period
ended September 30, 1996 from the same period in 1995. The increase in
international sales in 1996 was attributable primarily to higher unit sale of
Media Composer and Pro Tools product lines in Europe and the Asia Pacific
region.
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 aftermarket hardware products. Gross margin decreased to 47.1% in the
third quarter of 1996 compared to 50.7% in the third quarter of 1995 and
decreased to 45.4% for the nine-month period ended September 30, 1996 from 51.4%
for the same period in 1995 due to an increase in manufacturing overhead
associated with higher facility and information system costs and increased
provisions for inventory obsolescence, increased sales of aftermarket hardware
products, and an increase in the percentage of customer support costs allocated
to cost of revenues. Gross margins for the nine months ended September 30, 1996
were also negatively affected by upgrading of Media Composer systems for use on
PCI-based computers and the recognition of the sale of certain server-based
broadcast products at an aggregate gross margin of approximately 20%. In the
second quarter of 1996 the Company recognized approximately $2.4 million in
revenues from two of these server-based broadcast systems 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 costs, increased percentage of customer support costs allocated to
post-sales support, and higher provisions for inventory obsolescence.
RESEARCH AND DEVELOPMENT
Research and development expenses for the third quarter of 1996 increased $4.7
million (36.9%) from the third quarter of 1995. For the nine-month period ended
September 30, 1996, research and development expenses increased $13.6 million
(35.7%) 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 third quarter of
1996 compared to 11.2% 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. In addition, research and development expenses for the
third quarter of 1995 and nine months ended 1995 were reduced by approximately
$2.1 million as a result of payments received under certain development
agreements with third parties. The Company capitalized software development
costs of approximately $120,000 or 0.7% and $1.3 million or 2.4% of total
research and development costs during the third quarter of 1996 and the
nine-month period ended September 30, 1996, respectively. During the third
quarter of 1995 and the nine months ended September 30, 1995, respectively, the
Company capitalized approximately $1.2 million or 8.6% and $2.2 million or 5.4%
of total research and development costs. The capitalized software development
costs in the third quarter of 1996 were associated primarily with enhancements
to the Pro Tools product software. 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 $1.1 million and $2.4 million during
the third quarter of 1996 and the nine-month period ended September 30, 1996,
respectively. For the three and nine month periods ended September 30, 1995,
amortization totaled approximately $322,000 and $792,000, respectively.
MARKETING AND SELLING
Marketing and selling expenses for the third quarter of 1996 increased by $3.6
million (12.8%) from the third quarter of 1995 and increased by $20.0 million
(26.7%) for the nine-month period ended September 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 to 27.3% and 30.0% in the third
quarter of 1996 and the nine-month period ended September 30, 1996,
respectively, from 24.3% and 25.2% in the corresponding periods in 1995 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 in the second quarter of each
year.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the third quarter of 1996 increased by
$2.3 million (51.8%) from the third quarter of 1995 and increased $5.5 million
(43.3%) for the nine-month period ended September 30, 1996, compared to the
nine-month period ended September 30, 1995. General and administrative expenses
increased as a percentage of net revenues to 5.9% in the third quarter of 1996
from 3.9% in the third quarter of 1995 and to 5.8% from 4.3% for the nine-month
period ended September 30, 1996 and the same period in 1995, 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. In
addition, general and administrative expenses increased in the third quarter of
1996 due to certain severance and recruiting costs.
NONRECURRING COSTS
In the third quarter of 1996, the Company recorded charges for nonrecurring
costs of $8.8 million, associated primarily with the Company's decision not to
release the Avid Media Spectrum product line. During 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 recorded 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 third quarter of 1996
increased $576,000 from the third quarter of 1995. For the nine months ended
September 30, 1996, interest income, net increased $1.1 million compared
to 1995 primarily due to higher cash and investment balances in 1996 and a
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 third quarter of 1996 and
1995. The 1996 and 1995 third 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 36.8% for the
nine-month periods ended September 30, 1996 and September 30, 1995,
respectively. The 1995 provision included taxes of $8.7 million at an effective
rate of 32% on $27.5 million of earnings before merger charges. The 1995
provision for the nine-month period ended September 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 and 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
September 30, 1996 the Company's principal sources of liquidity included cash
and cash equivalents and marketable securities totaling approximately
$75.6 million.
The Company's operating activities generated cash of $16.6 million in the
nine-month period ended September 30, 1996 compared to using cash of $17.3
million in the nine-month period ended September 30, 1995. Cash was generated
during the nine months ended September 30, 1996 primarily from reductions in
accounts receivable and inventory.
The Company purchased $21.8 million of property and equipment and other assets
in the nine months ended September 30, 1996, compared to $36.1 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 equipment 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% on the $35,000,000 line. 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 September 30, 1996. The Company believes existing cash, 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 1997. In the event
the Company requires additional financing the Company believes that it would be
able to obtain such financing; however, there is no assurance that it would be
successful in doing so, or that it could do 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 and platform upgrades, price discounts
and other sales promotion programs, the volume of sales of aftermarket hardware
products, 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 and cost 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 costs,
increased percentage of customer support costs allocated to post-sales support
and higher provisions for inventory obsolescence.
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. In the second quarter of 1996, the Company recognized approximately
$2.4 million in revenues from three of these systems and approximately $1.9
million of related costs. In future quarters, the Company expects to recognize
an additional $6.1 million in revenues and approximately $7.5 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 additional 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. In recent quarters, 40% or more of the Company's revenues
for a quarter have been recorded in the third month of the quarter. Further, in
many cases, quarterly operating expense levels cannot be reduced rapidly in the
event that quarterly revenue levels fail to meet internal expectations.
Therefore, if quarterly 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 operate profitably. Reductions of
certain operating expenses, if incurred, in the face of lower than expected
revenues could involve material one-time charges associated with reductions in
headcount, trimming product lines, eliminating facilities and offices and
writing off fixed assets and inventory.
The Company has recently initiated steps designed to shift an increasing
proportion of its sales through indirect channels such as distributors and
resellers. The Company expects that this shift will result in an increase in the
number of software and circuit board "kits" sold through indirect channels in
comparison with turnkey systems consisting of CPU's, monitors, and peripheral
devices including accompanying software and circuit boards sold by the Company
through its direct sales force to customers. Therefore, to the extent the
Company increases its sales through indirect channels, its revenue per unit sale
will be less than it would have been had the same sale been made directly by the
Company. In the event the Company is unable to increase the volume of sales in
order to offset this decrease in revenue per sale or is unable to reduce its
costs associated with such sales, profits could be adversely affected. Because
the Company to date has emphasized sales through its direct sales channels,
there is no assurance that the Company will be able to increase the
volume of sales through indirect channels or that it will be able to reduce
its costs in sufficient amounts to operate profitably.
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 lower priced production and post production tools, including the corporate
and industrial user market. 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,
additional costs and expenses incurred by the Company to improve market
acceptance of such products, or the withdrawal from the market of such products
or of the Company from such new markets could have a material adverse effect
on the Company's business and results of operations.
The Company had announced the introduction of several new editing and image
processing products which were designed to operate on computers from SGI. In
August 1996, the company determined not to release one of these SGI-based
products, Avid Media Spectrum, which had been expected to be released during the
second half of 1996. In the third quarter of 1996, the Company incurred a
one-time charge of $8.8 million primarily associated with the costs of
implementing this decision. The failure of the other SGI-based 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'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 additional 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 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, including the corporate and industrial user
market. 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 is converting 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, including patent and
securities fraud litigation, 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). This litigation has been discussed in previously filed reports on
Forms 10-Q and 10-K.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
OTHER
The Company has also received inquiries with regard to possible patent
infringement claims in addition to those which have been specifically disclosed
by the Company. These inquiries are referred to patent counsel. 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
10.1 Employment agreement between the Company and William J.
Miller.
10.2 Employment agreement between the Company and William L.
Flaherty.
10.3 Employment agreement between the Company and Clifford Jenks.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. For the fiscal quarter ended September 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: November 14, 1996 By: /S/ WILLIAM L. FLAHERTY
William L. Flaherty,
Vice President of Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.1 Employment agreement between the Company and William J.
Miller.
10.2 Employment agreement between the Company and William L.
Flaherty.
10.3 Employment agreement between the Company and Clifford Jenks.
27 Financial Data Schedule