AVID TECHNOLOGY, INC.
Metropolitan Technology Park
One Park West
Tewksbury, MA 01876
November 12, 1997
OFIS Filer Support
SEC Operations Center
6432 General Green Way
Alexandria, VA 22312-2413
Re: Avid Technology, Inc.
File No. 0-21174
QUARTERLY REPORT ON FORM 10-Q
Ladies and Gentlemen:
Pursuant to regulations of the Securities and Exchange Commission, submitted
herewith for filing on behalf of Avid Technology, Inc. is the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997.
This filing is being effected by direct transmission to the Commission's
EDGAR System.
Very truly yours,
/s/ Frederic G. Hammond
Frederic G. Hammond
General Counsel
==============================================================================
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, 1997
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: (978) 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
7, 1997 was 24,151,403.
==============================================================================
AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
a) Condensed Consolidated Statements of Operations (unaudited)
for the three months ended September 30, 1997 and 1996, and the nine
months ended September 30, 1997 and 1996 ................................1
b) Condensed Consolidated Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996........................................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1997 and 1996 ...................3
d) Notes to Condensed Consolidated Financial Statements (unaudited).........4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..................................................17
ITEM 6. Exhibits and Reports on Form 8-K...................................18
Signatures....................................................................19
EXHIBIT INDEX.................................................................20
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,
--------------------- ---------------------
1997 1996 1997 1996
(unaudited) (unaudited) (unaudited)(unaudited)
Net revenues $116,510 $114,664 $347,602 $315,798
Cost of revenues 51,606 60,670 167,491 172,542
--------- --------- --------- ---------
Gross profit 64,904 53,994 180,111 143,256
--------- --------- --------- ---------
Operating expenses:
Research and development 18,598 17,569 53,310 51,822
Marketing and selling 30,109 31,303 89,094 94,823
General and administrative 6,734 6,767 18,830 18,346
Nonrecurring costs 8,800 28,950
--------- --------- --------- ---------
Total operating expenses 55,441 64,439 161,234 193,941
--------- --------- --------- ---------
Operating income (loss) 9,463 (10,445) 18,877 (50,685)
Interest and other income, net 2,596 523 5,882 1,820
--------- --------- --------- ---------
Income (loss) before income taxes 12,059 (9,922) 24,759 (48,865)
Provision for (benefit from)
income taxes 3,231 (3,164) 7,675 (15,652)
--------- --------- --------- ---------
Net income (loss) $8,828 $(6,758) $17,084 $(33,213)
========= ========= ========= =========
Net income (loss) per common share $0.34 $(0.32) $0.72 $(1.57)
========= ========= ========= =========
Weighted average common and
common equivalent shares
outstanding 25,747 21,224 23,857 21,116
========= ========= ========= =========
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,
1997 1996
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $115,704 $75,795
Marketable securities 69,147 17,248
Accounts receivable, net of allowances of
$6,047 and $7,519 in 1997 and 1996, respectively 79,811 86,187
Inventories 18,701 28,359
Deferred tax assets 15,994 15,852
Prepaid expenses 5,100 6,310
Other current assets 3,091 1,947
------------- -------------
Total current assets 307,548 231,698
------------- -------------
Marketable securities 997
Property and equipment, net 39,997 49,246
Long-term deferred tax assets 15,538 15,538
Other assets 3,949 3,500
------------- -------------
Total assets $367,032 $300,979
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $23,870 $25,332
Current portion of long-term debt 733 1,726
Accrued compensation and benefits 21,126 9,085
Accrued expenses 27,801 21,844
Income taxes payable 9,867 3,258
Deferred revenues 25,241 25,133
------------- -------------
Total current liabilities 108,638 86,378
------------- -------------
Long-term debt, less current portion 586 1,186
Commitments and contingencies
Stockholders' equity:
Preferred stock
Common stock 241 213
Additional paid-in capital 249,813 212,474
Retained earnings 18,535 1,451
Deferred compensation (8,604)
Cumulative translation adjustment (2,227) (724)
Net unrealized gains on marketable securities 50 1
------------- -------------
Total stockholders' equity 257,808 213,415
------------- -------------
Total liabilities and stockholders' equity $367,032 $300,979
============= =============
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,
--------------------------
1997 1996
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $17,084 $(33,213)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 19,893 21,527
Provision for accounts receivable allowances 1,464 4,370
Deferred tax assets (151) (10,729)
Provision for product transition costs,
non-cash portion 13,150
Provision for other nonrecurring costs,
non-cash portion 6,394
Tax benefit of stock option exercises 2,394 97
Loss on disposal of equipment 218
Changes in operating assets and liabilities:
Accounts receivable 90 18,570
Inventories 11,813 (2,978)
Prepaid expenses and other current assets (108) (711)
Accounts payable (1,259) (5,940)
Accrued expenses 18,962 8,371
Income taxes payable 6,824 (6,279)
Deferred revenues 759 4,008
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 77,983 16,637
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs (107) (1,296)
Purchases of property and equipment and other assets (12,033) (21,966)
Proceeds from disposal of equipment 1,554
Purchases of marketable securities (102,193) (13,311)
Proceeds from sales of marketable securities 51,341 58,250
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (61,438) 21,677
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (1,593) (1,488)
Proceeds from issuance of common stock 25,821 3,339
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 24,228 1,851
Effects of exchange rate changes on cash and cash
equivalents (864) (26)
---------- ----------
Net increase in cash and cash equivalents 39,909 40,139
Cash and cash equivalents at beginning of period 75,795 32,847
---------- ----------
Cash and cash equivalents at end of period $115,704 $72,986
========== ==========
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. and its wholly owned subsidiaries ("the
Company"). 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 for the year ended
December 31, 1996 on Form 10-K which included all information and footnotes
necessary for such presentation.
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 in these financial statements include
accounts receivable and sales allowances as well as inventory valuation and
income tax asset valuation allowances. Actual results could differ from those
estimates.
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.
In February 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"). SFAS
128 simplifies the computation of earnings per share ("EPS") by replacing the
presentation of primary EPS with a presentation of basic EPS. Basic EPS includes
no dilution and is computed by dividing income available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could share in
the earnings of an entity, similar to fully diluted EPS. SFAS 128 is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted. SFAS 128
requires restatement of all prior period earnings per share data.
Had the Company computed earnings per share consistent with the provisions of
SFAS 128, basic and diluted EPS would have been $0.37 and $0.34, respectively,
for the three-month period ended September 30, 1997 and $0.75 and $0.72 for the
nine-month period ended September 30, 1997, respectively. Both basic and diluted
EPS for the three and nine months ended September 30, 1996 would have been
$(0.32) and $(1.57), respectively.
3. INVENTORIES
Inventories consist of the following (in thousands):
September 30, December 31,
1997 1996
-------------- ---------------
Raw materials $10,973 $19,182
Work in process 1,127 870
Finished goods 6,601 8,307
-------------- ---------------
$18,701 $28,359
============== ===============
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following (in thousands):
September 30, December 31,
1997 1996
--------------- --------------
Computer and video equipment $73,632 $68,171
Office equipment 4,603 4,233
Furniture and fixtures 6,895 6,915
Leasehold improvements 12,638 12,962
--------------- --------------
97,768 92,281
Less accumulated depreciation and
amortization 57,771 43,035
--------------- --------------
$39,997 $49,246
=============== ==============
5. LINE OF CREDIT
The Company has an unsecured line of credit with a group of banks which provides
for up to $35.0 million in revolving credit. The agreement was amended on June
27, 1997 to expire on June 30, 1998. Under the terms of the agreement, the
Company must pay an annual commitment fee of 1/4% of the average daily unused
portion of the facility, payable quarterly in arrears. The Company has two loan
options available under the agreement: the Base Rate Loan and the LIBOR Rate
Loan. The interest rates to be paid on the outstanding borrowings for each loan
annually are equal to the Base Rate or LIBOR plus 1.25%, respectively.
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, 1997.
6. NONRECURRING COSTS
In the first quarter of 1996, the Company recorded a nonrecurring charge of
$20.2 million. Included in this charge was $7.0 million associated with
restructuring, consisting of approximately $5.0 million of costs related to
staff reductions of approximately 70 employees, primarily in the U.S., and
associated write-offs of fixed assets, and $2.0 million related to the decision
to discontinue development of certain products and projects. Included in this
$7.0 million were approximately $5.0 million of cash payments consisting of $3.6
million of salaries and related severance costs and $1.4 million of other staff
reduction and discontinued development costs. The non-cash charges of $2.0
million recorded during 1996 consist primarily of $1.5 million for the write-off
of fixed assets. Also included in this $20.2 million nonrecurring charge was
$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. As of
December 31, 1996, the Company had completed the related restructuring and
product transition actions.
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 included costs to write-off inventory, fixed
assets, capitalized software and various other costs associated with the
canceled product line. Approximately $7.2 million of the $8.8 million
nonrecurring charge related to non-cash items associated with the write-off of
assets. As of March 31, 1997, the Company had completed the related
restructuring.
7. CONTINGENCIES
On June 7, 1995, the Company filed a patent infringement complaint in the United
States District Court for the District of Massachusetts against Data
Translation, Inc., a Marlboro, Massachusetts-based company. Avid is seeking
judgment against Data Translation that, among other things, Data Translation has
willfully infringed Avid's patent number 5,045,940, entitled "Video/Audio
Transmission System and Method." Avid is also seeking an award of treble damages
together with prejudgment interest and costs, Avid's costs and reasonable
attorneys' fees, and an injunction to prohibit further infringement by Data
Translation. The litigation has been temporarily stayed pending a decision by
the U.S. Patent and Trademark Office on a reissue patent application based on
the issued patent.
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 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 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. A motion to dismiss both the `34
Act suit and the `33 Act suit was filed on October 18, 1996. After briefing and
argument on the motions, the Court issued its decision on August 14, 1997. With
respect to the `33 Act suit, the Court dismissed the claims against the
underwriters, dismissed the claims brought against the Company under ss.12(2) of
the `33 Act, and dismissed the plaintiffs' claims relating to the Company's all
digital newsroom (in both the `33 Act and `34 Act cases) on the grounds that the
plaintiffs had failed to allege a material misrepresentation or omission.
Finding that it was required to draw all reasonable inferences in favor of the
plaintiffs, the Court declined to dismiss on the pleadings the plaintiffs'
remaining claims in the `33 Act case and the `34 Act claims relating to matters
other than the all digital newsroom. On September 26, 1997, the plaintiffs filed
a motion seeking to have the Court reconsider its dismissal of the underwriters
from the `33 Act suit, which the underwriters have opposed. The plaintiffs have
also sought leave to amend their `33 Act Complaint to add new claims concerning
the all digital newsroom, which the Company opposes. Despite the Court's ruling
on the motions to dismiss, the Company believes that it and the other defendants
have meritorious defenses to the remaining allegations made by the plaintiffs
and intends to contest these lawsuits vigorously. Nonetheless, 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. A reasonable estimate of the Company's
potential loss for damages cannot be made at this time. 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 on motion by the Company.
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.
The Company also receives inquiries from time to time with regard to additional
possible patent infringement claims. These inquiries are generally referred to
counsel and are in various stages of discussion. If any infringement is
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 have been asserted or commenced against
the Company arising from or related to contractual or employee relations or
product performance. Management does not believe these claims will have a
material adverse effect on the financial position or results of operations of
the Company.
The Company has entered into employment agreements with certain officers of the
Company that provide for severance pay and benefits, including vesting of
options during the severance period, as defined in the agreements. Under the
terms of the agreements, these officers receive 100% of such severance benefits
if they are involuntarily terminated. Such agreements are effective for two
years and are automatically extended for successive one year periods after the
second anniversary, unless 30 days advance written notice is given by either
party. The Company has also entered into change in control employment agreements
with certain officers of the Company. As defined in the agreements, a change in
control includes, but is not limited to: a third person or entity becomes the
beneficial owner of 30% or more of the Company's common stock, the shareholders
approve any plan or proposal for the liquidation or dissolution of the Company,
or within a twenty-four month period a majority of the members of the Company's
Board of Directors cease to continue as members of the board unless their
successors are each approved by at least two-thirds of the Company's directors.
If at any time within two years of the change in control, the officer's
employment is terminated by the Company for any reason other than cause or by
the officer for good reason, as such terms are defined in the agreement, then
the employee is entitled to receive severance payments equal to two times salary
plus an amount equal to compensation earned under the management incentive
compensation plan during the previous two years as well as accelerated vesting
of options.
8. CAPITAL STOCK
On March 24, 1997, the Company issued 1,552,632 shares of its common stock to
Intel Corporation in exchange for approximately $14.8 million in cash. The
Company plans to use the net proceeds for working capital and other general
corporate purposes.
During June and July 1997, the Company granted 347,200 shares of $.01 par value
restricted common stock to certain employees under the 1997 Stock Incentive Plan
approved by the shareholders on June 4, 1997. These shares vest annually in 20%
increments beginning May 1, 1998. Accelerated vesting may occur if certain stock
price performance goals established by the Board of Directors are met. Unvested
restricted shares are subject to forfeiture in the event that an employee ceases
to be employed by the Company. The Company initially recorded, as a separate
component of stockholders' equity, deferred compensation of approximately $9.1
million with respect to this restricted stock. This deferred compensation
represents the fair value of the restricted shares at the date of the award and
is recorded as compensation expense ratably as the shares vest.
9. SUBSEQUENT EVENTS
On October 23, 1997, the Company announced that the Board of Directors
authorized the repurchase of up to 1.0 million shares of the Company's common
stock, $0.01 par value per share. Purchases will be made in the open market or
in privately negotiated transactions. The Company plans to use any repurchased
shares for its employee stock plans.
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."
Avid develops and provides digital film, video and audio editing and special
effects software and hardware technologies to create media content for
information and entertainment applications. Integrated with the Company's
digital storage and networking solutions, Avid's products are used worldwide in
film studios; video production and post-production facilities; network,
independent and cable television stations; recording studios; advertising
agencies; government and educational institutions; corporate communications
departments; and by individual home users.
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 $1.8 million (1.6%) to $116.5 million in the quarter ended
September 30, 1997 from $114.7 million in the same quarter of last year. Net
revenues for the nine months ended September 30, 1997 of $347.6 million
increased by $31.8 million (10.1%) from $315.8 million for the nine months ended
September 30, 1996. The increase during 1997 in net revenues was primarily the
result of growth in unit sales of storage, MCXpress, and digital audio products
and, to a lesser extent, the increase in sales of other 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. The Company
began shipping Version 6.5 of its Media Composer family of systems in December
1996. During the third quarter of 1997, the Company began shipments of
AudioVision 4.0 and Pro Tools 24 systems. To date, returns of all products have
been immaterial.
The Company has recently initiated steps to shift an increasing proportion of
its sales through indirect channels such as distributors and resellers. Net
revenues derived through indirect channels were greater than 60% for the third
quarter of 1997, compared to approximately 50% in the same quarter of last year.
Indirect channel revenues accounted for greater than 60% of net revenues for the
nine months ended September 30, 1997, compared to approximately 47% for the same
period in 1996.
International sales (sales to customers outside the U.S. and Canada) accounted
for approximately 46% and 48% of the Company's third quarter 1997 and 1996 net
revenues, respectively. International sales decreased by 3% in the third quarter
of 1997 compared to the same period in 1996. International sales accounted for
approximately 48% and 50% of the Company's net revenues for the first nine
months of 1997 and 1996, respectively. International sales increased by 6% in
the nine-month period ended September 30, 1997 from the same period in 1996. The
increase in international sales in 1997 was attributable primarily to higher
unit sales of the storage, MCXpress, and Pro Tools products in Europe.
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 increased to
55.7% in the third quarter of 1997 compared to 47.1% in the third quarter of
1996 and increased to 51.8% for the nine-month period ended September 30, 1997
from 45.4% for the same period in 1996. The increase during 1997 was primarily
due to lower material costs, reduced discounts and other sales promotion
programs, and a favorable product mix. The Company expects that gross margins
during the remainder of 1997 will be consistent with recent levels.
Research and Development
Research and development expenses increased $1.0 million (5.9%) in the third
quarter of 1997 compared to the same period in 1996. For the nine-month period
ended September 30, 1997, research and development expenses increased $1.5
million (2.9%) compared to the same period of 1996. These increased expenditures
were primarily due to additions to the Company's engineering staffs for the
continued development of new and existing products as well as provisions
resulting from the Company's profit sharing plan. Offsetting these increases is
the allocation in 1997 of product marketing costs to sales and marketing
expenses rather than research and development expenses, as this more
appropriately reflects the current activities of that function. Research and
development expenses increased to 16.0% of net revenues in the third quarter of
1997 compared to 15.3% in the same quarter of 1996 and decreased to 15.3% from
16.4% for the nine-month periods ended September 30, 1997 and 1996,
respectively. No software development costs were capitalized in the third
quarter of 1997. The Company capitalized software development costs of
approximately $107,000 or 0.2% of total research and development costs during
the nine-month period ended September 30, 1997. The Company capitalized
approximately $120,000 or 0.7% and $1.3 million or 2.5% of total research and
development costs during the third quarter of 1996 and the nine months ended
September 30, 1996, respectively. These costs are amortized into cost of
revenues over the estimated life of the related products, generally 12 to 24
months. Amortization totaled approximately $145,000 and $801,000 during the
three- and nine-month periods ended September 30, 1997, respectively. For the
three- and nine-month periods ended September 30, 1996, amortization totaled
approximately $1.1 million and $2.4 million, respectively.
Marketing and Selling
Marketing and selling expenses decreased by $1.2 million (3.8%) in the third
quarter of 1997 compared to the same period in 1996 and decreased by $5.7
million (6.0%) for the nine-month period ended September 30, 1997 compared to
the same period in 1996 primarily due to the effect of the restructuring of the
Company's sales and marketing operations during the first quarter of 1997. The
Company has shifted its primary distribution emphasis from a direct sales force
to indirect sales channels, which reduced certain costs including direct sales
compensation and office overhead expenses in the first three quarters of 1997.
Marketing and selling expenses decreased as a percentage of net revenues to
25.8% and 25.6% in the three- and nine-month periods ended September 30, 1997,
respectively, from 27.3% and 30.0% in the corresponding periods in 1996. This
decrease was primarily due to the increase in net revenues in the first three
quarters of 1997 compared to 1996.
General and Administrative
General and administrative expenses for the third quarter of 1997 decreased by
$33,000 (0.5%) from the third quarter of 1996 and increased $484,000 (2.6%) for
the nine-month period ended September 30, 1997, compared to the nine-month
period ended September 30, 1996. This increase in general and administrative
expenses for the nine-month period ended September 30, 1997 compared to 1996 was
primarily due to provisions resulting from the Company's profit sharing plan.
General and administrative expenses decreased as a percentage of net revenues to
5.8% in the third quarter of 1997 from 5.9% in the third quarter of 1996 and to
5.4% for the nine-month period ended September 30, 1997 from 5.8% for the same
period in 1996 primarily due to the increase in net revenues in the first nine
months of 1997 compared to 1996.
Nonrecurring Costs
During the first quarter of 1996, the Company recorded charges for nonrecurring
costs consisting of $7.0 million for restructuring charges related to February
1996 staffing reductions of approximately 70 employees primarily in the U.S.,
the Company's concurrent 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. Included in the $7.0 million for restructuring charges were
approximately $5.0 million of cash payments and $2.0 million of non-cash
charges. During the third quarter of 1996, the Company recorded charges for
costs of $8.8 million, associated primarily with the Company's decision not to
release the Avid Media Spectrum product line. Approximately $7.2 million of the
$8.8 million nonrecurring charge related to non-cash items associated with the
write-off of assets. The Company has completed the related restructuring
actions.
Interest and Other Income, Net
Interest and other income, net consists primarily of interest income, other
income and interest expense. Interest and other income, net for the third
quarter in 1997 increased $2.1 million as compared to the same period in 1996.
For the nine-month period ended September 30, 1997 and 1996, interest and other
income, net increased $4.1 million. These increases were primarily due to higher
cash and investment balances in 1997 compared to 1996.
Provision for (Benefit from) Income Taxes
The Company's effective tax rate was 26.8% for the three months ended September
30, 1997 and 31.0% for the nine months ended September 30, 1997. These rates
compare to a 32.0% rate for the three and nine months ended September 30, 1996.
The 1997 effective tax rate of 31.0% is different from the Federal statutory
rate of 35.0% due primarily to the Company's foreign subsidiaries, which are
taxed in the aggregate at a lower rate, and the U.S. Federal Research Tax
Credit. The reduction in the 1997 effective tax rate from 35.0% to 31.0% during
the third quarter is due primarily to the tax law change which extended the U.S.
Federal Research Tax Credit for the full year as well as the relative levels of
profit within the Company's foreign subsidiaries, which are taxed in the
aggregate at a lower rate. The 1996 effective tax rate is different from the
Federal statutory rate of 35.0% primarily due to the impact of the Company's
foreign subsidiaries.
Recent Accounting Pronouncements
In February 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"). SFAS
128 simplifies the computation of earnings per share ("EPS") by replacing the
presentation of primary EPS with a presentation of basic EPS. Basic EPS includes
no dilution and is computed by dividing income available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution of securities that could share in
the earnings of an entity, similar to fully diluted EPS. SFAS 128 is effective
for financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted. SFAS 128
requires restatement of all prior period earnings per share data.
Had the Company computed earnings per share consistent with the provisions of
SFAS 128, basic and diluted EPS would have been $0.37 and $0.34, respectively,
for the three-month period ended September 30, 1997 and $0.75 and $0.72 for the
nine-month period ended September 30, 1997, respectively. Both basic and diluted
EPS for the three and nine months ended September 30, 1996 would have been
$(0.32) and $(1.57), respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through public offerings
of equity securities in 1993 and 1995 and private sales of equity securities in
1997 which generated net proceeds to the Company of approximately $66.6 million,
$88.2 million and $14.8 million, respectively, as well as through cash flows
from operations. As of September 30, 1997, the Company's principal sources of
liquidity included cash, cash equivalents and marketable securities totaling
approximately $184.9 million.
The Company's operating activities generated cash of $78.0 million in the nine
months ended September 30, 1997 compared to generating cash of $16.6 million in
the nine months ended September 30, 1996. Cash from operating activities
increased during the nine months ended September 30, 1997 primarily due to
increases in accrued expenses and income taxes payable as well as reductions in
inventory. In the nine months ended September 30, 1996, cash was used primarily
to fund the increases in inventories and to reduce accounts payable.
The Company purchased $12.0 million of property and equipment and other assets
during the nine months ended September 30, 1997, compared to $22.0 million in
the same period in 1996. The 1997 purchases primarily included the purchase of
equipment for hardware and software for the Company's information systems and
equipment to support research and development activities.
The Company has an unsecured line of credit agreement with a group of banks
which provides for up to $35.0 million in revolving credit. The agreement, as
amended in June 1997, has been extended to June 30, 1998. Under the terms of the
agreement, the Company must pay an annual commitment fee of 1/4% of the average
daily unused portion of the facility, payable quarterly in arrears. The interest
rates to be paid on any outstanding borrowings are equal to either the Base Rate
or LIBOR plus 1.25%. 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
the line and was not in default of any financial covenants as of September 30,
1997.
The Company believes existing cash and marketable securities, anticipated cash
flows from operations, and available borrowings under its bank credit line will
be sufficient to meet the Company's working capital and capital expenditure
needs, at least through the next twelve months. In the event the Company
requires additional financing, the Company believes that it would be able to
obtain such financing; however, there can be 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, allocations of overhead
costs to manufacturing and customer support costs to cost of goods, 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 has shifted an increasing proportion of its sales through indirect
channels such as distributors and resellers. The majority of the Company's
product sales to the broadcast industry, however, continues to be sold on a
direct basis. The Company believes the overall shift to indirect channels has
resulted in an increase in the number of software and circuit board "kits" sold
through indirect channels in comparison with turnkey systems consisting of CPUs,
monitors, and peripheral devices, including accompanying software and circuit
boards, sold by the Company through its direct sales force to customers.
Resellers and distributors typically purchase software and "kits" from the
Company and other turnkey components from other vendor sources in order to
produce complete systems for resale. 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 continue to
reduce its costs associated with such sales, profits could be adversely
affected.
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 at the time that such systems were
originally installed, 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
at the time that such systems were originally installed, 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 has recognized
approximately $6.9 million in revenues from these initial installations and
approximately $7.8 million of related costs. In future quarters, the Company
expects to recognize an additional $805,000 in revenues associated with the
remaining initial installations. The Company has provided a reserve for
estimated costs in excess of anticipated revenues. Revenues and costs are
recognized upon acceptance of the systems by customers. The Company is unable to
determine whether and when the systems will be accepted. There can be no
assurance that the remaining initial installations 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 initial installations are
recognized or written off. In 1996 and 1997, the Company installed additional
server-based, all-digital broadcast newsroom systems at other customer sites.
Some of these systems have been accepted by customers, and the resulting
revenues and associated costs were recognized by the Company. Others of these
systems have not yet been accepted by customers. The Company believes that such
installations, when and if fully recognized as revenue on customer acceptance,
will be profitable. However, the Company is unable to determine whether and when
the systems will be accepted. In any event, 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, including the third quarter of 1997,
more than 40% of the Company's revenues for the 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 upon which expense levels are based,
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 certain assets.
The Company has significant deferred tax assets in the accompanying balance
sheets. The deferred tax assets reflect the net tax effects of tax credit and
operating loss carryforwards and temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced.
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, 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, that such products will achieve widespread customer acceptance, or
that the Company will be able to develop distribution and support channels to
serve these markets. 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 and to
develop new distribution and support channels, 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 has from time to time developed new products, or upgraded existing
products that incorporate advances in enabling technologies. The Company
believes that further advances will occur in such enabling technologies,
including microprocessors, computers, operating systems, networking
technologies, bus architectures, storage devices, and digital media formats. The
Company may be required, based on market demand, or on the decision of certain
suppliers to end the manufacturing of certain products based on earlier
generations of technology, 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 Intel Architecture "(IA)"-based computers and the Windows NT operating
system. There can be no assurance that customers will not defer purchases of
existing Apple-based products in anticipation of the release of IA-based,
NT-based products, that the Company will be successful in developing additional
IA-based, NT-based or other new products or that they will gain market
acceptance, if developed. Any deferral by customers of purchases of existing
Apple-based products, failure by the Company to develop such new 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's products operate primarily 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 competitors' 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.
The Company is also dependent on a number of other suppliers as sole source
vendors of certain other key components of its products and systems. 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; and application specific
integrated circuits ("ASIC") from Lucent, AMI, and LSI Logic. The Company
purchases these sole source components pursuant to purchase orders placed from
time to time. The Company also manufactures certain circuit boards under license
from Truevision, Inc. The Company generally does not carry significant
inventories of these sole source components and has no guaranteed supply
arrangements. 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 technical,
operating or financial difficulties that might imperil the Company's supply of
such sole source components. While the Company believes that alternative sources
of supply for sole source components could be developed, or systems redesigned
to permit the use of alternative components, its business and results of
operations would be materially affected if it were to encounter an untimely or
extended 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, distribution, support, 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.
A significant portion of the Company's business is conducted in currencies other
than the U.S. dollar. Changes in the value of major foreign currencies relative
to the value of the U.S. dollar, therefore, could adversely affect future
revenues and operating results. The Company attempts to reduce the impact of
currency fluctuations on results through the use of forward exchange contracts
that hedge foreign currency-denominated intercompany net receivables or payable
balances. The Company has generally not hedged transactions with external
parties, although it periodically evaluates its hedging practices.
The Company is involved in various legal proceedings, including patent and
securities 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 7 to Condensed Consolidated Financial Statements (unaudited), and PART
II ITEM 1, "LEGAL PROCEEDINGS". This litigation has also been described in
previously filed reports on Form 10-Q and 10-K.
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 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 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. A motion to dismiss both the `34
Act suit and the `33 Act suit was filed on October 18, 1996. After briefing and
argument on the motions, the Court issued its decision on August 14, 1997. With
respect to the `33 Act suit, the Court dismissed the claims against the
underwriters, dismissed the claims brought against the Company under ss.12(2) of
the `33 Act, and dismissed the plaintiffs' claims relating to the Company's all
digital newsroom (in both the `33 Act and `34 Act cases) on the grounds that the
plaintiffs had failed to allege a material misrepresentation or omission.
Finding that it was required to draw all reasonable inferences in favor of the
plaintiffs, the Court declined to dismiss on the pleadings the plaintiffs'
remaining claims in the `33 Act case and the `34 Act claims relating to matters
other than the all digital newsroom. On September 26, 1997, the plaintiffs filed
a motion seeking to have the Court reconsider its dismissal of the underwriters
from the `33 Act suit, which the underwriters have opposed. The plaintiffs have
also sought leave to amend their `33 Act Complaint to add new claims concerning
the all digital newsroom, which the Company opposes. Despite the Court's ruling
on the motions to dismiss, the Company believes that it and the other defendants
have meritorious defenses to the remaining allegations made by the plaintiffs
and intends to contest these lawsuits vigorously. Nonetheless, 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. A reasonable estimate of the Company's
potential loss for damages cannot be made at this time. No costs have been
accrued for this possible loss contingency.
OTHER
The Company also receives inquiries from time to time with regard to possible
patent infringement claims. These inquiries are generally referred to counsel
and are in various stages of discussion. If any infringement is 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 have been asserted or commenced against the
Company arising from or related to contractual or employee relations or product
performance.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
11 Statement Regarding Supplemental Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K. For the fiscal quarter ended September 30, 1997, 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 12, 1997 By: /s/ William L. Flaherty
---------------------------
William L. Flaherty,
Senior Vice President of Finance and
Administration, and
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
11 Statement Regarding Supplemental Computation of Per Share
Earnings
27 Financial Data Schedule
Exhibit 11
STATEMENT REGARDING SUPPLEMENTAL COMPUTATION OF EARNINGS PER SHARE
Historical
------------------------------
Primary Fully Diluted
-------------- -------------
For the three months ended September 30, 1997:
Weighted average number of common shares
outstanding 23,912,150 23,912,150
Common stock equivalents 1,835,002 1,943,078
-------------- -------------
25,747,152 25,855,228
============== =============
Net income $8,828,000 $8,828,000
============== =============
Net income per common share $0.34 $0.34
============== =============
For the three months ended September 30, 1996:
Weighted average number of common shares
outstanding 21,224,026 21,224,026
============== =============
Net income (loss) $(6,758,000) $(6,758,000)
============== =============
Net income (loss) per common share $(0.32) $(0.32)
============== =============
Historical
------------------------------
Primary Fully Diluted
-------------- -------------
For the nine months ended September 30, 1997:
Weighted average number of common shares
outstanding 22,875,489 22,875,489
Common stock equivalents 982,012 1,262,041
-------------- -------------
23,857,501 24,137,530
============== =============
Net income $17,084,000 $17,084,000
============== =============
Net income per common share $0.72 $0.71
============== =============
For the nine months ended September 30, 1996:
Weighted average number of common shares
outstanding 21,115,926 21,115,926
============== =============
Net income (loss) $(33,213,000) $(33,213,000)
============== =============
Net income (loss) per common share $(1.57) $(1.57)
============== =============
5
1000
9-MOS
DEC-31-1997
JAN-01-1997
SEP-30-1997
115,704
69,147
85,858
6,047
18,701
307,548
97,768
57,771
367,032
108,638
0
0
0
241
257,567
367,032
347,602
347,602
167,491
167,491
161,234
0
0
24,759
7,675
17,084
0
0
0
17,084
0.72
0.71
