AVID TECHNOLOGY, INC.
Avid Technology Park
One Park West
Tewksbury, MA 01876
May 14, 2002
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,
2002.
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, 2002
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 8,
2002 was 26,243,207.
AVID TECHNOLOGY, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2002
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
a) Condensed Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 2002 and 2001 .................1
b) Condensed Consolidated Balance Sheets as of
March 31, 2002 (unaudited) and December 31, 2001....................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2002 and 2001 .................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 SATEMENTS
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended March 31,
----------------------------
2002 2001
----------- -----------
(unaudited) (unaudited)
Net revenues $92,009 $118,133
Cost of revenues 47,715 56,513
----------- -----------
Gross profit 44,294 61,620
----------- -----------
Operating expenses:
Research and development 19,818 23,273
Marketing and selling 22,966 29,746
General and administrative 4,513 6,967
Restructuring and other costs, net 364
Amortization of acquisition-related intangible assets 346 12,420
----------- -----------
Total operating expenses 47,643 72,770
----------- -----------
Operating loss (3,349) (11,150)
Other income (expense), net 265 1,496
----------- -----------
Loss before income taxes (3,084) (9,654)
Provision for income taxes 600 800
----------- -----------
Net loss ($3,684) ($10,454)
=========== ===========
Net loss per common share - basic and diluted ($0.14) ($0.41)
=========== ===========
Weighted average common shares outstanding -
basic and diluted 26,029 25,348
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2002 2001
----------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $28,891 $45,613
Marketable securities 24,644 27,348
Accounts receivable, net of allowances of
$10,603 and $11,497 at March 31, 2002 and
December 31, 2001, respectively 77,863 78,010
Inventories 24,968 21,690
Deferred tax assets, net 677 695
Prepaid expenses 7,600 6,722
Other current assets 3,314 3,440
----------- -----------
Total current assets 167,957 183,518
Property and equipment, net 25,877 27,164
Acquisition-related intangible assets, net 2,026 3,462
Goodwill 1,087
Other assets 1,504 1,662
----------- -----------
Total assets $198,451 $215,806
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $20,242 $19,076
Accrued compensation and benefits 12,058 13,023
Accrued expenses and other current liabilities 20,080 26,125
Income taxes payable 9,521 10,932
Deferred revenues 33,933 28,872
----------- -----------
Total current liabilities 95,834 98,028
Long-term debt
- 13,020
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock
Common stock 266 266
Additional paid-in capital 356,666 357,446
Accumulated deficit (240,563) (235,926)
Treasury stock (4,817) (8,035)
Deferred compensation (773) (1,294)
Accumulated other comprehensive loss (8,162) (7,699)
----------- -----------
Total stockholders' equity 102,617 104,758
----------- -----------
Total liabilities and stockholders' equity $198,451 $215,806
=========== ===========
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,
----------------------------
2002 2001
------------ ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($3,684) ($10,454)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,612 16,315
Provision for doubtful accounts 132
Compensation from stock grants and options 517 926
Equity in income of non-consolidated companies (52) (1,084)
Changes in operating assets and liabilities, net of
effects of acquisition:
Accounts receivable (346) 9,049
Inventories (3,298) (3,275)
Prepaid expenses and other current assets (807) (2,060)
Accounts payable 1,282 (5,103)
Income taxes payable (1,425) (1,162)
Accrued expenses, compensation and benefits and other
current liabilities (5,520) (10,591)
Deferred revenues 5,082 90
- --------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (4,639) (7,217)
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,222) (2,686)
Payments for other long-term assets (40)
Dividend from non-consolidated company 59
Payments for business acquisition, net of cash acquired (5,439)
Payment on note issued in connection with acquisition (13,020)
Purchase of marketable securities (12,219) (8,632)
Proceeds from sales of marketable securities 14,893 10,044
- --------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (13,509) (6,753)
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock for treasury (4,155)
Proceeds from issuance of common stock 1,491 2,440
- --------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,491 (1,715)
- --------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents (65) (1,316)
- --------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (16,722) (17,001)
Cash and cash equivalents at beginning of period 45,613 64,875
- --------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $28,891 $47,874
============================================================================================
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, 2001 on Form 10-K, which
included all information and footnotes necessary for such presentation.
The Company's preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reported periods. The most significant estimates reflected
in these financial statements include accounts receivable and sales allowances,
inventory valuation 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, 2002 and
2001 excludes the weighted-average effect of dilutive options and warrants to
purchase 647,377 and 2,194,245 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,
2002 2001
-------------- --------------
Raw materials $11,990 $13,043
Work in process 3,429 2,553
Finished goods 9,549 6,094
-------------- --------------
$24,968 $21,690
============== ==============
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, The Grass Valley Group, Inc. (now a unit of
Thomson Multimedia). The Company's investment in the joint venture was 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 March 31, 2001
was approximately $1.1 million. Beginning in 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 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. The Company recorded amortization on these
intangibles of $0.2 million in the quarter ended March 31, 2002. In connection
with the adoption of SFAS 142, the Company reclassified to goodwill $1.1 million
of the remaining acquired work force.
5. GOODWILL AND INTANGIBLE ASSETS
In June 2001, the FASB issued Statement of Accounting Standard No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets." SFAS 142 supersedes APB Opinion
No. 17 "Intangible Assets" and is effective for the Company on January 1, 2002.
SFAS 142 addresses how acquired goodwill and other intangible assets should be
accounted for in financial statements subsequent to their initial recognition.
The provisions of SFAS 142 (1) prohibit the amortization of goodwill and
indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), (3) require
that reporting units be identified for the purposes of assessing potential
future impairments of goodwill and (4) remove the forty-year limitation on the
amortization period of intangible assets that have finite lives. 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 Company adopted SFAS 142 on January 1, 2002, and is in the process of making
the determinations as to what its reporting units are and what amounts of
goodwill and intangible assets should be allocated to those reporting units.
Once the reporting units are determined, the Company will complete its
transitional impairment review by June 30, 2002 in accordance with SFAS 142. If
the Company determines that its reporting units are consistent with the
Company's disclosed operating segments, acquired intangible assets and goodwill
will be allocated to the Video and Film Editing and Effects segment. In
connection with the adoption of SFAS 142, the Company reclassified to goodwill
$1.1 million representing the remaining value of acquired work force from the
iNews acquisition and, as a result, ceased amortizing this amount; prior to this
reclassification the Company had no unamortized goodwill.
5
Intangible assets at March 31, 2002 and December 31, 2001 consisted only of
completed technology with a gross carrying amount of $5.9 million. The related
accumulated amortization was $3.9 million and $3.5 million at March 31, 2002 and
December 31, 2002, respectively. Completed technology is amortized on a
straight-line basis over periods ranging from 3 to 4.5 years. The Company
expects annual amortization to be approximately $1.1 million during 2002, $1.0
million during 2003, and $0.3 million during 2004.
The following summary reflects the pro forma results of operations as if SFAS
142 had been applicable as of January 1, 2001 (in thousands, except per share
amounts):
For the Three Months Ended
March 31,
--------------------------
2002 2001
----------- -----------
Reported net loss ($3,684) ($10,454)
Goodwill amortization 9,912
Amortization of work force 1,046
----------- -----------
Pro forma net income (loss) ($3,684) $504
=========== ===========
Basic net income (loss) per share:
As reported ($0.14) ($0.41)
Pro forma ($0.14) $0.02
Weighted average common shares outstanding - basic 26,029 25,348
Diluted net income (loss) per share:
As reported ($0.14) ($0.41)
Pro forma ($0.14) $0.02
Weighted average common shares outstanding - diluted 26,029 27,543
6. LONG-TERM DEBT AND OTHER LIABILITIES
In connection with the acquisition of Softimage Inc. ("Softimage"), Avid issued
a $5.0 million subordinated note (the "Note") to Microsoft Corporation
("Microsoft"). The principal amount of the Note, including any adjustments
relative to unvested Avid stock options forfeited by Softimage employees plus
all unpaid accrued interest, was due on June 15, 2003. The Note bore interest at
9.5% per year, payable quarterly. During 1999, the Company made a principal
payment of $8.0 million. On February 6, 2002, the Company made a payment of
approximately $13.0 million in full satisfaction of the Company's outstanding
note to Microsoft. The Company made cash payments for interest during the
quarters ended March 31, 2002 and 2001 of $20,000 and $0.3 million,
respectively.
6
7. 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 Media 100 that, among other things, Media 100 willfully
infringed Avid's U.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 Media
100. 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, 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 were dismissed by the lower court. Glen Holly is appealing the lower
court's decision. Avid views the complaint and 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.
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.
8. COMPREHENSIVE LOSS
Total comprehensive loss, net of taxes, was approximately $4.1 million and $12.4
million for the three-month periods ended March 31, 2002 and 2001, 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.
7
9. 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,
----------------------------------
2002 2001
---------- ----------
Video and Film Editing and Effects:
Net revenues $59,749 $87,332
========== ==========
Operating loss ($6,238) ($2,056)
========== ==========
Professional Audio:
Net revenues $32,260 $30,801
========== ==========
Operating income $3,235 $3,690
========== ==========
Combined Segments:
Net revenues $92,009 $118,133
========== ==========
Operating income (loss) ($3,003) $1,634
========== ==========
The following table reconciles operating income (loss) for reportable segments
to total consolidated amounts for the quarters ended March 31, 2002 and 2001 (in
thousands):
For the Three Months Ended March 31,
-------------------------------------
2002 2001
--------- ---------
Total operating income (loss) for reportable segments ($3,003) $1,634
Unallocated amounts:
Amortization of acquisition-related intangible assets (346) (12,420)
Restructuring and other costs, net (364)
--------- ---------
Consolidated operating loss ($3,349) ($11,150)
========= =========
10. RESTRUCTURING AND OTHER COSTS, NET
In March 2001, the Company implemented a restructuring plan related to its
Softimage operations. As a result, the Company terminated 47 employees,
primarily in Montreal, Cananda, and vacated a leased facility in California. In
connection with this plan, the Company recorded a $1.3 million restructuring
charge during the first quarter of 2001. The restructuring charge included
approximately $1.1 million for severance and related costs of terminated
employees and $0.2 million for facility vacancy costs, including a
non-cancelable lease commitment.
8
The following table sets forth the activity in the restructuring accrual
accounts for the three months ended March 31, 2002 (in thousands):
Employee Facilities
Related Related Total
----------- ----------- -----------
Accrual balance at December 31, 2001 $1,471 $3,619 $5,090
Non-cash charges (1,030) (1,030)
Cash payments (576) (433) (1,009)
----------- ----------- -----------
Accrual balance at March 31, 2002 $895 $2,156 $3,051
=========== =========== ===========
Related to the August 2001 restructuring plan, in the first quarter of 2002, the
Company wrote off leasehold improvements of approximately $1.0 million related
to a facility vacated during the quarter. The Company expects that the majority
of the remaining $0.9 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 1999 and 2001 restructuring actions. The leases and
lease payment requirements extend 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, which established the entity as a distributor of
Avid products. The sale was completed in the first quarter of 2000. The Company
incurred and recorded a loss of approximately $2.0 million relating 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 had originally been recorded.
11. RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted SFAS 142, "Goodwill and Other Intangible
Assets" (see Note 5) and SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"). The objectives of SFAS 144 are to address
significant issues relating to the implementation of SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
and to develop a single accounting model, based on the framework established by
SFAS 121, for long-lived assets to be disposed of by sale. The adoption of SFAS
144 did not have any impact on the Company's 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 hardware and software 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, non-linear 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. (Non-linear systems allow editors to
access material as needed rather than requiring them to work sequentially.) To
complement these non-linear 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 3D and special effects software products from 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. 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 of success
for many broadcast and media companies with multiple product lines and
geographic locations. 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.
Move Media. We offer products that allow customers to distribute their
final product. We believe that the Internet will gradually become a critical
content distribution channel. We have developed 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 provide technology for playback directly to air
for broadcast television applications.
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 game developers and
Internet professionals. Projects produced using our products--from major motion
pictures and prime-time television to music, video, and marquee recording
10
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, Inc. (now, a unit
of Thomson Multimedia). Since the acquisition date, operating results of iNews
have been included in our consolidated operating results. Prior to that date,
our share of the operating results of iNews was included in other income
(expense).
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. This
market has been, and is expected to continue to be, highly competitive. A
significant portion of these revenues are generated by sales near the end of
each quarter, which can impact our ability to precisely forecast revenues on a
quarterly basis.
Net revenues decreased to $92.0 million in the quarter ended March 31,
2002 from $118.1 million in the same quarter of last year. This decrease
occurred across most product families in our Video and Film Editing and Effects
("Video") business. We believe that a portion of this decline was due to the
general worldwide economic slowdown, and if this slowdown continues, it may
impact our future revenues as well. More specifically, we believe that weakness
in advertising spending worldwide has had a negative impact on our
post-production video business, causing our customers to reduce capital spending
pending an upturn in their businesses. Revenue was also adversely impacted by
pricing reductions and discounts. Certain product families within the Video
segment, in particular Avid Xpress DV and Avid|DS HD (introduced in early 2001),
showed sequential growth in revenue in the quarter ended March 31, 2002 due to
higher unit volume. Additionally, in January 2002, our Professional Audio
("Audio") business introduced Pro Tools|HD, which also contributed favorably to
revenues. These increases in revenue were more than offset by declines in
revenue from our other product families, most notably Media Composer in our
video segment. Also contributing to the decline for the quarter ended March 31,
2002 versus the same quarter a year ago was an adverse currency effect of $1.9
million (assuming prior quarter revenues were expressed at current quarter
exchange rates).
Net revenues derived through indirect channels (primarily resellers and
distributors) were approximately 82% and 83% of net revenue for each of the
three-month periods ended March 31, 2002 and 2001, respectively.
Sales in the Americas accounted for 55% and 51% of the Company's first
quarter 2002 and 2001 net revenues, respectively. Americas sales for the three
months ended March 31, 2002 decreased by approximately $9.6 million or 16%
compared to the same period in 2001. Sales in the Europe and Asia Pacific
regions accounted for 45% and 49% of the Company's first quarter 2002 and 2001
net revenues, respectively. Europe and Asia Pacific sales for the three months
ended March 31, 2002 decreased by approximately $16.5 million or 29% compared to
the same period in 2001.
11
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 exchange rate fluctuations.
Gross margin decreased to 48.1% in the first quarter of 2002 compared to
52.2% in the same period of 2001. The decrease was primarily due to pricing
reductions and discounts, under absorption of overhead from lower than expected
revenues, and the negative impact of currency fluctuations, primarily a
weakening of the Japanese yen, and to a lesser extent the euro. These decreases
were partially offset by, among other factors, a more favorable product mix of
higher margin sales.
Research and Development
Research and development expenses decreased by $3.5 million (14.8%) in the
first quarter of 2002 compared to the same period in 2001. The decrease was
primarily the result of reduced personnel and other restructuring actions
implemented later in 2001, partially offset by an increase in hardware
development expense. Due to a lower revenue base in 2002, research and
development expenses increased as a percentage of net revenues to 21.5% in the
first quarter of 2002 from 19.7% for the same period in 2001.
Marketing and Selling
Marketing and selling expenses decreased by approximately $6.8 million
(22.8%) in the first quarter of 2002 compared to the same period in 2001
primarily due to restructuring actions implemented later in 2001. The most
significant spending reductions realized during 2002 were in marketing program
spending and personnel related costs. Due to a lower revenue base in 2002,
marketing and selling expenses decreased only slightly as a percentage of net
revenues to 25.0% in the first quarter of 2002 from 25.2% for the same period in
2001. The Company expects the second quarter 2002 expenses for marketing and
selling to be higher than those incurred in 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 decreased by approximately $2.5
million (35.2%) in the first quarter of 2002 compared to the same period in
2001. This decrease was primarily the result of reduced fees for professional
legal services and a reduction in personnel related costs due to staff
reductions. General and administrative expenses decreased as a percentage of net
revenues to 4.9% in the first quarter of 2002 from 5.9% for the same period in
2001. This percentage decrease was primarily due to the decrease in general and
administrative expenses noted above, partially offset by a lower revenue base in
2002.
12
Restructuring and Other Costs, Net
In March 2001, the Company implemented a restructuring plan related to the
Softimage operations. As a result, 47 employees were terminated, primarily in
Montreal, Canada, and the Company vacated a leased facility in California. In
connection with this plan, the Company recorded a $1.3 million restructuring
charge during the first quarter of 2001. The restructuring charge included
approximately $1.1 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, which established the entity as a
distributor of Avid products. The sale was completed in the first quarter of
2000. The Company incurred and recorded a loss of approximately $2.0 million
relating 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.
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. In
connection with these acquisitions, the Company allocated $6.5 million to
intangible assets consisting of completed technologies and work force. Results
for the quarters ended March 31, 2002 and 2001 reflect amortization of $0.3
million and $12.4 million, respectively, associated with these
acquisition-related intangible assets.
As of January 1, 2002, in connection with the adoption of SFAS 142, the
Company reclassified $1.1 million of previously recorded acquired work force to
goodwill and, as a result, ceased amortizing such amount. During the first
quarter of 2002, the Company recorded no goodwill or acquired workforce
amortization as compared to approximately $11.0 million in the same period in
2001.
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 2002 decreased $1.2 million to $0.3
million as compared to the same period in 2001. The decrease is mostly
attributable to $1.1 million included in other income during the first quarter
of 2001 related to the Company's equity in the income of iNews prior to the
acquisition of the remaining ownership interest in that quarter.
13
Provision for Income Taxes
The Company recorded a tax provision of $0.6 million for the first quarter
of 2002. This compares to a tax provision of $0.8 million recorded in the same
period of last year. In general, these provisions were comprised of taxes
payable by certain of the Company's foreign subsidiaries. No tax benefit was
recorded on the losses before income taxes in the U.S.
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, 2002, the Company's principal sources of liquidity included
cash, cash equivalents, and marketable securities totaling approximately $53.5
million.
Net cash used in operating activities was $4.6 million for the quarter
ended March 31, 2002 compared to $7.2 million used in operating activities
during the quarter ended March 31, 2001. During the quarter ended March 31,
2002, net cash used in operating activities primarily reflects the net loss
adjusted for depreciation and amortization as well as a decrease in accrued
expenses, and increases in inventories and deferred revenue. During the quarter
ended March 31, 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.
The Company purchased $3.2 million of property and equipment during the
first quarter of 2002, compared to $2.7 million during the quarter ended March
31, 2001. 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. In February 2002, the Company made a payment of
approximately $13.0 million in full satisfaction of the Company's outstanding
note to Microsoft.
During the three months ended March 31, 2002 and 2001, the Company
received cash proceeds of approximately $1.5 million and $2.4 million,
respectively, from the issuance of common stock upon stock option exercises and
under the Company's employee stock purchase plan.
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 were made in the open market or in privately negotiated
transactions. The Company has used, and plans to continue to use, any
repurchased shares for its employee stock plans. During the first quarter of
2001, 232,000 shares were repurchased at a cost of approximately $4.2 million,
which completed this stock buyback program.
The Company expects that the majority of the remaining $0.9 million
employee-related restructuring accrual balance will be expended over the next
nine months and will be funded from working capital. The majority of the $2.2
million facilities-related restructuring accrual represents estimated losses on
subleases of space vacated as part of 1999 and 2001 restructuring actions. The
leases and lease payment requirements extend through 2010, unless the Company is
able to negotiate an earlier termination.
14
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 twelve 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.
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 and introduce new 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 therefore be limited. Our
future growth will depend in part upon our ability to introduce new features and
functionality for Media Composer, improve upon its price/performance, respond to
competitive offerings, introduce and transition to new products, and adapt to
new industry requirements and standards. Any delay or failure to develop these
enhancements or to introduce other new products in this market could harm our
business and reduce our operating results. At the same time, the introduction
and transition to new products could have an impact on the market for our
existing products, which could adversely affect our revenues and business.
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, and
with the server, newsroom, and browser products obtained in the Pluto and iNews
acquisitions. Our broadcast strategy depends on the conversion of this market
from analog to digital, which has proven to be slower than expected. Moreover,
as a relatively new player in the broadcast market, we may encounter
difficulties in establishing ourselves and developing a strong, loyal customer
base. Meanwhile, our competitors may devote greater resources to the broadcast
market than we do, or may be able to leverage their market presence more
effectively. If the digital broadcast market continues to develop slowly, or we
are unsuccessful in capturing a share of this market, our business and revenues
could be adversely affected.
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, or other difficulties that delay or
prevent our development, introduction or marketing of new products or
enhancements, which, in turn, could harm our business.
16
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.
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), competitors' products have eroded Softimage's market
share and have contributed to downward price pressure, which has resulted in
reduced margins. In addition, we have experienced delays in introducing new
products. Finally, revenues in recent years have been increasingly derived from
sales to the games industry and non-traditional markets. If these
non-traditional markets were to slow or delay their purchases of 3D tools, our
revenues could be adversely affected. To the extent that these factors continue
or worsen, our business could suffer.
We use independent firms and contractors to perform some of our product
development activities.
Independent firms and contractors, some of whom are located in other
countries, perform some of our product development activities. We generally own
the software developed by these contractors. The use of independent firms and
contractors, especially those located abroad, could expose us to risks related
to governmental regulation, intellectual property, exchange rate fluctuation,
political instability and unrest, natural disasters, and other risks, which
could adversely impact our revenues.
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 multiple 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,
Microsoft's Windows and Apple's Macintosh platforms. 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, which is likely to adversely affect our operating
results.
Our operating results are dependent on several unpredictable factors.
The revenue and gross profit on our products depend 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 revenue and
gross profit.
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. For example, the
current worldwide economic slowdown has had an impact on our recent results, and
if this slowdown persists, it may continue to lower our revenues. Additionally,
a significant portion of our business occurs near the end of each quarter, which
can impact our ability to precisely forecast revenues on a quarterly basis.
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, with
limited barriers to entry, and are 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.
Poor global macroeconomic conditions could disproportionately impact our
industry.
As a result of unfavorable economic conditions and reduced capital
spending, our customers in the media, broadcast and content-creation industries
have delayed or reduced expenditures. The revenue growth and profitability of
our business depends primarily on the overall demand for our products. Softening
demand for our products resulting from ongoing economic uncertainty may result
in decreased revenues or earnings levels or growth rates. If global economic
conditions worsen, demand for our products may weaken, and 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 revenues.
Moreover, we are increasingly distributing our products directly, which could
put us in competition with our resellers and distributors and could adversely
affect our revenues.
19
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.
Our future growth could be harmed if we lose 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 websites could subject us to legal claims that could harm our business.
Certain of our websites provide interactive information and services to
our customers. To the extent that materials may be posted on and/or downloaded
from the 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 our websites 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, as well as hardware security keys, to
protect our proprietary technology. However, our means of protecting our
proprietary rights may not be adequate. 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 software piracy can be expected to be a persistent problem.
20
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 7, "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 (including the euro, the British pound, and the Japanese yen)
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;
o changes in our relationships with suppliers, distributors, resellers, system
integrators, or customers; and
o continuing repercussions of the September 11, 2001 national tragedy.
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
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 this hedging program depends on forecasts of transaction activity in the
various currencies. To the extent that these forecasts are over- or understated
during the periods of currency volatility, the Company could experience
unanticipated currency gains or losses.
At March 31, 2002, the Company had $26.4 million of forward-exchange
contracts outstanding, denominated in euros, British pounds, Japanese yen,
Canadian dollars and Australian dollars, as a hedge against forecasted foreign
currency-denominated receivables, payables and cash balances. For the
three-month period ended March 31, 2002, net gains of $0.2 million resulting
from forward-exchange contracts were recorded, which partially offset net
transaction losses of $0.3 million on the related assets 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 at least partially offset
the impact on the asset and liability positions of the Company's foreign
subsidiaries.
Interest Rate Risk
At March 31, 2002, the Company held $53.5 million in cash, 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 accumulated other 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, 2002,
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 14, 2002 By: /s/ Paul J. Milbury
--------------------
Paul J. Milbury
Chief Financial Officer
(Principal Financial Officer)
Date: May 14, 2002 By: /s/ Carol L. Reid
--------------------
Carol L. Reid
Vice President and Corporate Controller
(Principal Accounting Officer)
25
EXHIBIT INDEX
Exhibit No. Description Page
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