AVID TECHNOLOGY, INC.
Avid Technology Park
One Park West
Tewksbury, MA 01876
May 12, 2000
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,
2000.
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
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, 2000
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 9,
2000 was 24,730,549.
AVID TECHNOLOGY, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2000
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, 2000 and 1999 ....................1
b) Consolidated Balance Sheets as of
March 31, 2000 (unaudited) and December 31, 1999.......................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2000 and 1999 ....................3
d) Notes to Condensed Consolidated Financial Statements (unaudited).......4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......17
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................................19
Signatures...................................................................20
EXHIBIT INDEX................................................................21
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended March 31,
-------------------------------------
2000 1999
--------------- --------------
(unaudited) (unaudited)
Net revenues $108,696 $111,283
Cost of revenues 53,258 44,420
--------------- --------------
Gross profit 55,438 66,863
--------------- --------------
Operating expenses:
Research and development 19,445 24,248
Marketing and selling 28,539 32,563
General and administrative 6,912 6,741
Amortization of acquisition-related intangible assets 19,800 20,511
--------------- --------------
Total operating expenses 74,696 84,063
--------------- --------------
Operating loss (19,258) (17,200)
Interest and other income, net 1,044 600
--------------- --------------
Loss before income taxes (18,214) (16,600)
Provision for (benefit from) income taxes 1,250 (5,146)
--------------- --------------
Net loss ($19,464) ($11,454)
=============== ==============
Net loss per common share - basic and diluted ($0.81) ($0.47)
=============== ==============
Weighted average common shares outstanding - basic and diluted 24,065 24,391
=============== ==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
AVID TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2000 1999
---------------- ----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $51,970 $46,072
Marketable securities 10,124 26,733
Accounts receivable, net of allowances of $9,268 and $8,954
at March 31, 2000 and December 31, 1999, respectively 80,244 76,172
Inventories 14,258 14,969
Deferred tax assets 2,083 2,114
Prepaid expenses 8,710 5,584
Other current assets 8,494 4,795
---------------- ----------------
Total current assets 175,883 176,439
Property and equipment, net 32,968 32,748
Acquisition-related intangible assets 75,260 95,073
Other assets 5,940 7,764
---------------- ----------------
Total assets $290,051 $312,024
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $20,231 $23,998
Accrued compensation and benefits 14,556 16,955
Accrued expenses 27,189 36,022
Income taxes payable 8,488 5,073
Other current liabilities 2,389 3,789
Deferred revenues 26,330 20,258
---------------- ----------------
Total current liabilities 99,183 106,095
Long-term debt and other liabilities, less current portion 15,142 14,220
Purchase consideration 13,458 23,786
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock
Common stock 266 266
Additional paid-in capital 362,247 366,569
Accumulated deficit (155,105) (128,083)
Treasury stock (40,891) (66,489)
Deferred compensation (1,405) (1,853)
Accumulated other comprehensive loss (2,844) (2,487)
---------------- ----------------
Total stockholders' equity 162,268 167,923
---------------- ----------------
Total liabilities and stockholders' equity $290,051 $312,024
================ ================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended March 31,
--------------------------------------
2000 1999
-------------- --------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($19,464) ($11,454)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 24,303 25,283
Provision for doubtful accounts 1,793 471
Compensation from stock grants and options 683 332
Changes in deferred tax assets (129)
Gain on disposal of equipment (60)
Equity in (income) loss of joint venture (616) 558
Changes in operating assets and liabilities:
Accounts receivable (7,803) 17,382
Inventories 796 3,042
Prepaid expenses and other current assets (6,894) 126
Accounts payable (3,608) (3,151)
Income taxes payable 3,530 (7,471)
Accrued expenses, compensation and benefits (8,793) (16,169)
Deferred revenues 3,689 (1,064)
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (12,384) 7,696
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,690) (4,838)
Decrease (increase) in other long-term assets 801 (4,470)
Proceeds from disposal of assets 134
Investments in non-consolidated companies (2,100) (1,500)
Payments on note issued in connection with acquisition (8,000)
Purchases of marketable securities (4,481) (23,235)
Proceeds from sales of marketable securities 21,100 24,327
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 13,630 (17,582)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (225)
Purchase of common stock for treasury (149) (531)
Proceeds from issuance of common stock 5,008 2,546
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,859 1,790
- ----------------------------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents (207) (1,088)
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,898 (9,184)
Cash and cash equivalents at beginning of period 46,072 62,904
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $51,970 $53,720
- ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
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
(collectively, "Avid" or the "Company"). These 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, 1999 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 reflected 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 LOSS PER COMMON SHARE
Diluted net loss per share for the three-month periods ended March 31, 2000 and
1999 excluded options and warrants to purchase 6,696,998 and 5,611,041 weighted
shares of common stock outstanding, respectively. Inclusion of these options and
warrants would be anti-dilutive for each of these periods.
3. INVENTORIES
Inventories consist of the following (in thousands):
March 31, December 31,
2000 1999
------------------- ------------------
Raw materials $8,147 $9,896
Work in process 1,956 1,946
Finished goods 4,155 3,127
------------------- ------------------
$14,258 $14,969
=================== ==================
4
4. INVESTMENT IN JOINT VENTURE
In January 1999, Avid and Tektronix formally organized a 50/50 owned and funded
newsroom computer system joint venture, Avstar Systems LLC ("Avstar"). The joint
venture is dedicated to providing the next generation of newsroom computer
systems products by combining both companies' newsroom computer systems
technology and certain personnel. In September 1999, Tektronix transferred its
interest in Avstar to a third party, Grass Valley Group, Inc. The Company's
initial contribution to the joint venture was approximately $2.0 million,
consisting of $1.5 million of cash and $0.5 million of fixed assets and
inventory. During the fourth quarter of 1999, Avstar distributed $1.5 million to
each joint venture partner, which was recorded by Avid as a return on investment
during 1999. The Company's investment in the joint venture is being accounted
for under the equity method of accounting. The pro rata share of earnings
(losses) of the joint venture recorded by the Company during the quarters ended
March 31, 2000 and 1999 was approximately $0.6 million and ($0.6) million,
respectively.
5. LONG-TERM DEBT AND OTHER LIABILITIES
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 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.
In connection with the acquisition of Softimage, the Company issued stock
options to retained employees. As agreed with Microsoft, the value of the Note
will be increased by $39.71 for each share underlying forfeited employee stock
options. 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 is increased, with
Purchase Consideration being reduced by a corresponding amount in either case.
Through March 31, 2000, the Note has been increased by approximately $14.3
million for forfeited Avid stock options. The Company made cash payments of
approximately $8.0 million for principal resulting in a note balance of $11.3
million. The Company made cash payments for interest of $0.2 million during each
of the quarters ended March 31, 2000 and 1999.
6. 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.
5
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,
intellectual property rights 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.
7. COMPREHENSIVE LOSS
Total comprehensive loss, net of taxes, was approximately $19.8 million and
$12.6 million for the three-month periods ended March 31, 2000 and 1999,
respectively, which consists of net loss, the net changes in foreign currency
translation adjustment and the net unrealized gains and losses on
available-for-sale securities.
8. 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, and Professional Audio. The following is a summary of the
Company's operations by operating segment (in thousands):
For the Three Months Ended March 31,
---------------------------------------
2000 1999
--------------- ---------------
Video and Film Editing and Effects:
Net revenues $77,880 $86,025
=============== ===============
Operating loss ($7,122) ($3,754)
=============== ===============
Professional Audio:
Net revenues $30,816 $25,258
=============== ===============
Operating income $7,664 $7,065
=============== ===============
Combined Segments:
Net revenues $108,696 $111,283
=============== ===============
Operating income $542 $3,311
=============== ===============
6
The following table reconciles total segment operating income to total
consolidated operating loss (in thousands):
For the Three Months Ended March 31,
------------------------------------
2000 1999
--------------- -------------
Total operating income for reportable segments $542 $3,311
Unallocated amounts:
Amortization of acquisition-related intangible assets (19,800) (20,511)
--------------- -------------
Consolidated operating loss ($19,258) ($17,200)
=============== =============
The unallocated amounts represent the amortization of acquired intangible
assets, including goodwill, associated with the acquisition of Softimage.
9. RESTRUCTURING COSTS
In 1999, the Company announced and implemented a restructuring plan to
strategically refocus the Company and bring operating expenses in line with net
revenues. The major elements of the restructuring plan included the termination
of certain employees, the vacating of certain facilities and a decision not to
provide any future releases of a limited number of existing products, including
stand-alone Marquee, Avid Cinema, Media Illusion and Matador. In connection with
this plan, the Company recorded a restructuring charge of $9.6 million, of which
$0.6 million represented non-cash charges relating to the disposition of certain
fixed assets. The following table sets forth the activity in the restructuring
accrual accounts for the three months ended March 31, 2000 (in thousands):
Employee Facilities Fixed
Related Related Assets Total
-------------- -------------- -------------- --------------
Accrual balance at December 31, 1999 $4,421 $2,154 $541 $7,116
Cash payments (2,243) (217) (2,460)
Non-cash disposals (316) (316)
-------------- -------------- -------------- --------------
Accrual balance at March 31, 2000 $2,178 $1,937 $225 $4,340
============== ============== ============== ==============
The Company expects that the majority of the remaining $4.3 million accrual
balance will be expended over the next nine months and will be funded from
working capital.
10. SUPPLEMENTAL RECONCILIATION OF NET 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.
7
(in thousands, except per share data)
For the Three Months Ended March 31,
---------------------------------------
2000 1999
-------------- --------------
Net loss ($19,464) ($11,454)
Adjustments:
Amortization of acquisition-related intangible assets 19,800 20,511
Tax impact of adjustments (6,359)
-------------- --------------
Tax-effected income excluding amortization of
acquisition-related intangible assets $336 $2,698
============== ==============
Tax-effected income per diluted share excluding amortization of
acquisition-related intangible assets $0.01 $0.10
============== ==============
Weighted average common shares outstanding - diluted -
used for calculation 25,850 27,225
============== ==============
11. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133 - an amendment of FASB Statement No. 133." SFAS 137 defers the
implementation of SFAS 133 by one year. SFAS 133, as amended by SFAS 137, is
effective for fiscal quarters beginning after January 1, 2001 for the Company,
and its adoption is not expected to have a material impact on the Company's
financial position or results of operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain views of the staff on applying generally
accepted accounting principles to revenue recognition in financial statements.
The staff believes that revenue is realized or realizable and earned when all of
the following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered; the seller's price to the
buyer is fixed or determinable; and collectibility is reasonably assured. In
March 2000, Staff Accounting Bulletin No. 101A, "Amendment: Revenue Recognition
in Financial Statements," was released. This staff accounting bulletin delays
the implementation of SAB 101 until the second quarter of 2000. The Company does
not expect the application of SAB 101 to have a material impact on the Company's
financial position or results of operations.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of previously fixed stock options or awards, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
8
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 Technology, Inc. ("Avid" or the "Company") develops, markets, sells and
supports a wide range of software and systems for creating and manipulating
digital media content. Digital media are media elements, whether video or audio
or graphics, in which the image, sound or picture is recorded and stored as
digital values, as opposed to analog signals. Avid's digital, nonlinear video
and film editing systems are designed to improve the productivity of video and
film editors by enabling them to edit moving pictures and sound in a faster,
easier, more creative, and more cost-effective manner than by use of traditional
analog tape-based systems. To complement these systems, Avid develops and sells
a range of image manipulation products that allow users in the video and film
post-production and broadcast markets to create graphics and special effects for
use in feature films, television programs and advertising, and news programs.
Additionally, Avid develops and sells digital audio systems for the professional
audio market. Avid believes that the Internet is one of the most important new
content distribution channels and is continuing to invest in this area. The
Company's plans are to enable Internet publishing across its entire product
line. Upcoming releases of the Company's core products are expected to include
Internet video and audio streaming capabilities.
Avid's products are used worldwide in production and post-production facilities;
film studios; network, affiliate, independent, and cable television stations;
recording studios; advertising agencies; government and educational
institutions; and corporate communication departments.
On April 26, 2000, the Company announced that David Krall, who was the Company's
President and Chief Operating Officer, had been appointed President and Chief
Executive Officer. The Company also announced that William L. Flaherty, the
Company's Acting Chief Executive Officer and Chief Financial Officer had decided
to leave the Company. Ethan E. Jacks, a Vice President and the Company's General
Counsel, has been appointed Senior Vice President, and Acting Chief Financial
Officer as the Company conducts a search for a Chief Financial Officer.
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 decreased to $108.7 million in the quarter ended March 31, 2000 from
$111.3 million in the same quarter of last year. The decrease in revenue was
related to a number of factors. Revenue related to Media Composer, Symphony and
storage peripheral products was lower due to promotions and discounting. There
were decreased unit sales of Media Composer systems and Computer Graphics
product, partially offset by increased unit sales in Media Composer upgrades.
9
Service revenue was lower compared to the first quarter of 1999 and there was a
significant Broadcast server sale during the first quarter of 1999 with no
comparable sale in the first quarter of 2000. These decreases were partially
offset by the strong sales performance of Digidesign audio products and by sales
of Avid Unity MediaNet products, which began shipping in June 1999. During the
first quarter of 2000, the Company began shipping Avid Xpress DV on IBM
IntelliStation for Windows NT. To date, returns of all products have been
immaterial.
Net revenues derived through indirect channels were greater than 85% of net
revenue for each of the three-month periods ended March 31, 2000 and 1999.
International sales (sales to customers outside the U.S. and Canada) accounted
for approximately 55% and 54% of the Company's first quarter 2000 and 1999 net
revenues, respectively. International sales decreased by approximately $1.0
million or 1.6% in the first quarter of 2000 compared to the same period in
1999. The decrease in international sales reflected a decrease in Europe
partially offset by an increase in 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 offering of product upgrades, price
discounts and other sales promotion programs, the distribution channels through
which products are sold, the timing of new product introductions, and sales of
aftermarket hardware products.
Gross margin decreased to 51.0% in the first quarter of 2000 compared to 60.1%
in the same period of 1999. The decrease was primarily due to product mix,
principally a shift to lower-end products and upgrades. Promotions, price
reductions and discounting also had an effect on the current quarter margin
compared to the same quarter in the prior year. These factors were partially
offset by continued improvements in manufacturing efficiencies and material cost
savings. The Company currently expects that gross margin for the remainder of
2000 will not differ materially from that of the most recent quarter.
Research and Development
Research and development expenses decreased by $4.8 million (19.8%) in the first
quarter of 2000 compared to the same period in 1999. The decrease was primarily
due to planned reductions in personnel-related expenditures resulting from the
1999 restructuring actions, reduced consulting costs and increased funding from
third party partners for certain development projects. Research and development
expenses decreased as a percentage of net revenues to 17.9% in the first quarter
of 2000 from 21.8% for the same period in 1999. This percentage decrease was
primarily due to the decrease in research and development expenses as noted
above.
10
Marketing and Selling
Marketing and selling expenses decreased by approximately $4.0 million (12.4%)
in the first quarter of 2000 compared to the same period in 1999 primarily due
to planned reductions in personnel-related expenditures in the Company's video
and film editing and effects business resulting from the 1999 restructuring
actions, and in discretionary spending. These savings were partially offset by
an increase in the Company's bad debt provision for the current quarter.
Marketing and selling expenses decreased as a percentage of net revenues to
26.3% in the first quarter of 2000 from 29.3% for the same period in 1999. This
percentage decrease was primarily due to the decrease in marketing and selling
expenses as noted above. The Company expects the second quarter 2000 expenses
for marketing and selling to be higher than that of the first quarter due to
expenses associated with the National Association of Broadcasters trade show,
which occurred in the second quarter.
General and Administrative
General and administrative expenses increased by $0.2 million (2.5%) in the
first quarter of 2000 compared to the same period in 1999. The increase is
primarily attributable to increased bonus and personnel retention expenses, and
by legal expenses related to patent applications. These increases were partially
offset by planned reductions in personnel resulting from the 1999 restructuring
actions. General and administrative expenses increased as a percentage of net
revenues to 6.4% in the first quarter of 2000 from 6.1% for the same period in
1999. This percentage increase was primarily due to the increase in general and
administrative expenses noted above.
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 quarters ended March 31,
2000 and 1999 reflect amortization of $19.8 million and $20.5 million,
respectively, associated with these acquisition-related intangible assets. The
balance of the intangible assets, including goodwill, was $75.3 million at March
31, 2000. Approximately $46.7 million of additional amortization is expected
during the last three quarters of 2000, with the remaining $28.6 million
expected to be amortized through July 2001.
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 2000 increased $0.4 million as compared to the same period in 1999. This
increase was primarily due to the equity income related to the Company's 50%
ownership in Avstar, partially offset by the reduced interest income as a result
of lower cash and investment balances during the current quarter.
Provision for Income Taxes
The Company recorded a tax provision of $1.3 million for the first quarter of
2000. This provision was comprised of taxes payable by the Company's foreign
subsidiaries and state taxes. No tax benefit was provided for the loss before
income taxes incurred in the U.S. This provision compares to a tax benefit of
11
$5.1 million for the loss before income taxes of $16.6 million in the same
period of last year, for an effective rate of 31%. This rate was 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, 2000, the Company's principal sources of liquidity included cash, cash
equivalents and marketable securities totaling approximately $62.1 million.
With respect to cash flow, net cash used in operating activities was $11.6
million for the period ended March 31, 2000 compared to $7.2 million provided by
operating activities in 1999. During the quarter ended March 31, 2000, net cash
used in operating activities primarily reflects the net loss adjusted for
depreciation and amortization as well as increases in accounts receivable and
other current assets, and decreases in accounts payable and accrued expenses.
During 1999, net cash provided by operating activities primarily reflects the
net loss adjusted for depreciation and amortization as well as a decrease in
accounts receivable offset by decreases in taxes payable and accrued expenses.
The Company purchased $1.7 million of property and equipment during the first
quarter of 2000, compared to $4.8 million in 1999. In both of these periods, the
purchases were primarily of hardware and software to support research and
development activities and for the Company's information systems. During the
quarter ended March 31, 2000, the Company also made a cash investment of $2.1
million in Rocket Network, Inc., a provider of Internet recording studios which
allows audio professionals to meet and collaborate on the Internet. During the
quarter ended March 31, 1999, the Company made a payment of $8.0 million against
the note issued to Microsoft Corporation in connection with the acquisition of
Softimage. The remaining principal balance on the note issued to Microsoft is
due and payable in June 2003.
In 1999, the Company announced and implemented a restructuring plan to
strategically refocus the Company and bring operating expenses in line with net
revenues, with the goal of restoring long-term profitability to the Company and
supporting the Company's new strategic initiatives. The major elements of the
resulting restructuring plan included the termination of certain employees and
the vacating of certain facilities. The plan also provided for no further
releases of a limited number of existing product offerings, including
stand-alone Marquee, Avid Cinema, Media Illusion and Matador. In connection with
this plan, the Company recorded a restructuring charge of $9.6 million. The
charge included approximately $6.6 million for severance and related costs for
209 employees on a worldwide basis, $2.4 million for facility vacancy costs and
approximately $600,000 of non-cash charges relating to the disposition of
certain fixed assets. At the time of the charge, the Company expected that the
1999 restructuring actions would result in an expense reduction of approximately
$18.0 million on an annualized basis. These savings will likely be largely
offset by incremental costs associated with new strategic initiatives and the
growth of the Company; however, there can be no assurance that such expected
savings will be realized. During 1999 and the first quarter of 2000, the Company
made cash payments of $2.5 million and $2.5 million, respectively, related to
these restructuring activities. The majority of the remaining accrual balance at
March 31, 2000 of $4.3 million is expected to be paid out during the remainder
of 2000 and will be funded from working capital.
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The Company believes existing cash, cash equivalents, marketable securities and
internally generated funds will be sufficient to meet the Company's cash
requirements, including capital expenditures, for at least 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 21, 1998, the Company announced that the Board of Directors had
authorized the repurchase of up to 2.0 million shares 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 plans to continue to use any
repurchased shares for its employee stock plans. During 1999, the Company
repurchased a total of 1.2 million shares of common stock at a cost of $19.7
million, under the program announced in October 1998. As of March 31, 2000,
there were approximately 300,000 shares remaining authorized for repurchase.
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 affected
countries to the euro by the end of the three-year transition period. The
conversion to the euro has not had 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133 - an amendment of FASB Statement No. 133." SFAS 137 defers the
implementation of SFAS 133 by one year. SFAS 133, as amended by SFAS 137, is
effective for fiscal quarters beginning after January 1, 2001 for the Company,
and its adoption is not expected to have a material impact on the Company's
financial position or results of operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain views of the staff on applying generally
accepted accounting principles to revenue recognition in financial statements.
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The staff believes that revenue is realized or realizable and earned when all of
the following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered; the seller's price to the
buyer is fixed or determinable; and collectibility is reasonably assured. In
March 2000, Staff Accounting Bulletin No. 101A, "Amendment: Revenue Recognition
in Financial Statements" was released. This staff accounting bulletin delays the
implementation of SAB 101 until the second quarter of 2000. The Company does not
expect the application of SAB 101 to have a material impact on the Company's
financial position or results of operations.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
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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 core video editing market predominantly uses Avid products, and
future growth in this market is limited. Accordingly, 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 Internet broadcast market
and the corporate market. A significant portion of the Company's future growth
will depend on customer acceptance in these and other new markets. 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. Any
failure of such products to achieve market acceptance, any 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 plans for future growth in the Internet broadcast market depend on
increased use of the Internet for the creation, use, manipulation and
distribution of media content from corporate markets to the highest-end
post-production. Such uses of the Internet are currently at an early stage of
development and the future evolution of the Internet in the media broadcast
market is not clear. Because a significant portion of the Company's business
strategy depends on its Internet initiative, its business may suffer if
commercial use of the Internet fails to grow in the future.
As another component of its Internet initiative, the Company recently launched
the Avid Production Network site to provide interactive information and services
to new media and post-production professionals. The Company's plans for the Avid
Production Network include content-hosting, remote reviewing and stock footage
availability. Because materials may be posted on, and/or downloaded and
subsequently distributed to others from the Avid Production Network site, the
Company may be subject to claims for defamation, negligence, copyright or
trademark infringement, personal injury, or other theories based on the nature,
content, publication and distribution of such materials.
As a result of the Internet's popularity and increasing use, new laws and
regulations may be adopted. These laws and regulations may cover issues such as
privacy, distribution and content. The enactment of any additional laws or
regulations may impede the growth of the Internet, and the Company's
Internet-related business and could place additional financial burdens on the
Company's business.
The Company's gross margin fluctuates based on various factors. Such factors
include the mix of products sold, the 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 of customer support costs to cost of goods, sales of
third-party computer hardware to 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.
15
Gross profit varies from product to product depending primarily on the
proportion and cost of third-party hardware included in each product. The
Company, from time to time, adds functionality and features to its systems. If
such additions are accomplished through the use of more, or more costly,
third-party hardware, and if the Company does not increase the price of such
systems to offset these increased costs, the Company's gross margins on such
systems would be adversely affected.
The Company sells most of its products and services through indirect channels
such as distributors and resellers. 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. As the
majority of the Company's sales are through the indirect channel model, it has a
significant dependence on its resellers and their third party component
suppliers. Any disruption to its resellers or their suppliers may adversely
affect the Company's revenue and gross margin.
The Company's operating expense levels are based, in part, on its expectations
of future revenues. 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.
The Company's success depends in large part upon the services of a number of key
employees. The loss of the services of one or more of these key employees could
have a material adverse effect on the Company. The Company's success will also
depend in significant part upon its ability to continue to attract highly
skilled personnel to fill a number of vacancies. On April 26, 2000, William L.
Flaherty resigned as the Company's Chief Financial Officer and Acting Chief
Executive Officer. David Krall, the Company's President, has been appointed the
Company's Chief Executive Officer and Ethan E. Jacks, a Vice President and the
Company's General Counsel, has been appointed Senior Vice President, and Acting
Chief Financial Officer while the Company conducts a search for a new Chief
Financial Officer. There can be no assurance that the Company will be successful
in its search for a new Chief Financial Officer or in attracting and/or
retaining key employees generally.
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
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 on
the appropriate platforms, the occurrence of any of which could have a material
adverse effect on the Company's business and results of operations.
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
16
fibre channel adapter card from JNI; a fibre channel storage array from the
Clariion division of EMC; 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 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 third-party and intercompany net
receivables or payable balances and cash balances. The Company has generally not
hedged specific 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk
The Company's primary exposures to market risk are the effect of fluctuations in
interest rates earned on its cash equivalents and marketable securities and the
effect of volatility in currencies on asset and liability positions of its
international subsidiaries that are denominated in foreign currencies.
Foreign Exchange Risk
The Company derives greater than 50% of its revenues from customers outside the
United States. This business is, for the most part, transacted through
international subsidiaries and generally in the local currency. This
17
circumstance exposes the Company to risks associated with changes in foreign
currency that can impact revenues, net income (loss) and cash flow. The Company
enters into foreign exchange forward contracts to hedge the foreign exchange
exposure of certain forecasted receivables and payables of its foreign
subsidiaries. Gains and losses associated with currency rate changes on the
contracts are recorded in results of operations, offsetting losses and gains on
the related assets and liabilities. The success of the hedging program depends
on forecasts of transaction activity in the various currencies. To the extent
that these forecasts are over- or understated during the periods of currency
volatility, the Company could experience unanticipated currency gains or losses.
At March 31, 2000, the Company had $36.9 million of foreign exchange forward
contracts outstanding, denominated in various European, Asian and Canadian
currencies, as a hedge against forecasted foreign denominated receivables and
payables. Net gains of $0.4 million resulting from forward exchange contracts
were included in the results of operations in the first quarter of 2000, which
partially offset net losses on the related asset and liabilities of $1.0
million. A hypothetical 10 percent change in foreign currency rates would not
have a material impact on the Company's results of operations because the impact
on the forward contracts as a result of a 10 percent change would offset the
impact on the asset and liability positions of the Company's foreign
subsidiaries.
Interest Rate Risk
At March 31, 2000, the Company held $47.9 million in cash equivalents and
marketable securities, consisting of short-term government obligations, state
and municipal bonds, and commercial paper. Cash equivalents and marketable
securities are classified as "available for sale" and are recorded on the
balance sheet at market value, with any unrealized gain or loss recorded in
comprehensive income (loss). A hypothetical 10 percent increase in interest
rates would not have a material impact on the fair market value of these
instruments due to their short maturity.
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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, 2000, the
Company filed no current reports on Form 8-K.
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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, 2000 By: /s/ Ethan E. Jacks
----------------------------
Ethan E. Jacks
Senior Vice President,
Acting Chief Financial Officer
Date: May 12, 2000 By: /s/ Carol L. Reid
----------------------------
Carol L. Reid
Vice President and Corporate Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule
21