Avid 1996 Annual Report Download - page 17

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increased due to increased legal expenses associated with various litigation matters to which the Company is a party and
certain severance and recruiting costs.
Nonrecurring Costs. During the first quarter of 1996, the Company recorded charges for nonrecurring costs consisting of
$7.0 million for restructuring charges related to February 1996 staffing reductions of approximately 70 employees primarily
in the U.S., the Company’s concurrent decision to discontinue certain products and development projects, and $13.2 million
for product transition costs in connection with the transition from NuBus to PCI bus technology in certain of its product
lines. As of December 31, 1996, the Company had completed the related restructuring actions. Included in the $7.0 million
for restructuring charges were approximately $5.0 million of cash payments and $2.0 million of non-cash charges. In the
third quarter of 1996, the Company recorded a nonrecurring charge of $8.8 million associated primarily with the Company’s
decision not to release the Avid Media Spectrum product line. In the first quarter of 1995, the Company acquired
Digidesign, Inc., Parallax Software Limited, 3 Space Software Limited and Elastic Reality, Inc. In connection with these
acquisitions, the Company recorded merger costs of approximately $5.5 million, of which $3.9 million represented direct
transaction expenses and $1.6 million consists of various restructuring charges.
Interest and Other Income, Net. Interest and other income, net consists primarily of interest income, other income and
interest expense. Interest and other income, net for 1996 increased $2.0 million from 1995 and decreased $295,000 in 1995
compared to 1994. For the year ended December 31, 1996, interest and other income, net increased primarily due to higher
cash and investment balances in 1996 compared to 1995. In addition, 1996 other income increased from 1995 due to the
spin-out of certain technologies which resulted in equity income, a gain on sale of a product line, and royalties received
during the year. The 1995 decrease in interest and other income, net was principally related to higher interest expense
incurred in 1995 and lower cash balances prior to the Company’s offering of Common Stock in September 1995.
Provision for (Benefit from) Income Taxes. The Company’s effective tax rate was 32%, 36%, and 29%, respectively for
1996, 1995, and 1994. The 1996 and 1994 effective tax rates are different than the Federal statutory rate of 35% primarily
due to the impact of the Company’s foreign subsidiaries. The 1995 effective tax rate of 36% is greater than the Federal
statutory rate primarily due to non-deductible merger costs. The 1995 provision included taxes of $8.7 million at an
effective rate of 32% on $27.5 million of earnings before merger charges. The 1995 provision also included a tax benefit of
$640,000 on merger costs of $5.5 million, of which $1.6 million were tax deductible.
Liquidity and Capital Resources
The Company funded its operations to date through private sales of equity securities and public offerings of equity securities
in 1993 and 1995 which generated net proceeds to the Company of approximately $67 million and $88 million,
respectively, as well as through cash flows from operations. As of December 31, 1996, the Company’s principal sources of
liquidity included cash, cash equivalents, and marketable securities totaling approximately $94.0 million.
The Company’s operating activities generated cash of $40.9 million in 1996 compared to using cash of $19.3 million in
1995. Cash was generated during the twelve months ended December 31, 1996 primarily from reductions in accounts
receivable and inventory. In 1996, the decrease in accounts receivable was primarily due to improved collections while the
reduction in inventory resulted from improved stock turns and the write-off of inventory no longer required to support the
Company’s business.
The Company purchased $28.2 million of property and equipment and other assets during 1996, compared to $42.4 million
in 1995. These purchases included primarily the purchase of equipment for hardware and software for the Company’s
information systems and equipment to support research and development activities.
The Company had an equipment-financing arrangement with a bank which expired on March 31, 1996. In 1995, the
Company entered into an unsecured line of credit agreement with a group of banks which provided for up to $50,000,000 in
revolving credit. The original expiration date of June 30, 1996 has been extended to June 28, 1997. Under the terms of the
agreement, as amended in June 1996, the Company may borrow up to $35,000,000. The Company must pay a quarterly
commitment fee calculated based on the debt service ratio of the Company and ranges from .25% to .40% on the
$35,000,000 line. The interest rate to be paid on any outstanding borrowings is contingent upon the financial performance
of the Company and ranges from LIBOR plus 1.25% to LIBOR plus 1.75%. Additionally, the Company is required to
maintain certain financial ratios and covenants over the life of the agreement, including a restriction on the payment of
dividends. The Company has in certain prior periods been in default of certain financial covenants. On these occasions the
defaults have been waived by the banks. There can be no assurance that the Company will not default in future periods or