AVID TECHNOLOGY, INC.
Avid Technology Park
One Park West
Tewksbury, MA 01876
August 13, 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 June 30,
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
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, 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 August
8, 2002 was 26,348,293.
AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 and six months ended June 30, 2002 and 2001 ...........1
b) Condensed Consolidated Balance Sheets as of
June 30, 2002 (unaudited) and December 31, 2001 .....................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 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 ............................12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk .....26
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders ............27
ITEM 5. Other Information ..............................................28
ITEM 6. Exhibits and Reports on Form 8-K ...............................29
Signatures ..................................................................30
EXHIBIT INDEX ...............................................................31
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,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Net revenues $106,094 $109,434 $198,103 $227,567
Cost of revenues 52,591 53,516 100,306 110,029
----------- ----------- ----------- -----------
Gross profit 53,503 55,918 97,797 117,538
----------- ----------- ----------- -----------
Operating expenses:
Research and development 20,411 21,882 40,229 45,155
Marketing and selling 26,775 31,520 49,741 61,266
General and administrative 5,018 5,432 9,531 12,399
Restructuring and other costs, net (327) (118) (327) 246
Amortization of acquisition-related
intangible assets 257 13,132 603 25,552
----------- ----------- ----------- -----------
Total operating expenses 52,134 71,848 99,777 144,618
----------- ----------- ----------- -----------
Operating income (loss) 1,369 (15,930) (1,980) (27,080)
Other income (expense), net (717) 1,895 (452) 3,391
----------- ----------- ----------- -----------
Income (loss) before income taxes 652 (14,035) (2,432) (23,689)
Provision for income taxes 500 800 1,100 1,600
----------- ----------- ----------- -----------
Net income (loss) $152 ($14,835) ($3,532) ($25,289)
=========== =========== =========== ===========
Net income (loss) per share - basic $0.01 ($0.58) ($0.14) ($1.00)
=========== =========== =========== ===========
Net income (loss) per share - diluted $0.01 ($0.58) ($0.14) ($1.00)
=========== =========== =========== ===========
Weighted average shares outstanding - basic 26,161 25,440 26,095 25,395
=========== =========== =========== ===========
Weighted average shares outstanding - diluted 26,511 25,440 26,095 25,395
=========== =========== =========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2002 2001
-------------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $42,408 $45,613
Marketable securities 22,700 27,348
Accounts receivable, net of allowances
of $11,787 and $11,497 at June 30, 2002
and December 31, 2001, respectively 77,619 78,010
Inventories 25,249 21,690
Deferred tax assets, net 727 695
Prepaid expenses 6,979 6,722
Other current assets 3,707 3,440
-------------- --------------
Total current assets 179,389 183,518
Property and equipment, net 25,815 27,164
Acquisition-related intangible assets, net 1,778 3,462
Goodwill 1,087 -
Other assets 676 1,662
-------------- --------------
Total assets $208,745 $215,806
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $28,498 $19,076
Accrued compensation and benefits 12,676 13,023
Accrued expenses and other current liabilities 22,576 26,125
Income taxes payable 9,959 10,932
Deferred revenues 29,939 28,872
-------------- --------------
Total current liabilities 103,648 98,028
Long-term debt - 13,020
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock
Common stock 266 266
Additional paid-in capital 355,890 357,446
Accumulated deficit (239,733) (235,926)
Treasury stock (5,159) (8,035)
Deferred compensation (523) (1,294)
Accumulated other comprehensive loss (5,644) (7,699)
-------------- --------------
Total stockholders' equity 105,097 104,758
-------------- --------------
Total liabilities and stockholders' equity $208,745 $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)
Six Months Ended June 30,
----------------------------------
2002 2001
-------------- --------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($3,532) ($25,289)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,701 33,194
Provision for doubtful accounts 902 811
Compensation from stock grants and options 751 1,571
Equity in income of non-consolidated companies (133) (1,164)
Gain on sale of businesses (327) (2,366)
Gain on sale of marketable securities (359)
Write-down of investment in non-consolidated company 1,000 1,100
Changes in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable 693 15,577
Inventories (3,384) (5,415)
Prepaid expenses and other current assets (98) (318)
Accounts payable 9,283 (9,654)
Income taxes payable (1,096) (1,067)
Accrued expenses, compensation and benefits and other
current liabilities (3,441) (13,630)
Deferred revenues 885 94
- ---------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 8,204 (6,915)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (5,711) (4,719)
Payments for other long-term assets (132) (280)
Dividends from non-consolidated company 59 94
Payments for business acquisition, net of cash acquired (5,439)
Payment on note issued in connection with acquisition (13,020)
Collections of notes receivable from sale of business 327 333
Purchases of marketable securities (15,516) (8,632)
Proceeds from sales of marketable securities 20,866 15,991
- ---------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (13,127) (2,652)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock for treasury (4,155)
Proceeds from issuance of common stock 1,062 3,876
- ---------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,062 (279)
- ---------------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents 656 (1,220)
- ---------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (3,205) (11,066)
Cash and cash equivalents at beginning of period 45,613 64,875
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $42,408 $53,809
- ---------------------------------------------------------------------------------------------------
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 INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share were as follows (in thousands,
except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
----------- ---------- ---------- -----------
Net income (loss) $152 ($14,835) ($3,532) ($25,289)
=========== ========== ========== ===========
Weighted average common shares
outstanding - basic 26,161 25,440 26,095 25,395
Weighted average potential common stock 350 - - -
----------- ---------- ---------- -----------
Weighted average common shares
outstanding - diluted 26,511 25,440 26,095 25,395
=========== ========== ========== ===========
Basic net income (loss) per share $0.01 ($0.58) ($0.14) ($1.00)
Diluted net income (loss) per share $0.01 ($0.58) ($0.14) ($1.00)
Common stock options and warrants that
were considered anti-dilutive securities
and excluded from the diluted net income
(loss) per share calculations were as
follows, on a weighted-average basis: 8,823 9,307 8,952 8,964
4
For the three and six months ended June 30, 2002 and 2001, certain stock options
and warrants have been excluded from the diluted net income (loss) per share
calculation as their effect would be anti-dilutive. For periods that the Company
reports a net loss, all potential common stock is considered anti-dilutive; for
periods when the Company reports net income, only potential common shares with
purchase prices in excess of the Company's average common stock fair value for
the related period are considered anti-dilutive.
3. INVENTORIES
Inventories consisted of the following (in thousands):
June 30, December 31,
2002 2001
--------------- ---------------
Raw materials $13,527 $13,043
Work in process 2,612 2,553
Finished goods 9,110 6,094
--------------- ---------------
$25,249 $21,690
=============== ===============
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
technologies 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). Beginning in September 2000, AvStar has been doing business
as iNews, LLC ("iNews").
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 six-month period ended June 30, 2001 was
approximately $1.1 million. 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 was initially 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 of these intangible assets of $0.2 million and
$0.4 million in the three- and six-month periods ended June 30, 2002 and $0.7
million for each of the three- and six-month periods ended June 30, 2001. In
connection with the adoption of SFAS 142 discussed below, the Company
reclassified $1.1 million of the remaining acquired work force to goodwill on
January 1, 2002 (see Note 5).
5
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, which supersedes APB
Opinion No. 17 "Intangible Assets", 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. SFAS No. 142 requires that goodwill not be amortized but rather be tested
for impairment at the reporting unit level at least annually and more frequently
upon the occurrence of certain events. 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.
In connection with its adoption of SFAS 142 on January 1, 2002, the Company
reclassified the remaining value of acquired work force from the iNews
acquisition of $1.1 million to goodwill and, as a result, ceased amortizing this
amount; prior to this reclassification, the Company had no unamortized goodwill
as of that date.
SFAS 142 requires the Company to test all existing goodwill for impairment as of
January 1, 2002, on a reporting unit basis. SFAS 142 prescribes a two-phase
process of impairment testing of goodwill. The first phase, which under SFAS
142's transitional guidance was required to be completed by June 30, 2002, tests
for impairment by comparing the fair value of each reporting unit with its book
value. The second phase, which under SFAS 142's transitional guidance is
required to be completed by December 31, 2002, is not necessary if the fair
value of each reporting unit exceeds its book value, as tested in the first
phase. If the second phase is necessary the impairment of goodwill is measured
by comparing the fair value of each reporting unit's goodwill with the related
carrying amount of the goodwill. As defined by SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", a reporting unit is the same
level as or one level below an operating segment. The Company has determined
that its reporting units are its operating segments, Video and Film Editing and
Effects and Professional Audio. The Company completed the first phase of the
impairment analysis during the second quarter of 2002 and found no instances of
impairment of its recorded goodwill as of January 1, 2002; accordingly, absent
future indicators of impairment, no further testing phases are expected during
2002. Additional impairment analyses will be completed at least annually, or
more frequently when events and circumstances indicate that the recorded
goodwill might be impaired.
6
Finite-lived intangible assets at June 30, 2002 and December 31, 2001 consisted
only of completed technologies with a gross carrying amount of $3.9 million and
$6.5 million, respectively. The related accumulated amortization was $2.1
million and $3.1 million at June 30, 2002 and December 31, 2001, respectively.
Completed technologies are amortized on a straight-line basis over periods
ranging from 3 to 4.5 years. The Company expects amortization to be
approximately $0.5 million for the remainder of 2002, $1.0 million during 2003,
and $0.2 million during 2004.
The following summary reflects the pro forma results of operations as if SFAS
142 had been retroactively applied as of January 1, 2001 (in thousands, except
per share amounts):
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------- --------------------------
2002 2001 2002 2001
------------ ----------- ----------- -----------
Reported net income (loss) $152 ($14,835) ($3,532) ($25,289)
Goodwill amortization 9,912 19,824
Amortization of work force 1,046 1,801
------------ ----------- ----------- -----------
Pro forma net income (loss) $152 ($3,877) ($3,532) ($3,664)
============ =========== =========== ===========
Basic net income (loss) per share:
As reported $0.01 ($0.58) ($0.14) ($1.00)
Pro forma $0.01 ($0.15) ($0.14) ($0.14)
Weighted average common shares
outstanding - basic 26,161 25,440 26,095 25,395
Diluted net income (loss) per share:
As reported $0.01 ($0.58) ($0.14) ($1.00)
Pro forma $0.01 ($0.15) ($0.14) ($0.14)
Weighted average common shares
outstanding - diluted 26,511 25,440 26,095 25,395
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. Through December 31, 2001, the Note had been
increased by approximately $16.0 million for forfeited Avid stock options.
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 three-month period ended June 30, 2001 of
$0.3 million. The Company made cash payments for interest during the six-month
periods ended June 30, 2002 and 2001 of $20,000 and $0.6 million, respectively.
7
7. 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 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. On January 16, 1998, the litigation was 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
8. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss), net of taxes, consists of net income (loss),
the net changes in foreign currency translation adjustment and the net
unrealized gains and losses on available-for-sale securities. The following is a
summary of the Company's comprehensive income (loss), net of taxes (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------
2002 2001 2002 2001
----------- ----------- ---------- -----------
Net income (loss) $152 ($14,835) ($3,532) ($25,289)
Foreign currency translation adjustment 2,505 (184) 2,040 (2,388)
Unrealized gains (losses) on securities 13 (805) 15 (545)
----------- ----------- ---------- -----------
Total comprehensive income (loss) $2,670 ($15,824) ($1,477) ($28,222)
=========== =========== ========== ===========
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):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2002 2001 2002 2001
----------- ------------ ----------- ------------
Video and Film Editing and Effects:
Net revenues $70,227 $79,907 $129,976 $167,239
=========== =========== =========== ============
Operating loss ($3,459) ($5,957) ($9,697) ($8,015)
=========== =========== =========== ============
Professional Audio:
Net revenues $35,867 $29,527 $68,127 $60,328
=========== =========== =========== ============
Operating income $4,758 $3,041 $7,993 $6,733
=========== =========== =========== ============
Combined Segments:
Net revenues $106,094 $109,434 $198,103 $227,567
=========== =========== =========== ============
Operating income (loss) $1,299 ($2,916) ($1,704) ($1,282)
=========== =========== =========== ============
The following table reconciles operating income for reportable segments to total
consolidated operating income (loss) (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
----------- ---------- ---------- -----------
Total operating income (loss) for reportable segments $1,299 ($2,916) ($1,704) ($1,282)
Unallocated amounts:
Amortization of acquisition-related
intangible assets (257) (13,132) (603) (25,552)
Restructuring and other costs, net 327 118 327 (246)
----------- ---------- ---------- -----------
Consolidated operating income (loss) $1,369 ($15,930) ($1,980) ($27,080)
=========== ========== ========== ===========
9
10. RESTRUCTURING AND OTHER COSTS, NET
During the six months ended June 30, 2001, the Company implemented restructuring
plans resulting in the termination of 54 employees, primarily related to its
Softimage operations in Montreal, Canada, and the vacating of a leased facility
in California. The Company incurred charges of approximately $1.5 million under
these plans, which included $1.3 million for severance and related costs of the
terminated employees and $0.2 million for facility vacancy costs, including a
non-cancelable lease commitment.
The following table sets forth the activity in the restructuring accrual
accounts for the six months ended June 30, 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 (796) (515) (1,311)
------------ ------------ ------------
Accrual balance at June 30, 2002 $675 $2,074 $2,749
============ ============ ============
The Company expects that the majority of the remaining $0.7 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 various
restructuring actions. The leases 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. In 1999, the
Company incurred and recorded a loss of approximately $2.0 million relating to
the sale, including a reserves of $1.0 million for the Company's guarantee of
the new entity's line of credit with a bank and $0.8 million for loans extended
to the buyers in connection with the transaction. The line of credit 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. In addition, in the quarter ended June 30, 2002, the
Company received a payment of $0.3 million under the note received as partial
consideration from the buyers of the Italian subsidiary. The Company also
received a payment of $0.3 million under the note in the quarter ended June 30,
2001. These payments were recorded as credits to restructuring and other costs,
net, since the note was fully reserved when received. The payment received in
the quarter ended June 30, 2002 satisfied the remaining balance of the note in
full.
10
11. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (SFAS 146) which nullifies EITF Issue No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, whereas EITF No 94-3 had
allowed the liability to be recorded at the commitment date of an exit plan. The
Company is required to adopt the provisions of SFAS 146 effective for exit or
disposal activities initiated after December 31, 2002, and is currently
evaluating the impact of adoption of this statement.
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 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. For example, we provide technology for playback directly to air
for broadcast television applications. In addition, we believe that the
Internet will eventually become a critical content distribution channel, and we
therefore develop and sell Internet ready products.
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
12
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
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 by $29.5 million (12.9%) to $198.1 million for
the six months ended June 30, 2002 from $227.6 million for the six months ended
June 30, 2001. This decrease occurred across most product families in our Video
and Film Editing and Effects ("Video") business, in particular the Media
Composer family. We believe that a portion of this decline was due to the
general worldwide economic slowdown. More specifically, we believe that a
reduction 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 in the Video segment was also
adversely impacted by pricing reductions and discounts. Our Professional Audio
("Audio") business contributed favorably to revenues due to strong demand for
its new flagship digital audio workstation, Pro Tools|HD, which was introduced
in January 2002. Revenue from the combined segments includes an adverse currency
effect of approximately $2.0 million in 2002 versus the same period a year ago,
primarily due to a weakening of the yen, and to a lesser extent the weakening of
the euro (assuming prior quarter revenues were expressed at current quarter
exchange rates).
Net revenues decreased by $3.3 million (3.1%) to $106.1 million for the
quarter ended June 30, 2002 from $109.4 million for the same quarter in 2001.
This decrease occurred primarily in the Media Composer family of the Video
business for the reasons noted above. These decreases were in part offset by
continued strong demand for Pro Tools|HD in our Audio segment. The decrease
quarter-on-quarter was substantially less than that of the six-month periods due
to higher revenues in the quarter ended June 30, 2002, which were up from the
quarter ended March 31, 2002 by $14.1 million or 15.3%. This improvement over
the first quarter of 2002 occurred in both the Video and Audio segments, driven
by the release of several new Video products at the end of the quarter ended
June 30, 2002 and by delivery of third-party software from the Audio business
for which revenue had previously been deferred.
During the second quarter of 2002, the Company began shipping Digital
Studio v6.0, Digital Studio HD v6.0, Symphony v4.0, Media Composer v11.0, Xpress
v5.0, NewsCutter Effects v3.0, Newscutter XP v3.0 and NewsCutter Mobile v3.0.
13
Net revenues derived through indirect channels were approximately 82% of
net revenues for the three months ended June 30, 2002, compared to 81% of net
revenues for the same period in 2001. Indirect channel revenues were
approximately 82% of net revenues for both the six-month periods ended June 30,
2002 and 2001.
Sales in the Americas accounted for 55% and 57% of the Company's second
quarter 2002 and 2001 net revenues, respectively. For the six-month periods
ended June 30, 2002 and 2001, sales in the Americas accounted for 55% and 54% of
net revenues, respectively. For the three- and six-month periods ended June 30,
2002, Americas sales decreased by approximately $3.3 million or 5.3% and $12.9
million or 10.5%, respectively, compared to the same periods in 2001.
Sales in the Europe and Asia Pacific regions accounted for 45% and 43%
of the Company's second quarter 2002 and 2001 net revenues, respectively. For
the six-month periods ended June 30, 2002 and 2001, sales in the Europe and Asia
pacific regions accounted for 45% and 46% of net revenues, respectively. The
combined Europe and Asia Pacific sales in the second quarter of 2002 were
relatively unchanged compared to the same period in 2001 and decreased by
approximately $16.6 million or 15.8% for the first half of 2002 compared to the
same period in 2001.
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 peripher hardware products such as disk drives, and currency exchange
rate fluctuations.
Gross margin decreased to 49.4% for the six months ended June 30, 2002
from 51.6% for the same period in 2001. This decrease was primarily due to price
reductions and discounting in the Video segment, and higher manufacturing costs
in the Audio segment, both of which were partially offset by a more favorable
product mix in the Video business driven by the release of several new products
at the end of the quarter and by delivery of third-party promotional software
from Audio for which revenue had previously been deferred. Additionally, there
was a negative impact from currency exchange rate fluctuations, primarily a
weakening of the Japanese yen, and to a lesser extent the weakening of the euro
for the six-month period ended June 30, 2002.
Gross margin decreased to 50.4% in the second quarter of 2002 compared
to 51.1% in the same period of 2001. This decrease was primarily due to price
reductions, discounting and higher manufacturing costs per unit in the Video
segment and higher manufacturing costs in the Audio segment, both of which were
partially offset by the more favorable product mix from the Video business and
by delivery of third-party promotional software from Audio for which revenue had
previously been deferred.
14
Research and Development
Research and development expenses decreased by $1.5 million (6.7%) in
the second quarter of 2002 compared to the same period in 2001 and decreased by
$4.9 million (10.9%) for the six months ended June 30, 2002 compared to the same
period in 2001. The decrease in each period was primarily the result of reduced
personnel and other restructuring actions implemented in late 2001, partially
offset by an increase in research and development costs related to our hardware
architecture projects. Research and development expenses decreased to 19.2% of
net revenues in the second quarter of 2002 compared to 20.0% in the same quarter
of 2001. Due to a lower revenue base in 2002, research and development expenses
increased to 20.3% of net revenues for the six months ended June 30, 2002 from
19.8% for the same period in 2001 despite lower research and development
spending.
Marketing and Selling
Marketing and selling expenses decreased by approximately $4.7 million
(15.1%) in the second quarter of 2002 compared to the same period in 2001 and
decreased by $11.5 million (18.8%) for the six months ended June 30, 2002
compared to the same period in 2001 primarily due to restructuring actions
implemented in the third quarter of 2001. The most significant spending
reductions realized during 2002 were in personnel and related costs, marketing
programs and travel and related expenses. Marketing and selling expenses
decreased to 25.2% of net revenues in the second quarter of 2002 compared to
28.8% in the same quarter of 2001. Marketing and selling expenses decreased to
25.1% of net revenues for the six months ended June 30, 2002 from 26.9% for the
same period in 2001.
General and Administrative
General and administrative expenses decreased by $0.4 million (7.6%) in
the second quarter of 2002 compared to the same period in 2001 and decreased by
$2.9 million (23.1%) for the six months ended June 30, 2002 compared to the same
period in 2001. These decreases were primarily due to a reduction in outside
legal fees and personnel and related expenditures. General and administrative
expenses decreased to 4.7% of net revenues in the second quarter of 2002
compared to 5.0% in the same quarter of 2001 and decreased to 4.8% from 5.4% of
net revenues for the six months ended June 30, 2002 and 2001, respectively.
Restructuring and Other Costs, Net
During the six months ended June 30, 2001, the Company implemented
restructuring plans resulting in the termination of 54 employees, primarily
related to its Softimage operations in Montreal, Canada, and the vacating of a
leased facility in California. The Company incurred charges of approximately
$1.5 million under these plans, which included $1.3 million for severance and
related costs of the 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. In 1999, 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
15
Company's guarantee of the new entity's line of credit with a bank and $0.8
million for loans extended to the buyers in connection with the transaction. The
line of credit 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. In addition, in the quarter ended June
30, 2002, the Company received a payment of $0.3 million under the note received
as partial consideration from the buyers of the Italian subsidiary. The Company
also received a payment of $0.3 million under the note in the quarter ended June
30, 2001. These payments were recorded as credits to Restructuring and other
costs, net, since the note was fully reserved when received. The payment
received in the quarter ended June 30, 2002 satisfied the remaining balance of
the note in full.
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 June 30, 2002 and 2001 reflect amortization of $0.3
million and $13.1 million, respectively, associated with these
acquisition-related intangible assets. Results for the six-month periods ended
June 30, 2002 and 2001 reflect amortization of $0.6 million and $25.6 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 this amount. During 2002 the
Company recorded no goodwill or acquired workforce amortization as compared to
approximately $11.0 million and $21.6 million in the three- and six-month
periods ended June 30, 2001, respectively.
Other Income (Expense), Net
Other income (expense), net, generally consists primarily of income
associated with various non-consolidated companies, interest income, and
interest expense. Other income (expense), net, for the second quarter 2002 was
($.7 million) compared to $1.9 million for the same quarter last year, a
decrease of $2.6 million. The decrease was due primarily to an unrealized gain
recorded in the prior-year quarter on receipt of stock in connection with the
sale of the Company's share of Avid Sports LLC in June 2000. For the six-month
period ended June 30, 2002, other income (expense), net, decreased $3.8 million
to ($0.5) million as compared to the same period in 2001, primarily due to the
gain in 2001 on the sale of Avid Sports LLC noted above, along with the absence
of any equity in the net income of iNews in the 2002 period as a result of the
Company's acquisition of the remaining ownership interest in the first quarter
of 2001. The Company recorded charges of $1.0 million and $1.1 million in the
three months ended June 30, 2002 and 2001, respectively, to write off an
impaired investment accounted for under the cost method. The investment
impairment considered evidence of recent financing transactions and reviews of
operating plans of the underlying entity.
16
Provision for Income Taxes
The Company recorded a tax provision of $0.6 million and $0.5 million
for the first and second quarters of 2002, respectively. This compares to a tax
provision of $0.8 million recorded in each of the same quarters 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 realized 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 June 30, 2002, the Company's principal sources of liquidity included cash,
cash equivalents and marketable securities totaling approximately $65.1 million.
Net cash provided by operating activities was $8.2 million for the six
months ended June 30, 2002 compared to $6.9 million used in operating activities
in the same period in 2001. During the six months ended June 30, 2002, net cash
provided by operating activities primarily reflects the net loss adjusted for
depreciation and amortization and other non-cash adjustments as well as an
increase in accounts payable, offset by an increase in inventories and a
decrease in accrued expenses. During the six months ended June 30, 2001, net
cash used in operating activities primarily reflects the net loss adjusted for
depreciation and amortization and other non-cash adjustments as well as an
increase in inventories and decreases in accrued expenses and accounts payable,
offset by a decrease in accounts receivable.
The Company purchased $5.7 million of property and equipment during the
six months ended June 30, 2002, compared to $4.7 million in the same period in
2001. In both of these periods, the purchases were primarily of hardware and
software to support research and development. During the six months ended June
30, 2002, the Company also made a cash payment of approximately $13.0 million in
full satisfaction of the Company's outstanding note to Microsoft. During the six
months ended June 30, 2001, the Company 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, 2002 and 2001, the Company received
cash proceeds of approximately $1.1 million and $3.9 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 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.
17
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146) which nullifies EITF
Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Acitvity (including Certain Costs Incurred in a
Restructuring)". SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred,
whereas EITF No 94-3 had allowed the liability to be recorded at the commitment
date of an exit plan. The Company is required to adopt the provisions of SFAS
146 effective for exit or disposal activities initiated after December 31, 2002
and is currently evaluating the impact of adoption of this statement.
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 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 to offer broadcast solutions. 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, creating compelling
customer solutions, 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.
19
We are expanding our product line and offering solutions to new markets, 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 offer digital media production solutions to 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 solutions
successfully. To be successful, we will need to introduce new products, gain
customer acceptance, and establish appropriate distribution channels, support,
and maintenance. 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.
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 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
21
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.
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, allowing them
to reduce 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
22
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.
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.
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
23
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.
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;
24
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.
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.
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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 June 30, 2002, the Company had $24.8 million of forward-exchange
contracts outstanding, denominated in euros, Japanese yen, Canadian dollars and
Australian dollars, as a hedge against forecasted foreign currency-denominated
receivables, payables and cash balances. For the three- and six-month periods
ended June 30, 2002, net losses of $3.2 million and $3.0 million, respectively
resulting from forward-exchange contracts were included in the results of
operations and were more than offset by net transaction and translation gains on
the related asset and liabilities for the same periods of $4.1 million and $3.8
million, respectively. 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 June 30, 2002, the Company held $65.1 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.
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 May 22, 2002. At the
meeting, Robert M. Halperin and William J. Warner were reelected as Class III
Directors. The vote with respect to each nominee is set forth below:
Total Vote For Total Vote Withheld
Each Director From Each Director
-------------- -------------------
Mr. Halperin 19,820,655 3,425,259
Mr. Warner 22,949,010 297,004
Additional Directors of the Company whose term of office continued after
the meeting are Charles T. Brumback, Nancy Hawthorne, Pamela F. Lenehan,
and David A. Krall.
In addition, the stockholders ratified the selection of PricewaterhouseCoopers
LLP as the Company's independent accountants by a vote of 22,983,076 shares for,
249,406 shares against, and 13,532 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 2003
Annual Meeting of Stockholders (the "2003 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 13, 2002.
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 February 11, 2003 or 60 days before the date of the 2003
Meeting, whichever is later. The Company has not yet set a date for the 2003
Meeting. However, if the 2003 Meeting is held on May 22, 2003 (the anniversary
of the 2002 Annual Meeting of Stockholders), the deadline for delivery of the
notice would be March 24, 2003.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed as
part of this Quarterly Report on Form 10-Q.
(b) REPORTS ON FORM 8-K. For the fiscal quarter ended June 30, 2002, 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, 2002 By: /s/ Paul J. Milbury
-----------------------
Paul J. Milbury
Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 2002 By: /s/ Carol L. Reid
-----------------------
Carol L. Reid
Vice President and Corporate Controller
(Principal Accounting Officer)
30
EXHIBIT INDEX
Exhibit No. Description Page
99.1 Statement Pursuant to 18 U.S.C.ss.1350, dated as of August 13, 2002
31