AVID TECHNOLOGY, INC.
Avid Technology Park
One Park West
Tewksbury, MA 01876
May 15, 2001
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,
2001.
This filing is being effected by direct transmission to the Commission's
EDGAR System.
Very truly yours,
/s/ Carol E. Kazmer
Carol E. Kazmer
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, 2001
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,
2001 was 25,811,988.
AVID TECHNOLOGY, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2001
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, 2001 and 2000 ...................1
b) Consolidated Balance Sheets as of
March 31, 2001 (unaudited) and December 31, 2000......................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2001 and 2000 ...................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
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........23
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K..................................24
Signatures..................................................................25
EXHIBIT INDEX...............................................................26
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,
----------------------------
2001 2000
----------- ----------
(unaudited) (unaudited)
Net revenues $118,133 $108,696
Cost of revenues 56,513 53,258
----------- ----------
Gross profit 61,620 55,438
----------- ----------
Operating expenses:
Research and development 23,273 19,445
Marketing and selling 29,746 28,539
General and administrative 6,967 6,912
Restructuring and other costs, net 364 -
Amortization of acquisition-related intangible assets 12,420 19,800
----------- ----------
Total operating expenses 72,770 74,696
----------- ----------
Operating loss (11,150) (19,258)
Other income (expense), net 1,496 1,044
----------- ----------
Loss before income taxes (9,654) (18,214)
Provision for income taxes 800 1,250
----------- ----------
Net loss ($10,454) ($19,464)
=========== ==========
Net loss per common share - basic and diluted ($0.41) ($0.81)
=========== ==========
Weighted average common shares outstanding - basic and
diluted 25,348 24,065
=========== ==========
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,
2001 2000
------------ -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $47,874 $64,875
Marketable securities 17,181 18,331
Accounts receivable, net of allowances of
$11,595 and $11,384 at March 31, 2001 and
December 31, 2000, respectively 91,143 90,047
Inventories 24,446 21,102
Deferred tax assets 913 1,014
Prepaid expenses 8,867 6,102
Other current assets 4,014 4,634
------------ -------------
Total current assets 194,438 206,105
Property and equipment, net 27,059 26,136
Acquisition-related intangible assets 21,912 30,316
Other assets 2,708 3,925
------------ -------------
Total assets $246,117 $266,482
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $24,686 $28,775
Accrued compensation and benefits 15,035 21,072
Accrued expenses 21,339 22,851
Income taxes payable 10,722 12,039
Other current liabilities 1,148 304
Deferred revenues 29,418 24,479
------------ -------------
Total current liabilities 102,348 109,520
Long-term debt and other liabilities,
less current portion 13,595 13,449
Purchase consideration 2,689 5,663
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock
Common stock 266 266
Additional paid-in capital 359,964 359,103
Accumulated deficit (208,667) (197,779)
Treasury stock (15,437) (15,622)
Deferred compensation (3,334) (4,752)
Accumulated other comprehensive loss (5,307) (3,366)
------------ -------------
Total stockholders' equity 127,485 137,850
------------ -------------
Total liabilities and stockholders' equity $246,117 $266,482
============ =============
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,
-----------------------------
2001 2000
----------- -----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($10,454) ($19,464)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 16,315 24,303
Provision for doubtful accounts 132 1,793
Compensation from stock grants and options 926 683
Equity in income of non-consolidated companies (1,084) (616)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable 9,049 (7,803)
Inventories (3,275) 796
Prepaid expenses and other current assets (2,060) (6,894)
Accounts payable (5,103) (3,608)
Income taxes payable (1,162) 3,530
Accrued expenses, compensation and benefits (10,591) (8,793)
Deferred revenues 90 3,689
- -----------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (7,217) (12,384)
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,686) (1,690)
Payments for other long-term assets (40) 801
Investments in non-consolidated companies (2,100)
Cash paid to acquire business, net of cash acquired (5,439)
Purchases of marketable securities (8,632) (4,481)
Proceeds from sales of marketable securities 10,044 21,100
- -----------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (6,753) 13,630
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock for treasury (4,155) (149)
Proceeds from issuance of common stock 2,440 5,008
- -----------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,715) 4,859
- -----------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents (1,316) (207)
- -----------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (17,001) 5,898
Cash and cash equivalents at beginning of period 64,875 46,072
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $47,874 $51,970
- -----------------------------------------------------------------------------------------
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, 2000 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 amounts 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, 2001 and
2000 excluded stock options and warrants to purchase 5,335,171 and 6,696,998
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,
2001 2000
-------------- --------------
Raw materials $14,492 $14,082
Work in process 2,062 2,353
Finished goods 7,892 4,667
-------------- --------------
$24,446 $21,102
============== ==============
4
4. INVESTMENT IN JOINT VENTURE
In January 1999, Avid and Tektronix, Inc. established a 50/50 owned and funded
newsroom computer system joint venture, AvStar Systems LLC ("AvStar"). The joint
venture was 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
investment in the joint venture was being accounted for under the equity method
of accounting. The pro rata share of earnings of the joint venture recorded by
the Company during the quarters ended March 31, 2001 and 2000 was approximately
$1.1 million and $0.6 million, respectively. Since September 2000, AvStar has
been doing business as iNews, LLC.
In January 2001, the Company acquired Grass Valley Group's 50% interest in iNews
for approximately $6.0 million. This acquisition was accounted for under the
purchase method of accounting. Accordingly, the assets and liabilities acquired
that represented the acquired 50% interest were recorded in the Company's
financial statements as of the acquisition date based on their fair values,
while the assets and liabilities that represented Avid's investment in the joint
venture were recorded as of the acquisition date based on the book values of the
joint venture's assets and liabilities without adjustment. Since the acquisition
date, operating results of iNews have been included in the consolidated
operating results of the Company. The purchase price of $6.0 million has been
allocated to net tangible assets of $1.9 million, completed technologies of $2.3
million and work force of $1.8 million. The purchase price allocation is subject
to adjustment until certain additional information on the valuation of assets
acquired is finalized. Identifiable intangible assets will be amortized on a
straight-line basis over a three-year period.
The following table presents unaudited pro forma results as if Avid and iNews
had been combined as of the beginning of the periods presented. The pro forma
data are presented for illustrative purposes only and are not necessarily
indicative of the combined financial position or results of operations of future
periods or of results that actually would have occurred had Avid and iNews been
a combined company for the period presented.
Pro Forma Unaudited
(in thousands, except per share amounts)
Three Months Ended March 31, 2000
Net revenue $113,275
==============
Net loss ($19,069)
==============
Net loss per common share- basic and diluted ($0.79)
==============
Weighted average common shares outstanding - basic
and diluted 24,065
==============
5
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 unvested 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. As
of March 31, 2001, the Note has been increased by approximately $16.0 million
for forfeited Avid stock options. The Company made cash payments of
approximately $8.0 million in 1999 for principal resulting in a note balance of
$13.0 million at March 31, 2001. The Company made cash payments for interest
during the quarters ended March 31, 2001 and 2000 of $0.3 million and $0.2
million, respectively.
6. CONTINGENCIES
On June 7, 1995, Avid filed a patent infringement complaint in the United States
District Court for the District of Massachusetts against Data Translation, Inc.
(now known as Media 100), 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, Avid was named as a 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. Avid believes that it has meritorious defenses to the complaint
and intends to contest it vigorously. However, an adverse resolution of this
litigation could have an adverse effect on the Company's consolidated financial
position or results of operations in the period in which the litigation is
resolved. No costs have been accrued for this possible loss contingency.
In March 1999, Avid and Tektronix, Inc. were sued by Glen Holly Entertainment,
Inc., a Tektronix distributor, claiming that Tektronix's discontinuance of the
Tektronix Lightworks product line was the result of a strategic alliance by
Tektronix and Avid. Glen Holly raised antitrust and common law claims against
the Company and Tektronix, and sought lost future profits, treble damages,
attorneys' fees, and interest. All of the antitrust claims against the Company
and Tektronix, and all other claims against Avid have been dismissed, but
certain claims against Tektronix are still pending. A trial for those remaining
claims is currently set for June 2001, and Glen Holly has indicated that it
intends to appeal all dismissals after the trial. Avid views the complaint and
any appeal of the dismissals as without merit and intends to defend itself
vigorously. However, an adverse resolution of this litigation could have an
adverse effect on the Company's consolidated financial position or results of
operations in the period in which the litigation is resolved. No costs have been
accrued for this possible loss contingency.
6
Avid receives inquiries from time to time with regard to possible patent
infringement claims. 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, 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 $12.4 million and
$19.8 million for the three-month periods ended March 31, 2001 and 2000,
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,
----------------------------------
2001 2000
---------- ----------
Video and Film Editing and Effects:
Net revenues $87,332 $77,880
========== ==========
Operating loss ($2,056) ($7,122)
========== ==========
Professional Audio:
Net revenues $30,801 $30,816
========== ==========
Operating income $3,690 $7,664
========== ==========
Combined Segments:
Net revenues $118,133 $108,696
========== ==========
Operating income $1,634 $542
========== ==========
The following table reconciles operating income for reportable segments to total
consolidated operating loss (in thousands):
For the Three Months Ended March 31,
-------------------------------------
2001 2000
--------- ---------
Total operating income for reportable segments $1,634 $542
Unallocated amounts:
Amortization of acquisition-related intangible assets (12,420) (19,800)
Restructuring and other costs, net (364) -
--------- ---------
Consolidated operating loss ($11,150) ($19,258)
========= =========
7
The unallocated amounts represent the amortization of acquired intangible
assets, including goodwill, associated primarily with the acquisition of
Softimage. In the three months ended March 31, 2001, unallocated amounts also
include the net charges for the 2001 Softimage restructuring and other actions.
9. RESTRUCTURING AND OTHER COSTS, NET
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.
On March 29, 2001, the Company announced a restructuring plan related to its
Softimage operations. As a result, the Company terminated 47 employees,
primarily in Montreal, Canada, and vacated a leased facility in California. In
connection with this plan, the Company recorded a $1.4 million restructuring
charge during the first quarter of 2001. The restructuring charge includes
approximately $1.2 million for severance and related costs of terminated
employees and $0.2 million for facility vacancy costs, including a
non-cancelable lease commitment.
The following table sets forth the activity in the restructuring accrual
accounts for the three months ended March 31, 2001 (in thousands):
Employee Facilities
Related Related Total
---------- ---------- ----------
Accrual balance at December 31, 2000 $399 $1,454 $1,853
Restructuring charge in March 2001 1,172 192 1,364
Cash payments (114) (59) (173)
---------- ---------- ----------
Accrual balance at March 30, 2001 $1,457 $1,587 $3,044
========== ========== ==========
The Company expects that the majority of the remaining $1.5 million employee
related accrual balance will be expended over the next nine months and will be
funded from working capital. The majority of the facilities related accrual
represents estimated losses on subleases of space vacated as part of the 1999
restructuring action. The lease extends through 2010 unless the Company is able
to negotiate an earlier termination.
In December 1999, the Company entered into an agreement to sell its Italian
subsidiary to a third party, who established the entity as a distributor of Avid
products. The Company incurred a loss of approximately $2.0 million related to
the sale, including a reserve of $1.0 million for the Company's guarantee of the
new entity's line of credit with a bank. This guarantee ended on January 31,
2001 without requiring any cash payment by Avid. Accordingly, in the quarter
ended March 31, 2001, the Company recorded a credit associated with the reversal
of the reserve, which was included under the caption, Restructuring and other
cost, net, where the charge was originally recorded.
8
10. SUPPLEMENTAL RECONCILIATION OF NET LOSS TO TAX-EFFECTED INCOME
EXCLUDING NONRECURRING COSTS AND AMORTIZATION OF ACQUISITION-RELATED
INTANGIBLE ASSETS
The following table presents a calculation of tax-effected income and diluted
per share amounts excluding nonrecurring costs and 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) For the Three Months Ended March 31,
------------------------------------
2001 2000
----------- -----------
Net loss ($10,454) ($19,464)
Adjustments:
Amortization of acquisition-related intangible assets 12,420 19,800
Nonrecurring costs 364
----------- -----------
Tax-effected income excluding nonrecurring costs and
amortization of acquisition-related intangible assets $2,330 $336
=========== ===========
Tax-effected income per diluted share excluding
nonrecurring costs and amortization of acquisition-
related intangible assets $0.08 $0.01
=========== ===========
Weighted average common shares outstanding - diluted -
Used for calculation 27,543 25,850
=========== ===========
11. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 140 ("SFAS 140"), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
Replacement of FASB Statement No. 125." SFAS 140 revises the standards of
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, and reiterates many of the
provisions of SFAS 125. SFAS 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. The Company does not expect the application of SFAS 140 to have a material
impact on its financial position or results of operations.
9
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company develops, markets, sells and supports a wide range of software and
systems for digital media production, management and distribution. Digital media
are media elements, whether video, audio or graphics, in which the image, sound
or picture is recorded and stored as digital values, as opposed to analog, or
tape-based, signals. Our product and service offerings enable customers to
"Make, Manage and Move Media."
Make Media. To make media, we offer digital, nonlinear video and film editing
systems to enable customers 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. (Nonlinear systems allow editors to access material
randomly rather than requiring them to work sequentially.) To complement these
nonlinear editing systems, we develop and sell 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 shows and advertising, and news programs. The products include 3-D
and special effects software products developed by our Softimage subsidiary. We
also offer digital audio systems through our Digidesign division. Digidesign's
audio systems have applications in music, film, television, video, broadcast,
streaming media, and web development, as well as in home and hobbyist markets.
These systems are based upon proprietary Digidesign/Avid audio hardware,
software, and control surfaces, and permit users to record, edit, mix, process,
and master audio in an integrated manner.
Manage Media. We provide complete network, storage, and database solutions based
on our Avid Unity MediaNet technology. This technology enables users to share
and manage media assets throughout a project or organization. The ability to
effectively manage digital media assets is a critical component for success for
many broadcast and media companies with multiple product lines. Accordingly, we
have designed our products to work together in the network, storage, and
database environment, allowing for the sharing of data and increasing the
effectiveness of our customers' workflow. Our key technologies help our
customers to reduce costs and increase the value of their media assets by
letting them easily and quickly "repurpose" or find new uses or markets for
their assets. We intend to increase our network based services offerings and
develop this area into an incremental revenue opportunity.
Move Media. We offer products that allow customers to distribute their final
product. We believe that the Internet will become a significant new content
distribution channel and we are continuing to invest in this area. We develop
and sell Internet infrastructure products to support the broadcast of streaming
Internet video, and continue to integrate new capabilities into our core
products designed for the Internet environment, enabling Internet publishing and
Internet video and audio streaming capabilities. In addition, we now provide
technology for playback directly to air for broadcast television applications.
10
Our 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, corporate communication departments, and by Internet professionals
and hobbyists. Projects produced using our products--from major motion pictures
and prime-time television to music, video, and marquee recording artists--have
been honored with Oscar(R), Emmy(R), and Grammy(R) awards, as well as a host of
other international awards. (Oscar is a registered trademark and service mark of
the Academy of Motion Picture Arts and Sciences. Emmy is a registered trademark
of ATAS/NATAS. Grammy is a registered trademark of The National Academy of
Recording Arts and Sciences, Inc.)
RESULTS OF OPERATIONS
In January 2001 the Company acquired the remaining 50% ownership interest in
iNews, which was formerly held by the Grass Valley Group. Since the acquisition
date, operating results of iNews have been included in the consolidated
operating results of the Company.
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 $118.1 million in the quarter ended March 31, 2001 from
$108.7 million in the same quarter of last year, despite an adverse currency
effect of $3.3 million assuming exchange rates during the quarter ended March
31, 2001 remained consistent with the quarter ended March 31, 2000. The revenue
increase reflected sales of newer products such as the Company's high-definition
product from its DS group, which began shipping during the current quarter,
iNews products and services as a result of the acquisition, increased sales of
Avid Unity systems and upgrades, and Media Composer and Symphony upgrades. These
revenue increases were partially offset by decreased unit sales of Media
Composer systems, Avid Xpress systems, standard definition DS systems and local
storage.
Net revenues derived through indirect channels were approximately 84% and 88% of
net revenue for each of the three-month periods ended March 31, 2001 and 2000,
respectively.
Sales in the Americas accounted for 51% and 47% of the Company's first quarter
2001 and 2000 net revenues, respectively. Americas sales increased by
approximately $8.8 million or 17% compared to the same period in 2000. Sales in
Europe and Asia Pacific regions accounted for 49% and 53% of the Company's first
quarter 2001 and 2000 net revenues, respectively. The Europe and Asia Pacific
sales increased by approximately $0.7 million or 1% compared to the same period
in 2000.
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; royalties for third-party
software included in the products; 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 and software
included in the systems sold, 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, sales of after
market hardware products, and currency.
11
Gross margin increased to 52.2% in the first quarter of 2001 compared to 51.0%
in the same period of 2000. The increase was primarily due to product mix, the
most significant factor being the acquisition of iNews which improved gross
margin by .8%. Sales of Avid|DS-HD, which began shipping during the quarter, as
well as a lower proportion of Media Composer upgrades and Avid Xpress systems in
the first quarter of 2001, also contributed to the positive mix factor. This was
partially offset by, among other factors, a negative impact from currency of 2%
assuming exchange rates for the quarter ended March 31, 2001 remained consistent
with the quarter ended March 31, 2000.
Research and Development
Research and development expenses increased by $3.8 million (19.7%) in the first
quarter of 2001 compared to the same period in 2000. The increase was primarily
due to increases in personnel-related expenditures, largely attributable to the
acquisition of iNews. Research and development expenses increased as a
percentage of net revenues to 19.7% in the first quarter of 2001 from 17.9% for
the same period in 2000. 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 $1.2 million (4.2%) in
the first quarter of 2001 compared to the same period in 2000 primarily due to
increases in personnel-related expenditures, travel and miscellaneous expenses,
largely attributable to the acquisition of iNews. These increases were partially
offset by a decrease in the Company's bad debt provision for the current
quarter. Marketing and selling expenses decreased as a percentage of net
revenues to 25.2% in the first quarter of 2001 from 26.3% for the same period in
2000. This percentage decrease was primarily due to the increase in marketing
and selling expenses, as noted above, occurring at a lesser rate than revenue
growth. The Company expects the second quarter 2001 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 occurs in the
second quarter.
General and Administrative
General and administrative expenses increased by approximately $0.1 million
(0.8%) in the first quarter of 2001 compared to the same period in 2000. The
increase is primarily attributable to the acquisition of iNews, largely offset
by reduced legal fees. General and administrative expenses decreased as a
percentage of net revenues to 5.9% in the first quarter of 2001 from 6.4% for
the same period in 2000. This percentage decrease was primarily due to the
increase in general and administrative expenses noted above occurring at a
lesser rate than revenue growth.
Restructuring
In 1999, the Company announced and implemented a restructuring plan to
strategically refocus the Company and bring operating expenses in line with net
12
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.
On March 29, 2001, the Company announced a restructuring plan related to its
Softimage operations. As a result, the Company terminated 47 employees,
primarily in Montreal, Canada, and vacated a leased facility in California. In
connection with this plan, the Company recorded a $1.4 million restructuring
charge during the first quarter of 2001. The restructuring charge includes
approximately $1.2 million for severance and related costs of terminated
employees and $0.2 million for facility vacancy costs, including a
non-cancelable lease commitment.
In December 1999, the Company entered into an agreement to sell its Italian
subsidiary to a third party who established the entity as a distributor of Avid
products. The Company incurred a loss of approximately $2.0 million related to
the sale, including a reserve of $1.0 million for the Company's guarantee of the
new entity's line of credit with a bank. This guarantee ended on January 31,
2001 without requiring any cash payment by Avid. Accordingly, in the quarter
ended March 31, 2001, the Company recorded a credit associated with the reversal
of the reserve, which was included under the caption, Restructuring and other
cost, net, where the charge was originally recorded.
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. During the second and third quarters of
2000 and the first quarter of 2001, the Company recorded additional intangible
assets as it acquired three smaller companies, The Motion Factory, Inc., Pluto
Technologies International Inc. and iNews, LLC. Results for the quarters ended
March 31, 2001 and 2000 reflect amortization of $12.4 million and $19.8 million,
respectively, associated with all of these acquisition-related intangible
assets. The unamortized balance of the intangible assets relating to these
acquisitions, including goodwill, was $21.9 million at March 31, 2001.
Approximately $17.1 million additional amortization is expected through July
2001, with the remaining $4.8 million to be amortized through December 2003.
Other Income (Expense), Net
Other income (Expense), net, consists primarily of equity in the income of
non-consolidated companies, interest income, and interest expense. Other income
(Expense), net, for the first quarter 2001 increased $0.5 million to $1.5
million as compared to the same period in 2000 primarily due to an increase in
the Company's equity in the income of iNews prior to the acquisition of the
remaining ownership interest in the first quarter.
Provision for Income Taxes
The Company recorded a tax provision of $0.8 million for the first quarter of
2001. This compares to a tax provision of $1.25 million recorded in the same
period of last year. In general, these provisions were comprised of taxes
payable by the Company's foreign subsidiaries. No tax benefit was recorded on
the losses before income taxes in the U.S.
13
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, 2001, the Company's principal sources of liquidity included cash, cash
equivalents, and marketable securities totaling approximately $65.1 million.
With respect to cash flow, net cash used in operating activities was $7.2
million for the period ended March 31, 2001 compared to $12.4 million provided
by operating activities in 2000. During the quarter ended 2001, net cash used in
operating activities primarily reflects the net loss adjusted for depreciation
and amortization as well as a decrease in accounts receivable (excluding
receivables acquired as part of the iNews acquisition), accounts payable and
accrued expenses, and increases in inventories and other current assets. 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.
The Company purchased $2.7 million of property and equipment during the first
quarter of 2001, compared to $1.7 million in 2000. 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, 2001, the Company also made a cash payment, net of cash
acquired, of $5.4 million for the purchase of the remaining 50% of iNews. During
the quarter ended March 31, 2000, the Company 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 1998, the Company announced that the board of directors had authorized
the repurchase of up to 3.5 million shares of the Company's common stock.
Purchases have been made in the open market or in privately negotiated
transactions. The Company has used, and plans to continue to use, any
repurchased shares for reissuance under its employee stock plans. During the
first quarter of 2001, 232,000 shares were repurchased at a cost of
approximately $4.2 million, which completed the stock buyback program.
We believe existing cash, cash equivalents, marketable securities and internally
generated funds will be sufficient to meet our cash requirements for at least
the next 12 months. In the event we require additional financing, we believe
that we will be able to obtain such financing; however, there can be no
assurance that we would be successful in doing so, or that we could do so on
favorable terms.
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 remain legal tender
in the participating countries until 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.
14
We began conducting certain business transactions in the euro on January 1,
1999, and changed our functional currency for the effected countries to the euro
on January 1, 2000. 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 our European
businesses.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 140 ("SFAS 140"), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
Replacement of FASB Statement No. 125." SFAS 140 revises the standards of
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, and reiterates many of the
provisions of SFAS 125. SFAS 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. The Company does not expect the application of SFAS 140 to have a material
impact on its financial position or results of operations.
15
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Some of the statements in this Form 10-Q relating to our future performance,
constitute forward-looking statements. Such forward-looking statements are based
upon management's current expectations and involve known and unknown risks.
Realization of any of these risks may cause actual results to differ materially
from the results described in the forward-looking statements. Certain of these
risks are as follows:
Our future success will depend in part upon our ability to enhance our existing
products in the digital editing market.
Our core digital video and film editing market predominantly uses Avid products,
particularly Media Composer, which represents a significant portion of our
revenues, and future growth in this market could be limited. Our future growth
will depend upon our ability to introduce new features and functionality for
Media Composer, improve upon its price/performance, respond to competitive
offerings, and adapt to new industry requirements and standards. Any delay or
failure to further develop Media Composer or to introduce other new products in
this market, could harm our business and reduce our operating results.
The broadcast market is large, widely dispersed, and highly competitive, and we
may not be successful in growing our customer base in this market.
We are currently building our presence in the broadcast market and have
augmented our NewsCutter offering with the Avid Unity for News products,
launched in December 2000, and with the server, newsroom, and browser products
obtained in the recent Pluto and iNews acquisitions. As a relatively new player
in the broadcast market, we may encounter difficulties in establishing ourselves
and developing a strong, loyal customer base. Our competitors, such as
Associated Press, Sony, Panasonic, and Grass Valley, may devote greater
resources to the broadcast market than we do, or may be able to leverage their
market presence more effectively. If we are unsuccessful in capturing a share of
the market, our business and revenues could be adversely affected.
Competition in the 3D animation market has increased dramatically since our
acquisition of Softimage.
The animation market has changed significantly from the time when we acquired
our Softimage subsidiary in August 1998. While Softimage once dominated the
higher end of the 3D market (i.e., feature films and other intensive graphics
applications), it now faces new challenges to its products and services.
Competitors' products, including Alias/Wavefront's Maya, Discreet's 3D Studio
Max, and Newtek's Lightwave, have reduced Softimage's market share. In addition,
new product offerings from all of the market players in recent years have
contributed to downward price pressure, which has resulted in increasing
compression of margins. To the extent that these factors continue or worsen, our
business may suffer.
16
We have a significant share of the professional audio market and therefore
growth in this market will depend in part on our ability to successfully
introduce new products.
Currently, products of our Digidesign division have captured a significant
portion of the professional audio market. Our future success will depend in part
upon our ability to offer, on a timely and cost-effective basis, new audio
products and enhancements of our existing audio products. The timely development
of new or enhanced products is a complex and uncertain process, and we may
experience design, manufacturing, marketing, and other difficulties that delay
or prevent our development, introduction or marketing of new products or
enhancements.
We are expanding our product line, and our future revenues depend in part on the
success of this expansion.
We are expanding our product line beyond our core video editing market to
address the digital media production needs of the broadcast news market,
including cable and Internet news, the on-line film and video finishing market,
and the emerging market for multimedia production tools, including the Internet
and corporate markets. We have limited experience in serving these markets, and
there can be no assurance that we will be able to develop such products
successfully. To be successful, we will need to introduce new products, gain
customer acceptance, and establish appropriate distribution and support
channels. Any unexpected delays or additional costs that we incur in achieving
these goals could harm our business and reduce our operating results.
Our future growth depends in part on the widespread adoption of the Internet by
the digital media market.
Our plans for future growth in the Internet market, including the Avid
Production Network and Trilligent product lines, as well as the Internet news
market, depend on increased use of the Internet for the creation, use,
manipulation, and distribution of media content from corporate markets to
high-end post-production. Such uses of the Internet are currently at an early
stage of development, and the future evolution of the Internet market is not
clear. Our success in this emerging Internet market will depend on the rate at
which the market develops and on our ability to establish our market presence.
If the commercial use of the Internet fails to grow as anticipated or if we are
unable to capture a significant market share, our business and results of
operations could suffer.
Our products are complex and delays or difficulties in introducing new products
could harm our business.
Our future success will depend in part on our ability to offer products that
compete favorably with our competitors' products in terms of reliability,
performance, ease of use, range of features, product enhancements, reputation,
price, and training. Delays or difficulties in product development and
introduction may harm our business. Our products are internally complex and,
despite extensive testing and quality control, may contain errors or defects.
Such errors or defects could cause us to issue corrective releases and could
result in loss of revenues, increased product returns, lack of market
acceptance, and damage to our reputation.
17
New product announcements by our competitors and by us could have the effect of
reducing customer demand for our existing products. Some of our new products
constitute upgrades of existing products. In the past, we have offered discounts
on the price of such upgrades to existing customers, which, where appropriate,
have been based upon the return of circuit boards and system keys. To the extent
that such circuit boards and system keys are not returned, it can decrease the
revenue generated by such new products. New product introductions require us to
devote time and resources to training our sales channels in product features and
target customers, with the temporary result that the sales channels have less
time to devote to selling our products.
Qualifying and supporting our products on both Windows and MacIntosh platforms,
as well as other computer platforms, is time consuming and expensive.
Our software engineers devote significant time and effort to qualify and support
our products on various computer platforms, including most notably, Windows NT
and MacIntosh. Computer platform modifications and upgrades require additional
time to be spent to ensure that our products will function properly. To the
extent that the current configuration of the qualified and supported platforms
change or that we need to qualify and support new platforms, we may be required
to expend valuable engineering resources and thereby reduce our profit margins.
Our operating results are dependent on several unpredictable factors.
Our gross profit margin on our products depends on many factors. Such factors
include:
o mix of products sold;
o the cost and the proportion of third-party hardware included in such products;
o product distribution channels;
o timing of new product introductions;
o product offers and platform upgrades;
o price discounts and sales promotion programs;
o volume of sales of aftermarket hardware products;
o costs of swapping or fixing products released to the market with defects;
o provisions for inventory obsolescence;
o allocations of manufacturing overhead and customer support costs to cost of
goods;
o sales of third-party computer hardware to distributors;
o competitive pressure on product prices; and
o currency fluctuations.
Negative changes in any of these factors could reduce our gross profit margin.
Our operating costs are tied to projections of future revenues, which may differ
from actual results.
Our operating expense levels are based, in part, on our expectations of future
revenues. Such future revenues are difficult to predict. Further, we are
generally unable to reduce quarterly operating expense levels 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, our results of operations could be lower than we
had anticipated.
18
The markets for our products are competitive, and we expect competition to
intensify in the future.
The digital video, audio and animation markets are competitive and characterized
by pressure to reduce prices, incorporate new features, and accelerate the
release of new products. Many of our current and potential competitors have
substantially greater financial, technical, distribution, support, and marketing
resources than we do. Such competitors may use these resources to lower their
product costs and thus be able to lower prices to levels at which we could not
operate profitably. Further, such competitors may be able to develop products
comparable or superior to ours, or adapt more quickly to new technologies or
evolving customer requirements. If we are unable to compete effectively in our
target markets, our business and results of operations could suffer.
We depend on a number of sole source suppliers.
We are dependent on a number of specific suppliers for certain key components of
our products. These components include, among others: video compression chips
manufactured by C-Cube Microsystems; a small computer systems interface ("SCSI")
accelerator board from ATTO Technology; a 3-D 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 the Clariion division of EMC; a PCI expansion chassis from SBS
Technologies, Inc.; a fixed programmable gate array from Quicklogic; digital to
analog and analog to digital converter integrated circuits from Cirrus Logic; an
interconnect bridge integrated circuit from Intel Corp.; and analog switches and
op amps from Analog Devices.
We purchase these sole source components pursuant to purchase orders placed from
time to time. We generally do not carry significant inventories of these sole
source components and have no guaranteed supply arrangements. If any of these
sole source vendors failed to supply or enhance such components, it could
imperil our supply of these components. Similarly, if any such vendor
encountered technical, operating or financial difficulties, it might threaten
our supply of these components. While we believe that alternative sources of
supply for sole source components could be developed, or our products redesigned
to permit the use of alternative components, an interruption in our sources of
supply could damage our business and negatively affect our operating results.
If we fail to maintain strong relationships with our resellers, distributors,
and component suppliers, our ability to successfully deploy our products may be
harmed.
We sell many of our products and services indirectly through resellers and
distributors. These resellers and distributors typically purchase software and
"kits" from us and other turnkey components from other vendors in order to
produce complete systems for resale. Any disruption to our resellers and
distributors, or their third-party suppliers, could reduce our gross profit
margin.
If we become dependent on third-party hardware for our products, our operating
results could be harmed.
Our gross profit margin varies from product to product depending primarily on
the proportion and cost of third-party hardware included in each product. From
time to time, we add functionality and features to our products. If we effect
such additions through the use of more, or more costly, third-party hardware,
and do not increase the price of such products to offset these increased costs,
then our gross profit margin on these products could decrease.
19
Our future growth could be harmed if we lost the services of our key personnel.
Our success depends upon the services of a number of key current employees. The
loss of the services of one or more of these key employees could harm our
business. Our success also depends upon our ability to attract highly skilled
new employees. Competition for such employees is intense in the industries and
geographic areas in which we operate. If we are unable to compete successfully
for such employees, our business could suffer.
Our AvidProNet.com website could subject us to legal claims that could harm our
business.
We have launched the Avid Production Network site (AvidProNet.com) to provide
interactive information and services to new media and post-production
professionals. Our plans for AvidProNet.com include content-hosting, remote
reviewing, and stock footage availability. Because materials may be posted on
and/or downloaded from the AvidProNet.com website and distributed to others, we
may be subject to claims for defamation, negligence, copyright or trademark
infringement, personal injury, or other theories of liability based on the
nature, content, publication and distribution of such materials. In addition,
although we have attempted to limit our exposure by contract, we may also be
subject to claims for indemnification by end users in the event that the
security of the AvidProNet.com website is compromised. As the website is
available on a worldwide basis, the website could potentially be subject to a
wide variety of international laws.
Regulations could be enacted that restrict our Internet initiatives and result
in slowing our future growth.
As a result of the increasing use and popularity of the Internet, federal,
state, and local authorities may adopt new laws and regulations governing the
Internet. These laws and regulations may cover issues such as privacy,
distribution, and content. The enactment of any additional laws or regulations
could impede the growth of the Internet, harm our Internet initiatives, and
place additional financial burdens on our business.
We could incur substantial costs protecting our intellectual property or
defending against a claim of infringement.
Our ability to compete successfully and achieve future revenue growth will
depend, in part, on our ability to protect our proprietary technology and
operate without infringing upon the rights of others. We rely upon a combination
of patent, copyright, and trademark laws, trade secret, confidentiality
procedures, and contractual provisions to protect our proprietary technology.
Despite our efforts to protect our proprietary technology, from time to time
unauthorized persons, have obtained, copied, and used information that we
consider proprietary. Policing the unauthorized use of our proprietary
technology is costly and time-consuming and may be inadequate to protect us
fully.
We occasionally receive communications suggesting that our products may infringe
the intellectual property rights of others. It is our practice to investigate
the factual basis of such communications and negotiate licenses where
20
appropriate. While it may be necessary or desirable in the future to obtain
licenses relating to one or more products or relating to current or future
technologies, we may be unable to do so on commercially reasonable terms. If we
are unable to protect our proprietary technology or unable to negotiate licenses
for the use of others' intellectual property, our business would be impaired.
We are currently involved in various legal proceedings, including patent
litigation. An adverse resolution of any such proceedings could harm our
business and reduce our results of operations. See Note 6 "Contingencies" in the
Company's financial statements.
If we acquire other companies or businesses, we will be subject to risks that
could hurt our business.
We periodically acquire businesses, form strategic alliances, or make debt or
equity investments. The risks associated with such acquisitions, alliances, and
investments include, among others, the difficulty of assimilating the operations
and personnel of the target companies, the failure to realize anticipated return
on investment, cost savings and synergies, and the diversion of management's
time and attention. Such acquisitions, alliances, and investments often involve
significant transaction-related costs and cause short-term disruption to normal
operations. If we are unable to overcome or counter these risks, it could
undermine our business and lower our operating results.
Our operating results could be harmed by currency fluctuations.
A significant portion of our business is conducted in currencies other than the
U.S. dollar. Accordingly, changes in the value of major foreign currencies
relative to the value of the U.S. dollar could lower future revenues and
operating results.
Strikes by actors or writers could harm our revenues.
As reported in the press, the guilds and unions that represent actors and
writers in the film and television industries periodically threaten to strike.
If such a strike were to occur, it could slow down or even stop production at
major film and television studios. If such a strike were to last for a
significant amount of time, the demand for our products could be reduced and our
revenues could decline.
Our stock price may continue to be volatile.
The market price of our common stock has been volatile in the recent past and
could fluctuate substantially in the future based upon a number of factors, some
of which are beyond our control. These factors include:
o changes in our quarterly operating results;
o shortfalls in revenues or earnings compared to securities analysts'
expectations;
o changes in analysts' recommendations or projections;
o fluctuations in investors' perceptions of us or our competitors;
o shifts in the markets for our products;
o development and marketing of products by our competitors; and
o changes in our relationships with suppliers, distributors, resellers,
system integrators, or customers.
21
Further, the stock market has witnessed unusual volatility with respect to the
price of equity securities of high technology companies generally, and this
volatility has, at times, appeared to be unrelated to any of the factors above.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk
Our primary exposures to market risk are the effect of volatility in currencies
on asset and liability positions of our international subsidiaries that are
denominated in foreign currencies and the effect of fluctuations in interest
rates earned on our cash equivalents and marketable securities.
Foreign Currency Exchange Risk
We derive greater than 50% of our revenues from customers outside the United
States. This business is, for the most part, transacted through international
subsidiaries and generally in the currency of the end user customers. This
circumstance exposes us to risks associated with changes in foreign currency
that can impact revenues, net income (loss) and cash flow. We enter into foreign
currency forward-exchange contracts to hedge the foreign exchange exposure of
certain forecasted receivables, payables and cash balances of our foreign
subsidiaries. Gains and losses associated with currency rate changes on the
contracts are recorded in results of operations, offsetting gains and losses 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, we could experience unanticipated currency gains or losses.
At March 31, 2001, we had $41.0 million of forward-exchange contracts
outstanding, denominated in various European and Asian currencies and the
Canadian and Australian dollars, as a hedge against forecasted foreign
currency-denominated receivables, payables and cash balances. Net gains of $1.0
million resulting from forward-exchange contracts were included in the results
of operations in the first quarter of 2001, which partially offset net losses on
the related asset and liabilities of $2.1 million. A hypothetical 10% change in
foreign currency rates would not have a material impact on our results of
operations, assuming the above-mentioned forecast of foreign currency exposure
is accurate, because the impact on the forward contracts as a result of a 10%
change would offset the impact on the asset and liability positions of our
foreign subsidiaries.
Interest Rate Risk
At March 31, 2001, we held $22.4 million in cash equivalents and marketable
securities, including short-term government and government agency obligations.
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%
increase or decrease in interest rates would not have a material impact on the
fair market value of these instruments due to their short maturity.
23
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) REPORTS ON FORM 8-K. For the fiscal quarter ended March 31, 2001, the
Company filed no current reports on Form 8-K.
24
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 15, 2001 By: /s/ Paul J. Milbury
--------------------
Paul J. Milbury
Chief Financial Officer
(Principal Financial Officer)
Date: May 15, 2001 By: /s/ Carol L. Reid
--------------------
Carol L. Reid
Vice President and Corporate
Controller
(Principal Accounting Officer)
25
EXHIBIT INDEX
Exhibit No. Description Page
26