SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
TOTAL NUMBER OF
PAGES 12
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
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OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
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OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-21280
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DAVIDSON & ASSOCIATES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 33-0067635
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
19840 PIONEER AVE.
TORRANCE, CA 90503
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER (310) 793-0600
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
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AS OF MARCH 31, 1996 THERE WERE 35,233,463 SHARES OF THE REGISTRANTOS
COMMON, $.00025 PAR VALUE, STOCK OUTSTANDING.
1
DAVIDSON & ASSOCIATES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
At March 31, 1996 and December 31, 1995............ 3
Condensed Consolidated Statements of Income
Three months ended March 31, 1996
and 1995........................................... 4
Condensed Consolidated Statements of Cash Flow
Three Months ended March 31, 1996
and 1995........................................... 5
Notes to Condensed Consolidated
Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 7
PART II. OTHER INFORMATION........................................ 11
Signature.................................................. 12
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DAVIDSON & ASSOCIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, 1996 December 31, 1995
Unaudited (a) Audited
-----------------------------------
ASSETS
Current assets:
Cash and cash equivalents $3,082 $3,130
Marketable Investment Securities 15,702 14,669
Accounts receivable (net) 29,171 36,902
Inventories 8,306 11,792
Prepaid expenses and other current assets 1,760 1,341
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Total current assets 58,021 67,834
Deferred Tax Asset 5,324 5,324
Net property and equipment, at cost 8,188 8,054
Intangible assets, net of accumulated amortization 1,662 1,780
Other assets 2,863 2,804
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$76,058 $85,796
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable 3,946 13,032
Accrued expenses 6,149 7,737
Deferred revenue 262 199
Income taxes payable 2,665 4,124
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Total current liabilities 13,022 25,092
Minority interest in subsidiaries 929 1,049
Shareholders' equity
Common stock 9 9
Additional paid-in capital 35,886 35,486
Retained earnings 26,212 24,160
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Net shareholders' equity 62,107
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$76,058 $85,796
======= =======
(a) Amounts for Davidson & Associates, Inc. as of December 31, 1995 have been
restated to include the balances from Condor (recently renamed Blizzard
North).
See accompanying notes to Condensed Financial Statements.
3
DAVIDSON & ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited) (a) (b)
Three Months Ended
March 31,
1996 1995
----------------------
Net revenues $29,203 $25,622
Cost of revenues 11,192 11,985
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Gross profit 18,011 13,637
Operating expenses:
Research and development 6,087 4,499
Selling, general and administrative 9,132 7,452
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Total operating expenses 15,219 11,951
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Operating income 2,792 1,686
Other income 179 134
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Net earnings before income taxes 2,971 1,820
Provision for income taxes 1,019 603
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Net earnings before minority interest 1,952 1,217
Minority interest in net loss of subsidiary (119) 0
------- -------
Net earnings $2,071 $1,217
======= =======
Net earnings per share $0.06 $0.03
======= =======
Shares used in computing
net earnings per share (b) 35,712 35,116
(a) Amounts for Davidson & Associates, Inc. for the period ended March 31, 1995
have been restated to include Maverick and Condor (recently renamed
Blizzard North).
(b) All per share data has been adjusted to reflect a 2-for-1 stock split
issued to shareholders on September 6, 1995.
See accompanying notes to Condensed Financial Statements.
4
DAVIDSON & ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three months ended
March 31,
------------------
1996 1995
Cash flows from operating activities:
Net earnings $ 2,071 $ 1,217
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 684 502
Changes in current assets and current liabilities (2,483) (1,401)
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Net cash provided by operating activities: 272 318
Cash flows from investing activities:
Capital expenditures (700) (1,292)
------- -------
Net cash used by investing activities: (700) (1,292)
Cash flows from financing activities:
Proceeds from issuance of common stock 400 258
S-Corporation tax distributions by pooled companies (20) (70)
------- -------
Net cash provided by financing activities 380 188
Net (decrease) in cash and cash equivalents (48) (786)
Cash and cash equivalents at end of period 3,130 3,864
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Cash and cash equivalents at end of period $ 3,082 $ 3,078
======= =======
See accompanying notes to Condensed Consolidated Financial Statements.
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DAVIDSON & ASSOCIATES, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1996
(unaudited)
1. Basis of Presentation
---------------------
The condensed consolidated financial statements for the three months ended
March 31, 1996 and 1995 are unaudited and reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of the results for the
interim periods. These condensed consolidated financial statements should
be read in conjunction with the financial statements and notes thereto
included in Davidson's Annual Report (Form 10-K) for the year ended
December 31, 1995. The results of operations for the three months ended
March 31, 1996 are not necessarily indicative of the results for the entire
year ending December 31, 1996.
2. Earnings Per Share
------------------
Per share data is based on the weighted average number of common shares and
dilutive common stock equivalents outstanding for the period. On March 18,
1996, Davidson acquired by merger all of the outstanding shares of Condor,
Inc. (subsequently renamed Blizzard North) in exchange for 225,409 shares
of Davidson's common stock. This merger is being accounted for on a
pooling-of-interests basis and all share and per share information has been
restated to reflect the effect of the merger.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the consolidated
financial statements and the notes thereto and in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations in
Davidson's Annual Report (Form 10-K) for the year ended December 31, 1995. This
analysis is provided pursuant to applicable Securities and Exchange Commission
regulations and is not intended to serve as a basis for projections of future
events.
Overview
Davidson & Associates, Inc. is an educational software company that develops,
publishes, manufactures and distributes high-quality educational software
products for home and school use. On March 7, 1996, Davidson acquired by merger
all of the outstanding shares of Condor, Inc. (subsequently renamed Blizzard
North). Blizzard North develops entertainment software for platforms which
include Windows, DOS, 3DO's M2 System, Sega and Nintendo. The acquisition of
Blizzard North is being accounted for on a pooling-of-interests basis. All
financial information included in this report has been restated to include
Blizzard North's operating results.
In February 1996, Davidson announced that it signed a definitive merger
agreement with CUC International Inc., a technology-driven retail and membership
services company based in Stamford, CT. All regulatory filings have been
submitted and federal agencies are currently reviewing the transaction which is
anticipated to close in July 1996. Each Davidson share will be converted into
.85 shares of CUC stock in the merger.
As is typical in the consumer software industry, the Company's business is
highly seasonal. Net revenues and operating income are highest during the third
and fourth quarters and are lowest in the first and second quarters. This
seasonal pattern is primarily due to the increased demand for the company's
products during the year-end holiday selling season.
Other factors that contribute to fluctuations in quarterly operating results
include the timing of new product introductions, competitive offerings, product
shipments, product returns, catalog printing and promotional programs. In
addition, quarterly operating results are affected by changes in the market
acceptance and sales of existing products. There can be no assurance that new
products will be introduced by the Company in a timely manner, will achieve any
significant degree of market acceptance, or that such acceptance will be
sustained for any significant period. The operating results for any quarter are
not necessarily indicative of results for any future period.
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Results of Operations
Net Revenues. Davidson's net revenues increased 14% to $29.2 million in the
first quarter of 1996 from $25.6 million in the first quarter of 1995. For the
quarter ended March 31, 1996, core publishing net revenues increased 53% ($6.5
million), affiliate label net revenues decreased 97% ($3.2 million) and
distribution revenues increased 2% ($240 thousand). The increase in core
publishing revenues is attributable to strong sales of the company's traditional
consumer educational products, such as the Blaster line, the Fisher Price line
and the continuing success of the company's consumer entertainment title,
Warcraft II: Tides of Darkness. The significant decrease in affiliated label
net revenues is attributable to the previously announced termination of
distribution for Simon & Schuster and Impressions Software, Inc. Distribution
revenues increased only modestly over the prior year as the Company continues to
experience weak demand in the school channel as well as seasonal factors which
resulted in a low level of reorders by NewMedia Express' two customers, Toys "R"
Us and The Neostar Group.
Cost of revenues. Cost of revenues includes cost of goods sold and royalties
paid to developers and affiliated label publishers. Cost of revenues decreased
7% from $12 million in the comparable quarter of 1995 to $11.2 million in the
quarter ended March 31, 1996. The gross profit margin for 1996 increased to 62%
from 53% in the prior year. This increase is primarily attributable to the net
revenue mix. Affiliated label net revenues accounted for .03% of total net
revenues for the first quarter of 1996 as compared to 12.7% of total net
revenues for the first quarter of 1995. Affiliated label net revenues carry a
substantially lower gross profit margin than core Davidson products.
Research and development. Research and development expenses increased
approximately 35% to $6.1 million in the first quarter of 1996 from $4.5 million
in the first quarter of 1995. This increase was primarily due to the increase
in the size of Davidson's internal development staff as part of Davidson's
continued focus on the development of more technically sophisticated products
and an increase in the number of ongoing product development projects. As a
percentage of net revenues, research and development expenses increased to 21%
in the first quarter of 1996 from 18% in the first quarter of 1995. This
increase was largely attributable to increased product flow and to the
acquisitions of development centers such as Blizzard North and FUNNYBONE
Interactive. As of March 31, 1996, Davidson had 296 employees dedicated to
research and development activities.
Davidson expects to release approximately 30 new titles during 1996 as compared
to 23 titles for 1995. The company continues to aggressively invest in research
and development, and expects to continue this trend for the remainder of 1996.
Selling, general and administrative. Selling, general and administrative
expenses increased approximately 23% to $9.1 million in the first quarter of
1996 from $7.5 million in the first quarter of 1995. This increase was largely
attributable to increases in
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sales and marketing personnel required to support increased sales and more
products. As a percentage of net revenues, selling, general and administrative
expenses increased to 31% in the first quarter of 1996 from 29% in the same
period of 1995. This increase was primarily attributable to the fact that, in
the first quarter of 1996, core publishing revenues represented 64% of total
revenues, as compared to 48% of total revenues for the first quarter of 1995.
Core publishing revenues require a higher level of marketing and sales support
than affiliated labels.
Other income. Other income increased to $178,000 for the first quarter of 1996
from $134,000 in the first quarter of 1995. This increase was primarily due to
higher levels of cash invested during the quarter.
Provision for income taxes. Davidson's effective tax rate was estimated to be
approximately 34% in the first quarter of 1996 compared to 33% for the
comparable quarter in the prior year. The 1996 income tax rate was less than
the statutory rate (federal and state), primarily due to foreign earnings taxed
at a lower rate. The 1995 income tax rate was less than the statutory rate
(federal and state), primarily due to income from acquired companies which,
prior to their acquisition by Davidson, had elected to be taxed as
S corporations.
Minority interest in net income (loss) of subsidiary. This represents Mattel's
25% share of the net earnings (loss) from NewMedia Express.
Net income. Net income increased 70% to $2.1 million in the first quarter of
1996 from $1.2 million in the first quarter of 1995. As discussed above, the
increase in net income was due to growth in the net revenues and an improvement
in the gross profit margin, partially offset by higher research and development,
and selling, general and administrative expenses.
Liquidity and Capital Resources
Cash, cash equivalents, and marketable investment securities increased $1
million to $18.8 million during the first quarter of 1996 from $17.8 million at
December 31, 1995. Davidson's working capital increased approximately $1.9
million during the first quarter of 1996 to $44.6 million at March 31, 1996 from
$42.7 million at December 31, 1995 and accounts receivable, net decreased $8.1
million to $28.8 million. These trends are consistent with Davidson's seasonal
business. The higher revenues typically generated by the holiday selling season
during the third and fourth quarters increased Davidson's receivables at year
end. As these holiday season receivables are collected during the seasonably
slower first quarter, Davidson's cash increases and receivables decline. Excess
cash balances are generally invested in readily marketable investment
securities.
Inventories decreased $3.5 million to $8.3 million at March 31, 1996 from $11.8
million at December 31, 1995. The decrease in inventories was primarily
attributable to the seasonal factors mentioned in the previous paragraph.
9
Accounts payable and accrued expenses decreased $10.7 million from $20.8 million
at December 31, 1995 to $10.1 million at March 31, 1996. The decrease in these
current liabilities is also attributable to the seasonal factors mentioned
above.
Davidson uses its working capital to finance ongoing operations and to fund the
expansion and development of its product lines. In addition, Davidson evaluates
from time to time acquisitions of products or companies that complement
Davidson's business. During March 1996, the company began negotiations to
purchase a warehouse facility in Torrance, California for $9.3 million. This
transaction is expected to close during the second quarter and marketable
securities will be liquidated to fund this purchase.
Management believes the existing cash balances, readily marketable investment
securities, and cash generated from operations will be sufficient to meet
Davidson's liquidity and capital needs for the next twelve months.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) THE FOLLOWING EXHIBIT IS FILED AS PART OF THIS REPORT:
27 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K was filed February 21, 1996 announcing the signing of a
definitive merger agreement with CUC International Inc.
Form 8-K was filed on March 12, 1996 announcing the acquisition of
Condor, Inc. in a stock-for-stock merger pursuant to an Agreement and
Plan of Reorganization.
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SIGNATURE
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 duly authorized.
DAVIDSON & ASSOCIATES, INC.
(Registrant)
Dated: May 8, 1996 s/ Jack R. Allewaert
--------------------
Jack R. Allewaert
Vice President, Chief Financial Officer
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