AVID TECHNOLOGY, INC.
Avid Technology Park
One Park West
Tewksbury, MA 01876
May 12, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, DC 20549
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,
1999.
This filing is being effected by direct transmission to the Commission's
EDGAR System.
Very truly yours,
/s/ Ethan E. Jacks
Ethan E. Jacks
General Counsel
<PAGE>
================================================================================
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, 1999
_________
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.)
Avid 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 10,
1999 was 23,978,106.
================================================================================
<PAGE>
AVID TECHNOLOGY, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 1999
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, 1999 and 1998 .................1
b) Condensed Consolidated Balance Sheets as of
March 31, 1999 (unaudited) and December 31, 1998....................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 1999 and 1998..................3
d) Notes to Condensed Consolidated Financial Statements (unaudited)....4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................10
PART II. OTHER INFORMATION
ITEM 6.....Exhibits and Reports on Form 8-K..............................19
Signatures...............................................................20
EXHIBIT INDEX............................................................21
<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,
--------------------------------
1999 1998
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Net revenues $111,283 $108,742
Cost of revenues 44,420 45,527
------------ ------------
Gross profit 66,863 63,215
------------ ------------
Operating expenses:
Research and development 24,248 20,312
Marketing and selling 32,563 27,694
General and administrative 6,741 6,579
Amortization of acquisition-related
intangible assets 20,511
------------ ------------
Total operating expenses 84,063 54,585
------------ ------------
Operating income (loss) (17,200) 8,630
Interest and other income, net 600 2,536
------------ ------------
Income (loss) before income taxes (16,600) 11,166
Provision for (benefit from) income taxes (5,146) 3,461
------------ ------------
Net income (loss) ($11,454) $7,705
============ ============
Net income (loss) per common share - basic ($0.47) $0.34
============ ============
Net income (loss) per common share - diluted ($0.47) $0.31
============ ============
Weighted average common shares outstanding -
basic 24,391 22,908
============ ============
Weighted average common shares outstanding -
diluted 24,391 24,587
============ ============
</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,
1999 1998
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $53,720 $62,904
Marketable securities 47,794 48,922
Accounts receivable, net of allowances of
$6,923 and $7,171 in 1999 and 1998, respectively 68,982 89,754
Inventories 11,828 11,093
Deferred tax assets 19,341 17,771
Prepaid expenses 6,816 6,095
Other current assets 4,062 5,108
------------ -------------
Total current assets 212,543 241,647
Property and equipment, net 35,464 35,398
Long-term deferred tax assets 24,020 23,891
Acquisition-related intangible assets 161,193 181,631
Other assets 6,393 4,148
------------ -------------
Total assets $439,613 $486,715
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $21,168 $24,311
Current portion of long-term debt 405 398
Accrued compensation and benefits 15,074 29,031
Accrued expenses 29,466 32,708
Income taxes payable 7,939 13,715
Deferred revenues 19,625 22,519
------------ -------------
Total current liabilities 93,677 122,682
Long-term debt and other liabilities, less
current portion 5,987 13,261
Purchase consideration 43,355 60,461
Commitments and contingencies
Stockholders' equity:
Preferred stock
Common stock 265 265
Additional paid-in capital 360,241 349,289
Retained earnings 2,627 14,338
Treasury stock (60,280) (68,024)
Deferred compensation (3,283) (3,773)
Accumulated other comprehensive income (loss) (2,976) (1,784)
------------ -------------
Total stockholders' equity 296,594 290,311
------------ -------------
Total liabilities and stockholders' equity $439,613 $486,715
============ =============
</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,
-----------------------------
1999 1998
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($11,454) $7,705
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 25,283 6,122
Compensation from stock grants and options 332 1,534
Provision for doubtful accounts 471 58
Changes in deferred tax assets (129) 260
Gain on disposal of equipment (60) (292)
Changes in operating assets and liabilities:
Accounts receivable 17,382 11,888
Inventories 3,042 (795)
Prepaid expenses and other current assets 126 (1,409)
Accounts payable (3,151) (99)
Income taxes payable (7,471) 2,303
Accrued expenses, compensation, and benefits (16,074) (9,086)
Deferred revenues (1,064) (100)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,233 18,089
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment and other
assets (8,750) (5,961)
Proceeds from disposal of equipment 134 629
Purchases of marketable securities (23,235) (54,924)
Proceeds from sales of marketable securities 24,327 32,164
Investment in joint venture (1,500)
Payments on note issued in connection with
acquisition (8,095)
- --------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES: (17,119) (28,092)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (225) (269)
Purchase of common stock for treasury (531) (5,963)
Proceeds from issuance of common stock 2,546 5,006
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,790 (1,226)
- --------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash
equivalents (1,088) 81
- --------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (9,184) (11,148)
Cash and cash equivalents at beginning of period 62,904 108,308
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $53,720 $97,160
________________________________________________________________________________
</TABLE>
Non-cash Financing and Investing Activities:
Property and equipment and inventory transferred
to joint venture $500
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 ("Avid" or
"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, 1998 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, the
recoverability of intangible assets including goodwill, and income tax valuation
allowances. Actual results could differ from those estimates.
2. NET INCOME (LOSS) PER COMMON 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,
--------------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Basic EPS
Numerator:
Net income (loss) ($11,454) $7,705
Denominator:
Weighted common shares outstanding 24,391 22,908
Basic EPS ($0.47) $0.34
============= =============
Diluted EPS
Numerator:
Net income (loss) ($11,454) $7,705
Denominator:
Weighted common shares outstanding 24,391 22,908
Weighted common stock equivalents - 1,679
------------- -------------
24,391 24,587
Diluted EPS ($0.47) $0.31
============= =============
</TABLE>
Options and warrants to purchase 5,611,041 weighted shares of common stock
outstanding were excluded from the calculation of diluted earnings per share for
the three months ended March 31, 1999 because their inclusion would be
anti-dilutive. Approximately 2,777,734 of these weighted shares had an exercise
price that exceeded the average market price of common stock during that period.
Options to purchase 71,747 weighted shares of common stock outstanding were
excluded from the calculation of diluted earnings per share for the three month
period ended March 31, 1998 because the exercise prices of those options
exceeded the average market price of common stock for the three-month period
ended March 31, 1998.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Raw materials $6,143 $6,193
Work in process 1,965 2,081
Finished goods 3,720 2,819
-------------- --------------
$11,828 $11,093
============== ==============
</TABLE>
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Computer and video equipment $88,912 $85,365
Office equipment 5,045 4,874
Furniture and fixtures 7,194 7,138
Leasehold improvements 15,486 15,287
------------- -------------
116,637 112,664
Less accumulated depreciation and amortization 81,173 77,266
------------- -------------
$35,464 $35,398
============= =============
</TABLE>
5. INVESTMENT IN JOINT VENTURE
On January 27, 1999, the Company, with Tektronix, Inc., incorporated a 50% owned
and funded newsroom venture, AvStar Systems LLC ("AvStar"), which began
operations in February 1999 with its corporate office located in Madison,
Wisconsin. The joint venture is dedicated to providing the next generation of
digital news production products. The Company's investment in the joint venture
is being accounted for under the equity method of accounting. The Company's
initial contribution to the joint venture was approximately $2.0 million,
consisting of $1.5 million in cash and $0.5 million of licensed technology,
fixed assets and inventory.
6. LONG-TERM DEBT AND PURCHASE CONSIDERATION
In connection with the acquisition of Softimage, Avid issued a $5.0 million
subordinated note (the "Note") to Microsoft Corporation. The principal amount of
the Note, including any adjustments as provided for in the underlying agreement
relative to Avid stock options forfeited by Softimage employees, plus all unpaid
accrued interest is due on June 15, 2003. The Note bears interest at 9.5% per
annum, payable quarterly. Through March 31, 1999, the Note has been increased by
approximately $6.3 million for forfeited Avid stock options. The Company made
cash payments of approximately $180,000 for interest and $8.0 million for
principal during the quarter ended March 31, 1999.
In conjunction with the acquisition of Softimage, the Company issued stock
options to retained employees. As agreed with the seller, the value of the note
payable to the seller will be increased by $39.71 for each share underlying
options that become forfeited by employees. At the date of acquisition, the
Company recorded these options as Purchase Consideration on the balance sheet at
a value of $68.2 million. As these options become vested, additional paid-in
capital is increased or, alternatively, as the options are forfeited, the note
payable to the seller is increased, with Purchase Consideration being reduced by
a corresponding amount in either case.
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 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.
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,
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.
8. CAPITAL STOCK
On October 23, 1997, February 5, 1998 and October 21, 1998, the Company
announced that the Board of Directors authorized the repurchase of up to 1.0
million, 1.5 million and 2.0 million shares, respectively, of the Company's
common stock. Purchases have been 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 $28.8
million, which completed the program announced in October 1997. As of December
31, 1998, the Company had repurchased approximately 1.9 million additional
shares of Avid common stock at a cost of $61.8 million, which completed the
program announced during February 1998 and initiated the program announced in
October 1998. As of March 31, 1999, the balance of shares authorized for
repurchase was 1.5 million shares.
9. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss), net of taxes, was approximately ($12.6)
million and $8.0 million for the three-month periods ended March 31, 1999 and
1998, respectively, which consists of net income (loss), the net changes in
foreign currency translation adjustment and the net unrealized gains and losses
on available-for-sale securities. This calculation is in accordance with the
requirements of Statement of Financial Accounting Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income", and has no impact on the Company's net
income or stockholders' equity.
10. SEGMENT INFORMATION
The Company's organizational structure is based on strategic business units that
offer various products to the principle markets in which the Company's products
are sold. These business units equate to two reportable segments: Video and Film
Editing and Effects; Professional Audio.
The following is a summary of the Company's operations by operating segment for
the three months ended March 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Video and Film Editing and Effects:
Net revenues $86,025 $92,504
========== ==========
Depreciation $4,847 $5,175
========== ==========
Operating income (loss) ($3,754) $5,627
========== ==========
Professional Audio:
Net revenues $25,258 $16,238
========== ==========
Depreciation $275 $367
========== ==========
Operating income $7,065 $3,003
========== ==========
Segment Totals:
Net revenues $111,283 $108,742
========== ==========
Depreciation $5,122 $5,542
========== ==========
Operating income $3,311 $8,630
========== ==========
</TABLE>
The following table reconciles segment operating income (loss) to total
consolidated operating income (loss) for the three months ended March 31, 1999
and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Total operating income for reportable segments $3,311 $8,630
Unallocated amount:
Amortization of acquisition-related (20,511)
intangible assets
--------- --------
Consolidated operating income (loss) ($17,200) $8,630
========= ========
</TABLE>
The 1999 unallocated amount represents the amortization of acquired intangible
assets, including goodwill, associated with the acquisition of Softimage.
11. SUPPLEMENTAL RECONCILIATION OF NET INCOME (LOSS) TO TAX-EFFECTED INCOME
EXCLUDING AMORTIZATION OF ACQUISITION-RELATED INTANGIBLE ASSETS
The following table presents a calculation of tax-effected income and diluted
per share amounts excluding amortization of acquisition-related intangible
assets. The information is presented in order to enhance the comparability of
the statements of operations for the periods presented.
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Net income (loss) ($11,454) $7,705
Adjustments:
Amortization of acquisition-related
intangible assets 20,511
Tax impact of adjustment (6,359)
-------------- -------------
Tax-effected income excluding amortization of
acquisition-related intangible assets $2,698 $7,705
============== =============
Tax-effected income per diluted share excluding
amortization of acquisition-related
intangible assets $0.10 $0.31
============== =============
Weighted average common shares outstanding -
diluted - used for calculation 27,225 24,587
============== =============
</TABLE>
The 1999 adjustment represents the amortization of $20.5 million related to
acquired intangible assets, including goodwill, associated with the acquisition
of Softimage.
<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
video and audio production and post-production facilities; film studios;
network, affiliate, independent and cable television stations; recording
studios; advertising agencies; government and educational institutions;
corporate communications departments; and by individual home users.
In August 1998, the Company acquired the business of Softimage. The acquisition
was recorded as a purchase and, accordingly, the results of Softimage are
included in the Company's financial statements as of the acquisition date.
RESULTS OF OPERATIONS
Net Revenues
The Company's net revenues have been derived mainly from the sales of
computer-based digital, nonlinear media editing systems and related peripherals,
licensing of related software, and sales of software maintenance contracts. Net
revenues increased to $111.3 million in the quarter ended March 31, 1999 from
$108.7 million in the same quarter of last year. Revenues reflected incremental
Softimage business and increased sales of digital audio products. These
increased revenues were partially offset by decreased sales of Media Composer
products and related storage peripherals and Broadcast products. During the
first quarter of 1999, the Company began shipments of Pro Tools|24 Mix and Mix
Plus for Windows NT. To date, product returns of all products have been
immaterial.
Net revenues derived through indirect channels were greater than 85% of net
revenue for the three months ended March 31, 1999, compared to greater than 65%
of net revenue for the same period in 1998 and greater than 70% of net revenue
for the full year ended December 31, 1998.
International sales (sales to customers outside the U.S. and Canada) accounted
for approximately 54% and 48% of the Company's first quarter 1999 and 1998 net
revenues, respectively. International sales increased approximately 16% in the
first quarter of 1999 compared to the same period in 1998. The increase in
international sales reflected increases in Europe and, to a lesser extent, the
Asia Pacific region.
Gross Profit
Cost of revenues consists primarily of costs associated with the procurement of
components; the assembly, test, and distribution of finished products;
warehousing; post-sales customer support costs; and provisions for inventory
obsolescence. 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 60.1% in the first
quarter of 1999 compared to 58.1% in the same period of 1998. This increase was
primarily due to lower material costs, continued improvements in manufacturing
efficiencies, and a favorable product mix, principally from Softimage product
margins. The Company currently expects that gross margins for the remainder of
1999 will approximate results of the most recent quarter.
Research and Development
Research and development expenses increased by $3.9 million (19.4%) in the first
quarter of 1999 compared to the same period in 1998. The increase was primarily
due to incremental Softimage costs as well as additions to the Company's
engineering staffs for the continued development of new and existing products.
Research and development expenses increased as a percentage of net revenues to
21.8% in the first quarter of 1999 from 18.7% for the same period in 1998. This
percentage increase was primarily due to the increase in research and
development expenses as noted above.
Marketing and Selling
Marketing and selling expenses increased by approximately $4.9 million (17.6%)
in the first quarter of 1999 compared to the same period in 1998 primarily due
to incremental Softimage costs and increased spending on various marketing
programs. Marketing and selling expenses increased as a percentage of net
revenues to 29.3% in the first quarter of 1999 from 25.5% for the same period in
1998. This percentage increase was primarily due to the increase in marketing
and selling expenses as noted above.
General and Administrative
General and administrative expenses increased by $162,000 (2.5%) in the first
quarter of 1999 compared to the same period in 1998. The increase is primarily
attributable to increased compensation-related expenses. General and
administrative expenses remained flat as a percentage of net revenues, at 6.1%
in the first quarters of 1999 and 1998.
Amortization of Acquisition-related Assets
In connection with the August 1998 acquisition of the business of Softimage, the
Company allocated $88.2 million of the total purchase price of $247.9 million to
intangible assets consisting of completed technologies, work force and trade
name, and $127.8 million to goodwill. Results for the quarter ended March 31,
1999 reflect amortization of $20.5 million associated with these
acquisition-related intangible assets.
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 1999 decreased $1.9 million as compared to the same period in 1998.
This decrease in interest and other income, net was primarily due to lower cash
and investment balances and to Avid's share of the net losses of its joint
venture with Tektronix.
Provision for Income Taxes
The Company's effective tax rate was 31% for the first quarters of 1999 and
1998. The 1999 and 1998 effective tax rates of 31% are different from the U.S.
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, 1999, the Company's principal sources of liquidity included cash, cash
equivalents and marketable securities totaling approximately $101.5 million.
With respect to cash flow, net cash provided by operating activities was $7.2
million for the period ended March 31, 1999 compared to $18.1 million in 1998.
During the three months ended March 31, 1999, net cash provided by operating
activities primarily reflects net income adjusted for depreciation and
amortization as well as a decrease in accounts receivable, partially offset by
decreases in accrued expenses and income taxes payable. During the three months
ended March 31, 1998, net cash provided by operating activities primarily
reflects net income adjusted for depreciation and amortization, as well as a
decrease in accounts receivable, partially offset by a decrease in accrued
expenses.
The Company purchased $8.8 million of property and equipment and other assets
during the three months ended March 31, 1999, compared to $6.0 million in the
same period in 1998. These purchases included hardware and software for the
Company's information systems and equipment to support research and development
activities. The Company also utilized $8.1 million to pay down a portion of the
note issued to Microsoft Corporation in connection with the acquisition of
Softimage. Additionally, the Company made a cash investment of $1.5 million into
a joint venture with Tektronix.
The Company maintains an unsecured line of credit agreement with a group of
banks that provides for up to $35.0 million in revolving credit. The line of
credit agreement, as renewed and amended, expires on June 29, 1999. 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 the line and was not in default of any financial covenants as
of March 31, 1999. 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 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.
On October 23, 1997, February 5, 1998 and October 21, 1998, the Company
announced that the Board of Directors authorized the repurchase of up to 1.0
million, 1.5 million and 2.0 million shares, respectively, of the Company's
common stock. Purchases have been 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 $28.8
million, which completed the program announced in October 1997. As of December
31, 1998, the Company had repurchased approximately 1.9 million additional
shares of Avid common stock at a cost of $61.8 million, which completed the
program announced during February 1998 and initiated the program announced in
October 1998. As of March 31, 1999, the balance of shares authorized for
repurchase was 1.5 million shares.
Other planned uses of cash include the efforts to develop the purchased
in-process research and development related to the Softimage acquisition into
commercially viable products. Additionally, the note issued to Microsoft
Corporation in connection with the Softimage acquisition is due and payable in
June 2003.
YEAR 2000 READINESS DISCLOSURE
The Company has a worldwide program in place to address its exposure to the Year
2000 issue. This program is designed to minimize the possibility of significant
Year 2000 interruptions. Possible worst case scenarios include the interruption
of significant parts of the Company's business as a result of critical business
systems failures or failures experienced by suppliers, resellers, or customers.
Any such interruption may have a material adverse impact on future results.
Since the possibility of such interruptions cannot be eliminated, the Company
has involved a significant number of cross-functional resources with technical,
business, legal, and financial expertise in order to achieve Year 2000
readiness.
In 1998, the Company established the worldwide program to address its software
and hardware product and customer concerns, its internal business systems,
including technology infrastructure and embedded technology systems, and the
compliance of its suppliers. This program includes the following phases:
identification, assessment, testing, remediation, and contingency planning.
The readiness status of the Company's hardware and software products is
available on the Company's web site, which is updated from time to time. This
web site has been and will continue to be the Company's primary method for
communicating information about its products to the public. With respect to its
products, the Company has created categories to describe the status of its
products. Approximately 70% of the products that the Company has considered for
testing have been classified as "Year 2000 Ready." The "Year 2000 Ready"
category indicates that the Company has determined that the product, when used
in its designated manner, will not terminate abnormally or give incorrect
results with respect to date data before, during or after December 31, 1999,
provided that all products used in conjunction with the Avid product exchange
accurately formatted information with the Avid product. The Company intends to
continue testing the majority of the remaining 30% of its designated products
and to provide updates such as software patches, workarounds, or other solutions
for such designated products where necessary to make them Year 2000 ready. In
certain cases, for older products, the Company has or may deem it inappropriate
to test or provide upgrade paths for Year 2000 readiness. Because all customer
situations cannot be anticipated, the Company may see a change in demand or an
increase in warranty or service claims as a result of the Year 2000 transition.
Such events, should they occur, could have a material adverse impact on future
results.
With respect to the Company's efforts to address the Year 2000 readiness of its
internal business systems the identification and assessment phases have, for the
most part, been completed; the remainder of these efforts will occur in the
second quarter of 1999. These identification and assessment phases involved
evaluation of substantially all of the Company's internal information systems
and other infrastructure areas including communication systems, building
security systems and embedded technologies in areas such as manufacturing and
customer support processes. Testing of certain existing internal information
systems is currently underway and is scheduled to be substantially completed in
the second quarter of 1999. Those systems which are already known or are shown
not to be Year 2000 ready are scheduled for remediation during the second or
third quarter of 1999. Remediation may involve upgrades or replacements of
non-ready systems. Certain of the Company's business systems were already
scheduled to be replaced in the normal course of business for reasons unrelated
to potential Year 2000 issues. Those systems will be tested for Year 2000 issues
as part of the normal installation and testing process.
The Company has initiated communications with mission critical third party
suppliers and service providers, such as inventory suppliers, equipment
suppliers, financial institutions, landlords, and resellers, to determine the
extent to which the Company's operations are vulnerable to those third parties'
failure to remediate their own Year 2000 issues. Suppliers of software, hardware
or other products that might contain embedded processors were requested to
provide certification regarding the Year 2000 readiness status of their products
and business processes. Suppliers of services were also requested to provide
certification or other appropriate information regarding their Year 2000
readiness status. For service suppliers who interface with the Company via
electronic means, the Company intends to test mission critical interfaces where
possible or appropriate. In addition, in order to protect against the
acquisition of additional products or services that may not be Year 2000 ready,
the Company is implementing a policy that requires sufficient assurances that
such products and services are Year 2000 ready. With respect to the Company's
resellers, the Company has requested or is in the process of requesting from
them appropriate assurances regarding Year 2000 readiness status of their
business processes.
The Company's efforts with respect to third party suppliers and service
providers is scheduled for completion during the second quarter of 1999. The
Company does not anticipate any related delays that will significantly impact
its Year 2000 readiness as a whole. However, the Company does face a risk with
respect to third party suppliers who may prove unable to address and remediate
their Year 2000 issues. The Company is developing contingency plans to address
the products or services obtained from those third parties who fail to provide
the requested information or whose responses are inadequate.
The costs of the readiness program are primarily costs of existing internal
resources and expertise combined with small incremental external spending. The
entire cost of the program is estimated at $3.2 million, of which approximately
50% has been incurred through April 30, 1999. Costs for business system
replacements or upgrades unrelated to Year 2000 issues are not included in this
estimate. No future material product readiness costs are anticipated. However,
milestones and implementation dates and the costs of the Company's Year 2000
readiness program are subject to change based on new circumstances that may
arise or new information becoming available.
Based on the Company's ongoing evaluation of internal information and other
systems, the Company does not anticipate significant business interruptions.
However, satisfactorily addressing a particular Year 2000 issue on a timely
basis is dependent on many factors, some of which are not completely within the
Company's control, such as those involving third parties. Additionally, there
remains the risk that errors or defects related to the Year 2000 issue may
remain undetected. Should business interruptions occur, or should a significant
Year 2000 issue go undetected, there could be a material adverse impact on
future results.
EUROPEAN MONETARY UNION
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their sovereign currencies and the
euro. As of that date, the participating countries agreed to adopt the euro as
their common legal currency. However, the legacy currencies will also remain
legal tender in the participating countries for a transition period between
January 1, 1999 and January 1, 2002. During this transition period, public and
private parties may elect to pay or charge for goods and services using either
the euro or the participating country's legacy currency.
The Company began conducting certain business transactions in the euro on
January 1, 1999, and will change its functional currencies for the effected
countries to the euro by the end of the three-year transition period. The
conversion to the euro has not and is not expected to have a significant
operational impact or a material financial impact on the results of operations,
financial position, or liquidity of its European businesses.
<PAGE>
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 began shipping its Avid Symphony product, which is based on Intel
Architecture ("IA") computers and the Microsoft Windows NT operating system, and
its SOFTIMAGE|DS and Pro Tools|24 Mix products during 1998. The Company expects
that a significant portion of its future revenues will be attributable to sales
of these newly introduced products. However, if these products fail to achieve
anticipated levels of market acceptance, the Company's revenues and results of
operations could be adversely affected. In addition, the Company from time to
time develops new products or upgraded existing products to incorporate advances
in enabling technologies. For example, the Company is continuing to develop
additional products that operate using IA - based computers and the Windows NT
operating system. There can be no assurance that customers will not defer
purchases of existing Apple-based and other products in anticipation of the
release of such new products, that the Company will be successful in developing
additional new products or that they will gain market acceptance, if developed.
Any deferral by customers of purchases of existing Apple-based or other 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.
Certain of the Company's products operate only on specific computer platforms.
The Company currently relies on Apple Computer, Inc., IBM and Intergraph as the
sole manufacturers of such computer platforms. There can be no assurance that
customers will not purchase competitors' products based on other computer
platforms, that the respective manufacturers will continue to develop,
manufacture, and support such computer platforms suitable for the Company's
existing and future markets or that the Company will be able to secure an
adequate supply of computers, the occurrence of any of which could have a
material adverse effect on the Company's business and results of operations.
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 and home 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's gross margin may 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, during 1998
and 1999, 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 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 unit 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 approximately half 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 may 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. 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 is dependent on a number of suppliers as sole source vendors of
certain key components of its products and systems. Components purchased by the
Company from sole source vendors include; 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 Chip Express
and LSI Logic; digital signal processing integrated circuits from Motorola; a
fibre channel adapter card from JNI; a fibre channel storage array from Data
General's Clariion division; and a PCI expansion chassis from Magma Inc. 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 (a subsidiary of Pinnacle Systems). 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 could 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 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 reevaluates its hedging practices.
The Company is involved in various legal proceedings, including patent
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.
<PAGE>
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, 1999, the
Company filed one Current Report on Form 8-K on February 4, 1999,
reporting under Item 5 its preliminary results of operations for the
fourth quarter of 1998. The report included unaudited condensed
consolidated statements of operations before acquisition-related charges.
<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 12, 1999 By: /s/ William L. Flaherty
--------------------
William L. Flaherty
Senior Vice President of
Finance, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
Date: May 12, 1999 By: /s/ Carol L. Reid
--------------------
Carol L. Reid
Vice President and Corporate
Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
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, 1999
AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AS FILED ON FORM 10-Q FOR
THE PERIOD ENDED MARCH 31, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 53,720
<SECURITIES> 47,794
<RECEIVABLES> 75,905
<ALLOWANCES> 6,923
<INVENTORY> 11,828
<CURRENT-ASSETS> 212,543
<PP&E> 116,637
<DEPRECIATION> 81,173
<TOTAL-ASSETS> 439,613
<CURRENT-LIABILITIES> 93,677
<BONDS> 0
0
0
<COMMON> 265
<OTHER-SE> 296,329
<TOTAL-LIABILITY-AND-EQUITY> 439,613
<SALES> 111,283
<TOTAL-REVENUES> 111,283
<CGS> 44,420
<TOTAL-COSTS> 44,420
<OTHER-EXPENSES> 84,063
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (16,600)
<INCOME-TAX> (5,146)
<INCOME-CONTINUING> (11,454)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,454)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
