AVID TECHNOLOGY, INC.
Metropolitan Technology Park
One Park West
Tewksbury, MA 01876
May 13, 1998
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 March 31,
1998.
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
<PAGE>
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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 MARCH 31, 1998
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 May 11,
1998 was 23,337,640.
==============================================================================
<PAGE>
AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
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 March 31, 1998 and 1997 ...........1
b) Condensed Consolidated Balance Sheets as of
March 31, 1998 (unaudited) and December 31, 1997..............2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 1998 and 1997 ...........3
d) Notes to Condensed Consolidated Financial Statements
(unaudited)...................................................4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................8
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.........................14
Signatures..........................................................15
EXHIBIT INDEX.......................................................16
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1998 1997
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Net revenues $108,742 $108,209
Cost of revenues 45,527 56,185
------------ ------------
Gross profit 63,215 52,024
------------ ------------
Operating expenses:
Research and development 20,312 16,416
Marketing and selling 27,694 28,297
General and administrative 6,579 5,803
------------ ------------
Total operating expenses 54,585 50,516
------------ ------------
Operating income 8,630 1,508
Interest and other income, net 2,536 1,240
------------ ------------
Income before income taxes 11,166 2,748
Provision for income taxes 3,461 962
------------ ------------
Net income $7,705 $1,786
============ ============
Net income per common share - basic $0.34 $0.08
============ ============
Net income per common share - diluted $0.31 $0.08
============ ============
Weighted average common shares
outstanding - basic 22,908 21,550
============ ============
Weighted average common shares
outstanding - diluted 24,587 21,750
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $97,160 $108,308
Marketable securities 101,406 78,654
Accounts receivable, net of allowances of
$7,228 and $7,529 in 1998 and 1997, respectively 67,523 79,773
Inventories 10,906 9,842
Deferred tax assets 16,919 17,160
Prepaid expenses 5,804 4,645
Other current assets 2,929 2,700
------------- ------------
Total current assets 302,647 301,082
Property and equipment, net 37,230 38,917
Long-term deferred tax assets 14,820 14,820
Other assets 2,854 1,986
------------- ------------
Total assets $357,551 $356,805
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $22,076 $22,166
Current portion of long-term debt 725 783
Accrued compensation and benefits 14,785 23,737
Accrued expenses 29,558 30,249
Income taxes payable 13,529 11,210
Deferred revenues 26,312 26,463
------------- ------------
Total current liabilities 106,985 114,608
Long-term debt, less current portion 192 403
Commitments and contingencies
Stockholders' equity:
Preferred stock
Common stock 240 242
Additional paid-in capital 252,838 252,307
Retained earnings 30,797 27,286
Treasury stock (24,296) (27,548)
Deferred compensation (7,047) (8,034)
Cumulative translation adjustment (2,161) (2,472)
Net unrealized gains on marketable securities 3 13
------------- ------------
Total stockholders' equity 250,374 241,794
------------- ------------
Total liabilities and stockholders' equity $357,551 $356,805
============= ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------
1998 1997
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $7,705 $1,786
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,122 6,427
Compensation from stock grants and options 1,534
Provision for doubtful accounts 58 479
Changes in deferred tax assets 260 (155)
(Gain)/loss on disposal of equipment (292) 504
Changes in operating assets and liabilities:
Accounts receivable 11,888 14,500
Inventories (795) 5,985
Prepaid expenses and other current assets (1,409) (744)
Accounts payable (99) 876
Income taxes payable 2,303 4,888
Accrued expenses, compensation, and benefits (9,086) 2,406
Deferred revenues (100) (1,172)
---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,089 35,780
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software development costs (20) (107)
Purchases of property and equipment and other
assets (5,941) (3,869)
Proceeds from disposal of equipment 629 316
Purchases of marketable securities (54,924) (8,983)
Proceeds from sales of marketable securities 32,164 9,343
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (28,092) (3,300)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (269) (521)
Purchase of common stock for treasury (5,963)
Proceeds from issuance of common stock 5,006 15,806
----------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (1,226) 15,285
Effects of exchange rate changes on cash and cash
equivalents 81 (579)
----------- ----------
Net increase (decrease) in cash and cash equivalents (11,148) 47,186
Cash and cash equivalents at beginning of period 108,308 75,795
----------- ----------
Cash and cash equivalents at end of period $97,160 $122,981
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
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, 1997 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 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.
2. NET INCOME PER COMMON SHARE
The Company computes basic and diluted earnings per share in accordance with
Financial Accounting Standards No. 128, "Earnings per Share". The following
table reconciles the numerator and denominator of the basic and diluted earnings
per share computations shown on the Condensed Consolidated Statements of
Operations:
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
----------------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Basic EPS
Numerator:
Net income $7,705 $1,786
Denominator:
Common shares outstanding 22,908 21,550
Basic EPS $0.34 $0.08
============== =============
Diluted EPS
Numerator:
Net income $7,705 $1,786
Denominator:
Common shares outstanding 22,908 21,550
Common stock equivalents 1,679 200
-------------- -------------
24,587 21,750
Diluted EPS $0.31 $0.08
============== =============
</TABLE>
Options to purchase 71,747 and 3,432,900 shares of common stock outstanding at
March 31, 1998 and 1997, respectively, were excluded from the calculation of
diluted earnings per share because the exercise prices of those options exceeded
the average market price of common stock for the three month periods ended March
31, 1998 and 1997, respectively.
3. INVENTORIES
Inventories consist of the following (in thousands):
March 31, December 31,
1998 1997
------------- -------------
Raw materials $6,760 $5,488
Work in process 781 674
Finished goods 3,365 3,680
------------- -------------
$10,906 $9,842
============= =============
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following (in thousands):
March 31, December 31,
1998 1997
-------------- --------------
Computer and video equipment $77,425 $75,042
Office equipment 4,626 4,652
Furniture and fixtures 6,842 6,820
Leasehold improvements 13,064 13,105
-------------- --------------
101,957 99,619
Less accumulated depreciation and
amortization 64,727 60,702
-------------- --------------
$37,230 $38,917
============== ==============
5. 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 dismissed without prejudice (with leave to
refile) 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 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 also sought leave to
amend their `33 Act Complaint to add new claims concerning the all digital
newsroom, which the Company opposed. In February 1998, the Company and the
Plaintiffs entered into a Stipulation of Settlement in both suits and the judge
issued an order granting preliminary approval to the settlement. A Final
Settlement Approval hearing is scheduled for May 28, 1998. The Company believes
the potential settlement will not have a material effect on the Company's
consolidated financial position or results of operations. In the event the
settlement is not finally approved, 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, in the
event the settlement is not approved, 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. In such event, a reasonable estimate of the Company's potential loss
for damages cannot be made at this time.
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 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.
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.
6. CAPITAL STOCK
On March 24, 1997, the Company issued 1,552,632 shares of its common stock to
Intel Corporation in exchange for approximately $14,727,000 in cash. The Company
used 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 including
an additional 20% which will vest on May 1, 1998. 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 $9,100,000 with
respect to this restricted stock. This deferred compensation represents the
excess of fair value of the restricted shares at the date of the award over the
purchase price and is recorded as compensation expense ratably as the shares
vest.
On October 23, 1997 and February 5, 1998, the Company announced that the Board
of Directors authorized the repurchase of up to 1.0 million and 1.5 million
shares, respectively, of the Company's common stock. Purchases have and will be
made in the open market or in privately negotiated transactions. The Company has
used and will continue to use any repurchased shares for its employee stock
plans. As of December 31, 1997, the Company had repurchased a total of 1.0
million shares at a cost of $28,776,000, which completed the program announced
in October. As of March 31, 1998, the Company had repurchased approximately
180,000 shares at a cost of $5,963,000, under the program announced during
February.
7. RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". Statement No.
130 requires the reporting of comprehensive income in addition to net income
from operations. Comprehensive income is a more inclusive reporting methodology
that includes disclosure of certain financial information that historically has
not been recognized in the calculation of net income. The adoption of SFAS 130
had no impact on the Company's net income or stockholder's equity. Total
comprehensive income, net of taxes, for the three months ended March 31, 1998
and 1997 was $7,913,000 and $1,113,000, respectively, which consists of net
income, the net changes in foreign currency translation adjustment and the net
unrealized losses on available-for-sale securities.
In March 1998, Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), was issued which
provides guidance on applying generally accepted accounting principles in
addressing whether and under what condition the costs of internal-use software
should be capitalized. SOP 98-1 is effective for transactions entered into in
fiscal years beginning after December 15, 1998, however earlier adoption is
encouraged. The Company adopted the guidelines of SOP 98-1 as of January 1,
1998, and the impact of such adoption was not material to results of operations
or cash flows for the quarter ended March 31, 1998.
<PAGE>
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 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 to $108.7 million in the quarter ended March 31, 1998 from $108.2
million in the same quarter of last year. Revenues reflected increased sales of
MCXpress and Avid Xpress, storage peripherals, customer service, and digital
audio products. These increased revenues were offset by a reduction in sales of
Avid Cinema and Media Composer products. During 1997, the Company began
shipments of new versions of MCXpress and Avid Xpress, AudioVision 4.0, Pro
Tools 24, AvidNews, and MediaShare F/C. In February 1998, the Company began
shipments of version 7.0 of Media Composer and Film Composer as well as version
2.0 of Avid Xpress. To date, product returns of all products have been
immaterial.
The Company continues 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 65% of net revenue for the three
months ended March 31, 1998, compared to greater than 55% of net revenue for the
same period in 1997.
International sales (sales to customers outside the U.S. and Canada) accounted
for approximately 47.8% and 48.4% of the Company's first quarter 1998 and 1997
net revenues, respectively. International sales were essentially flat in the
first quarter of 1998 compared to the same period in 1997. Revenue growth from
1997 to 1998 was impacted adversely by the strengthening of the U.S. dollar
against various currencies.
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 58.1% in
the first quarter of 1998 compared to 48.1% in the same period of 1997. This
increase was primarily due to lower material costs, continued improvements in
manufacturing efficiencies, and improved service margins. The Company currently
expects that 1998 gross margins will approximate results of the two most recent
quarters.
Research and Development
Research and development expenses increased by $3.9 million (23.7%) in the first
quarter of 1998 compared to the same period in 1997. The increase was primarily
due to additions to the Company's engineering staffs for the continued
development of new and existing products and higher compensation-related costs
as compared to the first quarter of 1997. Research and development expenses
increased as a percentage of net revenues to 18.7% in the first quarter of 1998
from 15.2% for the same period in 1997. This increase was primarily due to the
increase in research and development expenses with relatively flat revenues. The
Company capitalized immaterial amounts of software development costs during the
first quarter of 1998 and 1997. 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 $69,000 and $429,000 in the first
quarter of 1998 and 1997, respectively. The capitalized software development
costs are associated primarily with enhancements to Media Composer and Pro Tools
software, as well as the development of software to be used in other products.
Marketing and Selling
Marketing and selling expenses decreased by approximately $600,000 (2.1%) in the
first quarter of 1998 compared to the same period in 1997 primarily due to the
continued effect of the shift to an indirect sales model, resulting in savings
in compensation, facilities and depreciation costs. These savings were partially
offset by the cost of marketing programs. Marketing and selling expenses
decreased as a percentage of net revenues to 25.5% in the first quarter of 1998
from 26.1% for the same period in 1997. This decrease was primarily due to the
decrease in marketing and selling expenses with relatively flat revenues.
General and Administrative
General and administrative expenses increased by $776,000 (13.4%) in the first
quarter of 1998 compared to the same period in 1997. This increase in general
and administrative expenses was primarily due to higher compensation-related
costs as compared to the first quarter of 1997. General and administrative
expenses increased as a percentage of net revenues to 6.1% in the first quarter
of 1998 from 5.4% for the same period in 1997 primarily due to the increase in
general and administrative expenses with relatively flat revenues.
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 first
quarter in 1998 increased $1.3 million as compared to the same period in 1997.
This increase in interest and other income, net was primarily due to higher
investment balances.
Provision for Income Taxes
The Company's effective tax rate was 31% for the first quarter of 1998, compared
to 35% for the same quarter in 1997. The 1998 effective tax rate of 31% is
different from the Federal statutory rate of 35% 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date through both private and public
sales of equity securities as well as through cash flows from operations. As of
March 31, 1998, the Company's principal sources of liquidity included cash, cash
equivalents and marketable securities totaling approximately $198.6 million.
The Company's operating activities generated cash of $18.1 million in the first
quarter of 1998 compared to $35.8 million in the first quarter of 1997. Cash was
generated during the first quarter of 1998 primarily from net income, as well as
from collections of accounts receivable offset by a decrease in accrued
expenses. In the first quarter of 1997, cash was generated primarily from
collections of accounts receivable and reductions in inventory.
The Company purchased $5.9 million of property and equipment and other assets
during the first quarter of 1998, compared to $3.9 million in the same period in
1997. These purchases included primarily 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 with a group of banks which provides
for up to $35.0 million in revolving credit. The line of credit agreement
expires 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 is bound by
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 March
31, 1998. The Company believes existing cash and marketable securities,
internally generated funds and available borrowings under its bank credit line
will be sufficient to meet the Company's cash requirements, including capital
expenditures, at least through the end of 1998. 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.
On October 23, 1997 and February 5, 1998, the Company announced that the Board
of Directors authorized the repurchase of up to 1.0 million and 1.5 million
shares, respectively, of the Company's common stock. Purchases have and will be
made in the open market or in privately negotiated transactions. The Company has
used and will continue to use any repurchased shares for its employee stock
plans. As of December 31, 1997, the Company had repurchased a total of 1.0
million shares at a cost of approximately $28.8 million, which completed the
program announced in October. As of March 31, 1998, the Company had repurchased
approximately 180,000 shares at a cost of approximately $6.0 million, under the
program announced during February.
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. In addition, in 1997 and during the first
quarter of 1998, the Company installed server-based, all-digital broadcast
newsroom systems at certain 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, the gross margins on such sales will be lower than the gross margins
generally on the Company's other systems.
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.
The Company's operating expense levels are based, in part, on its expectations
of future revenues. In recent quarters more than 45% 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, online film and video
finishing market and the emerging market for multimedia production tools,
including the corporate 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 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 or
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 or any 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. 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; application specific
integrated circuits ("ASICS") from AMI, Atmel, and LSI Logic; digital signal
processing integrated circuit from Motorola; and a fibre channel adapter card
from Adaptec. 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 video and film editing and effects, digital news production, and
professional audio markets. 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 re-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 6 to Condensed Consolidated Financial Statements, and ITEM 3, "Legal
Proceedings", of the Company's annual report or Form 10-K for the year ended
December 31, 1997.
The Company recognizes that it must ensure that its products and operations will
not be adversely impacted by year 2000 software failures (the "Year 2000 issue")
which can arise in time-sensitive software applications which utilize a field of
two digits to define the applicable year. In such applications, a date using
"00" as the year may be recognized as the year 1900 rather than the year 2000.
In general, the Company expects to resolve Year 2000 issues through planned
replacement or upgrades. In addition, the Company expects that any costs
incurred to modify its internal systems will not be material. Although
management does not expect Year 2000 issues to have a material impact on its
business or future results of operations, there can be no assurance that there
will not be interruptions of operations or other limitations of system
functionality or that the Company will not incur significant costs to avoid such
interruptions or limitations.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. For the fiscal quarter ended March 31, 1998, the
Company filed no Current Reports on Form 8-K.
<PAGE>
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: May 13, 1998 By:/s/ William L. Flaherty
---------------------------
William L. Flaherty
Senior Vice President of
Finance, Chief Financial Officer
and Treasurer
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEETS ON THE FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998
AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AS FILED ON FORM 10-Q FOR
THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 97,160
<SECURITIES> 101,406
<RECEIVABLES> 74,751
<ALLOWANCES> 7,228
<INVENTORY> 10,906
<CURRENT-ASSETS> 302,647
<PP&E> 101,957
<DEPRECIATION> 64,727
<TOTAL-ASSETS> 357,551
<CURRENT-LIABILITIES> 106,985
<BONDS> 0
0
0
<COMMON> 240
<OTHER-SE> 250,134
<TOTAL-LIABILITY-AND-EQUITY> 357,551
<SALES> 108,742
<TOTAL-REVENUES> 108,742
<CGS> 45,527
<TOTAL-COSTS> 45,527
<OTHER-EXPENSES> 54,585
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,166
<INCOME-TAX> 3,461
<INCOME-CONTINUING> 7,705
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,705
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.31
</TABLE>
