AVID TECHNOLOGY, INC.
Avid Technology Park
One Park West
Tewksbury, MA 01876
August 13, 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 June 30,
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 JUNE 30, 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 August
1, 2001 was 26,011,292.
AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 and six months ended June 30, 2001 and 2000...........1
b) Consolidated Balance Sheets as of
June 30, 2001 (unaudited) and December 31, 2000.....................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 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.............................12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk......27
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.............28
ITEM 5. Other Information...............................................29
ITEM 6. Exhibits and Reports on Form 8-K................................30
Signatures................................................................31
EXHIBIT INDEX.............................................................32
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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
2001 2000 2001 2000
(unaudited) (unaudited) (unaudited) (unaudited)
Net revenues $109,434 $119,959 $227,567 $228,655
Cost of revenues 53,516 57,934 110,029 111,192
---------- ---------- ---------- ----------
Gross profit 55,918 62,025 117,538 117,463
---------- ---------- ---------- ----------
Operating expenses:
Research and development 21,882 20,825 45,155 40,270
Marketing and selling 31,520 31,382 61,266 59,921
General and administrative 5,432 8,101 12,399 15,013
Restructuring and other costs, net (118) 246
Amortization of acquisition-related
intangible assets 13,132 19,792 25,552 39,592
---------- ---------- ---------- ----------
Total operating expenses 71,848 80,100 144,618 154,796
---------- ---------- ---------- ----------
Operating loss (15,930) (18,075) (27,080) (37,333)
Other income (expense), net 1,895 1,233 3,391 2,277
---------- ---------- ---------- ----------
Loss before income taxes (14,035) (16,842) (23,689) (35,056)
Provision for income taxes 800 1,250 1,600 2,500
---------- ---------- ---------- ----------
Net loss ($14,835) ($18,092) ($25,289) ($37,556)
========== ========== ========== ==========
Net loss per common share - basic and
diluted ($0.58) ($0.74) ($1.00) ($1.54)
========== ========== ========== ==========
Weighted average common shares
outstanding - basic and diluted 25,440 24,578 25,395 24,322
========== ========== ========== ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
AVID TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2001 2000
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $53,809 $64,875
Marketable securities 12,367 18,331
Accounts receivable, net of allowances of
$12,503 and $11,384 at June 30, 2001
and December 31, 2000, respectively 83,707 90,047
Inventories 26,580 21,102
Deferred tax assets 913 1,014
Prepaid expenses 8,287 6,102
Other current assets 3,933 4,634
------------ ------------
Total current assets 189,596 206,105
Property and equipment, net 25,513 26,136
Acquisition-related intangible assets 9,083 30,316
Other assets 1,794 3,925
------------ ------------
Total assets $225,986 $266,482
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $20,110 $28,775
Accrued compensation and benefits 14,570 21,072
Accrued expenses 20,812 22,851
Income taxes payable 10,859 12,039
Other current liabilities 343 304
Deferred revenues 29,262 24,479
------------ ------------
Total current liabilities 95,956 109,520
Long-term debt and other liabilities 13,594 13,449
Purchase consideration 2,365 5,663
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock
Common stock 266 266
Additional paid-in capital 358,159 359,103
Accumulated deficit (223,068) (197,779)
Treasury stock (12,361) (15,622)
Deferred compensation (2,628) (4,752)
Accumulated other comprehensive loss (6,297) (3,366)
------------ ------------
Total stockholders' equity 114,071 137,850
------------ ------------
Total liabilities and stockholders' equity $225,986 $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)
Six Months Ended June 30,
-------------------------
2001 2000
----------- -----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($25,289) ($37,556)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 33,194 48,492
Provision for doubtful accounts 811 3,835
Compensation from stock grants and options 1,571 872
Equity in income of non-consolidated companies (1,164) (926)
Gain on sale of businesses (2,272)
Gain on sale of marketable securities (359)
Write-down of investment in non-consolidated company 1,100
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable 15,577 (19,311)
Inventories (5,415) (2,089)
Prepaid expenses and other current assets (318) 1,739
Accounts payable (9,654) 1,362
Income taxes payable (1,067) 3,847
Accrued expenses, compensation and benefits (13,630) (9,390)
Deferred revenues 94 7,034
- -------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (6,821) (2,091)
- -------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,719) (3,640)
(Increase) decrease in other long-term assets (280) 1,058
Collections of notes receivable from sale of business 333
Investments in non-consolidated companies (2,100)
Cash paid to acquire business, net of cash acquired (5,439) (995)
Purchases of marketable securities (8,632) (20,941)
Proceeds from sales of marketable securities 15,991 29,394
- -------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (2,746) 2,776
- -------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock for treasury (4,155) (368)
Proceeds from issuance of common stock 3,876 5,177
- -------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (279) 4,809
- -------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents (1,220) (634)
- -------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (11,066) 4,860
Cash and cash equivalents at beginning of period 64,875 46,072
- -------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $53,809 $50,932
- -------------------------------------------------------------------------------------
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 excluded options and warrants to purchase 6,206,596
and 5,517,784 weighted shares of common stock outstanding for the three- and
six-month periods ended June 30, 2001, respectively. Diluted net loss per share
excluded options and warrants to purchase 6,822,806 and 6,719,700 weighted
shares of common stock outstanding for the three- and six-month periods ended
June 30, 2000, respectively. Inclusion of these options and warrants would have
been anti-dilutive for each of these periods.
3. INVENTORIES
Inventories consisted of the following (in thousands):
June 30, December 31,
2001 2000
----------- -----------
Raw materials $17,696 $14,082
Work in process 2,176 2,353
Finished goods 6,708 4,667
----------- -----------
$26,580 $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 quarter ended June 30, 2000 was approximately $0.2
million. The pro rata share of earnings of the joint venture recorded by the
Company during the six-month periods ended June 30, 2001 and 2000 were
approximately $1.1 million and $0.8 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 $1.7 million, completed technologies of $2.5
million and work force of $1.8 million. Identifiable intangible assets are being
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 Six Months Ended
June 30, 2000 June 30, 2000
------------------ ------------------
Net revenue $124,787 $238,062
================== ==================
Net loss ($17,711) ($37,396)
================== ==================
Net loss per common share - basic and diluted ($0.72) ($1.54)
================== ==================
Weighted average common shares outstanding
- basic and diluted 24,578 24,322
================== ==================
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 June 30, 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 June 30, 2001. The Company made cash payments for interest during the
three-month periods ended June 30, 2001 and 2000 of $0.3 million and $0.2
million, respectively. The Company made cash payments for interest during the
six-month periods ended June 30, 2001 and 2000 of $0.6 million and $0.4 million,
respectively.
6. COMMITMENTS AND 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 claims against the Company and
Tektronix where dismissed by the lower court. However, Glen Holly has indicated
that it intends to appeal. Avid views the complaint and any appeal 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 $15.8 million and
$14.3 million for the three-month periods ended June 30, 2001 and 2000,
respectively, and $23.5 million and $34.1 million for the six-month periods
ended June 30, 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 marketable securities.
8. SEGMENT INFORMATION
The Company's organizational structure is based on strategic business units that
offer various products to the principal 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):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Video and Film Editing and Effects:
Net revenues $79,907 $85,958 $167,239 $163,837
========= ========= ========= =========
Operating loss ($5,957) ($8,070) ($8,015) ($15,192)
========= ========= ========= =========
Professional Audio:
Net revenue $29,527 $34,001 $60,328 $64,818
========= ========= ========= =========
Operating income $3,041 $9,787 $6,733 $17,451
========= ========= ========= =========
Combined Segments:
Net revenues $109,434 $119,959 $227,567 $228,655
========= ========= ========= =========
Operating income (loss) ($2,916) $1,717 ($1,282) $2,259
========= ========= ========= =========
7
The following table reconciles operating income for reportable segments to total
consolidated operating loss (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Total operating income (loss) for reportable segments ($2,916) $1,717 ($1,282) $2,259
Unallocated amounts:
Amortization of acquisition-related
intangible assets (13,132) (19,792) (25,552) (39,592)
Restructuring and other costs, net 118 (246)
--------- --------- --------- ---------
Consolidated operating loss ($15,930) ($18,075) ($27,080) ($37,333)
========= ========= ========= =========
The unallocated amounts represent the amortization of acquired intangible
assets, including goodwill, associated primarily with the acquisition of
Softimage. In the three and six months ended June 30, 2001, unallocated amounts
also include the net charges and credits related to restructuring actions,
including the 1999 sale of the Company's Italian subsidiary.
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. In June 2001, the Company implemented a
restructuring plan related to its Avid Internet Solutions operations resulting
in the termination of 7 employees and a restructuring charge of $0.2 million for
severance and related costs.
On August 1, 2001, the Company announced a restructuring plan expected to result
in annual cost savings of approximately $11.0 million. The savings will be
achieved through consolidation of some operations and reductions of
approximately 140 jobs worldwide. The Company expects to take a charge of
approximately $8.0 million in the third quarter in connection with this
restructuring.
8
The following table sets forth the activity in the restructuring accrual
accounts for the six months ended June 30, 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 31, 2001 1,457 1,587 3,044
Restructuring charge in June 2001 210 210
Cash payments (1,192) (160) (1,352)
Revisions of estimated liabilities (128) 128 -
-------- ---------- ----------
Accrual balance at June 30, 2001 $347 $1,555 $1,902
======== ========== ==========
The Company expects that the majority of the remaining $0.3 million employee
related accrual balance will be expended over the next six 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 of $1.0 million associated
with the reversal of the reserve, which was included under the caption
Restructuring and other costs, net, where the charge was originally recorded. In
addition, in the quarter ended June 30, 2001, the Company received a payment of
$0.3 million under the note received as partial consideration from the buyers of
the Italian subsidiary. This payment was recorded as a credit to Restructuring
and other costs, net, since the note was fully reserved when received. Any
future payments to be received under the note will be similarly accounted for on
a cash basis.
10. SUPPLEMENTAL RECONCILIATION OF NET LOSS TO TAX-EFFECTED INCOME (LOSS)
EXCLUDING NONRECURRING COSTS AND AMORTIZATION OF ACQUISITION-RELATED
INTANGIBLE ASSETS
The following table presents a calculation of tax-effected income (loss) and
diluted per share amounts excluding nonrecurring costs and amortization of
acquisition-related intangible assets. The information is unaudited and is
presented in order to enhance the comparability of the statements of operations
for the periods presented.
9
(in thousands, except per share data) For the Three Months Ended June 30,
-----------------------------------
2001 2000
----------- -----------
Net loss ($14,835) ($18,092)
Adjustments:
Amortization of acquisition-related
intangible assets 13,132 19,792
Nonrecurring costs (118)
----------- -----------
Tax-effected income (loss) excluding
nonrecurring costs and amortization of
acquisition-related intangible assets ($1,821) $1,700
=========== ===========
Tax-effected income (loss) per diluted
share excluding nonrecurring costs and
amortization of acquisition-related
intangible assets ($0.07) $0.07
=========== ===========
Weighted average common shares outstanding
- basic - used for calculation 25,440 24,578
=========== ===========
Weighted average common shares outstanding
- diluted - used for calculation 25,440 25,652
=========== ===========
(in thousands, except per share data) For the Six Months Ended June 30,
----------------------------------
2001 2000
----------- -----------
Net loss ($25,289) ($37,556)
Adjustments:
Amortization of acquisition-related
intangible assets 25,552 39,592
Nonrecurring costs 246
----------- -----------
Tax-effected income excluding nonrecurring
costs and amortization of acquisition-related
intangible assets $509 $2,036
=========== ===========
Tax-effected income per diluted share
excluding nonrecurring costs and amortization
of acquisition-related intangible assets $0.02 $0.08
=========== ===========
Weighted average common shares outstanding
- - diluted - used for calculation 27,235 25,824
=========== ===========
11. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2001, the Financial Accounting Standards Board's Emerging Issues Task
Force (EITF) reached a consensus on Issue No. 00-25, "Vendor Income Statement
Characterization of Consideration to a Purchaser of the Vendor's Products or
Services." This issue addresses the income statement classification of "slotting
fees," cooperative advertising arrangements and "buydowns." The Company will
adopt EITF 00-25 no later than January 1, 2002 and its adoption is not expected
to have a material impact on the Company's financial position or results of
operations.
10
In July 2001, the Financial Accounting Standards Board issued Statement of
Accounting Standard No. 141 ("SFAS 141"), "Business Combinations," which
supersedes APB Opinion No. 16 "Business Combinations." SFAS 141 addresses
financial accounting and reporting for business combinations and requires that
all business combinations be accounted for using the purchase method. SFAS 141
requires disclosures in addition to those required under APB Opinion No. 16,
including disclosure of the primary reasons for the business combination and the
allocation of the purchase price paid to the assets acquired and liabilities
assumed. SFAS 141 applies to all business combinations initiated after June 30,
2001. The Company does not expect the application of SFAS 141 to have a material
impact on the Company's financial position or results of operations.
In July 2001, the Financial Accounting Standards Board issued Statement of
Accounting Standard No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets." SFAS 142 addresses how acquired goodwill and other intangible assets
should be accounted for in financial statements. SFAS 142 requires separate
accounting for goodwill and intangible assets that have indefinite useful lives
versus finite useful lives. Goodwill and intangible assets that have indefinite
useful lives will not be amortized, but instead will be tested annually for
impairment. Intangible assets that have finite useful lives will be amortized
ratably over the useful life, no longer subject to a 40-year ceiling.
Additionally, SFAS 142 provides guidance about how to determine and measure
goodwill impairment and requires disclosure of information about goodwill and
other intangible assets in the years subsequent to their acquisition. The impact
of SFAS 142 on the consolidated financial statements is still being evaluated.
The Company will adopt SFAS 142 on January 1, 2002.
11
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.
12
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 decreased by $10.6 million (8.8%) to $109.4 million in the quarter
ended June 30, 2001 from $120.0 million for the same quarter in 2000. Net
revenues decreased by $1.1 million (0.5%) to $227.6 million for the six months
ended June 30, 2001 from $228.7 million for the six months ended June 30, 2000.
The revenue decrease in both periods reflected a decline in sales from
Digidesign products, Symphony systems, Media Composer systems and Xpress
systems. The decreases in revenue in both periods were partially offset by
increased sales from Digital Studio HD-systems and upgrades, iNews products and
services and Unity systems and upgrades. For the three- and six-month periods
ended June 30, 2001 there was also an adverse currency effect of $2.7 million
and $6.0 million, respectively, assuming exchange rates during these periods
remained consistent with the three- and six-month periods ended June 30, 2000.
During the second quarter of 2001, the Company began shipments of NewsCutter XP
version 2.0, NewsCutter XP Mobile and Avid Xpress DV version 2.0. In the first
quarter of 2001, the Company began shipments of high-definition products from
the DS group along with iNews products and services as a result of the
acquisition.
Net revenues derived through indirect channels were approximately 81% of net
revenues for the three months ended June 30, 2001, compared to 87% of net
revenues for the same period in 2000. Indirect channel revenues were
approximately 83% of net revenues for the six months ended June 30, 2001,
compared to approximately 87% for the same period in 2000.
Sales in the Americas accounted for 57% and 51% of the Company's second quarter
2001 and 2000 net revenues, respectively. Americas sales in the second quarter
of 2001 increased by approximately $1.1 million or 1.7% compared to the same
period in 2000. Sales in the Europe and Asia Pacific regions accounted for 43%
and 49% of the Company's second quarter 2001 and 2000 net revenues,
respectively. The Europe and Asia Pacific sales in the second quarter of 2001
decreased by approximately $11.6 million or 19.7% compared to the same period in
2000. For the six-month periods ended June 30, 2001 and 2000, sales in the
13
Americas accounted for 54% and 49% of net revenues, respectively. Americas sales
in the first half of 2001 increased by approximately $9.8 million or 8.8%
compared to the same period in 2000. Sales in the Europe and Asia Pacific
regions accounted for 46% and 51% of the Company's net revenues for the
six-month periods ended June 30, 2001 and 2000, respectively. Europe sales in
the first half of 2001 decreased by approximately $11.0 million or 13.4%
compared to the same period in 2000, which was slightly offset by an increase in
Asia Pacific sales by approximately $0.1 million or 0.3% 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 fluctuations. Gross margin decreased to
51.1% in the second quarter of 2001 compared to 51.7% in the same period of 2000
and increased to 51.6% for the six months ended June 30, 2001 from 51.4% for the
same period in 2000. The decrease in the second quarter was primarily due to
lower than expected revenue, product promotions and discounting, and a negative
impact from currency of 1% assuming exchange rates for the quarter ended June
30, 2001 remained consistent with the quarter ended June 30, 2000. This decrease
was partly offset by lower manufacturing costs and a more favorable product mix.
The increase for the six-month period was due to a more favorable product mix
and lower manufacturing costs, partially offset by the negative impact from
currency of 2% assuming exchange rates for the six-month period ended June 30,
2001 remained consistent with the six-month period ended June 30, 2000.
Research and Development
Research and development expenses increased by $1.1 million (5.1%) in the second
quarter of 2001 compared to the same period in 2000 and increased by $4.9
million (12.1%) for the six months ended June 30, 2001 compared to the same
period in 2000. The increase in each period was primarily due to increases in
headcount, due primarily to the acquisition of iNews and hardware development
expense. Research and development expenses increased to 20.0% of net revenues in
the second quarter of 2001 compared to 17.4% in the same quarter of 2000,
primarily due to the decrease in revenue for the second quarter of 2001.
Research and development expenses increased to 19.8% of net revenues for the six
months ended June 30, 2001 from 17.6% for the six months ended June 30, 2000.
This increase was primarily due to the increase in research and development
expenses noted above.
Marketing and Selling
Marketing and selling expenses increased by approximately $0.1 million (0.4%) in
the second quarter of 2001 compared to the same period in 2000 and increased by
$1.3 million (2.2%) for the six months ended June 30, 2001 compared to the same
14
period in 2000. These increased expenditures in selling and marketing
quarter-on-quarter were primarily due to increases in headcount, due primarily
to the acquisition of iNews and increased spending on various marketing programs
partially offset by decreases in the provision for bad debt expense and trade
show expense. For the year to date periods, the increase was caused primarily by
increased personnel-related expenses and marketing programs. Marketing and
selling expenses increased to 28.8% of net revenues in the second quarter of
2001 compared to 26.2% in the same quarter of 2000, primarily due to the
decrease in revenue for the second quarter of 2001. Marketing and selling
expenses increased to 26.9% from 26.2% for the six months ended June 30, 2001
and 2000, respectively. This increase was primarily due to the increase in
marketing and selling expenses noted above.
General and Administrative
General and administrative expenses decreased by $2.7 million (32.9%) in the
second quarter of 2001 compared to the same period in 2000 and decreased by $2.6
million (17.4%) for the six months ended June 30, 2001 compared to the same
period in 2000. These decreased expenditures in general and administrative
expenses were primarily due to executive severance benefits in the 2000 periods,
along with a reduction in other personnel-related expenses. General and
administrative expenses decreased to 5.0% of net revenues in the second quarter
of 2001 compared to 6.8% in the same quarter of 2000 and decreased to 5.4% from
6.6% of net revenues for the six months ended June 30, 2001 and 2000,
respectively. These decreases were primarily due to the decrease in expenses
noted above.
Restructuring
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.
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. In addition, in the quarter
ended June 30, 2001, the Company received a payment of $0.3 million under the
note received as partial consideration from the buyers of the Italian
subsidiary. This payment was recorded as a credit to Restructuring and other
costs, net since the note was fully reserved when received. Any future payments
to be received under the note will be similarly accounted for on a cash basis.
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
15
charge during the first quarter of 2001. The restructuring charge included
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 June 2001, the Company implemented a
restructuring plan related to its Avid Internet Solutions operations resulting
in the termination of 7 employees and a restructuring charge of $0.2 million for
severance and related costs.
On August 1, 2001, the Company announced a restructuring plan expected to result
in annual cost savings of approximately $11.0 million. The savings will be
achieved through consolidation of some operations and reductions of
approximately 140 jobs worldwide. The Company expects to take a charge of
approximately $8.0 million in the third quarter in connection with the
restructuring.
Amortization of Acquisition-related Intangible 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
June 30, 2001 and 2000 reflect amortization of $13.1 million and $19.8 million,
respectively, associated with these acquisition-related intangible assets.
Results for the six-month periods ended June 30, 2001 and 2000 reflect
amortization of $25.6 million and $39.6 million, respectively, associated with
these acquisition-related intangible assets. The unamortized balance of the
intangible assets relating to these acquisitions, including goodwill, was $9.1
million at June 30, 2001. Approximately $4.6 million additional amortization is
expected through September 2001, with the remaining $4.5 million to be amortized
through December 2003.
Other Income (Expense), Net
Other income (expense), net, generally consists primarily of equity in the
income of non-consolidated companies, interest income, and interest expense.
Other income (expense), net, for the second quarter 2001 increased $0.7 million
to $1.9 million as compared to the same period in 2000 primarily due to an
unrealized gain on receipt of stock in connection with the sale of Avid's share
of Avid Sports LLC in June 2000. The fair value of the stock received amounted
to $1.9 million, and was offset by a charge of $1.1 million to partially
write-down an investment accounted for under the cost method. This impairment
considered evidence of recent financing transactions and reviews of operating
plans. For the six-month period ended June 30, 2001, Other income (expense),
net, increased $1.1 million to $3.4 million as compared to the same period in
2000 primarily due to the reasons noted above, along with an increase in the
Company's equity in the net income of iNews prior to the acquisition of the
remaining ownership interest in the first quarter of 2001.
Provision for Income Taxes
The Company recorded a tax provision of $0.8 million for each of the first and
second quarters of 2001. This compares to a tax provision of $1.25 million
recorded in each of the same periods 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.
16
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
June 30, 2001, the Company's principal sources of liquidity included cash, cash
equivalents and marketable securities totaling approximately $66.2 million.
With respect to cash flows, net cash used in operating activities was $6.2
million for the six months ended June 30, 2001 compared to $2.1 million used in
operating activities in the same period in 2000. During the six months ended
June 30, 2001, net cash used in operating activities primarily reflects the net
loss adjusted for depreciation and amortization as well as an increase in
inventory and decreases in accrued expenses and accounts payable, offset by a
decrease in accounts receivable. During the six months ended June 30, 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
deferred revenue, and decreases in accrued expenses.
The Company purchased $4.7 million of property and equipment during the six
months ended June 30, 2001, compared to $3.7 million in the same period 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 six months ended June 30, 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 six months ended June 30, 2000, the Company also made a
cash investment of $2.1 million in Rocket Networks, Inc.
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.
In July 2000, the Company completed a program offered in June 2000 whereby
employees could elect to exchange certain "out-of-the-money" stock options for
shares of restricted stock at specified conversion ratios. In July 2000,
approximately 118,000 shares of restricted stock were issued in exchange for
options to purchase approximately 432,000 shares of common stock at exercise
prices ranging from $9.4375 to $45.25. Restrictions imposed on holders of the
issued restricted stock as to transfers or sales lapse annually over a
three-year period. Deferred compensation of $1.4 million was recorded as a
component of stockholders' equity for the fair value of the restricted stock
upon issuance and is being recognized as compensation expense ratably over the
three-year restriction period, assuming that restrictions on all shares lapse.
The Company believes existing cash, cash equivalents, marketable securities and
internally generated funds will be sufficient to meet the Company's cash
requirements for at least the next 12 months. In the event the Company requires
additional financing, the Company believes that it will be able to obtain such
financing; however, there can be no assurance that the Company would be
successful in doing so, or that the Company could do so on favorable terms.
17
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.
The Company began conducting certain business transactions in the euro on
January 1, 1999, and changed its 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 the
Company's European businesses.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2001, the Financial Accounting Standards Board's Emerging Issues Task
Force (EITF) reached a consensus on Issue No. 00-25, "Vendor Income Statement
Characterization of Consideration to a Purchaser of the Vendor's Products or
Services." This issue addresses the income statement classification of "slotting
fees," cooperative advertising arrangements and "buydowns." The Company will
adopt EITF 00-25 no later than January 1, 2002 and its adoption is not expected
to have a material impact on the Company's financial position or results of
operations.
In July 2001, the Financial Accounting Standards Board issued Statement of
Accounting Standard No. 141 ("SFAS 141"), "Business Combinations," which
supersedes APB Opinion No. 16 "Business Combinations." SFAS 141 addresses
financial accounting and reporting for business combinations and requires that
all business combinations be accounted for using the purchase method. SFAS 141
requires disclosures in addition to those required under APB Opinion No. 16,
including disclosure of the primary reasons for the business combination and the
allocation of the purchase price paid to the assets acquired and liabilities
assumed. SFAS 141 applies to all business combinations initiated after June 30,
2001. The Company does not expect the application of SFAS 141 to have a material
impact on the Company's financial position or results of operations.
In July 2001, the Financial Accounting Standards Board issued Statement of
Accounting Standard No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets." SFAS 142 addresses how acquired goodwill and other intangible assets
should be accounted for in financial statements. SFAS 142 requires separate
accounting for goodwill and intangible assets that have indefinite useful lives
versus finite useful lives. Goodwill and intangible assets that have indefinite
useful lives will not be amortized, but instead will be tested annually for
impairment. Intangible assets that have finite useful lives will be amortized
ratably over the useful life, no longer subject to a 40-year ceiling.
Additionally, SFAS 142 provides guidance about how to determine and measure
goodwill impairment and requires disclosure of information about goodwill and
other intangible assets in the years subsequent to their acquisition. The impact
of SFAS 142 on the consolidated financial statements is still being evaluated.
The Company will adopt SFAS 142 on January 1, 2002.
18
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 could suffer.
19
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 could
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.
20
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 could 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.
21
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. 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 our sole source vendors failed to supply or enhance such
components, it could imperil our supply of these components. Similarly, if any
of our vendors 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.
22
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 and DigiProNet.com websites 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. We have also launched the Digidesign
Production Network site (DigiProNet.com) to provide services to audio
professionals, including the sale of sound effects and audio samples, music
licensing for film and other applications, online bulletin boards and
classifieds, and online musical collaboration through virtual studios.
DigiProNet.com will also offer services similar to those provided by
AvidProNet.com, including remote reviewing.
Because materials may be posted on and/or downloaded from the AvidProNet.com and
DigiProNet.com websites 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 either the
AvidProNet.com website or DigiProNet.com website is compromised. As these
websites are available on a worldwide basis, the websites 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
persons unauthorized 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.
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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
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 could 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, "Commitments and
Contingencies" in the Company's unaudited quarterly 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.
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.
24
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.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk
The Company's 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
The Company derives approximately 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 currency of the end user
customers. This 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 currency forward-exchange contracts to
hedge the foreign exchange exposure of certain forecasted receivables, payables
and cash balances of its 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, the Company could experience
unanticipated currency gains or losses.
At June 30, 2001, the Company had $38.1 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 $0.3
million resulting from forward-exchange contracts were included in the results
of operations in the second quarter of 2001, which offset net losses on the
related asset and liabilities of $0.3 million. For the six-month period ended
June 30, 2001, net gains of $1.3 million resulting from forward-exchange
contracts were recorded, which partially offset net losses of $2.4 million on
the related asset and liabilities. A hypothetical 10% change in foreign currency
rates would not have a material impact on the Company's 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 the Company's foreign
subsidiaries.
Interest Rate Risk
At June 30, 2001, the Company held $44.0 million in cash equivalents and
marketable securities, including short-term government and government agency
obligations. 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.
26
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on June 6, 2001. At the
meeting, David A. Krall and Pamela F. Lenehan were reelected as Class II
Directors. The vote with respect to each nominee is set forth below:
Total Vote For Total Vote Withheld
Each Director From Each Director
-------------- --------------------
Mr. Krall 24,126,170 282,596
Ms. Lenehan 24,105,105 303,661
Additional Directors of the Company whose term of office continued after the
meeting are Charles T. Brumback, Nancy Hawthorne, Robert M. Halperin, and
William J. Warner.
In addition, the stockholders ratified the selection of PricewaterhouseCoopers
LLP as the Company's independent auditors by a vote of 24,250,052 shares for,
140,042 shares against, and 18,672 shares abstaining.
27
ITEM 5. OTHER INFORMATION
Any proposal that a stockholder wishes the Company to consider for inclusion in
the Company's proxy statement and form of proxy card for the Company's 2002
Annual Meeting of Stockholders (the "2002 Meeting") must be submitted to the
Secretary of the Company at its offices, Avid Technology Park, One Park West,
Tewksbury, Massachusetts 01876, no later than December 3, 2001.
In addition, the Company's By-laws require all stockholder proposals to be
timely submitted in advance to the Company at the above address (other than
proposals submitted for inclusion in the Company's proxy statement and form of
proxy card as described above). To be timely, the notice must be received by the
Company no later than March 22, 2002 or 60 days before the date of the 2002
Meeting, whichever is later. The Company has not yet set a date for the 2002
Meeting. However, if the 2002 Meeting is held on June 6, 2002 (the anniversary
of the 2001 Annual Meeting of Stockholders), the deadline for delivery of the
notice would be April 5, 2002.
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(b) REPORTS ON FORM 8-K. For the fiscal quarter ended June 30, 2001, 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: August 13, 2001 By: /s/Paul J. Milbury
----------------------
Paul J. Milbury
Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 2001 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 Page
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