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AVID TECHNOLOGY, INC.
Avid Technology Park
One Park West
Tewksbury, MA 01876
March 29, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, DC 20549
Re: Avid Technology, Inc.
File No. 0-21174
Annual Report on Form 10-K
--------------------------
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 Annual Report on Form 10-K for the fiscal year ended December 31,
2001.
This filing is being effected by direct transmission to the Commission's
EDGAR System.
Very truly yours,
/s/ Carol E. Kazmer
Carol E. Kazmer
General Counsel
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from to
---------- ----------
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) (Zip Code)
(978) 640-6789
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of The Act:
None
Securities Registered Pursuant to Section 12(g) of The Act:
Common Stock $.01 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) 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 such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES v NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $356,304,319 based on the closing price of the
Common Stock on the NASDAQ National Market on March 14, 2002.
The number of shares outstanding of the registrant's Common Stock as of March
14, 2002, was 26,096,982.
Documents Incorporated by Reference
Document Description 10-K Part
-------------------- ---------
Portions of the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held May 22, 2002................... III
This Annual Report on Form 10-K contains a number of forward-looking
statements. Any statements contained herein (including without limitation
statements to the effect that Avid or its management "believes", "expects",
"anticipates", "plans" and similar expressions) that are not statements of
historical fact should be considered forward-looking statements. There are a
number of important factors that could cause Avid's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth in "Certain Factors That
May Affect Future Results."
PART I
ITEM 1. BUSINESS
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 developed by our
Softimage subsidiary. We also offer digital audio systems through our Digidesign
division. Digidesign's audio systems have applications in music, film,
television, video, broadcast, streaming media, and web development. These
systems are based upon proprietary Digidesign/Avid audio hardware, software, and
control surfaces, and permit users to record, edit, mix, process, and master
audio in an integrated manner.
Manage Media. We provide complete network, storage, and database solutions
based on our Avid Unity MediaNet technology. This technology enables users to
share and manage media assets throughout a project or organization. The ability
to effectively manage digital media assets is a critical component for success
for many broadcast and media companies with multiple product lines 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
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.)
DIGITAL MEDIA CONTENT MARKETS
Digital formats and tools have largely displaced analog processes in many
markets, such as word processing, electronic spreadsheets, desktop publishing,
graphics, and electronic and mechanical design. Because of more challenging
technical and cost hurdles in handling digital forms of film, video, and audio
signals, markets that rely on these media types have begun to migrate to digital
formats and tools only in recent years. As technical advances in digital media
content-creation tools have made this migration possible, users have become able
to create more complex content that can incorporate several elements of digital
media. For example, many video games now include live-action video, detailed 3D
graphics, and high quality audio, all created, manipulated, and played back in
digital form. Feature films, such as "Lord of the Rings," "Pearl Harbor," and
"AI (Artificial Intelligence)," integrate sophisticated computer-generated
special effects into traditional live action shots.
2
We currently participate in two principal markets transitioning from
well-established analog content-creation processes to digital content-creation
tools. Both of these markets, video and film editing and effects and
professional audio, are beginning to use the Internet to collaborate and
distribute video and audio content.
Our video and film editing and effects market consists of professional
users, over-the-air and cable broadcast companies, and corporate, government,
and educational users. Professional users include independent production or
post-production companies that produce video and film material, such as feature
films, commercials, entertainment and documentary programming, industrial
videos, and music videos; professional character animators and video game
developers; and television facilities, film studios, and certain large
corporations that perform digital media production and post-production in-house.
A wide variety of companies originate news programming, including national and
international broadcasters, such as the British Broadcasting Corporation, the
Cable News Network, the American Broadcasting Company, and the National
Broadcasting Company, as well as network affiliates, local independent
television stations, web news providers and local and regional cable operators
which produce news programming. Users in corporations and various other
institutional settings use digital media tools to create and distribute
information enriched by the addition of digital media content to their customers
and employees.
Our professional audio market is comprised of professional music studios,
project studios, film and television production and post-production facilities
television and radio broadcasters, DVD, web and other "new media" production
studios, corporate, government, and educational facilities, as well as
home-hobbyists and enthusiasts. These companies range in size from individuals
to large multi-national corporations. Our products are employed in a wide
variety of applications, including recording, editing, mixing, processing and
mastering of audio.
ACQUISITIONS IN THE DIGITAL BROADCAST MARKET
In January 2001, we acquired the remaining 50% ownership interest in AvStar
Systems LLC ("AvStar"). AvStar was a joint venture that we had originally
established on a 50-50 basis with Tektronix, Inc. (which subsequently sold its
interest to The Grass Valley Group, Inc., now a unit of Thomson Multimedia) to
focus on developing the next generation of newsroom computer systems products by
combining both companies' newsroom computer systems technology and certain
personnel. Since September 2000, AvStar has been doing business as iNews, LLC.
iNews products include the iNEWS Newsroom Computer System (NRCS) for news
journalist story creation and production and Media Browse software, which
simplifies news production by giving journalists enhanced functionality and
features. These products provide broadcast news software solutions for
television, radio, and the Internet. In 2001, Avid worked to integrate products
from iNews and from Pluto Technologies International Inc. ("Pluto"), which we
acquired in 2000, into a more comprehensive product line offering for the
broadcast news markets.
STRATEGY
Our mission is to serve the industries that Make, Manage and Move Media.
Our strategy consists of four key elements:
Maintain a Leading Position in Existing Markets
We continue to focus on markets where digital media content creation
already takes place, and we believe we enjoy a leadership position in each of
these primary markets. These include professional video and film editing and
effects, including film and television studios and independent production and
post-production firms, and music and audio production and post-production
markets. We plan to strengthen these positions by enhancing our existing
products; by introducing new products that satisfy a broader range of customer
needs in these markets, through internal development, joint development with
third parties or through acquisitions; and by continuing to provide excellent
customer service, support and training.
3
Extend Technology to Analog-Based Market Sectors
We believe that we have established unit and revenue market share
leadership positions in the professional video and film digital editing markets,
the digital audio market, and the markets for broadcast digital news editing. To
strengthen these positions and further increase our overall market share, we are
specifically targeting market sectors that are currently analog-based. As an
example, we believe that expansion opportunity exists in television on-line
editing, which is the final piece of the post-production process that today is
still mainly tape-based. We believe that because digital solutions more
efficiently and cost-effectively address the needs of this editing process than
their analog counterparts, tape will ultimately be replaced by file-based
digital media. Market sectors that are primarily analog-based, and which we
intend to pursue, include broadcast news, corporate and industrial video, and
audio mixing, mastering and tracking.
Promote Interoperability of Avid Products and Develop Open and Integrated
Workflow Solutions
Avid continues to invest significant resources in enhancing the
interoperation of our broad suite of products that Make, Manage and Move Media.
To satisfy the demands of the post-production and broadcast markets, Avid is
focused on delivering integrated solutions to the market, rather than isolated
tools. With Avid Unity-based collaborative workgroups, we are working to enable
all Avid products to connect to one another, sharing common production media
assets and metadata in a seamless workflow that encompasses all the disciplines
in content creation - acquisition, editing, image manipulation, graphics, audio,
mastering, encoding and distribution. An Avid Unity for News solution, for
example, can facilitate all the tasks required to create news stories for
broadcast by leveraging the aggregate power of all of Avid's tools. The entire
process, including capturing news "feeds," managing scripts and announcer
recordings, editing and manipulating video, audio and graphics elements,
delivering the finished product to a video server for playback, automated
repurposing of the story for web distribution, and streaming the repurposed
content to the consumer, can be accomplished seamlessly by an array of Avid
products working together in an Avid Unity workgroup.
Beyond simply enabling Avid products to work well with one another as a
solution, we design all our products so that they are based on and can work with
major industry-wide standards, including computer platforms, operating systems,
networking protocols, data compression, and digital media handling formats. We
have been a leader in defining and developing the Advanced Authoring Format, or
AAF, a multimedia file format that enables content creators to easily exchange
digital media and information about the media, or metadata, across platforms and
between systems and applications. AAF saves time, simplifies project management,
and preserves valuable metadata that can be lost when transferring media between
applications.
In order to address the needs for collaboration and efficient workflow in a
wide-area network (or WAN) environment, Avid offers Avid Unity TransferManager
and Avid NetReview products. TransferManager enables geographically dispersed
content creators to collaborate easily by facilitating the exchange of digital
media. TransferManager streamlines and automates the task of transferring
production assets between editing systems, between collaborative Avid Unity
workgroups, or between an individual editing system and an Avid Unity workgroup.
The NetReview application is a browser-based application for frame-accurate
review and approval of video and audio content which can be integrated directly
into the editing process. NetReview revolutionizes the process of content
creation by integrating the feedback of content stakeholders regardless of their
physical location. NetReview obviates the need to send a video tape copy of a
program to each reviewer by enabling an electronic, file-based workflow that is
low-cost, almost instantaneous, and more reliable.
Play a Major Role in Internet Publishing and Distribution
We believe that the Internet will gradually become a critical content
distribution channel for all types of media. For this reason, every Avid editing
product can output web-ready files for distribution. For enhanced workflow we
offer ProEncode, a dedicated encoding server for Avid Unity-based workgroups.
ProEncode automates the process of translating broadcast-quality production
assets into web-ready streaming media files. To deliver web content to the
consumer, Avid offers the Trilligent line of turn-key streaming media solutions.
The Trilligent architecture offers industry-leading price performance,
delivering many simultaneous high-quality video and audio streams at a low cost
to the user. Trilligent scales from very small corporate deployments - where it
can act as a video "library" for applications such as distance learning - to the
very largest media streaming enterprise.
PRODUCTS
The following section lists our products within the two principal markets
in which they are sold. A description follows of the major products and product
families in each of these categories.
4
Video and Film Editing and Effects Products
Media Composer for Macintosh and Windows NT Platforms
Our Media Composer product is a computer-based digital, non-linear editing
system designed primarily for use by professional film and video editors. The
Media Composer system converts visual and audio source material from tape to a
digital format and stores the converted material on a range of hard disk storage
devices. Once digitized, the stored media can be previewed, edited, and played
back. The Media Composer family of products is used to create high-quality
productions such as television shows and commercials, feature films, music
videos, corporate videos, and other non-broadcast finished videos. The Media
Composer product line includes three models, the Media Composer Off-line, 1000
and 9000, which provide various levels of capability and functionality. The
Media Composer product is our original product offering and still accounts for a
significant portion of our revenues. We believe that the Media Composer product
line holds a greater unit market share than any other digital non-linear editing
system in professional video editing markets.
Avid Symphony
The Avid Symphony product line offers on-line editing and finishing
capabilities targeted at high-end post-production such as primetime television
programs and nationally broadcast commercials. The Avid Symphony system is
designed to finish high-end editorial projects, which are "off-lined", or put
into a narrative story format, on Media Composer and traditionally finished in a
linear suite. The Avid Symphony system uses the Windows NT operating system and
delivers all of the proven Media Composer editing functionality plus higher-end
finishing tools such as advanced scene-to-scene color correction and 24P
Universal Mastering.
Film Composer for Macintosh and Windows NT Platforms
The Film Composer product is a 24 frames-per-second, or fps, editing system
for projects that originate and finish on film. Film footage can be converted to
video signals for editing, but because video runs at different speeds - 30 fps
in the United States, and 25 fps in other countries - a standard 30 or 25 fps
video editing system does not yield an accurate 24 fps film cut list from which
to edit a final master of the film. The Film Composer system includes software
that determines which frames on the videotape are actual frames from the film
source material and allows the creation of a frame-accurate cut list. The Film
Composer software also includes special features to meet the specific needs of
film editors. We believe the Film Composer system holds a greater unit market
share than any other digital non-linear editing system in professional film
editing markets.
Avid|DS
The Avid|DS product is a comprehensive, non-linear production system for
creating, editing, and finishing effects-intensive short projects, such as
commercials and music videos. It combines a rich set of tools for video and
audio editing, compositing, effects generation, image treatment, and project
management, all integrated within a unified architecture and common user
interface, running on the Windows NT platform. With Avid|DS, digital artists
have access to a comprehensive toolset with the capability of processing
uncompressed video, combined with a choice of third-party hardware platforms. We
released an HD version of the Avid|DS system in early 2001.
Avid Xpress for Macintosh and Windows Platforms
The Avid Xpress product is a digital, non-linear video editing system
designed to meet the needs of media professionals and video/film educators
involved with video and multimedia production for a variety of distribution
mediums including videotape, CD-ROM and the Internet. Avid Xpress software has a
streamlined user interface and editing model targeted for this category of user.
As a less expensive product than the Media Composer, Symphony, and Avid|DS
systems, the Avid Xpress system targets a broader potential customer base.
Avid Xpress DV for Windows Platforms
The Avid Xpress DV product is a digital, non-linear video editing system
designed to offer the professional quality and sophistication of an Avid system
at a lower cost. The Avid Xpress DV system is designed to meet the needs of
media professionals, Internet video developers, and video/film educators
involved with video and multimedia production for a variety of distribution
mediums including videotape, CD-ROM and the Internet. Avid Xpress DV software
has a streamlined user interface and editing model, and is targeted for
5
DV-format based production environments where cost is a major factor. In 2001,
our Avid Xpress DV v2.0 product was introduced, which enables users to run the
software on a wide range of commodity PC desktop and laptop computers. The Avid
Xpress DV system delivers the industry leading Avid-editing interface at an
affordable low price entry point in a portable form convenient for editing in
the field or on location. In 2002, we plan to release our Avid Xpress DV v3.0
product for both Macintosh- and Windows- based platforms.
NewsCutter Effects
Our NewsCutter Effects product is a computer-based digital, non-linear
video editing system designed to meet the demands of television news production.
The NewsCutter Effects system supports the popular DVCPro 25 and 50 megabyte
media compression formats and the emerging D10/IMX format, and is built on a
Windows NT-based computer platform. NewsCutter Effects enables broadcast news
editors to edit news and news features in an environment with time-critical
demands. Based on the same core technology as the Media Composer system, the
NewsCutter Effects system offers a range of editing and effects features.
NewsCutter Effects can operate as a stand-alone editing system or in a news
production workgroup with a playback system.
NewsCutter XP
Our NewsCutter XP product significantly expands the reach of the NewsCutter
product line, delivering a powerful editing suite into the hands of a journalist
in the field using a laptop and a portable camera. The Desktop version of
NewsCutter XP offers a lower cost alternative to NewsCutter Effects, with all
the news-specific innovation of the NewsCutter line, excluding hardware based
acceleration.
Avid AirSPACE, VideoSPACE and HyperSPACE
Originally developed by Pluto, the AirSPACE, VideoSPACE and HyperSPACE
products, together with other Avid products, provide us with end-to-end
broadcast solutions from ingest to editing, storage and playback. These products
have been among the industry's leaders in HDTV and SDTV broadcast and
post-production server solutions. When combined with NewsCutter Effects,
NewsCutter XP and the Avid Unity for News systems, the AirSPACE product line is
a preferred server for news applications.
Avid iNews Products
The Avid iNews product is a newsroom production and automation system
designed to facilitate and integrate the processes of news gathering, story
creation, script editing, and newscast planning and creation. The Avid iNews
system features a simplified user interface for novice users and the ability to
export to the Internet and directly access Internet news files using standard
web browsers. The Avid iNews system is easily scalable from 10 to 10,000 users,
and its WAN capabilities allow stories to be automatically routed from one
station in a group to another.
The Avid Media Browse desktop tool streamlines news production by giving
producers, journalists, and writers simultaneous access to view video assets,
select clips, and perform simple edits at their workstations. With the AvidMedia
Browse product, media is available to multiple users even while feeds are
recording. Edit decisions can be automatically transferred to a NewsCutter
system. Additionally, the Media Browse tool is integrated with the Avid Unity
MediaNet for News environment.
SOFTIMAGE|XSI
Our SOFTIMAGE|XSI product, which is our next-generation non-linear
animation (NLA) system, builds on the success of our earlier SOFTIMAGE|3D
product. This versatile toolset is designed for digital artists in the film,
commercial/broadcast and games and interactive industries. With its modeling,
animation and rendering toolsets, the SOFTIMAGE|XSI v2.0 system lays a
foundation that allows the modern digital artist to innovate, create, and
collaborate in new ways with fast and efficient tools and workflows for
producing high-quality 3D imagery. SOFTIMAGE|XSI v2.0 is certified for Windows
NT, Windows 2000 IRIX and LINUX platforms.
SOFTIMAGE|3D
Our SOFTIMAGE|3D product is a content creation tool for 3D character
animation for the film, commercial, and games development markets. As a
price/performance leader, SOFTIMAGE|3D features production-proven organic
modeling, character animation tools, and high-quality photo-realistic rendering.
These tools are specifically designed for integration into the overall
production pipeline, providing rapid, high-quality results to meet the most
demanding deadlines. SOFTIMAGE|3D also features an easy upgrade path to the
next-generation SOFTIMAGE|XSI NLA system. SOFTIMAGE|3D v4.0 is certified for
Windows NT, Windows 2000, IRIX and LINUX platforms.
6
Storage Systems
We offer a family of media storage solutions for use with our systems.
Storage systems are used to add media editing or playback capacity, improve
image quality, support workgroup media sharing, and protect media from loss due
to hardware failure. We purchase disk drives, tape drives, and storage enclosure
sub-systems from third-party manufacturers, integrate them, enhance their
performance, test and certify them for use with our systems, and package them in
various configurations. These storage systems range in capacity from nine
gigabytes to over seven terabytes (7,000 gigabytes).
Avid Unity MediaNet
Avid Unity MediaNet is a set of open networking and central storage
technologies based on an advanced media file system that enables realtime,
simultaneous sharing of high-bandwidth media. Avid Unity MediaNet connects
editors, artists, sound designers, and effects specialists throughout a digital
facility to the same network, significantly improving workflow, raising
productivity, and enhancing creativity by eliminating many of the routine,
mechanical tasks associated with managing today's part-linear, part-non-linear
post-production process. Included in Avid Unity MediaNet are advanced media
transfer utilities and server-assisted shared storage and networking
technologies, providing support for a wide range of applications and platforms.
Trilligent Cluster
The Trilligent Cluster is a turnkey streaming media system optimized to
reliably deliver high-bandwidth content over the Internet. Its high performance,
linear scalability, and ease-of-use capabilities allow streaming service
providers, content delivery networks, and content hosts to rapidly distribute
high quality, dynamic content over the Internet. The Trilligent Cluster is a
streaming Internet platform that supports up to 5,000 megabits per second
sustained streaming bandwidth and provides seven terabytes of on-line storage at
its full configuration. This power is equivalent to the live or on-demand
delivery of more than 10,000 unique 500k broadband streams and the on-line
storage of tens of thousands of hours of broadband content. At the core of the
Trilligent Cluster is distributed file server software running in conjunction
with a storage area network. This combination produces extremely high
performance and enables real-time, shared media access by eliminating the need
to replicate disks and manage content between media servers.
Professional Audio Products
Pro Tools
Developed by our Digidesign division, the Pro Tools product is a
multi-track, non-linear digital audio workstation that runs on Mac OS- and
Windows-based personal computers. Pro Tools software provides solutions for the
entire audio production process, including sound synthesis, recording, editing,
signal processing, integrated surround mixing, and mastering. Pro Tools users
are in the consumer, prosumer and professional music, film, television, radio,
multimedia, DVD, and Internet production markets. Digidesign offers Pro Tools
software in a variety of configurations, ranging from Digi ToolBox and Digi 001
systems for home music studios, to high-end Pro Tools systems for professional
music and post production, including the ProTools|HD system which began shipping
in early 2002. The Pro Tools system also supports a rich development
architecture, with more than 100 development partners providing additional
software and hardware solutions for the Digidesign architecture.
ProControl
ProControl is Digidesign's high-end, expandable hardware control surface
for hands-on access to the recording, editing, processing, and surround mixing
capabilities of Pro Tools software. The ProControl control surface connects to
the Pro Tools software via high-speed Ethernet. ProControl allows full control
of Pro Tools functions with patented faders and dedicated switches, character
displays and knobs. With its modular design, the ProControl system can be
customized to fit any studio, providing from 8 to 48 channels of simultaneous
control. The Edit Pack option adds integrated control of advanced editing and
surround mixing features, and make the ProControl product a comprehensive front
end for professional Pro Tools systems.
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Control|24
In early 2001, Digidesign released Control|24, a control surface that
combines hands-on access to Pro Tools software features and high-quality
microphone pre-amplifiers from Focusrite Audio Engineering, Ltd., a leading
manufacturer of analog audio processing equipment. The Control|24 product
communicates with Pro Tools software via Ethernet, and provides control of a
vast majority of Pro Tools functions. Control|24 is a 24-channel, fixed-size
control surface, designed for music production and broadcast applications.
AVoption and AVoption|XL
The AVoption and AVoption|XL products are hardware options for Pro Tools
systems that allow the user to record, edit and process sound synchronized with
Avid-format, non-linear digital video. Designed for post production
professionals working in film, TV, and video, these options enable capture,
playback, and basic editing of broadcast-quality picture from projects
originating on Avid Media Composer, Film Composer and Symphony systems. AVoption
and AVoption|XL products also include DigiTranslator, a software option that
provides users with a high level of media and metadata interchange with any
Avid-compatible system.
SALES AND SERVICE
We market and sell our solutions through a combination of direct and
indirect sales channels, covering a range of industries that Make, Manage and
Move Media throughout the world.
From our traditional stronghold in the high-end post-production market to
broadcast news, low-cost post-production, and streaming media solutions, we
ensure balanced market and geographic sales coverage. Our products are sold
primarily through a network of more than 250 independent distributors,
value-added resellers and dealers. These channels are supplemented by a team of
Avid sales representatives directly serving select customers and markets.
We also provide both direct and indirect customer support. Our customers
are served directly through regional telephone support centers and major-market
field service representatives, supplemented by strategically located dealers,
value-added resellers and authorized third-party service providers. Customers
may choose from a variety of support offerings, including 24 hour telephone
support, quick-response on-site assistance, hardware replacement and software
upgrades. Customer training is available directly from us or through field-based
authorized third-party Avid training centers.
MANUFACTURING AND SUPPLIERS
Our manufacturing operations consist primarily of the testing of
subassemblies and components purchased from third parties, the duplication of
software, and the configuration, assembly and testing of board sets, software,
related hardware components, and complete systems. We also rely on independent
contractors to manufacture components and subassemblies to our specifications.
Our systems undergo testing and quality assurance at the final assembly stage.
We are dependent on a number of sole source vendors for certain key hardware
components of our products. For the risks associated with our reliance upon
certain vendors, see "Certain Factors that May Affect Future Results" under Item
7.
We have manufacturing facilities in Tewksbury, Massachusetts; Dublin,
Ireland; Madison, Wisconsin; and Menlo Park, California. The Company has also
contracted with third-party manufacturing facilities for certain component
parts.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on the development of
digital media content-creation tools and workgroup solutions that operate
primarily on Windows NT-based and Apple computers. This includes the development
and enhancement of best-in-class video, film, 3D animation, and audio editing
systems to meet the needs of professionals in the television, film, music,
broadcast news production, and industrial post-production markets, and of
end-users in the educational and corporate markets. Our research and development
efforts therefore also include networking and storage initiatives to deliver
standards-based media transfer and media asset management tools, as well as
stand-alone and network-attached media storage systems for workgroups.
Increasingly, we design our systems to be Internet-enabled with technology for
encoding and streaming media to the Internet. Our research and development
operations are primarily in Tewksbury, Massachusetts; Daly City and Santa
Monica, California; Madison, Wisconsin; and Montreal, Canada. We also employ
independent firms and contractors in the United States and abroad for certain
research and development activities.
8
COMPETITION
The markets for our products are highly competitive and subject to rapid
change. Competition is fragmented with a large number of suppliers providing
different types of products to different markets.
In the video and film editing and effects market, we encounter competition
primarily from vendors that offer similar digital production and post-production
editing, effects, and animation products based on standard computer platforms.
Our competitors in the digital production and post-production editing and
effects markets include Discreet Logic (a division of Autodesk, Inc.), Apple
Computer, Quantel, Alias/Wavefront (a subsidiary of Silicon Graphics), Panasonic
(a subsidiary of Matsushita), Media 100 Inc., Pinnacle Systems, Inc. and Sony
Corporation. Our animation competitors include Discreet Logic, Alias/Wavefront,
and NewTek. We also compete with vendors that offer editing and effects products
for originators of broadcast news. Our broadcast competitors include Associated
Press, Sony, Panasonic, The Grass Valley (now, a unit of Thomson Multimedia),
and Leitch. In the storage market, our competitors include EMC, Transoft (HP),
Medea, Rorke Data, and Compaq. We also compete with vendors that generally have
offered analog-based products, such as Sony and Matsushita. We expect that
competition from these vendors will increase to the extent that such vendors
develop and introduce digital media products.
In the professional audio market, we compete primarily with traditional
analog and digital recording and/or mixing system suppliers including Euphonix,
Mackie Designs, Alesis, and Yamaha as well as other disk-based digital audio
system suppliers including Fairlight, Roland, Steinberg, Studio/Audio/Video
(SADie), and others. In addition, companies such as Creative Technology
currently provide low-cost digital audio playback cards targeted primarily at
the personal computer game market. There can be no assurance that these
companies will not also introduce products that are more directly competitive
with our products.
We may also face competition in one or both of these markets in the future
from computer manufacturers, such as Compaq, Hewlett-Packard, IBM, and Silicon
Graphics, as well as from software vendors, such as Oracle and Sybase. All of
these companies have announced their intentions to enter some or all of our
target markets, including, specifically, the broadcast news and special effects
sectors of the video and film editing and effects market. In addition, certain
developers of shrink-wrapped digital media software products, such as Adobe and
Macromedia, either offer or have announced video and audio editing products
which may compete with certain of our products.
The primary competitive factors in all of our market sectors are
price/performance, functionality, product quality, reputation, product line
breadth, access to distribution channels, customer service and support, brand
name awareness, and ease of use.
EMPLOYEES
The Company employed 1,543 people as of December 31, 2001.
ITEM 2. PROPERTIES
Our principal administrative, sales and marketing, research and
development, support, and manufacturing facilities are located in three adjacent
buildings in an office park located in Tewksbury, Massachusetts. Our leases on
these buildings expire in June 2010. In September 2000, we subleased a portion
of this space to an unrelated company. The sublease expires in 2003. In January
2002, we vacated additional space in Tewksbury in connection with our 2001
restructuring action and are currently seeking a tenant for that space.
We also lease facilities in Dublin, Ireland; Madison, Wisconsin; and Menlo
Park, California for the manufacture and distribution of our products. We
additionally lease office space in Daly City, California housing our Digidesign
headquarters, including administrative, sales and marketing, and research and
development activities and in Iver Heath, United Kingdom, for our European
headquarters, including administrative, sales, and support functions. Finally,
we lease a facility in Montreal, Canada, which houses certain administrative,
research and development, and support operations.
In September 1995, our United Kingdom subsidiary entered into a 15-year
lease in London, England. We vacated this property in 1999 as part of our
corporate restructuring actions, and have currently sublet all of this space. We
also maintain sales and marketing support offices in leased facilities in
various other locations throughout the world.
We anticipate that our leased facilities will be adequate for our needs
during 2002.
9
ITEM 3. LEGAL PROCEEDINGS
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 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,
issued in 1981, and seeks injunctive relief, treble damages and costs, and
attorneys' fees. Avid believes that it has meritorious defenses to the complaint
and intends to contest it vigorously. However, an adverse resolution of this
litigation could have an adverse effect on the Company's consolidated financial
position or results of operations in the period in which the litigation is
resolved. No costs have been accrued for this possible loss contingency.
In March 1999, Avid and Tektronix, Inc. were sued by Glen Holly
Entertainment, Inc., a Tektronix distributor, claiming that Tektronix's
discontinuance of the Tektronix Lightworks product line was the result of a
strategic alliance by Tektronix and Avid. Glen Holly raised antitrust and common
law claims against the Company and Tektronix, and sought lost future profits,
treble damages, attorneys' fees, and interest. All of the claims against the
Company and Tektronix 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the last quarter of the fiscal year ended December 31, 2001.
10
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is (i) the name and age of each present executive officer of the
Company; (ii) the position(s) presently held by each person named; and (iii) the
principal occupation held by each person named for at least the past five years.
EXECUTIVE OFFICER AGE POSITION(S)
David Krall 41 President and Chief Executive Officer
Paul J. Milbury 53 Vice President and Chief Financial Officer
David R. Froker 46 Vice President and General Manager, Digidesign
Joseph Bentivegna 41 Vice President of Video Development and
Operations
Charles L. Smith 41 Vice President of Worldwide Sales,
Marketing & Services
Michael J. Rockwell 35 Chief Technology Officer
Carol L. Reid 54 Vice President and Corporate Controller
Ethan E. Jacks 48 Vice President of Business Development,
Chief Legal Officer and Corporate Secretary
- --------------------
DAVID KRALL. Mr. Krall is currently the Company's President (appointed in
October 1999) and Chief Executive Officer (appointed in April 2000). Previously
he served as Avid's Chief Operating Officer from October 1999 to April 2000.
Prior to that, Mr. Krall served in various capacities at Digidesign: Chief
Operating Officer of Digidesign from July 1998 to October 1999, Vice President
of Engineering from June 1996 to July 1998 and Director of Program Management
from May 1995 to June 1996.
PAUL J. MILBURY. Mr. Milbury was appointed Vice President and Chief Financial
Officer in December 2000. Prior to that time, he was Chief Financial Officer of
iBelong.com, Inc. from April 2000 to December 2000, and of JuniorNet Corporation
from October 1998 to April 2000. Mr. Milbury also spent 19 years at Digital
Equipment Corporation (now Compaq Computer Corporation) where in 1995 he became
Vice President and Treasurer.
DAVID R. FROKER. Mr. Froker has been Vice President and General Manager of
Digidesign since January 1997. Prior to serving in his present position, Mr.
Froker served in various capacities at Digidesign: General Manager from May 1996
to January 1997, Vice President Product Marketing from September 1995 to May
1996, and Vice President, Business Development from May 1994 to September 1995.
From November 1987 to July 1993 Mr. Froker held various positions in Product
Marketing and Business Strategy for Amdahl, a maker of mainframe computers and
storage peripherals.
JOSEPH BENTIVEGNA. In August 2001, Mr. Bentivegna was appointed Vice President
of Video Development and Operations. Prior to August 2001, he held several other
positions at Avid including Vice President and General Manager of Avid Media
Solutions from June 2000 to August 2001, Vice President of Worldwide Operations
from January 1999 to June 2000, Vice President and General Manager of Asia
Operations from September 1998 to January 1999 and Vice President of Worldwide
Manufacturing from June 1996 to September 1998. From November 1991 to June 1996
Mr. Bentivegna held various other positions at Avid. Prior to that he held
various positions in operations for Access Technology, Inc., a developer of
application software.
CHARLES L. SMITH. Mr. Smith was appointed Vice President of Worldwide Sales,
Marketing and Services in November 1999. Prior to serving in his present
position, Mr. Smith served in various capacities at Digidesign: Vice President
of Sales and Marketing from October 1996 to November 1999, Vice President of
International Sales from August 1995 to October 1996, and Managing Director
Digidesign UK from May 1993 to August 1995.
11
MICHAEL J. ROCKWELL. Mr. Rockwell was appointed Chief Technology Officer of Avid
in August 2001. Mr. Rockwell has also served as Vice President and General
Manager of Avid Internet Solutions from June 2000 to August 2001 and as Chief
Architect for Software Engineering of Digidesign, from January 1997 to November
1999. Prior positions with Digidesign were Director of Application Development
from March 1995 to January 1997 and Director of Multi-Media Products from April
1994 to March 1995.
CAROL L. REID. Ms. Reid joined Avid in November 1998 as Vice President and
Corporate Controller. Prior to joining the Company, Ms. Reid spent 20 years at
Digital Equipment Corporation (now Compaq Computer Corporation), where she was
Vice President of Internal Audit from January 1998 to November 1998 and
Assistant Treasurer/Director from October 1994 to January 1998.
ETHAN E. JACKS. Since March 1999, Mr. Jacks has served as Vice President of
Business Development and Chief Legal Officer. From May 2000 to December 2000, he
also served as Acting Chief Financial Officer. Prior to joining Avid, Mr. Jacks
was Vice President and General Counsel for Molten Metal Technology, Inc. from
November 1991 to October 1998. Mr. Jacks was also engaged in the private
practice of law for eleven years, including as a partner at McDermott, Will &
Emery.
There are no family relationships among the named executive officers.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the Nasdaq National Market under the symbol
AVID. The table below shows the high and low sales prices of the common stock
for each calendar quarter of the fiscal years ended December 31, 2001 and 2000.
2001 High Low
---- ---- ---
First Quarter $21.813 $12.500
Second Quarter $17.420 $11.500
Third Quarter $15.700 $6.650
Fourth Quarter $12.890 $6.550
2000 High Low
---- ---- ---
First Quarter $24.500 $11.438
Second Quarter $20.563 $ 9.375
Third Quarter $15.438 $10.063
Fourth Quarter $21.000 $13.359
On March 14, 2002, the last reported sale price of the Nasdaq National
Market for our common stock was $13.699 per share. The approximate number of
holders of record of our common stock at March 14, 2002, was 597. This number
does not include shareholders for whom shares were held in a "nominee" or
"street" name.
We have never declared or paid cash dividends on our capital stock and
currently intend to retain all available funds for use in the operation of our
business. We do not anticipate paying any cash dividends in the foreseeable
future.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected condensed consolidated
financial data. Included in our financial statements and selected financial data
are the results of operations of Softimage, which we acquired on August 3, 1998,
and iNews, which we acquired on January 1, 2001. These acquisitions were
accounted for as purchases and, accordingly, the results of operations of
Softimage and iNews are included as of their acquisition dates. The selected
consolidated financial data below should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this filing.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
In thousands (except per share data)
For the Year Ended December 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
---------------------------------------------------------
Net revenues $434,638 $476,090 $452,555 $482,377 $471,338
Cost of revenues 213,572 234,424 205,877 190,249 221,553
--------- --------- --------- --------- ---------
Gross profit 221,066 241,666 246,678 292,128 249,785
--------- --------- --------- --------- ---------
Operating expenses:
Research and development 86,140 82,900 88,932 88,787 73,470
Marketing and selling 113,053 119,469 129,889 125,280 120,394
General and administrative 23,313 27,504 28,147 28,549 25,808
Restructuring and other costs, net 8,268 14,469 28,373
Amortization of acquisition-related intangible assets 31,168 66,872 79,879 34,204
--------- --------- --------- --------- ---------
Total operating expenses 261,942 296,745 341,316 305,193 219,672
--------- --------- --------- --------- ---------
Operating income (loss) (40,876) (55,079) (94,638) (13,065) 30,113
Other income and expense, net 5,529 3,730 3,459 8,636 8,125
--------- --------- --------- --------- ---------
Income (loss) before income taxes (35,347) (51,349) (91,179) (4,429) 38,238
Provision for (benefit from) income taxes 2,800 5,000 46,369 (796) 11,854
--------- --------- --------- --------- ---------
Net income (loss) ($38,147) ($56,349) ($137,548) ($3,633) $26,384
========= ========= ========= ========= =========
Net income (loss) per common share - basic ($1.49) ($2.28) ($5.75) ($0.15) $1.14
========= ========= ========= ========= =========
Net income (loss) per common share - diluted ($1.49) ($2.28) ($5.75) ($0.15) $1.08
========= ========= ========= ========= =========
Weighted average common shares outstanding - basic 25,609 24,683 23,918 23,644 23,065
========= ========= ========= ========= =========
Weighted average common shares outstanding - diluted 25,609 24,683 23,918 23,644 24,325
========= ========= ========= ========= =========
CONSOLIDATED BALANCE SHEET DATA:
In thousands
As of December 31,
------------------------------------------------------
2001 2000 1999 1998 1997
------------------------------------------------------
Working capital $85,490 $96,585 $70,344 $118,965 $186,474
Total assets 215,806 266,482 312,024 486,715 356,805
Long-term obligations 13,020 13,449 14,220 13,261 403
Total stockholders' equity 104,758 137,850 167,923 290,311 241,794
14
SUPPLEMENTAL PRO FORMA INFORMATION:
The following table presents pro forma operating income (loss), excluding
the impact of restructuring and other costs, net and amortization of
acquisition-related intangible assets.
In thousands:
For the Year Ended December 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
-------- ------- ------- ------- -------
Pro forma operating income (loss), excluding restructuring
and other costs, net and amortization of acquisition-related
intangible assets ($1,440) $11,793 ($290) $49,512 $30,113
======== ======= ======= ======= =======
15
ITEM 7. 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.
During the fourth quarter of 1999, we announced and implemented a
restructuring plan to strategically refocus our business and bring operating
expenses in line with net revenues, with the goal of restoring long-term
profitability to the Company. The process included a re-evaluation of our core
competencies, technology plan, and business model, and was completed in tandem
with the development of our fiscal 2000 operating plan. The restructuring plan
resulted in a charge of approximately $9.6 million related to the termination of
209 employees, or 11% of our work force, and the vacating of certain facilities,
as well as the discontinuation of a limited number of products.
During 2001, we announced and implemented restructuring plans to decrease
costs through the consolidation of operations. The restructuring actions were
taken to further improve the Company's cost structure and profitability given
the economic pressures facing the industry, and were generally not targeted at
specific products or services. As a result, we recorded total charges of $10.0
million during the year related to the termination of 194 employees, or 11% of
our work force, and the vacating of certain facilities.
In January 2001, we acquired the remaining 50% ownership interest in iNews,
which was formerly held by The Grass Valley Group (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).
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In Management's Discussion and Analysis of Financial Condition and Results
of Operations we discuss Avid's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, management evaluates its
estimates and judgments, including those related to revenue recognition;
allowances for product returns and exchanges; allowance for bad debts; reserves
for recourse under financing transactions; and the valuation of inventories and
income tax assets. Management bases its estimates and judgments on historical
experience and various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities and the amounts of revenue
and expenses that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies most
significantly affect the portrayal of the Company's financial condition and
require management's most difficult and subjective judgments.
Revenue Recognition and Allowances for Product Returns and Exchanges
We recognize revenue from sales of software or products including
proprietary software upon receipt of a signed purchase order or contract and
product shipment, provided that collection is reasonably assured, the fee is
fixed or determinable, and all other revenue recognition criteria of SOP 97-2,
"Software Revenue Recognition," as amended, are met.
Avid's products do not require significant production, modification or
customization of software. Installation of our products generally requires
insignificant effort and is not typically performed by us. For sales where
installation is complex and non-routine, our policy is to defer product revenue
until such installation is satisfactorily completed. In addition, in rare
circumstances when an order includes a customer acceptance provision, we defer
all revenue recognition until the customer's acceptance of the products and
services has been received or the acceptance period has lapsed.
16
We generally recognize revenue upon shipment of our products to end-users
or distributors. Approximately 79% of our revenue is derived from indirect sales
channels, including authorized resellers and distributors. Most of our resellers
and distributors are not granted rights to return products to us after purchase,
and actual product returns from them have been insignificant to date. However,
some channel partners, particularly those who resell our Audio products, have
agreements with us that grant them limited rights of return, stock rotation and
price protection. We record a provision for estimated returns and other
allowances in the same period that related revenues are recorded. Management
estimates must be made and used in connection with establishing and maintaining
a sales allowance for expected returns and other credits. In making such
estimates, management analyzes historical returns and credits and considers the
impact of new product introductions, changes in customer demand, current
economic conditions, and other known factors. Material differences may result in
the amount and timing of our revenue for any period if management makes
judgments or uses estimates that prove to be materially different from actual
experience.
We use the residual method to recognize revenues when an order includes one
or more elements to be delivered at a future date and evidence of the fair value
of all undelivered elements exists. Under the residual method, the fair value of
the undelivered elements is deferred and the remaining portion of the
arrangement fee is recognized as revenues. If evidence of the fair value of one
or more undelivered elements does not exist, we defer all revenues and recognize
them when delivery of those elements occurs or when fair value can be
established.
At the time of a sale transaction, Avid must make an assessment of the
collectibility of the amount due from the customer. Revenue is only recognized
at that time if management is reasonably assured that collection will occur. In
making this assessment, management considers customer credit-worthiness and
historical payment experience. At that same time, we assess whether the fee
associated with the order is fixed or determinable, considering the payment
terms of the transaction, our collection experience in similar transaction
without making concessions, and our involvement, if any, in third-party
financing transactions, among other factors. If a significant portion of the fee
is due after our normal payment terms, which are generally 30 days (but up to 90
days) after the invoice date, we generally consider that the fee is not fixed or
determinable.
Allowance for Bad Debts and Reserves for Recourse under Financing Transactions
Avid maintains allowances for bad debts for estimated losses resulting from
the inability of its customers to make required payments for products or
services. When evaluating the adequacy of the allowance for doubtful accounts,
we analyze accounts receivable balances, historical bad debts, customer
concentrations, customer credit-worthiness and current economic trends. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Avid, through a third party, provides lease financing options to some of
its customers. Under the terms of these leases, which are generally three years,
we remain liable for any unpaid principal balance upon default by the end-user,
but such liability is limited in the aggregate. We record revenue from these
transactions upon the shipment of our products since we believe that our
collection experience with similar transactions supports our assessment that the
fee is fixed or determinable. We maintain a reserve for estimated recourse
losses under this financing program based on historical default rates. While we
have experienced insignificant losses from defaults to date under this program,
deterioration in the financial condition of our customers who participated in
the program could require additional reserves.
Inventories
Inventory in the digital media market, including our inventory, is subject
to rapid technological change or obsolescence. Our management regularly reviews
inventory quantities on hand and writes down inventory for estimated
obsolescence or unmarketability based upon assumptions about future inventory
demand, generally for the following twelve months, and market conditions. If
actual future demand or market conditions are less favorable than those
estimated by management, additional inventory write-downs might be required.
Income Tax Assets
We record deferred tax assets and liabilities based on the net tax effects
of tax credits, operating loss carryforwards and temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. We then assess the likelihood that
our deferred tax assets will be recovered from future taxable income and, to the
extent we believe that recovery is not likely, we establish a valuation
allowance. The valuation allowance is based on our estimates of taxable income
in each jurisdiction in which we operate and the period over which our deferred
tax assets will be recoverable. Through December 31, 2001, we believe it is more
likely than not that all of our deferred tax assets will not be realized and,
accordingly, we have recorded a valuation allowance against substantially all of
17
our deferred tax assets. If results of operations in the future indicate that
some or all of the deferred tax assets will be recovered, the reduction of the
valuation allowance will be recorded as a tax benefit during one period or over
many periods.
RESULTS OF OPERATIONS
The following table sets forth certain items from our consolidated
statements of operations as a percentage of net revenues for the periods
indicated:
For the Year Ended December 31,
-------------------------------
2001 2000 1999
-------------------------------
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 49.1% 49.2% 45.5%
------- ------- -------
Gross profit 50.9% 50.8% 54.5%
------- ------- -------
Operating expenses:
Research and development 19.8% 17.4% 19.7%
Marketing and selling 26.0% 25.1% 28.7%
General and administrative 5.4% 5.8% 6.2%
Restructuring and other costs, net 1.9% 3.2%
Amortization of acquisition-related intangible assets 7.2% 14.0% 17.7%
------- ------- -------
Total operating expenses 60.3% 62.3% 75.5%
------- ------- -------
Operating loss (9.4%) (11.5%) (21.0%)
Other income (expense), net 1.3% 0.8% 0.8%
------- ------- -------
Loss before income taxes (8.1%) (10.7%) (20.2%)
Provision for income taxes 0.7% 1.1% 10.2%
------- ------- -------
Net loss (8.8%) (11.8%) (30.4%)
======= ======= =======
Excluding amortization of acquisition-related intangible assets and, in
2001 and 1999, restructuring and other costs, net, pro forma operating income
(loss) was (0.3%), 2.5% and (0.1%) of net revenues in 2001, 2000 and 1999,
respectively.
Net Revenues
Our net revenues have been derived mainly from the sales of computer-based
digital, non-linear media editing systems and related peripherals, licensing of
related software, and sales of related software maintenance contracts. This
market has been, and we expect it 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 8.7% from $476.1 million in 2000 to
$434.6 million in 2001. This decrease occurred across product families in both
our Video and Film Editing and Effects ("Video") business and our Professional
Audio ("Audio") business. We believe that a portion of this overall decline was
due to the general worldwide economic slowdown, and if this slowdown continues,
it may impact our future revenues as well. Certain product families within the
Video business segment, in particular broadcast products and services, Avid
Unity, and Avid|DS HD (introduced in early 2001), showed growth year-over-year,
but this growth was more than offset by declines in other product families,
including Media Composer. The increase in broadcast product and service revenue
was attributable primarily to the acquisitions of iNews in January 2001 and
Pluto in September 2000. The decline in the Audio business segment was primarily
attributable to weaker third and fourth quarter revenues as customers
anticipated the release in early January 2002 of the new HD products.
Net revenues increased 5.2% from $452.6 million in 1999 to $476.1 million
in 2000. The increase in net revenues during 2000 was attributable primarily to
our Audio business segment, which had a revenue increase of $30.9 million
year-over-year attributable to the Digi 001 product, introduced in late 1999,
and distribution of third-party audio-related and Pro Tools compatible products.
Certain products within the Video business, in particular Avid Unity MediaNet,
introduced in late 1999, and Avid Xpress DV, introduced in early 2000,
contributed to an increase in revenue, but this increase was more than offset by
declines in other product families.
18
During 2001, we began shipments of Avid|DS HD, Newscutter XP v2.0,
Newscutter XP Mobile, Avid Unity MediaNet v2.0, Avid Unity LANshare 1.0 and
SOFTIMAGE|XSI v2.0, as well as several point-releases of other existing
products. We also began offering iNews products and services as a result of the
acquisition in January 2001. In 2000, we introduced several new products and
version updates of existing products, including Avid Xpress DV on IBM
IntelliStation for the Windows NT platform, SOFTIMAGE|XSI, Trilligent Cluster,
Avid Unity for News and NewsCutter Effects v2.0. We also began offering Pluto
products and services as a result of the acquisition in September 2000.
Net revenues derived through indirect channels were approximately 79% for
2001, compared to 85% of net revenue for 2000 and 89% of net revenue for 1999.
The trend to direct selling during 2001 is due primarily to the growth in sales
to our broadcast customers that generally require a longer selling cycle with
more direct support.
International sales (sales to customers outside the United States and
Canada) accounted for 47.6% of our 2001 net revenues, compared to 51.1% for 2000
and 51.3% for 1999. International sales decreased by approximately $36.6 million
or 15.0% in 2001 compared to 2000 and increased by approximately $11.3 million
or 4.9% in 2000 compared to 1999. The decrease in international sales for 2001
compared to 2000 reflected decreases in Europe primarily and, to a lesser
extent, the Asia Pacific region and Latin America. Management believes these
declines are attributable to the economic climate and the impact of currency
translation. The increase in international sales for 2000 compared to 1999
reflected increases in the Asia Pacific region primarily and, to a lesser
extent, Latin America, partially offset by decreases in Europe.
Gross Profit
Cost of revenues consists primarily of costs associated with the
procurement of components; the assembly, testing, and distribution of finished
products; warehousing; post-sales customer support costs; and provisions for
inventory obsolescence. The resulting gross profit fluctuates based on factors
such as the mix of products sold, the cost and proportion of third-party
hardware and software included in the systems sold by the Company, the offering
of product upgrades, price discounts and other sales promotion programs, the
distribution channels through which products are sold, the timing of new product
introductions, and sales of aftermarket hardware products. Gross margin
increased to 50.9% in 2001 compared to 50.8% in 2000, which had decreased from
54.5% in 1999. The increase during 2001 reflects lower vendor material costs,
manufacturing efficiencies, and in the Video business, a favorable product mix.
These increases were partially offset by a shift to lower margin Audio products
and the negative impact of currency fluctuations, primarily a weakening of the
Japanese yen, and to a lesser extent the euro, resulting in lower U.S. dollar
equivalent revenue. The decrease in the gross margin during 2000 from 1999
reflects the impact of currency fluctuations, primarily a weakening of the euro
resulting in lower U.S. dollar equivalent revenue, a shift to lower-margin
products and upgrades, pricing and other sales promotion programs, partially
offset by efficiencies in manufacturing.
Research and Development
Research and development expenses increased by $3.2 million, or 3.9%, in
2001 compared to 2000 and decreased by $6.0 million, or 6.8%, in 2000 compared
to 1999. The increase in expenditures in 2001 was primarily due to increased
personnel-related expenses and facility costs, primarily associated with the
acquisitions of iNews in January 2001 and Pluto in September 2000 and the
relocation of Digidesign's facilities in late 2001, partially offset by a
reduction in variable employee compensation expense. The decrease in
expenditures in 2000 compared to 1999 was primarily the result of restructuring
actions implemented in late 1999. Spending reductions were realized during 2000
in personnel and occupancy costs and were partially offset by investments in
several new initiatives, including Internet endeavors and the broadcast business
as well as the Digidesign Audio business and lower-end products such as Avid
Xpress DV. Research and development expenses increased as a percentage of net
revenues, to 19.8% in 2001 from 17.4% in 2000, primarily due to the increased
expenses noted above and the decreased revenue base in 2001. Research and
development expenses decreased as a percentage of net revenues to 17.4% in 2000
from 19.7% in 1999, primarily due to our 1999 restructuring actions coupled with
an increased revenue base in 2000.
Marketing and Selling
Marketing and selling expenses decreased by $6.4 million, or 5.4%, in 2001
compared to 2000 and decreased by $10.4 million, or 8.0%, in 2000 compared to
1999. The decrease in expenditures in 2001 was primarily due to reductions in
bad debt expense, variable employee compensation and trade show expenditures.
These decreases were partially offset by twelve months of incremental iNews
costs. The decrease in expenditures in 2000 compared to 1999 was primarily the
result of restructuring actions implemented in late 1999. Spending reductions
were realized during 2000 in personnel related costs, occupancy and marketing
19
related costs. These reductions were slightly offset by investments in several
new areas including our Internet initiatives. Marketing and selling expenses
increased as a percentage of net revenues to 26.0% in 2001 from 25.1% in 2000,
primarily due to a decreased revenue base in 2001. Marketing and selling
expenses decreased as a percentage of net revenues, to 25.1% in 2000 from 28.7%
in 1999, primarily due to the 1999 restructuring actions discussed above,
coupled with an increased revenue base in 2000.
General and Administrative
General and administrative expenses decreased by $4.2 million, or 15.2%, in
2001 compared to 2000 and decreased by approximately $0.6 million, or 2.3%, in
2000 compared to 1999. The decrease in expenses in 2001 was primarily the result
of reduced personnel-related costs, including variable compensation expense,
recruiting and relocation costs and executive severance benefits. The decrease
in expenses in 2000 compared to 1999 primarily represented reduced
personnel-related costs related to restructuring actions implemented in late
1999, consulting fees, legal fees and travel. These reductions in 2000 were
partially offset by executive severance benefits, profit sharing expense and
retention programs. General and administrative expenses decreased as a
percentage of net revenues to 5.4% in 2001 from 5.8% in 2000, primarily due to
the reductions in personnel related costs discussed above. General and
administrative expenses decreased as a percentage of net revenues to 5.8% in
2000 from 6.2% in 1999, as a result of reduced spending due to the restructuring
actions and an increased revenue base.
Restructuring and Other Costs
In March 2001, we implemented a restructuring plan related to the Softimage
operations. As a result, 47 employees were terminated, primarily in Montreal,
Canada, and we vacated a leased facility in California. In connection with this
plan, we 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 June
2001, we implemented a restructuring plan related to the Avid Internet Solutions
operations resulting in the termination of 7 employees and a restructuring
charge of $0.2 million for severance and related costs. In connection with these
plans, we made cash payments during 2001 of $1.4 million, of which $1.3 million
related to personnel costs and $0.1 million was facilities-related.
In August 2001, we implemented a restructuring plan to further decrease
costs through the consolidation of operations and the reduction of approximately
140 jobs worldwide. In connection with this plan, we recorded a charge to
operating expenses of $8.5 million in the third quarter. The restructuring
charge included approximately $6.1 million for severance and related costs of
terminated employees and $2.4 million for facility vacancy costs, of which $1.0
million represented non-cash charges relating to the disposition of leasehold
improvements which will be abandoned upon vacating the related properties in
2002. This restructuring plan is expected to result in annual cost savings of
approximately $11.0 million. During 2001, we made cash payments of $4.7 million
related to personnel severance-related costs. The remaining accrual balance at
December 31, 2001 was $3.8 million, of which $1.4 million relates to personnel
costs and $2.4 million relates to facility costs.
In November 1999, we implemented a restructuring plan to strategically
refocus the Company and bring operating expenses in line with net revenues, with
the goal of restoring long-term profitability and supporting our new strategic
initiatives. The process included a re-evaluation of our core competencies,
technology plans and business model, and was completed in tandem with
development of our fiscal 2000 operating plan. The major elements of the
restructuring plan included the termination of certain employees and the
vacating of certain facilities. The plan also provided for no further releases
of a limited number of existing product offerings, including stand-alone
Marquee, Avid Cinema, Media Illusion and Matador. In connection with this plan,
we recorded a restructuring charge of $9.6 million. The charge included
approximately $6.6 million for severance and related costs for 209 employees on
a worldwide basis, $2.4 million for facility vacancy costs and approximately
$0.6 million of non-cash charges relating to the disposition of certain fixed
assets that would no longer be used. At the time of the charge, the Company
expected that these restructuring actions would result in an expense reduction
of approximately $18.0 million on an annualized basis and results, net of
incremental investments contemplated at the time the restructuring plan was
implemented, have been in accordance with management's expectations. Since 1999,
we have made cash payments of $7.9 million, of which $6.6 million was related to
personnel costs and $1.2 million was facilities-related. The remaining accrual
balance at December 31, 2001 was $1.2 million, the majority of which relates to
estimated losses on office space in the United Kingdom which we vacated and
sublet.
20
In December 1999, in connection with the resignation of two executive
officers, we incurred and recorded a charge of $2.9 million for termination
benefits as specified in the employment contracts of the officers. Through
December 31, 2001, cash payments of approximately $2.4 million have been made in
full satisfaction of our obligations. As a result, in 2001, we recorded a credit
of $0.5 million to restructuring and other costs, net, associated with a
reduction in the estimated liability.
In December 1999, the Company entered into an agreement to sell its Italian
subsidiary to a third party who established the entity as a distributor of Avid
products. The sale was completed in the first quarter of 2000. The Company
recorded in 1999 a loss of approximately $2.0 million related to the sale,
including a reserve of $1.0 million for the Company's guarantee of the new
entity's line of credit with a bank. This guarantee ended on January 31, 2001
without requiring any cash payment by Avid. Accordingly, in the quarter ended
March 31, 2001, the Company recorded a credit associated with the reversal of
the reserve, which was included under the caption restructuring and other cost,
net, where the charge was originally recorded. In addition, in the quarter ended
June 30, 2001, the Company received a payment of $0.3 million under the note
received as partial consideration from the buyers of the Italian subsidiary.
This payment was recorded as a credit to restructuring and other costs, net
since the note was fully reserved when received. Any future payments to be
received under the note will be similarly accounted for only when received.
Amortization of Acquisition-related Intangible Assets
In connection with our August 1998 acquisition of the business of
Softimage, we allocated $127.8 million to goodwill and $88.2 million to
intangible assets consisting of completed technologies, work force, and trade
name. During 1999, a balance sheet purchase accounting adjustment was recorded
which decreased goodwill by approximately $6.9 million. Included in the
operating results for 2001, 2000 and 1999 is amortization of these intangible
assets and goodwill of $28.5 million, $66.5 million, and $79.9 million,
respectively. As of December 31, 2001, these intangible assets, including
goodwill, were fully amortized.
During 2001 and 2000, we recorded additional intangible assets as we
acquired the following companies: iNews, LLC, The Motion Factory, Inc. and Pluto
Technologies International Inc. In connection with these acquisitions, we
allocated $6.5 million to intangible assets consisting of completed technologies
and work force. Included in the operating results for 2001 and 2000 is
amortization of these intangible assets of $2.7 million and $0.3 million,
respectively. The unamortized balance of the intangible assets relating to these
acquisitions was $3.5 million at December 31, 2001.
Other Income and Expense, Net
Other income and expense, net, generally consists of interest income,
interest expense and equity in income of non-consolidated companies. During
2001, other income and expense, net, increased $1.8 million from $3.7 million.
The increase was primarily due to a net gain of $4.0 million recorded upon the
sale of all common stock received by us in connection with the sale in 2000 of
our investment in Avid Sports LLC, including additional shares of common stock
received during the second quarter of 2001. This increase was partially offset
by a decrease in interest income, primarily attributable to a decline in
interest rates; the elimination of our equity in the net income of iNews as a
result of the acquisition of the remaining ownership interest in 2001; and an
impairment charge of $1.1 million on an unconsolidated entity accounted for
under the cost method. During 2000, other income and expense, net, increased to
$3.7 million from $3.5 million in 1999. The increase was primarily related to an
increase in income related to non-consolidated companies, which was partially
offset by an increase in interest expense.
Provision for Income Taxes
Our effective tax rate was 8%, 10% and 51%, respectively, for 2001, 2000,
and 1999. The tax rate for 2001 includes an addition to the valuation allowance
against all U.S.-related deferred tax assets and an addition to the valuation
allowance against a majority of the foreign deferred tax assets. Based on the
level of deferred tax assets as of December 31, 2001 and the level of historical
U.S. and foreign taxable income, we have determined that the uncertainty
regarding the realization of these assets is sufficient to warrant the
establishment of a valuation allowance. Excluding the impact of the valuation
allowance, our effective tax rate would have been (34%) for 2001. This differs
from the Federal statutory rate of (35%) due primarily to state taxes, the U.S.
Federal Research Tax Credit and our foreign subsidiaries, which are taxed at
different rates.
The tax rate for 2000 includes an addition to the valuation allowance
against all U.S.-related deferred tax assets and the establishment of a
valuation allowance against a majority of the foreign deferred tax assets.
Excluding the impact of the valuation allowance, our effective tax rate would
have been (37%) for 2000. This differs from the Federal statutory rate of (35%)
due primarily to state taxes, the U.S. Federal Research Tax Credit and our
foreign subsidiaries, which are taxed at different rates.
21
The tax rate for 1999 includes the impact of establishing a full valuation
allowance against U.S.-related deferred tax assets. Excluding the impact of the
valuation allowance, our effective tax rate would have been (41%) for 1999. This
differs from the Federal statutory rate of (35%) due primarily to state taxes
and the U.S. Federal Research Tax Credit.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date through both private and public sales
of equity securities as well as through cash flows from operations. As of
December 31, 2001, our principal sources of liquidity included cash, cash
equivalents, and marketable securities totaling approximately $73.0 million.
With respect to cash flow, net cash provided by operating activities was
$8.7 million in 2001 compared to $12.1 million in 2000 and $7.6 million in 1999.
During 2001, cash generated from operating activities reflects net income after
adjustment for depreciation and amortization, as well as a decrease in accounts
receivable. This was partially offset by reductions in accounts payable and
accrued expenses. During 2000, cash generated from operating activities reflects
net income after adjustment for depreciation and amortization and provision for
doubtful accounts, offset by cash uses attributable primarily to an increase in
accounts receivable and inventories. During 1999, net cash provided by operating
activities primarily reflects net income after adjustment for depreciation and
amortization and changes in deferred taxes, as well as a decrease in accounts
receivable. This was offset by reductions in income taxes payable and accrued
expenses.
Net cash flow used in investing activities was $27.9 million in 2001,
compared to $1.7 million in 2000 and $10.1 million in 1999. We purchased $15.5
million of property and equipment during 2001, compared to $7.4 million and
$22.6 million in 2000 and 1999, respectively. Purchases in 2001 were primarily
of computers and furniture and fixtures purchased in connection with the
relocation of the Digidesign facility to Daly City, California and hardware and
software to support research and development activities and our information
systems. Purchases in 2000 were primarily of equipment to support research and
development activities. Purchases in 1999 were primarily of hardware and
software for our information systems and equipment to support research and
development activities. Our capital spending program for 2002 is currently
expected to be approximately $9.5 million, primarily for hardware and software
to support activities in the research and development, customer service, and
sales and marketing areas. However, this amount could increase in the event we
enter into strategic business acquisitions or for other reasons.
During 2001, we also made a cash payment, net of cash acquired, of $5.4
million for the purchase of the remaining 50% ownership interest in iNews. Also
during 2001, we received $4.0 million in cash upon the sale of all common stock
received by us in connection with the sale in 2000 of our investment in Avid
Sports LLC. During 2000, we also made a cash investment of $2.1 million in
Rocket Network, Inc. and purchased the assets of two companies, Pluto and The
Motion Factory, for a total of approximately $2.0 million in cash and $0.3
million of guaranteed bonuses paid in 2001. In connection with the acquisitions
of Pluto and The Motion Factory, we may be required to make future contingent
cash payments limited in the aggregate to an additional $13.5 million, dependent
upon future revenues and/or gross margin levels of products acquired from Pluto
and The Motion Factory through March 2002 and December 2004, respectively.
We made a payment of $8.0 million in 1999 against a note issued to
Microsoft Corporation in connection with the acquisition of Softimage. In
February 2002, we made an additional payment of approximately $13.0 million in
full satisfaction of our note to Microsoft. (See Note R to the Notes to
Consolidated Financial Statements).
During 2001 and 2000, we generated cash of approximately $1.2 million and
$10.1 million, respectively, net of common stock repurchases, from the issuance
of common stock related to the exercise of stock options and our employee stock
purchase plan. During 1999, we used approximately $16.0 million for financing
activities reflecting the acquisition of $19.7 million of treasury stock, which
was offset by the issuance of common stock related to the exercise of stock
options and the employee stock purchase plan.
During 1998, we announced that our board of directors had authorized the
repurchase of up to 3.5 million shares of our common stock. Purchases were made
in the open market or in privately negotiated transactions. During 2001, we
repurchased 232,000 shares in the open market at a cost of approximately $4.2
million, which completed this stock buyback program. We have used, and plan to
continue to use, any repurchased shares for our employee stock plans.
As a result of the various restructuring actions taken by the Company
during 2001 and prior periods, we have commitments to pay severance and other
termination benefits to employees of approximately $1.5 million over the next
twelve months. In connection to these restructuring actions we also have
facility-related cash obligations of approximately $2.6 million as a result of
losses to be incurred on subleases of space or lease vacancies. These payments
will be made over the remaining terms of the leases, which expire in 2010,
unless we are able to negotiate an earlier termination. All restructuring
related payments will be funded through working capital.
22
We believe existing cash, cash equivalents, marketable securities and funds
generated from operations will be sufficient to meet our cash requirements for
the foreseeable future. In the event we require additional financing, we believe
that we will be able to obtain such financing; however, there can be no
assurance that we would be successful in doing so, or that we could do so on
favorable terms.
CONTRACTUAL AND COMMERCIAL OBLIGATIONS
The following table sets forth future payments that we are obligated to
make under existing debt agreements, leases and other arrangements (in
thousands):
Less than 1 After
Total Year 1 - 3 Years 4 - 5 Years 5 Years
--------------- --------------- ---------------- --------------- ----------------
Long-term debt $13,020 $13,020
Operating leases 102,018 $16,929 26,561 $22,479 $36,049
Unconditional purchase obligations 7,600 7,600
--------------- --------------- ---------------- --------------- ----------------
$122,638 $24,529 $39,581 $22,479 $36,049
=============== =============== ================ =============== ================
Other contractual arrangements that may result in cash payments consist of
the following (in thousands):
Total Less than 1 Year 1 - 3 Years
----------------- ---------------------- ------------------
Transactions with recourse $21,500 $7,167 $14,333
Lines of credit 283 283
Stand-by letter of credit 5,850 5,850
----------------- ---------------------- ------------------
$27,633 $7,450 $20,183
================= ====================== ==================
We, through a third party, are a party to certain lease financing
transactions with our customers. Under the terms of these financing
arrangements, which are generally three years, we remain liable for any unpaid
principal balance upon default by the end-user. Our liability is limited in the
aggregate based on a percentage of initial amounts funded or, in certain cases,
amounts of unpaid balances. As of December 31, 2001, our maximum exposure under
this program was $21.5 million.
Two of our international subsidiaries have unsecured overdraft facilities
available that permit aggregate borrowings of approximately 325,000 euros
(approximately $0.3 million at December 31, 2001). No amounts were outstanding
under these facilities at December 31, 2001.
We have a stand-by letter of credit at a bank that is used as a security
deposit in connection with our Daly City, California office space lease. In the
event of default on our lease commitment, the landlord would be eligible to draw
against this letter of credit to a maximum of $5.8 million, subject to an annual
reduction of approximately $0.8 million but not below $2.0 million. The letter
of credit will remain in effect at this level throughout the remaining lease
period, which runs through September 2009. As of December 31, 2001, we were not
in default of this lease.
We conduct our business globally and, consequently, our results from
operations are exposed to movements in foreign currency exchange rates. We enter
into forward exchange contracts, which generally have one-month maturities, to
reduce exposures associated with intercompany and third-party receivables and
payables. At December 31, 2001, we are in a sell position with respect to the
euro, Japanese yen, Australian dollar and in a buy position with respect to the
British pound and the Canadian dollar. Our net currency position at December 31,
2001 is summarized as follows (in thousands):
Approximate
U.S. Dollar Equivalent
----------------------
euro $13,323
Canadian dollar 15,517
Japanese yen 7,469
British pound 536
Australian dollar 229
------------
$37,074
============
23
EUROPEAN MONETARY UNION
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their sovereign currencies and
the euro. As of that date, the participating countries agreed to adopt the euro
as their common legal currency. The euro is now traded on currency exchanges and
may be used in business transactions. On January 1, 2002, euro notes and coin
were put into circulation and the process of withdrawing legacy currency notes
and coin began. The legacy currencies will cease to be legal tender effective no
later than June 30, 2002.
We began conducting certain business transactions in the euro on January 1,
1999, and changed our functional currency for the effected countries to the euro
on January 1, 2000. The conversion to the euro has not had and is not expected
to have a significant operational impact or a material financial impact on the
results of operations, financial position, or liquidity of our European
businesses.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2001, the Emerging Issues Task Force ("EITF"), a committee of
the Financial Accounting Standards Board ("FASB"), reached a consensus on EITF
Issue 01-9, "Accounting for Consideration Given by a Vendor to a Customer or
Reseller of the Vendor's Products" ("EITF 01-9"). EITF 01-9 presumes that
consideration from a vendor to a customer or reseller of the vendor's products
is a reduction of the selling prices of the vendor's products and, therefore,
should be characterized as a reduction of revenue when recognized in the
vendor's income statement which could lead to negative revenue under certain
circumstances. Revenue reduction is required unless consideration relates to a
separate identifiable benefit and the benefit's fair value can be established,
in which case such amounts may be recorded as operating expenses. In accordance
with its provisions, the Company will adopt EITF 01-9 on January 1, 2002. The
Company sponsors certain cooperative marketing programs that are required to be
accounted for under EITF 01-9. Based on a review of these programs, management
believes that the programs meet the criteria for accounting for such amounts as
operating expenses, consistent with the Company's existing policy and, as a
result, does not anticipate that the adoption of EITF 01-9 will have a material
impact on the Company's results from operations.
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. We are in the
process of adopting SFAS 142 and we are making the determinations as to what our
reporting units are and what amounts of goodwill, intangible assets, other
assets and liabilities should be allocated to those reporting units. In
connection with the adoption of SFAS 142, we expect to reclassify to goodwill
$1.1 million of previously recorded acquired work force included in total
intangible assets of $3.5 million at December 31, 2001 and, as a result, will
cease amortizing such amount.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 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 FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), and
to develop a single accounting model, based on the framework established in SFAS
121, for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired. SFAS 144 supersedes SFAS 121; however, it retains
the fundamental provisions of SFAS 121 for (1) the recognition and measurement
of the impairment of long-lived assets to be held and used and (2) the
measurement of long-lived assets to be disposed of by sale. SFAS 144 supersedes
the accounting and reporting provisions of Accounting Principles Board No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB 30"), for segments of a business to be disposed
of. However, SFAS 144 retains APB 30's requirement that entities report
discontinued operations separately from continuing operations and extends that
reporting requirement to "a component of an entity" that either has been
disposed of or is classified as "held for sale." SFAS 144 also amends the
24
guidance of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a temporarily
controlled subsidiary. SFAS 144 became effective for the Company on January 1,
2002 and, generally, its provisions are to be applied prospectively. The Company
does not expect the application of SFAS 144 to have a material impact on the
Company's financial position or results of operations.
25
Certain Factors That May Affect Future Results
Some of the statements in this Form 10-K 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 recent 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.
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
26
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.
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 and thereby reduce 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.
27
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.
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 captial
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.
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.
28
Our future growth could be harmed if we lost the services of our key personnel.
Our success depends upon the services of a number of key current employees.
The loss of the services of one or more of these key employees could harm our
business. Our success also depends upon our ability to attract highly skilled
new employees. Competition for such employees is intense in the industries and
geographic areas in which we operate. If we are unable to compete successfully
for such employees, our business could suffer.
Our 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.
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 I, "Commitments and
Contingencies" in the Company's audited 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.
29
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.
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.
30
ITEM 7A. 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 December 31, 2001, the Company had $37.1 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
twelve-month period ended December 31, 2001, net gains of $1.8 million resulting
from forward-exchange contracts were recorded, which partially offset net
transaction losses of $2.0 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 December 31, 2001, the Company held $54.8 million in cash equivalents
and marketable securities, including short-term government and government agency
obligations. Marketable securities are classified as "available for sale" and
are recorded on the balance sheet at market value, with any unrealized gain or
loss recorded in 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.
31
AVID TECHNOLOGY, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2001
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION
32
AVID TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITEM 8:
Report of Independent Accountants................................ 34
Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999............................................ 35
Consolidated Balance Sheets as of December 31, 2001 and 2000..... 36
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999............................... 37
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999............................................ 38
Notes to Consolidated Financial Statements....................... 39
Consolidated Financial Statement Schedule for the years ended December 31, 2001,
2000 and 1999 included in Item 14(d):
Schedule II - Supplemental Valuation and Qualifying Accounts..... F-1
Schedules other than that listed above have been omitted since the required
information is not present, or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements or the notes thereto.
33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Avid Technology, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Avid
Technology, Inc. and its subsidiaries at December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 30, 2002, except for Note R
which is as of February 6, 2002
34
AVID TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Year Ended December 31,
---------------------------------------
2001 2000 1999
--------- --------- ---------
Net revenues $434,638 $476,090 $452,555
Cost of revenues 213,572 234,424 205,877
--------- --------- ---------
Gross profit 221,066 241,666 246,678
--------- --------- ---------
Operating expenses:
Research and development 86,140 82,900 88,932
Marketing and selling 113,053 119,469 129,889
General and administrative 23,313 27,504 28,147
Restructuring and other costs, net 8,268 14,469
Amortization of acquisition-related intangible assets 31,168 66,872 79,879
--------- --------- ---------
Total operating expenses 261,942 296,745 341,316
--------- --------- ---------
Operating loss (40,876) (55,079) (94,638)
Interest income 2,546 3,634 4,304
Interest expense (1,473) (1,275) (686)
Other income (expense), net 4,456 1,371 (159)
--------- --------- ---------
Loss before income taxes (35,347) (51,349) (91,179)
Provision for income taxes 2,800 5,000 46,369
--------- --------- ---------
Net loss ($38,147) ($56,349) ($137,548)
========= ========= =========
Net loss per common share - basic and diluted ($1.49) ($2.28) ($5.75)
========= ========= =========
Weighted average common shares outstanding - basic and diluted 25,609 24,683 23,918
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
35
AVID TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
December 31,
------------------------
2001 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $45,613 $64,875
Marketable securities 27,348 18,331
Accounts receivable, net of allowances of $11,497 and
$11,384 at December 31, 2001 and 2000, respectively 78,010 90,047
Inventories 21,690 21,102
Deferred tax assets, net 695 1,014
Prepaid expenses 6,722 6,102
Other current assets 3,440 4,634
--------- ---------
Total current assets 183,518 206,105
Property and equipment, net 27,164 26,136
Acquisition-related intangible assets, net 3,462 30,316
Other assets 1,662 3,925
--------- ---------
Total assets $215,806 $266,482
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $19,076 $28,775
Accrued compensation and benefits 13,023 21,072
Accrued expenses and other current liabilities 26,125 23,155
Income taxes payable 10,932 12,039
Deferred revenues 28,872 24,479
--------- ---------
Total current liabilities 98,028 109,520
--------- ---------
Long-term debt and other liabilities 13,020 13,449
Purchase consideration - 5,663
Commitments and contingencies (Note I)
Stockholders' equity:
Preferred stock, $.01 par value, 1,000 shares authorized;
no shares issued or outstanding
Common stock, $.01 par value, 50,000 shares authorized;
26,591 and 26,591 shares issued and 26,085 and 25,667
shares outstanding at December 31, 2001 and 2000, respectively 266 266
Additional paid-in capital 357,446 359,103
Accumulated deficit (235,926) (197,779)
Treasury stock, at cost, 506 and 924 shares at December 31,
2001 and 2000, respectively (8,035) (15,622)
Deferred compensation (1,294) (4,752)
Accumulated other comprehensive loss (7,699) (3,366)
--------- ---------
Total stockholders' equity 104,758 137,850
--------- ---------
Total liabilities and stockholders' equity $215,806 $266,482
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
36
AVID TECHNOLOGY, INC.
Consolidated Statements of Stockholders' Equity
(in thousands)
Accumulated
Retained Other Total
Shares of Common Additional Earnings Compre- Stock-
Common Stock Stock Paid-in (Accumulated) Treasury Deferred hensive holders'
Issued In Treasury Issued Capital Deficit) Stock Compensation Loss Equity
------------------------------------------------------------------------------------------------
Balances at December 31, 1998 26,591 (2,197) $265 $349,289 $14,338 ($68,024) ($3,773) ($1,784) $290,311
Purchase of treasury stock (1,183) (19,718) (19,718)
Stock issued pursuant to employee
stock plans 659 (11,931) (4,873) 21,253 4,449
Issuance of restricted stock 50 1 586 (587)
Conversion of purchase consideration 29,212 29,212
Restricted stock grants canceled
and compensation expense (30) (587) 2,507 1,920
Comprehensive loss:
Net loss (137,548) (137,548)
Net unrealized loss on
marketable securities (32) (32)
Translation adjustment (671) (671)
-----
Other comprehensive loss (703)
-----
Comprehensive loss (138,251)
------------------------------------------------------------------------------------------------
Balances at December 31, 1999 26,591 (2,701) 266 366,569 (128,083) (66,489) (1,853) (2,487) 167,923
Purchase of treasury stock (35) (460) (460)
Stock issued pursuant to employee
stock plans 1,503 (22,095) (9,530) 42,153 10,528
Issuance of restricted stock 378 (715) (3,817) 9,174 (4,638) 4
Options issued at below fair
market value 1,338 (1,338)
Conversion of purchase consideration 14,884 14,884
Restricted stock grants canceled
and compensation expense (69) (878) 3,077 2,199
Comprehensive loss:
Net loss (56,349) (56,349)
Net unrealized gain on
marketable securities 1,738 1,738
Translation adjustment (2,617) (2,617)
-------
Other comprehensive loss (879)
-------
Comprehensive loss (57,228)
------------------------------------------------------------------------------------------------
Balances at December 31, 2000 26,591 (924) 266 359,103 (197,779) (15,622) (4,752) (3,366) 137,850
Purchase of treasury stock (291) (5,054) (5,054)
Stock issued pursuant to employee
stock plans 756 (6,417) 12,641 6,224
Cancellation of options issued at
below fair market value (150) 150
Conversion of purchase consideration 5,519 5,519
Restricted stock grants canceled
and compensation expense (47) (609) 3,308 2,699
Comprehensive loss:
Net loss (38,147) (38,147)
Net change in unrealized gain
(loss) on marketable securities (1,733) (1,733)
Translation adjustment (2,600) (2,600)
-------
Other comprehensive loss (4,333)
-------
Comprehensive loss (42,480)
------------------------------------------------------------------------------------------------
Balances at December 31, 2001 26,591 (506) $266 $357,446 ($235,926) ($8,035) ($1,294) ($7,699) $104,758
================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
37
AVID TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Year Ended December 31,
----------------------------------------
2001 2000 1999
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($38,147) ($56,349) ($137,548)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 47,287 84,264 103,223
Provision for doubtful accounts 1,635 6,170 3,971
Compensation from stock grants and options 2,699 2,199 1,920
Changes in deferred tax assets and liabilities (329) 14 52,965
Loss on disposal of equipment 850
Equity in income of non-consolidated companies (1,252) (1,020)
Gain on sales of businesses (4,359)
Provision for restructuring charges, non-cash portion 1,030 541
Write-down of investment in non-consolidated company 1,100
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable 21,396 (23,677) 9,074
Inventories (498) (5,712) (4,252)
Prepaid expenses and other current assets 389 1,179 (813)
Accounts payable (10,677) 5,016 (245)
Income taxes payable (991) 7,052 (13,608)
Accrued expenses, compensation and benefits (10,175) (8,981) (8,054)
Deferred revenues (422) 1,955 (431)
----------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,686 12,110 7,593
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (15,522) (7,401) (22,588)
Payments for other long-term assets (358) (380) (3,005)
Proceeds from disposal of equipment 1,325
Proceeds from sales of businesses 4,359
Investments in non-consolidated companies (2,100)
Payments for business acquisitions, net of cash acquired (5,439) (1,990)
Payments on note issued in connection with acquisition (8,000)
Purchases of marketable securities (38,762) (31,861) (38,927)
Proceeds from sales of marketable securities 27,803 42,001 61,084
----------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (27,919) (1,731) (10,111)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (712)
Purchase of common stock for treasury (5,054) (460) (19,718)
Proceeds from issuance of common stock 6,224 10,532 4,449
----------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,170 10,072 (15,981)
----------------------------------------
Effects of exchange rate changes on cash and cash equivalents (1,199) (1,648) 1,667
----------------------------------------
Net increase (decrease) in cash and cash equivalents (19,262) 18,803 (16,832)
Cash and cash equivalents at beginning of year 64,875 46,072 62,904
----------------------------------------
Cash and cash equivalents at end of year $45,613 $64,875 $46,072
========================================
The accompanying notes are an integral part of the consolidated financial
statements.
38
AVID TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND OPERATIONS
Avid Technology, Inc. ("Avid" or the "Company") develops, markets, sells and
supports a wide range of software and systems for digital media production,
management and distribution. Digital media are media elements, whether video or
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. The Company's
products are used worldwide in production and post-production facilities, film
studios, network affiliates, independent and cable television stations,
recording studios, advertising agencies, government and educational
institutions, corporate communication departments and by Internet professionals.
Projects produced using the Company's products involve motion pictures and
prime-time television, music, video and recording artists.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Intercompany balances and transactions have been
eliminated. Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year 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.
Translation of Foreign Currencies
The functional currency of each of the Company's foreign subsidiaries is the
local currency, except for the Irish manufacturing branch whose functional
currency is the U.S. dollar. The assets and liabilities of the subsidiaries
whose functional currencies are other than the U.S. dollar are translated into
U.S. dollars at the current exchange rate in effect at the balance sheet date.
Income and expense items are translated using the average exchange rate for the
period. Cumulative translation adjustments are included in accumulated other
comprehensive income (loss), which is reflected as a separate component of
stockholders' equity. Foreign currency transaction and translation gains and
losses are included in results of operations.
The Company enters into foreign currency forward-exchange contracts, which
typically mature within one month, to hedge the exposure to foreign currency
fluctuations of expected intercompany and third-party receivables and payables
as well as foreign-currency cash balances. Gains and losses realized from the
forward contracts upon maturity are recorded in results of operations,
offsetting transaction and translation gains and losses on the related assets
and liabilities. Prior to contract maturity, the Company records on the balance
sheet at each reporting period the fair value of its forward-exchange contracts
and records any fair value adjustments in results of operations, due to the
immateriality of the adjustments that result from the short period that the
contracts are then outstanding. The cash flows related to the gains and losses
of foreign currency forward-exchange contracts are classified in the statements
of cash flows as part of the cash flows from operations.
The market risk exposure from forward contracts is assessed in light of the
underlying currency exposures and is mitigated by the short term of the
Company's contracts. Credit risk from forward contracts is minimized through the
placement of contracts with multiple financial institutions. (See Note O).
Cash and Cash Equivalents
Cash equivalents consist primarily of government and government agency
obligations. The Company considers all debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
39
Marketable Securities
Marketable securities consist of government and government agency obligations
and corporate equity securities. The Company classifies its marketable
securities as "available for sale" and reports them at fair value, with
unrealized gains and losses excluded from earnings and reported as an adjustment
to other comprehensive income (loss), which is reflected as a separate component
of stockholders' equity. The Company generally invests in securities that mature
within one year from the date of purchase.
Inventories
Inventories, principally purchased components, are stated at the lower of cost
(determined on a first-in, first-out basis) or market value. Inventory in the
digital media market, including the Company's inventory, is subject to rapid
technological change or obsolescence; therefore, utilization of existing
inventory may differ from the Company's estimates.
Property and Equipment
Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful life of the asset. Leasehold
improvements are amortized over the shorter of the useful life of the
improvement or the remaining term of the lease. Expenditures for maintenance and
repairs are expensed as incurred. Upon retirement or other disposition of
assets, the cost and related accumulated depreciation are eliminated from the
accounts and the resulting gain or loss is reflected in results of operations. A
significant portion of the property and equipment is subject to rapid
technological obsolescence; as a result, the depreciation and amortization
periods could ultimately shorten to reflect the change in future technology.
Acquisition-related Intangible Assets
Acquisition-related intangible assets result from the Company's acquisitions of
Softimage, TMF, Pluto and iNews (see Note F), which were accounted for under the
purchase method, and consist of the values of identifiable intangible assets
including completed technology, work force and trade name, as well as goodwill.
Goodwill is the amount by which the cost of acquired net assets exceeded the
fair values of those net assets on the date of purchase. Acquisition-related
intangible assets are reported at cost, net of accumulated amortization.
Identifiable intangible assets are amortized on a straight-line basis over their
estimated useful lives of two to four years. Goodwill is amortized on a
straight-line basis over three years.
Long-Lived Assets
The Company periodically evaluates the existence of long-lived asset
impairments. Recoverability of long-lived assets is assessed at each reporting
period by comparing the carrying value to undiscounted expected cash flows,
considering a number of factors including past operating results, budgets and
economic projections, market trends and product development cycles.
Purchase Consideration
In conjunction with the acquisition of Softimage in 1998, the Company issued
stock options to retained employees. As agreed with the seller, the value of a
subordinated note payable to the seller was increased by $39.71 for each share
underlying options that became forfeited by employees (see Note F). At the date
of acquisition, the Company recorded these options as purchase consideration on
the balance sheet at a value of $68.2 million. As these options became vested,
additional paid-in capital was increased or, alternatively, as the options were
forfeited, the note payable to the seller was increased, with purchase
consideration being reduced by a corresponding amount in either case. As of
December 31, 2001, all stock options issued to retained employees had either
vested or had been forfeited, reducing the purchase consideration to zero.
Revenue Recognition
The Company recognizes revenue from sales of software or products including
proprietary software generally upon receipt of a signed purchase order or
contract and product shipment to distributors or end users, provided that
collection is reasonably assured, the fee is fixed or determinable, and all
other revenue recognition criteria of SOP 97-2, "Software Revenue Recognition,"
as amended, are met. The Company's products do not require significant
production, modification or customization of software. Installation of the
products is generally routine, requires insignificant effort and is not
40
typically performed by the Company. However, certain transactions, those
typically involving orders from end-users of a significant number of products
for a single customer site, may require that Avid perform an installation effort
that is deemed by the Company to be non-routine and complex. In these
situations, the Company does not recognize revenue from either the products
shipped or the installation services until the installation is complete. In
addition, if such orders include a customer acceptance provision, no revenue is
recognized until the customer's acceptance of the products and services has been
received or the acceptance period has lapsed.
The Company recognizes revenue from maintenance contracts on a ratable basis
over their term, typically twelve months, and recognizes revenue from training,
installation or other services as the services are performed. Revenues from
services were not material in relation to total revenues for all periods
presented.
The Company uses the residual method to recognize revenues when an order
includes one or more elements to be delivered at a future date and evidence of
the fair value of all undelivered elements exists. Under the residual method,
the fair value of the undelivered elements is deferred and the remaining portion
of the arrangement fee is recognized as revenues. If evidence of the fair value
of one or more undelivered elements does not exist, revenues are deferred and
recognized when delivery of those elements occurs or when fair value can be
established. Fair value is based on the price charged when the same element is
sold separately to customers.
In connection with many of the Company's sales transactions, customers typically
purchase a one-year maintenance and support agreement. The Company defers the
fair value of such maintenance agreements and recognizes the related revenue
ratably over the term of the agreement. Additionally, telephone support,
enhancements and unspecified upgrades are typically provided at no additional
charge during the product's initial warranty period, generally between three and
twelve months. The Company defers the fair value of the free warranty and
recognizes the related revenue ratably over the initial warranty period. The
Company also from time to time offers certain customers free upgrades or
specified future products or enhancements. For each of these elements that are
undelivered at the time of product shipment, the Company defers the fair value
of the specified upgrade, product or enhancement and recognizes that revenue
only upon later delivery or at the time at which the remaining contractual terms
relating to the upgrade have been satisfied.
Most of our resellers and distributors are not granted rights to return products
to us after purchase, and actual product returns from them have been
insignificant to date. However, the Company's revenue from sales of Audio
products is generally derived from transactions with distributors and authorized
resellers that typically allow limited rights of return, inventory stock
rotation and price protection. Accordingly, reserves for estimated future
returns, exchanges and credits for price protection are provided, through
reductions to revenue, upon shipment of the related products to such
distributors and resellers, based upon the Company's historical experience.
Actual returns have not differed materially from management's estimates.
The Company from time to time offers rebates on purchases of certain products or
rebates based on purchasing volume, which are accounted for as offsets to
revenue upon shipment of related products or expected achievement of purchasing
volumes.
Accounts receivable allowances include an allowance for bad debts as well as the
sales allowances referred to above for expected future product returns, rebates
and credits.
The Company records as revenue all amounts billed to customers for shipping and
handling cost and records its actual shipping costs as a component of cost of
revenues.
Research and Development Costs
Research and development costs are expensed as incurred, except for costs of
internally developed or externally purchased software that qualify for
capitalization. Capitalized costs are amortized upon general release using the
straight-line method over the expected life of the related products, generally
12 to 24 months. The straight-line method generally results in approximately the
same amount of expense as that calculated using the ratio that current period
gross product revenues bear to total anticipated gross product revenues. The
Company evaluates the net realizable value of capitalized software on an ongoing
basis, relying on a number of business and economic factors.
The Company follows the guidance of EITF 00-02 to account for its website
development costs. To date, website development costs eligible for
capitalization have not been material.
41
Computation of Net Income (Loss) Per Common Share
Net income (loss) per common share is presented for both basic earnings per
share ("Basic EPS") and diluted earnings per share ("Diluted EPS"). Basic EPS is
based upon the weighted average number of common shares outstanding during the
period excluding unvested restricted stock held by employees. Diluted EPS is
based upon the weighted average number of common and potential common shares
outstanding during the period. Potential common shares are included in the
Diluted EPS calculation when the effect of their inclusion would be dilutive.
Potential common shares result from the assumed exercise of outstanding stock
options and warrants as well as unvested restricted stock shares, the proceeds
of which are then assumed to have been used to repurchase outstanding common
stock using the treasury stock method.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other
comprehensive income (loss), which includes foreign currency translation
adjustments and unrealized gains and losses on certain investments. For the
purposes of comprehensive income (loss) disclosures, the Company does not record
tax provisions or benefits for the net changes in the foreign currency
translation adjustment, as the Company intends to permanently reinvest
undistributed earnings in its foreign subsidiaries.
Accounting for Stock-Based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no compensation expense is recorded for options issued to employees
in fixed amounts and with fixed exercise prices at least equal to the fair
market value of the Company's common stock at the date of grant. When the
exercise price of stock options granted to employees is less than the fair
market value of common stock at the date of grant, the Company records that
difference multiplied by the number of shares under option as deferred
compensation, which is then amortized over the vesting period of the options.
Additionally, deferred compensation is recorded for restricted stock granted to
employees based on the fair market value of the Company's stock at date of grant
and is amortized over the period in which the restrictions lapse. The Company
reverses deferred compensation associated with options issued at below fair
market value as well as restricted stock upon the cancellation of such options
or shares for terminated employees. The Company has adopted the provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," through disclosure
only. All stock-based awards to non-employees are accounted for at their fair
value in accordance with SFAS No. 123.
Recent Accounting Pronouncements
In November 2001, the Emerging Issues Task Force ("EITF"), a committee of
the Financial Accounting Standards Board ("FASB"), reached a consensus on EITF
Issue 01-9, "Accounting for Consideration Given by a Vendor to a Customer or
Reseller of the Vendor's Products" ("EITF 01-9"). EITF 01-9 presumes that
consideration from a vendor to a customer or reseller of the vendor's products
is a reduction of the selling prices of the vendor's products and, therefore,
should be characterized as a reduction of revenue when recognized in the
vendor's income statement which could lead to negative revenue under certain
circumstances. Revenue reduction is required unless consideration relates to a
separate identifiable benefit and the benefit's fair value can be established,
in which case such amounts may be recorded as operating expenses. In accordance
with its provisions, the Company will adopt EITF 01-9 on January 1, 2002. The
Company sponsors certain cooperative marketing programs that are required to be
accounted for under EITF 01-9. Based on a review of these programs, management
believes that the programs meet the criteria for accounting for such amounts as
operating expenses, consistent with the Company's existing policy and, as a
result, does not anticipate that the adoption of EITF 01-9 will have a material
impact on the Company's results from operations.
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. We are in the
42
process of adopting SFAS 142 and we are making the determinations as to what our
reporting units are and what amounts of goodwill, intangible assets, other
assets and liabilities should be allocated to those reporting units. In
connection with the adoption of SFAS 142, the Company expects to reclassify to
goodwill $1.1 million of previously recorded acquired work force included in
total intangible assets of $3.5 million at December 31, 2001 and, as a result,
will cease amortizing such amount.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
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 FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), and
to develop a single accounting model, based on the framework established in SFAS
121, for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired. SFAS 144 supersedes SFAS 121; however, it retains
the fundamental provisions of SFAS 121 for (1) the recognition and measurement
of the impairment of long-lived assets to be held and used and (2) the
measurement of long-lived assets to be disposed of by sale. SFAS 144 supersedes
the accounting and reporting provisions of Accounting Principles Board No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB 30"), for segments of a business to be disposed
of. However, SFAS 144 retains APB 30's requirement that entities report
discontinued operations separately from continuing operations and extends that
reporting requirement to "a component of an entity" that either has been
disposed of or is classified as "held for sale." SFAS 144 also amends the
guidance of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a temporarily
controlled subsidiary. SFAS 144 is effective for the Company on January 1, 2002
and, generally, its provisions are to be applied prospectively. The Company does
not expect the application of SFAS 144 to have a material impact on the
Company's financial position or results of operations.
C. MARKETABLE SECURITIES
The cost (amortized cost of debt instruments) and fair value of marketable
securities as of December 31, 2001 and 2000 are as follows (in thousands):
Gross
Unrealized Fair
Cost Gains Value
---------- ---------- ----------
2001
----
Government and government agency obligations $27,337 $11 $27,348
---------- ---------- ----------
$27,337 $11 $27,348
========== ========== ==========
2000
----
Government and government agency obligations $16,605 $13 $16,618
Corporate common stock 1,713 1,713
---------- ---------- ----------
$16,605 $1,726 $18,331
========== ========== ==========
All federal, state and municipal obligations held at December 31, 2001 and 2000
mature within one year. The Company calculates realized gains and losses on a
specific identification basis.
Corporate common stock held at December 31, 2000 consisted of common stock of a
U.S. public company that was received in June 2000 in exchange for the Company's
minority ownership interest in Avid Sports LLC. The Company recorded an
unrealized gain in stockholders' equity of $1.7 million during 2000 associated
with that transaction. In June 2001, additional shares of common stock of the
same U.S. public company were received upon settlement of certain claims arising
after the sale. Upon the receipt of such shares, the Company recorded a realized
gain of $1.9 million in other income (expense) in the statement of operations.
During 2001, the Company sold all of its shares of this common stock for
proceeds of $4.0 million and realized an additional net gain of $2.1 million in
other income (expense). For the year ended December 31, 2000 and 1999, realized
gains and losses from the sale of marketable securities were immaterial.
43
D. INVENTORIES
Inventories consist of the following (in thousands):
December 31,
-----------------------------------
2001 2000
--------------- ---------------
Raw materials $13,043 $14,082
Work in process 2,553 2,353
Finished goods 6,094 4,667
--------------- ---------------
$21,690 $21,102
=============== ===============
E. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
December 31,
Depreciable --------------------------------
Life 2001 2000
----------------- -------------- -------------
Computer and video equipment and software 2 to 5 years $92,573 $87,478
Office equipment 3 years 6,174 5,856
Furniture and fixtures 3 years 9,289 8,786
Leasehold improvements 3 to 10 years 24,544 16,600
-------------- -------------
132,580 118,720
Less accumulated depreciation and amortization 105,416 92,584
-------------- -------------
$27,164 $26,136
============== =============
Depreciation and amortization expense related to property and equipment was
$15.6 million, $17.4 million and $21.0 million for the years ended December 31,
2001, 2000 and 1999, respectively.
F. ACQUISITIONS AND INVESTMENTS
Softimage
On August 3, 1998, the Company acquired from Microsoft Corporation ("Microsoft")
the common stock of Softimage and certain assets relating to the business of
Softimage. In connection with the acquisition, Avid paid $79.0 million in cash
to Microsoft and issued to Microsoft (i) a subordinated note (the "Note") in the
amount of $5.0 million, due June 2003, (ii) 2,394,813 shares of common stock,
valued at $64.0 million, and (iii) a ten-year warrant to purchase 1,155,235
shares of common stock at an exercise price of $47.65 per share, valued at $26.2
million. In addition, Avid agreed to issue to Softimage employees 40,706 shares
of common stock, valued at $1.5 million, as well as stock options with a nominal
exercise price to purchase up to 1,820,817 shares of common stock, valued at
$68.2 million ("Avid Options"). Avid also incurred fees of $4.0 million in
connection with the transaction. Per terms of the agreements, the principal
amount of the Note was to be increased by $39.71 for each share underlying
forfeited Avid Options. The value of the Avid Options was recorded on the
balance sheet as purchase consideration (see Note B).
As a result of the purchase price allocation $216.0 million was recorded as the
value of intangible assets including work force, trade name and goodwill. The
intangible assets were amortized over periods ranging from two to three years
and, as of December 31, 2001, were fully amortized. At December 31, 2000,
accumulated amortization associated with identifiable intangible assets was
approximately $80.8 million and accumulated amortization associated with
goodwill was $97.8 million.
At the date of acquisition, the Company recorded the value of the Avid Options
issued to retained employees as purchase consideration on the balance sheet. As
agreed with the seller, the value of the note payable to the seller was
increased by $39.71 for each share underlying options that became forfeited by
employees. As these options became vested, additional paid-in capital was
increased or, alternatively, as the options were forfeited, the note payable to
the seller was increased, with purchase consideration being reduced by a
corresponding amount in either case. Increases recorded to the note were
approximately $0.1 million, $3.2 million, $7.5 million and $5.2 million in 2001,
2000, 1999 and 1998, respectively. Increases recorded to additional paid-in
capital were approximately $5.5 million, $14.9 million, $29.2 million and $2.5
million in 2001, 2000, 1999 and 1998, respectively.
44
iNews, LLC.
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. The Company's
investment in the joint venture was being accounted for under the equity method
of accounting. The Company's initial contribution to the joint venture was
approximately $2.0 million, consisting of $1.5 million of cash and $0.5 million
of fixed assets and inventory. During the fourth quarter of 1999, AvStar
distributed $1.5 million to each joint venture partner, which was recorded by
Avid as a return on investment during 1999. The pro rata share of earnings of
the joint venture recorded by the Company during 2001, 2000 and 1999 was
approximately $1.1 million, $0.9 million and $0, respectively. Since September
2000, AvStar has been doing business as iNews, LLC ("iNews").
In January 2001, the Company acquired The Grass Valley Group's 50% interest in
iNews for approximately $6.0 million in cash. This acquisition was accounted for
under the purchase method of accounting. Accordingly, the assets and liabilities
acquired that represented the acquired 50% interest were recorded in the
Company's financial statements as of the acquisition date based on their fair
values, while the assets and liabilities that represented Avid's investment in
the joint venture were recorded as of the acquisition date based on the book
values of the joint venture's assets and liabilities without adjustment. Since
the acquisition date, operating results of iNews have been included in the
consolidated operating results of the Company. The purchase price of $6.0
million was allocated to net tangible assets of $1.7 million, completed
technologies of $2.5 million and work force of $1.8 million. Identifiable
intangible assets are being amortized on a straight-line basis over a three-year
period. The Company recorded amortization on these intangibles of $1.6 million
in 2001. The remaining balance of work force of $1.1 million will be
reclassified to goodwill in connection with the Company's adoption of SFAS 142
in 2002 and will not be subject to further amortization.
The following table presents unaudited pro forma results as if Avid and iNews
had been combined as of the beginning of the period presented. The pro forma
data are presented for illustrative purposes only and are not necessarily
indicative of the combined financial position or results of operations of future
periods or of results that actually would have occurred had Avid and iNews been
a combined company for the period presented.
Pro Forma Unaudited
(in thousands, except per share amounts)
For the Year Ended December 31,
----------------------------------------
2000
---------------------------
Net revenue $495,666
===========================
Net loss ($55,001)
===========================
Net loss per common share
- basic and diluted ($2.23)
===========================
Weighted average common shares
outstanding - basic and diluted 24,683
===========================
The Motion Factory and Pluto Technologies
During the second and third quarters of 2000, the Company acquired selected
assets and liabilities of two companies, The Motion Factory, Inc. ("TMF") and
Pluto Technologies International Inc. ("Pluto"), for cash payments totaling
approximately $2.0 million and guaranteed future bonus payments of $0.3 million.
TMF specializes in applications for the creation, delivery and playback of
interactive, rich 3D media for character-driven games and the web. Pluto is a
provider of video storage and networking solutions for broadcast news,
post-production and other bandwith-intensive markets. The business combinations
were accounted for using the purchase method of accounting. Accordingly, the
fair market values of the acquired assets and assumed liabilities have been
included in the Company's financial statements as of the acquisition dates, and
the results of operations of TMF and Pluto have been included in the Company's
financial statements thereafter. The purchase prices, aggregating $2.3 million,
were allocated to net tangible assets of $0.1 million, completed technologies of
$1.2 million and acquired work force of $1.0 million. These identifiable
intangible assets are being amortized on a straight-line basis through 2004,
resulting in accumulated amortization of $1.5 million at December 31, 2001. As
part of the purchase agreements, the Company may be required to make certain
contingent cash payments, limited in the aggregate up to an additional $13.5
million, dependent upon future revenues and/or gross margin levels of products
acquired from TMF and Pluto through December 2004. There were no contingent
payments owed or paid as of December 31, 2001. Any future contingent payments
45
will be recorded as additional purchase price, allocated to identifiable
intangible assets or goodwill, as appropriate, and amortized over the remaining
amortization period of the intangible assets. The Company's pro forma statements
of operations prior to the acquisitions would not differ materially from
reported results.
Rocket Network
During the first quarter of 2000, the Company acquired for $2.1 million a
non-controlling interest in the unregistered capital stock of Rocket Network,
Inc. ("Rocket"), a provider of Internet recording studios which allows audio
professionals to meet and collaborate on the Internet. This investment was
accounted for under the cost method. Additionally, in connection with a
technology development services agreement with Rocket Network, the Company
received warrants to acquire additional shares, of which 50% were exercisable at
date of grant and 50% are exercisable upon the achievement of certain joint
development milestones. The warrants were deemed by Avid to have an immaterial
value as of date of grant and as of December 31, 2001, and were not recorded. If
the warrants are exercised, the Company's ownership interest in Rocket Network
will be less than twenty percent. At December 31, 2001, the carrying value of
this investment was $1.0 million.
G. INCOME TAXES
Loss before income taxes and the components of the income tax provision
(benefit) for the years ended December 31, 2001, 2000 and 1999 are as follows
(in thousands):
2001 2000 1999
--------- --------- ---------
Profit (loss) before income taxes:
United States ($25,103) ($54,810) ($106,930)
Foreign (10,244) 3,461 15,751
--------- --------- ---------
Total loss before income taxes ($35,347) ($51,349) ($91,179)
========= ========= =========
Provisions for (benefit from) income taxes: Current tax
(benefit) expense:
Federal $200 ($6,183)
Foreign 2,729 $4,912 2,817
State 200 148 55
--------- --------- ---------
Total current tax expense (benefit) 3,129 5,060 (3,311)
Deferred tax (benefit) expense:
Federal 42,822
Foreign (329) (60) 2,211
State 4,647
--------- --------- ---------
Total deferred tax (benefit) expense (329) (60) 49,680
--------- --------- ---------
Total income tax provision $2,800 $5,000 $46,369
========= ========= =========
Net cash payments or (refunds) for income taxes in 2001, 2000 and 1999 were
approximately $2.4 million, ($1.3) million and $6.4 million, respectively.
The cumulative amount of undistributed earnings of subsidiaries, which is
intended to be permanently reinvested and for which U.S. income taxes have not
been provided, totaled approximately $11.8 million at December 31, 2001.
Net deferred tax assets are comprised of the following (in thousands):
December 31,
-------------------------
2001 2000
---------- ----------
Tax credit and net operating loss carryforwards $43,278 $34,239
Allowances for bad debts 1,295 2,054
Difference in accounting for:
Revenue 4,504 3,844
Costs and expenses 11,322 11,710
Inventories 2,528 2,139
Intangible assets 66,589 62,180
Foreign related items 4,327 1,721
Other (1,720) (1,486)
---------- ----------
Net deferred tax assets before valuation allowance 132,123 116,401
Valuation allowance (131,428) (115,962)
---------- ----------
Net deferred tax assets after valuation allowance $695 $439
========== ==========
46
Deferred tax assets reflect the net tax effects of the tax credits, operating
loss carryforwards and temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. The ultimate realization of the deferred tax assets is
dependent upon the generation of sufficient future taxable income.
For U.S. Federal income tax purposes at December 31, 2001, the Company has tax
credit carryforwards of approximately $25.7 million, which will expire between
2004 and 2021, and a net operating loss carryforward of approximately $46.3
million, which will expire in 2019 and 2020. Based on the level of the deferred
tax assets as of December 31, 2001 and the level of historical U.S. taxable
income, management has determined that the uncertainty regarding the realization
of these assets is sufficient to warrant the establishment of a full valuation
allowance. Accordingly, a valuation allowance of approximately $125.8 million
has been established against the U.S.-related deferred tax assets. In the event
that the related tax benefit is realized, such benefit will reduce future
provisions for income taxes. In addition, a valuation allowance of $2.0 million
has been established for U.S. tax return carryforwards resulting from stock
option compensation deductions. The tax benefit associated with the stock option
compensation deductions will be credited to equity when realized.
For foreign income tax purposes at December 31, 2001, the Company has a net
operating loss carryforward of approximately $29.4 million, which can be carried
forward indefinitely. Due to the similar uncertainty regarding the realization
of this asset, the Company has established a valuation allowance of
approximately $3.6 million which relates to this entire carryforward amount and
a portion of other foreign deferred tax assets. The net deferred tax assets of
$0.7 million and $0.4 million at December 31, 2001 and 2000, respectively,
related to foreign deferred tax assets deemed realizable in certain
jurisdictions.
A reconciliation of the Company's income tax provision (benefit) to the
statutory federal tax rate follows:
2001 2000 1999
----- ----- -----
Statutory rate (35%) (35%) (35%)
Tax credits (9) (4) (3)
Foreign operations 9 5
State taxes, net of federal benefit 1 (3) (3)
----- ----- -----
Effective tax rate before valuation allowance (34) (37) (41)
Change in valuation allowance 42 47 99
Reduction in required tax liabilities (7)
----- ----- -----
Effective tax rate 8% 10% 51%
===== ===== =====
Consolidated results of operations include results of manufacturing operations
in Ireland. Income from the sale of products manufactured or developed in
Ireland is subject to a 10% Irish tax rate through the year 2010. There was no
Irish tax benefit realized in 2001, 2000 and 1999 due to losses recorded for the
Irish manufacturing operations during those years.
47
H. LONG-TERM DEBT AND OTHER LIABILITIES
Long-term debt and other liabilities consist of the following (in thousands):
December 31,
-------------------------------------
2001 2000
-------------- --------------
Subordinated note $13,020 $12,874
Long-term deferred tax liabilities (see Note G) 575
-------------- --------------
$13,020 $13,449
============== ==============
Subordinated Note
In connection with the acquisition of Softimage, Avid issued a $5.0 million
subordinated note (the "Note") to Microsoft Corporation. The principal amount of
the Note, including any adjustments relative to Avid stock options forfeited by
Softimage employees, plus all unpaid accrued interest is due on June 15, 2003.
The Note bears interest at 9.5% per year, payable quarterly. Through December
31, 2001, the Note has been increased by approximately $16.0 million for
forfeited Avid stock options. During 1999, the Company made a principal payment
of $8.0 million. The Company also made cash interest payments of $1.2 million,
$1.1 million and $0.6 million during 2001, 2000 and 1999, respectively. See
also Note R.
Bank Overdraft Facilities
Two of the Company's international subsidiaries have unsecured overdraft
facilities that permit aggregate borrowings of 325,000 euros. No borrowings were
outstanding under these facilities as of December 31, 2001 or 2000.
I. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases its office space and certain equipment under non-cancelable
operating leases. The future minimum lease commitments under these
non-cancelable leases at December 31, 2001 are as follows (in thousands):
2002 $16,929
2003 14,120
2004 12,441
2005 11,500
2006 10,979
Thereafter 36,049
-------------
Total $102,018
=============
The total of future minimum rentals to be received by the Company under
non-cancelable subleases related to the above leases is $16.3 million. Such
amounts are not reflected in the schedule of minimum lease payments above.
The Company's two leases for corporate office space in Tewksbury, Massachusetts,
expiring June 2010, contain renewal options to extend the respective terms of
each lease for an additional 60 months. The Company leases office space that
have termination options, which if exercised by the Company would result in a
penalty of approximately $0.5 million in the aggregate. The future minimum lease
commitments above include the Company's obligations through the original lease
terms and do not include these penalties.
The Company has a stand by letter of credit at a bank that is used as a security
deposit in connection with the Company's Daly City, California office space
lease. In the event of default on this lease commitment, the landlord would be
eligible to draw against this letter of credit to a maximum of $5.9 million,
subject to an annual reduction of approximately $0.8 million but not below $2.0
million. The letter of credit will remain in effect at this level throughout the
remaining lease period which runs through September 2009. As of December 31,
2001, the Company was not in default of this lease.
48
The accompanying consolidated results of operations reflect rent expense on a
straight-line basis over the term of the leases. Total rent expense under
operating leases was approximately $13.8 million, $11.2 million and $12.3
million for the years ended December 31, 2001, 2000 and 1999, respectively.
Purchase Commitments
As of December 31, 2001, the Company has entered into non-cancelable purchase
commitments for certain inventory components used in its normal operations. The
purchase commitments covered by these agreements are generally less than one
year and aggregate approximately $7.6 million.
Transactions with Recourse
The Company, through a third party, provides lease financing options to its
customers, including distributors. Under the terms of these leases, which are
generally three years, the Company remains liable for any unpaid principal
balance upon default by the end-user, but such liability is limited in the
aggregate based on a percentage of initial amounts funded or, in certain cases,
amounts of unpaid balances. At December 31, 2001, 2000 and 1999, Avid's maximum
recourse exposure totaled approximately $21.5 million, $23.2 million and $22.7
million, respectively. The Company records revenue from these transactions upon
the shipment of products and maintains a reserve for estimated losses under this
recourse lease program based on historical default rates. To date, the Company
has not experienced significant losses under this lease financing program.
The Company also has an arrangement whereby it receives cash from the transfer
of certain trade receivables to a third party. The Company is liable to the
third party for any amounts not later collected from the customers. The Company
records a liability for the amount received upon transfer of the receivables,
and such liability and the related receivables are relieved from the balance
sheet only upon payment by the customer to the third party. As of December 31,
2001 and 2000, liabilities of $0.5 million and $0.3 million, respectively, were
recorded for receivables transferred which had not been paid as of those dates.
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 has
willfully infringed Avid's patent number 5,045,940, entitled "Video/Audio
Transmission System and Method." Avid is also seeking an award of treble damages
together with prejudgment interest and costs, Avid's costs and reasonable
attorneys' fees, and an injunction to prohibit further infringement by 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,
issued in 1981, and seeks injunctive relief, treble damages and costs, and
attorneys' fees. Avid believes that it has meritorious defenses to the complaint
and intends to contest it vigorously. However, an adverse resolution of this
litigation could have an adverse effect on the Company's consolidated financial
position or results of operations in the period in which the litigation is
resolved. No costs have been accrued for this possible loss contingency.
In March 1999, Avid and Tektronix, Inc. were sued by Glen Holly Entertainment,
Inc., a Tektronix distributor, claiming that Tektronix's discontinuance of the
Tektronix Lightworks product line was the result of a strategic alliance by
Tektronix and Avid. Glen Holly raised antitrust and common law claims against
the Company and Tektronix, and sought lost future profits, treble damages,
attorneys' fees, and interest. All of the claims against the Company and
Tektronix 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.
49
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.
The Company has employment agreements with certain of its executive officers,
which provide certain severance benefits, including the payment of up to 12
months of such officer's base salary, if the Company terminates such officer's
employment other than for cause or if the officer terminates employment under
certain limited circumstances. During the period from the first to the second
anniversary after a termination, the Company must pay the officer the amount by
which his or her monthly base salary at the time of termination exceeds the
monthly compensation from any new employer. In addition, the Company must pay
the officer his or her target incentive compensation for the last full calendar
year preceding the year of termination. Finally, the Company will immediately
vest any stock options and shares of restricted stock that were due to vest
within twelve months of the officer's date of termination.
The Company also has agreements with certain of its executive officers providing
that, upon any termination of employment without cause or for good reason (as
defined in the agreement) within two years following a change in control of the
Company, the officer will receive severance benefits of up to such officer's
base salary plus the greater of (i) two times such officer's annual bonus and
(ii) two times such officer's target bonus award for the year in which
termination occurred (grossed up to cover any excise tax imposed by Section 4999
of the Internal Revenue Code of 1986, as amended (the "Code")). In addition, any
unvested options and restricted stock then held by such officer will become
immediately vested and exercisable in full.
J. CAPITAL STOCK
Preferred Stock
The Company has authorized up to one million shares of preferred stock, $.01 par
value per share for issuance. Each series of preferred stock shall have such
rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges, and liquidation
preferences, as shall be determined by the Board of Directors.
Shareholder Rights Plan
In February 1996, the Board of Directors approved a Shareholder Rights Plan. The
rights were distributed in March 1996 as a dividend at the rate of one right for
each share of Common Stock outstanding. No value was assigned to these rights.
The rights may be exercised to purchase shares of a new series of $.01 par
value, junior participating preferred stock or to purchase a number of shares of
the Company's common stock which equals the exercise price of the right, $115,
divided by one-half of the then-current market price, upon occurrence of certain
events, including the purchase of 20% or more of the Company's common stock by a
person or group of affiliated or associated persons. The rights expire on
February 28, 2006 and may be redeemed by the Company for $.01 each at any time
prior to the tenth day following a change in control and in certain other
circumstances.
Common Stock
In 2000, 1999 and 1997, the Company granted shares of restricted common stock to
certain employees under Company stock option and award plans. The grants totaled
260,000 shares, 50,000 shares, and 347,200 shares, respectively. Unvested
restricted shares may not be sold, transferred or assigned and are subject to
forfeiture in the event that an employee ceases to be employed by the Company.
The shares under the 1997 award vested (and restrictions lapsed) annually in 20%
increments, and an additional 20% of the restricted stock became vested on May
1, 1998 due to the attainment of specific stock performance goals established by
the Board of Directors. There are no unvested shares outstanding under the 1997
award at December 31, 2001. The shares under the 1999 and 2000 awards vest 40%
on the first anniversary and 60% on the second anniversary of the awards. There
are no unvested shares outstanding under the 1999 award at December 31, 2001.
The Company initially recorded in 1997, 1999 and 2000, as a separate component
of stockholders' equity, deferred compensation of approximately $9.1 million,
$0.6 million, and $3.2 million, respectively, with respect to this restricted
stock. During 2000, the Company also completed a Stock Option Exchange Program
whereby employees could request that certain outstanding stock options be
exchanged for shares of restricted common stock according to specified exchange
ratios. The Company granted 118,115 shares of restricted common stock in
exchange for stock options to purchase 431,836 shares of common stock with
exercise prices ranging from $9.44 to $45.25 per share. The new awards vest (and
restrictions lapse) annually over three years from date of grant. The Company
50
initially recorded, as a separate component of stockholders' equity, deferred
compensation of approximately $1.4 million with respect to this restricted
stock. The deferred compensation amounts for all restricted stock awards
represent the fair value of the Company's common stock at the date of the award
less par value and are recorded as compensation expense ratably as the shares
vest. For the years ended December 31, 2001, 2000 and 1999, approximately $2.0
million, $2.2 million, and $1.4 million, respectively, was recorded as
compensation expense under all of these plans.
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.
During 1998, the Company repurchased approximately 2.0 million shares of common
stock at a cost of $61.8 million. During 1999, the Company repurchased a total
of 1.2 million shares of common stock at a cost of $19.7 million. During 2001,
the Company repurchased approximately 232,000 shares at a cost of $4.1 million.
As of December 31, 2001, there were no shares remaining authorized for
repurchase. The Company has used and plans to continue to use any repurchased
shares for its employee stock plans.
The Company generally allows employees to satisfy any withholding tax obligation
under certain award plans by tendering to the Company a portion of the common
stock received under the award. During the years ended December 31, 2001, 2000
and 1999, the Company repurchased 59,245 shares, 35,171 shares and 50,848 shares
of its common stock for $0.9 million, $0.5 million and $1.1 million,
respectively, in connection with these transactions.
Warrants
In connection with the acquisition of Softimage Inc., the Company issued to
Microsoft a ten-year warrant to purchase 1,155,235 shares of the Company's
common stock, valued at $26.2 million. The warrants became exercisable on August
3, 2000, at a price of $47.65 per share, and expire on August 3, 2008.
K. STOCK PLANS
Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan, as amended through February 23,
2000, authorizes the issuance of a maximum of 1,200,000 shares of common stock
in semi-annual offerings to employees at a price equal to the lower of 85% of
the closing price on the applicable offering commencement date or 85% of the
closing price on the applicable offering termination date.
Stock Option and Award Plans
The Company has several stock-based compensation plans under which employees,
officers, directors and consultants may be granted stock awards or options to
purchase the Company's common stock generally at the fair market value on the
date of grant. Certain plans allow for options to be granted at below fair
market value under certain circumstances. Options become exercisable over
various periods, typically two to four years for employees and immediately to
four years for officers and directors. The options have a maximum term of ten
years. As of December 31, 2001, a maximum of 14,833,000 shares of common stock
have been authorized for issuance under the Company's stock-based compensation
plans, of which 3,974,794 shares remain available for future grants. Shares
available for future grants at December 31, 2001 are net of 637,676 shares
issued as grants of restricted stock.
Information with respect to options granted under all stock option plans is as
follows:
2001 2000 1999
-------------------------- -------------------------- --------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Price Price Price
Shares Per Share Shares Per Share Shares Per Share
---------- ------------- ---------- ------------- ---------- -------------
Options outstanding at January 1, 7,056,233 $15.01 8,253,557 $15.95 7,401,490 $16.63
Granted, at fair value 2,334,439 $13.00 2,743,191 $14.09 2,551,790 $14.64
Granted, below fair value 145,000 $7.54
Exercised (544,920) $7.96 (1,312,985) $6.31 (481,003) $12.53
Canceled (1,752,569) $17.21 (2,772,530) $20.48 (1,218,720) $18.34
---------- ------------- ---------- ------------- ---------- -------------
Options outstanding at December 31, 7,093,183 $14.34 7,056,233 $15.01 8,253,557 $15.95
========== ============= ========== ============= ========== =============
Options exercisable at December 31, 4,152,591 $14.87 3,445,350 $15.74 3,388,955 $16.80
========== ============= ========== ============= ========== =============
Options available for future grant at
December 31, 3,974,794 3,364,838 1,529,362
========== ========== ==========
51
The following table summarizes information about stock options outstanding at
December 31, 2001:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------- ----------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------- ------------- ------------------ ------------------ ------------- ------------------
$0.01 to $10.44 899,645 8.39 $5.66 352,460 $2.99
$11.63 to $11.88 1,613,780 7.78 $11.37 1,437,566 $11.38
$12.00 to $12.80 1,391,038 9.24 $12.75 242,411 $12.70
$12.81 to $16.44 1,368,603 8.04 $14.28 794,685 $14.26
$16.50 to $21.44 1,345,231 6.70 $19.38 907,869 $19.41
$21.81 to $45.25 474,886 6.17 $29.48 417,600 $29.53
------------- -------------
$0.01 to $45.25 7,093,183 7.88 $14.34 4,152,591 $14.87
============= =============
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for the awards under these
plans consistent with the methodology prescribed under SFAS No. 123, the
Company's net loss and loss per share would have been adjusted to the pro forma
amounts indicated below:
2001 2000 1999
----------------------- ----------------------- ------------------------
Loss Loss Loss
Net Loss per share Net Loss per share Net Loss per share
---------- ---------- ---------- ---------- ---------- -----------
As Reported ($38,147) ($1.49) ($56,349) ($2.28) ($137,548) ($5.75)
========== ========== ========== ========== ========== ===========
Pro Forma ($50,842) ($1.99) ($68,372) ($2.77) ($154,898) ($6.48)
========== ========== ========== ========== ========== ===========
Under SFAS 123, the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions and results:
Stock Options Stock Purchase Plan
------------------------------------ ----------------------------------
2001 2000 1999 2001 2000 1999
------------------------------------ ----------------------------------
Expected dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Risk-free interest rate 4.3% 6.0% 6.0% 4.3% 6.0% 6.0%
Expected volatility 77.0% 74.0% 61.8% 77.0% 74.0% 61.8%
Expected-life (in months) 15 15 15 6 6 6
Weighted-average fair value of
options granted $7.16 $7.35 $5.61 $4.89 $4.63 $5.91
52
L. EMPLOYEE BENEFIT AND PROFIT SHARING PLANS
Employee Benefit Plans
The Company has an employee benefit plan under section 401(k) of the Internal
Revenue Code covering substantially all U.S. employees. The 401(k) plan allows
employees to make contributions up to a specified percentage of their
compensation. The Company may, upon resolution by the Board of Directors, make
discretionary contributions to the plan. The Company's contribution to the plan
is 50% of up to the first 6% of an employee's salary contributed to the plan by
the employee. The Company's contributions to this plan totaled $2.0 million,
$1.6 million and $2.2 million in 2001, 2000, and 1999, respectively.
As part of the iNews acquisition in 2001, the Company assumed an employee
benefit plan under section 401(k) of the Internal Revenue Code. Under this plan,
the Company contribution was 100% of up to the first 4% of an employee's salary
contributed to the plan by the employee. In 2001, the Company made related
contributions of approximately $0.2 million. The plan was merged into the Avid
401(k) plan in January 2002.
In addition, the Company has various retirement and post-employment plans
covering certain international employees. Certain of the plans require the
Company to match employee contributions up to a specified percentage as defined
by the plans. The Company made related contributions of approximately $1.0
million, $1.5 million and $1.3 million in 2001, 2000 and 1999, respectively.
Profit Sharing and Executive Compensation Plans
The Company has profit sharing plans that cover substantially all employees of
the Company and its participating subsidiaries, other than those employees
covered by other incentive plans. The plans provide that the Company contribute
a varying percentage of salary based on the Company's achievement of performance
goals set by management and the Board of Directors for each fiscal year.
Nonqualified Deferred Compensation Plan
The Board of Directors has approved a nonqualified deferred compensation Plan
(the "Deferred Plan"). The Deferred Plan covers senior management and members of
the Board of Directors as approved by the Company's Compensation Committee. The
plan provides for a trust to which participants can contribute varying
percentages or amounts of eligible compensation for deferred payment. Payouts
are made upon the earlier of the election of the employee or termination of
employment with the Company. The benefit payable under the Deferred Plan
represents an unfunded and unsecured contractual obligation of the Company to
pay the value of the deferred compensation in the future, adjusted to reflect
the trust's investment performance. The assets of the trust, as well as the
corresponding obligations, were approximately $0.9 million and $1.5 million as
of December 31, 2001 and 2000, respectively, and were recorded in other current
assets and accrued compensation and benefits at December 31, 2001 and 2000.
M. RESTRUCTURING AND OTHER COSTS, NET
In the fourth quarter of 1999, the Company announced and implemented a
restructuring plan to strategically refocus the Company and bring operating
expenses in line with net revenues with the goal of restoring long-term
profitability to the Company. The major elements of the restructuring plan
included the termination of certain employees and the vacating of certain
facilities. The plan also provided for no further releases of a limited number
of existing product offerings, including stand-alone Marquee, Avid Cinema, Media
Illusion and Matador. In connection with this plan, the Company recorded a
restructuring charge of $9.6 million. The charge included approximately $6.6
million for severance and related costs for 209 employees on a worldwide basis,
$2.4 million for facility vacancy costs and approximately $0.6 million of
non-cash charges relating to the disposition of certain fixed assets.
In 2001, the Company announced and implemented restructuring plans to further
decrease costs through the consolidation of operations and the reduction of
approximately 194 jobs worldwide. In connection with these plans, the Company
recorded a charge to operating expenses of $10.0 million for the year. The
restructuring charge included approximately $7.4 million for severance and
related costs of terminated employees and $2.6 million for facility vacancy
costs, of which $1.0 million represented non-cash charges relating to the
disposition of leasehold improvements.
53
The following table sets forth the activity in the restructuring accrual in
1999, 2000 and 2001 (in thousands):
Employee Facilities Fixed
Related Related Assets Total
-------------------------------------------------------------
Restructuring charge in 1999 $6,623 $2,443 $541 $9,607
Cash payments made in 1999 (2,202) (289) (2,491)
-------------------------------------------------------------
Accrual balance at December 31, 1999 4,421 2,154 541 7,116
Cash payments made in 2000 (3,987) (761) (4,748)
Non-cash disposals (515) (515)
Revisions of estimated liabilities (35) 61 (26)
-------------------------------------------------------------
Accrual balance at December 31, 2000 399 1,454 0 1,853
Restructuring charge in 2001 7,396 2,625 10,021
Cash payments made in 2001 (6,196) (588) (6,784)
Revisions of estimated liabilities (128) 128
-------------------------------------------------------------
Accrual balance at December 31, 2001 $1,471 $3,619 $0 $5,090
=============================================================
The Company expects that the majority of the remaining $1.5 million
employee-related accrual balance will be expended over the next 12 months and
will be funded from working capital. The majority of the facilities-related
accrual represents estimated losses on subleases of space vacated as part of the
1999 and 2001 restructuring actions. The leases extend through 2010 unless the
Company is able to negotiate an earlier termination. Included in the
facilities-related accrual is $1.0 million for the write-off of leasehold
improvements that will be abandoned upon vacating the related properties in
2002.
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. In addition, in
the quarter ended June 30, 2001, the Company received a payment of $0.3 million
under the note received as partial consideration from the buyers of the Italian
subsidiary. This payment was recorded as a credit to restructuring and other
costs, net, since the note was fully reserved when received. There was no
activity related to the note in the third and fourth quarters of 2001. Any
future payments to be received under the note will be similarly accounted for
only when received.
In 1999, in connection with the resignation of two executive officers, the
Company incurred and recorded a charge of $2.9 million for the termination
benefits as specified in the employment contracts of the officers. During 2001,
2000 and 1999, cash payments of approximately $0.8 million, $1.4 million and
$0.2 million were made and, at December 31, 2001, there was no remaining
accrual. The excess of the original charge over actual cash payments of $0.5
million was recorded as a credit to restructuring and other costs, net during
2001 when determined.
N. 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 Video and Film Editing and Effects segment produces non-linear video and
film editing systems to improve the productivity of video and film editors and
broadcasters by enabling them to edit moving pictures and sound in a faster,
easier, more creative, and more cost-effective manner than by use of traditional
analog tape-based systems. The products in this operating segment are designed
to provide capabilities for editing and finishing feature films, television
shows, broadcast news programs, commercials, music videos, and corporate and
home videos. The Professional Audio segment produces digital audio systems for
the professional audio market. This operating segment includes products
developed to provide audio recording, editing, signal processing, and automated
mixing.
54
The accounting policies of each of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based on profit and loss from operations before income taxes,
interest income, interest expenses and other income, further excluding the
effects of nonrecurring charges and amortization of intangible assets associated
with acquisitions. Common costs not directly attributable to a particular
segment are allocated among segments based on management's best estimates,
including an allocation of depreciation expense without a corresponding
allocation of the related assets. The segments are reported net of eliminations
resulting from intersegment sales and transfers. The Company does not report
segment assets as part of the assessment of segment performance, as such,
segment asset information is not available.
The following is a summary of the Company's operations by reportable segment (in
thousands):
For the Year Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- ---------
Video and Film Editing and Effects:
Net revenues $323,286 $353,647 $361,012
======== ======== =========
Depreciation $14,182 $16,219 $20,017
======== ======== =========
Operating loss ($10,117) ($11,671) ($20,061)
======== ======== =========
Professional Audio:
Net revenues $111,352 $122,443 $91,543
======== ======== =========
Depreciation $1,433 $1,174 $1,005
======== ======== =========
Operating income $8,677 $23,464 $19,771
======== ======== =========
Combined Segments:
Net revenues $434,638 $476,090 $452,555
======== ======== =========
Depreciation $15,615 $17,393 $21,022
======== ======== =========
Operating income (loss) ($1,440) $11,793 ($290)
======== ======== =========
The following table reconciles income (loss) for reportable segments to total
consolidated amounts for the years ended December 31, 2001, 2000 and 1999 (in
thousands):
2001 2000 1999
---------- ---------- ----------
Total operating income (loss) for reportable segments ($1,440) $11,793 ($290)
Unallocated amounts:
Restructuring and other costs, net (8,268) (14,469)
Amortization of acquisition-related intangible assets (31,168) (66,872) (79,879)
---------- ---------- ----------
Consolidated operating loss ($40,876) ($55,079) ($94,638)
========== ========== ==========
The following table summarizes the Company's revenues and long-lived assets,
excluding intangible assets and deferred tax assets, by country (in thousands):
For the Year Ended December 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Revenues
North America (U.S. and Canada) $227,824 $232,664 $220,405
Germany 31,902 38,347 46,454
Other countries 174,912 205,079 185,696
---------- ---------- ----------
Total revenues $434,638 $476,090 $452,555
========== ========== ==========
December 31,
-----------------------
2001 2000
---------- ----------
Long-lived assets
North America (U.S. and Canada) $26,094 $28,026
Other countries 2,732 2,035
---------- ----------
Total long-lived assets $28,826 $30,061
========== ==========
Foreign revenue is based on the country in which the sales originate.
55
O. FINANCIAL INSTRUMENTS
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist of temporary cash investments and trade receivables. The
Company places its excess cash in marketable investment grade securities. There
are no significant concentrations in any one issuer of debt securities. The
Company places its cash, cash equivalents and investments with financial
institutions with high credit standing. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer base, and their dispersion across different
regions. The Company also maintains reserves for potential credit losses and
such losses have been within management's expectations.
Forward-Exchange Contracts
As of December 31, 2001 and 2000, the Company had approximately $37.1 million
and $34.5 million, respectively, of foreign currency forward-exchange contracts
outstanding, denominated in euros, British pounds, Japanese yen, Canadian
dollars and Australian dollars, as a hedge against its intercompany and
third-party receivables and payables exposures. The following table summarizes
the Company's net currency positions and approximate U.S. dollar equivalents (in
thousands) at December 31, 2001. The Company is in a sell position with respect
to the euro, Japanese yen and Australian dollar, and in a net buy position with
respect to the British pound and Canadian dollar:
Approximate
Local Currency Amount U.S. Dollar Equivalent
----------------------- -------------------------
euro 15,200 $13,323
Canadian dollar 24,700 15,517
Japanese yen 980,000 7,469
British pound 370 536
Australian dollar 450 229
------------
$37,074
============
The forward-exchange contracts generally have maturities of one month. Net
realized and unrealized gains (losses) of approximately $1.8 million, ($0.9)
million and $3.0 million resulting from forward-exchange contracts were included
in results of operations for the years ended December 31, 2001, 2000 and 1999,
respectively.
P. NET LOSS PER COMMON SHARE
Diluted net loss per share for the years ended December 31, 2001, 2000, and 1999
excludes the weighted-average effect of dilutive options and warrants to
purchase 1,054,384, 1,415,966, and 2,031,990 weighted shares of common stock
outstanding as of the respective year-ends. Inclusion of these options and
warrants would be anti-dilutive for each of the reported periods.
Q. SUPPLEMENTAL CASH FLOW INFORMATION
The following table reflects supplemental cash flow investing activities related
to the acquitions of iNews in 2001 and of TMF and Pluto in 2000.
Year Ended Year Ended
December 31, 2001 December 31, 2000
------------------- -------------------
Fair value of:
Assets acquired and goodwill $10,734 $2,802
Liabilities assumed (4,734) (812)
------------------- -------------------
Cash paid 6,000 1,990
Less: cash acquired (561) -
------------------- -------------------
Net cash paid for acquisition $5,439 $1,990
=================== ===================
56
R. SUBSEQUENT EVENT
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.
S. QUARTERLY RESULTS (UNAUDITED)
The following information has been derived from unaudited consolidated financial
statements that, in the opinion of management, include all normal recurring
adjustments necessary for a fair presentation of such information.
In thousands, except per share data:
Quarters Ended
---------------------------------------------------------------------------------------------
2001 2000
-------------------------------------------- ---------------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
-------------------------------------------- ---------------------------------------------
Net revenues $104,790 $102,281 $109,434 $118,133 $126,144 $121,292 $119,959 $108,696
Cost of revenues 53,099 50,444 53,516 56,513 62,929 60,303 57,934 53,258
-------------------------------------------- ---------------------------------------------
Gross profit 51,691 51,837 55,918 61,620 63,215 60,989 62,025 55,438
-------------------------------------------- ---------------------------------------------
Operating expenses:
Research & development 21,355 19,630 21,882 23,273 21,740 20,890 20,825 19,445
Marketing & selling 24,173 27,614 31,520 29,746 29,560 29,989 31,382 28,539
General & administrative 5,615 5,299 5,432 6,967 6,421 6,070 8,101 6,912
Restructuring and other costs, net (281) 8,303 (118) 364
Amortization of acquisition-related
intangible assets 528 5,088 13,132 12,420 12,418 14,862 19,792 19,800
--------------------------------------------- ---------------------------------------------
Total operating expenses 51,390 65,934 71,848 72,770 70,139 71,811 80,100 74,696
--------------------------------------------- ---------------------------------------------
Operating income (loss) 301 (14,097) (15,930) (11,150) (6,924) (10,822) (18,075) (19,258)
Other income (expense), net 1,533 605 1,895 1,496 604 849 1,233 1,044
--------------------------------------------- ---------------------------------------------
Income (loss) before income taxes 1,834 (13,492) (14,035) (9,654) (6,320) (9,973) (16,842) (18,214)
Provision for income taxes 500 700 800 800 1,250 1,250 1,250 1,250
--------------------------------------------- ---------------------------------------------
Net income (loss) $1,334 ($14,192) ($14,835) ($10,454) ($7,570) ($11,223) ($18,092) ($19,464)
============================================= =============================================
Net income (loss) per
share - basic and diluted $0.05 ($0.55) ($0.58) ($0.41) ($0.30) ($0.45) ($0.74) ($0.81)
============================================= =============================================
Weighted average common
shares outstanding - basic 25,895 25,745 25,440 25,348 25,018 24,794 24,578 24,065
============================================= =============================================
Weighted average common
shares outstanding - diluted 26,451 25,745 25,440 25,348 25,018 24,794 24,578 24,065
============================================= =============================================
High common stock price $12.890 $15.700 $17.420 $21.813 $21.000 $15.438 $20.563 $24.500
Low common stock price $6.550 $6.650 $11.500 $12.500 $13.359 $10.063 $9.375 $11.438
The Company's quarterly operating results fluctuate as a result of a number of
factors including, without limitation, the timing of new product introductions,
marketing expenditures, promotional programs, and periodic discounting due to
competitive factors. The Company's operating results may fluctuate in the future
as a result of these and other factors, including the Company's success in
developing and introducing new products, its products and customer mix and the
level of competition which it experiences. The Company operates with a
relatively small backlog. Quarterly sales and operating results therefore
generally depend on the volume and timing of orders received during the quarter.
The Company's expense levels are based in part on its forecasts of future
revenues. If revenues are below expectations, the Company's operating results
may be adversely affected. Accordingly, there can be no assurance that the
Company will be profitable in any particular quarter.
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
58
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption "EXECUTIVE
OFFICERS OF THE COMPANY" in Part I hereof, and the remainder is contained in the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
May 22, 2002 (the "2002 Proxy Statement") under the captions "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is contained in the Company's 2002 Proxy Statement
under the captions "Election of Directors - Directors' Compensation" and
"Executive Compensation" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is contained in the Company's 2002 Proxy Statement
under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements are included in Item 8:
- Report of Independent Accountants
- Consolidated Statements of Operations for the years ended December 31,
2001, 2000, and 1999
- Consolidated Balance Sheets as of December 31, 2001 and 2000
- Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999
- Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999
- Notes to Consolidated Financial Statements
(a) 2. FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statement schedule is included in Item
14(d):
Schedule II - Supplemental Valuation and Qualifying Accounts
Schedules other than that listed above have been omitted since the required
information is not present, or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements or the notes thereto.
59
(a) 3. LISTING OF EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Stock and Asset Purchase Agreement among Microsoft Corporation,
Softimage Inc. and Avid Technology, Inc. dated as of June 15, 1998
together with all material exhibits thereto (incorporated by reference
to the Registrant's Quarterly Report a Form 10-Q as filed with the
Commission on August 12, 1998, File No. 0-21174).
3.1 Certificate of Amendment of the Third Amended and Restated Certificate
of Incorporation of the Registrant (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on May 15, 1995, File No. 0-21174).
3.2 Third Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to the Registrant's Registration
Statement on Form S-8 as filed with the Commission on June 9, 1993,
File No. 33-64126).
3.3 Amended and Restated By-Laws of the Registrant (incorporated by
reference to the Registrant's Registration Statement on Form S-1 as
declared effective by the Commission on March 11, 1993, File No.
33-57796).
3.4 Certificate of Designations establishing Series A Junior Participating
Preferred Stock (the "Certificate of Designations") (incorporated by
reference to the Registrant's Current Report on Form 8-K as filed with
the Commission on March 8, 1996).
3.5 Certificate of Correction to the Certificate of Designations
(incorporated by reference to the Registrant's Current Report on Form
8-K as filed with the Commission on March 8, 1996).
4.1 Specimen Certificate representing the Registrant's Common Stock
(incorporated by reference to the Registrant's Registration Statement
on Form S-1 as declared effective by the Commission on March 11, 1993,
File No. 33-57796).
4.2 Rights Agreement, dated as of February 29, 1996, between the
Registrant and The First National Bank of Boston, as Rights Agent
(incorporated by reference to the Registrant's Current Report on Form
8-K as filed with the Commission on March 8, 1996, File No. 0-21174).
4.3 Common Stock Purchase Warrant dated August 3, 1998 by and between Avid
Technology, Inc. and Microsoft Corporation (incorporated by reference
to the Registrant's Quarterly Report a Form 10-Q as filed with the
Commission on November 13, 1998, File No. 0-21174).
10.1 Lease dated September 29, 1995 between Allied Dunbar Insurance PLC and
Avid Technology Limited (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q as filed with the Commission on November
14, 1995, File No. 0-21174).
10.3 Lease between MGI Andover Street, Inc. and Avid Technology, Inc. dated
March 21, 1995 (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q as filed with the Commission on May 15,
1995, File No. 0-21174).
10.4 Amended and Restated lease dated as of June 7, 1996 between MGI One
Park West, Inc. and Avid Technology, Inc. (incorporated by reference
to the Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on August 14, 1996, File No. 0-21174).
10.15 Form of Distribution Agreement (incorporated by reference to the
Registrant's Registration Statement on Form S-1 as declared effective
by the Commission on March 11, 1993, File No. 33-57796).
60
10.16 Form of Purchase and License Agreement (incorporated by reference to
the Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
10.17 Form of Software Only License Agreement (incorporated by reference to
the Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
#10.18 1989 Stock Option Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-1 as declared effective
by the Commission on March 11, 1993, File No. 33-57796).
#10.19 1993 Stock Incentive Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-1 as declared effective
by the Commission on March 11, 1993, File No. 33-57796).
#10.20 1993 Director Stock Option Plan, as amended (incorporated by
reference to the Registrant's Proxy Statement as filed with the
Commission on April 27, 1995, File No. 0-21174).
#10.21 1993 Executive Compensation Agreement (incorporated by reference to
the Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
#10.22 1993 Employee Stock Purchase Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-8 as filed with the
Commission on June 9, 1993, File No. 33-64130).
#10.23 1994 Stock Option Plan, as amended (incorporated by reference to the
Registrant's Registration Statement on Form S-8 as filed with the
Commission on October 27, 1995, File No. 33-98692).
#10.25 1995 Executive Variable Compensation Program (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q as filed
with the Commission on May 15, 1995, File No. 0-21174).
#10.26 1998 Executive and Senior Management Variable Compensation Plan
(incorporated by reference to the Registrant's Annual Report on Form
10-K as filed with the Commission on March 27, 1998, File No.
0-21174).
#10.27 1997 Stock Option Plan (incorporated by reference to the
Registrant's Annual Report on Form 10-K as filed with the Commission
on March 27, 1998, File No. 0-21174).
#10.28 1996 Employee Stock Purchase Plan, as amended (incorporated by
reference to the Registrant's Annual Report on Form 10-K as filed with
the Commission on March 27, 1998, File No. 0-21174).
#10.29 1998 Non-Qualified Deferred Compensation Plan (incorporated by
reference to the Registrant's Registration Statement on Form S-8 as
filed with the Commission on December 18, 1997, File No. 33-42569).
#10.30 1998 Profit Sharing Plan (incorporated by reference to the
Registrant's Annual Report on Form 10-K as filed with the Commission
on March 27, 1998, File No. 0-21174).
#10.33 Employment Agreement between the Company and William L. Flaherty
(incorporated by reference to the Registrant's Annual Report on Form
10-K as filed with the Commission on March 27, 1998, File No.
0-21174).
#10.34 Change-in-Control Agreement between the Company and William L.
Flaherty (incorporated by reference to the Registrant's Annual Report
on Form 10-K as filed with the Commission on March 27, 1998, File No.
0-21174).
#10.36 1999 Profit Sharing Plan (incorporated by reference to the
Registrant's Annual Report on Form 10-K as filed with the Commission
on March 30, 1999, File No. 0-21174).
#10.37 1999 Executive and Senior Management Variable Compensation Plan
(incorporated by reference to the Registrant's Annual Report on Form
10-K as filed with the Commission on March 30, 1999, File No.
0-21174).
61
10.38 Registration Rights Agreement dated August 3, 1998 by and between
Avid Technology, Inc. and Microsoft Corporation (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q as filed
with the Commission on November 13, 1998, File No. 0-21174).
10.39 Form of Electronic Software License Agreement (incorporated by
reference to the Registrant's Annual Report on Form 10-K as filed with
the Commission on March 30, 1999, File No. 0-21174).
#10.40 Form of Employment Agreements between the Company and certain
Executive Officers (incorporated by reference to the Registrant's
Annual Report on Form 10-K as filed with the Commission on March 30,
1999, File No. 0-21174).
#10.41 Form of Change-in-Control Agreement between the Company and certain
Executive Officers (incorporated by reference to the Registrant's
Annual Report on Form 10-K as filed with the Commission on March 30,
1999, File No. 0-21174).
#10.44 1999 Stock Option Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-8 as filed with the
Commission on January 6, 2000, 1999, File No. 33-94167).
*21 Subsidiaries of the Registrant.
*23.1 Consent of PricewaterhouseCoopers LLP.
- ------------------
*documents filed herewith
#Management contract or compensatory plan identified pursuant to Item 14 (a) 3.
62
(b) REPORTS ON FORM 8-K
For the fiscal quarter ended December 31, 2001, the Company filed no Current
Reports on Form 8-K.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
By: /s/ David Krall By: /s/ Paul J. Milbury By: /s/ Carol L. Reid
------------------ ------------------- -----------------
David Krall Paul J. Milbury Carol L. Reid
President and Chief Financial Officer Vice President and
Chief Executive (Principal Financial Corporate Controller
Officer Officer) (Principal Accounting
(Principal Executive Officer)
Officer)
Date: March 28 , 2002 Date: March 28, 2002 Date: March 28, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ Charles T. Brumback Director March 20, 2002
-------------------------
Charles T. Brumback
/s/ Robert M. Halperin Director March 20, 2002
-------------------------
Robert M. Halperin
/s/ Nancy Hawthorne Director March 19, 2002
-------------------------
Nancy Hawthorne
/s/ Pamela F. Lenehan Director March 20, 2002
-------------------------
Pamela F. Lenehan
/s/ William J. Warner Director March 24, 2002
-------------------------
William J. Warner
64
AVID TECHNOLOGY, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2001
ITEM 14(d)
FINANCIAL STATEMENT SCHEDULE
65
AVID TECHNOLOGY, INC.
SCHEDULE II - SUPPLEMENTAL VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2001, 2000 and 1999
(in thousands)
Additions
------------------------------
Balance at Charged to Charged to Balance at
beginning of costs and other end of
Description period expenses accounts Deductions period
- ---------------------------------------- ------------- -------------- ------------- ------------- -------------
Allowance for doubtful accounts
December 31, 2001 $9,806 $619 ($1,859) (a) $8,566
December 31, 2000 7,397 4,350 (1,941) (a) 9,806
December 31, 1999 5,868 3,230 1,220 (2,921) (a) 7,397
Sales returns and allowances
December 31, 2001 $1,578 $9,086 (b) ($7,733) (c) $2,931
December 31, 2000 1,557 6,465 (b) (6,444) (c) 1,578
December 31, 1999 1,303 2,414 (b) (2,160) (c) 1,557
Allowance for transactions with recourse
December 31, 2001 $5,026 $1,016 $1,090 (b) ($3,270) (d) $3,862
December 31, 2000 3,923 1,744 2,079 (b) (2,720) (d) 5,026
December 31, 1999 3,449 747 1,368 (b) (1,641) (d) 3,923
Deferred tax asset valuation allowance
December 31, 2001 $115,962 $14,733 $733 $131,428
December 31, 2000 90,637 24,177 1,148 115,962
December 31, 1999 90,244 393 90,637
(a) Amount represents write-offs, net of recoveries.
(b) Provisions for sales returns, volume rebates, and a portion of the provision
for transactions with recourse are charged directly against revenue.
(c) Amount represents credits for returns, volume rebates, promotions and
warranty.
(d) Amount represents defaults, net of recoveries.
F-1
Index to Exhibits
Exhibit No. Description
------------------------------------------------------------------------------
2.1 Stock and Asset Purchase Agreement among Microsoft Corporation,
Softimage Inc. and Avid Technology, Inc. dated as of June 15, 1998
together with all material exhibits thereto (incorporated by reference
to the Registrant's Quarterly Report a Form 10-Q as filed with the
Commission on August 12, 1998, File No. 0-21174).
3.1 Certificate of Amendment of the Third Amended and Restated Certificate
of Incorporation of the Registrant (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on May 15, 1995, File No. 0-21174).
3.2 Third Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to the Registrant's Registration
Statement on Form S-8 as filed with the Commission on June 9, 1993,
File No. 33-64126).
3.3 Amended and Restated By-Laws of the Registrant (incorporated by
reference to the Registrant's Registration Statement on Form S-1 as
declared effective by the Commission on March 11, 1993, File No.
33-57796).
3.4 Certificate of Designations establishing Series A Junior Participating
Preferred Stock (the "Certificate of Designations") (incorporated by
reference to the Registrant's Current Report on Form 8-K as filed with
the Commission on March 8, 1996).
3.5 Certificate of Correction to the Certificate of Designations
(incorporated by reference to the Registrant's Current Report on Form
8-K as filed with the Commission on March 8, 1996).
4.1 Specimen Certificate representing the Registrant's Common Stock
(incorporated by reference to the Registrant's Registration Statement
on Form S-1 as declared effective by the Commission on March 11, 1993,
File No. 33-57796).
4.3 Rights Agreement, dated as of February 29, 1996, between the
Registrant and The First National Bank of Boston, as Rights Agent
(incorporated by reference to the Registrant's Current Report on Form
8-K as filed with the Commission on March 8, 1996, File No. 0-21174).
4.3 Common Stock Purchase Warrant dated August 3, 1998 by and between Avid
Technology, Inc. and Microsoft Corporation (incorporated by reference
to the Registrant's Quarterly Report a Form 10-Q as filed with the
Commission on November 13, 1998, File No. 0-21174).
10.1 Lease dated September 29, 1995 between Allied Dunbar Insurance PLC and
Avid Technology Limited (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q as filed with the Commission on November
14, 1995, File No. 0-21174).
10.3 Lease between MGI Andover Street, Inc. and Avid Technology, Inc. dated
March 21, 1995 (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q as filed with the Commission on May 15,
1995, File No. 0-21174).
10.4 Amended and Restated lease dated as of June 7, 1996 between MGI One
Park West, Inc. and Avid Technology, Inc. (incorporated by reference
to the Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on August 14, 1996, File No. 0-21174).
10.15 Form of Distribution Agreement (incorporated by reference to the
Registrant's Registration Statement on Form S-1 as declared effective
by the Commission on March 11, 1993, File No. 33-57796).
10.16 Form of Purchase and License Agreement (incorporated by reference to
the Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
10.17 Form of Software Only License Agreement (incorporated by reference to
the Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
#10.18 1989 Stock Option Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-1 as declared effective
by the Commission on March 11, 1993, File No. 33-57796).
#10.19 1993 Stock Incentive Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-1 as declared effective
by the Commission on March 11, 1993, File No. 33-57796).
#10.20 1993 Director Stock Option Plan, as amended (incorporated by
reference to the Registrant's Proxy Statement as filed with the
Commission on April 27, 1995, File No. 0-21174).
#10.21 1993 Executive Compensation Agreement (incorporated by reference to
the Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
#10.22 1993 Employee Stock Purchase Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-8 as filed with the
Commission on June 9, 1993, File No. 33-64130).
#10.23 1994 Stock Option Plan, as amended (incorporated by reference to the
Registrant's Registration Statement on Form S-8 as filed with the
Commission on October 27, 1995, File No. 33-98692).
#10.25 1995 Executive Variable Compensation Program (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q as filed
with the Commission on May 15, 1995, File No. 0-21174).
#10.26 1998 Executive and Senior Management Variable Compensation Plan
(incorporated by reference to the Registrant's Annual Report on Form
10-K as filed with the Commission on March 27, 1998, File No.
0-21174).
#10.27 1997 Stock Option Plan (incorporated by reference to the
Registrant's Annual Report on Form 10-K as filed with the Commission
on March 27, 1998, File No. 0-21174).
#10.28 1996 Employee Stock Purchase Plan, as amended (incorporated by
reference to the Registrant's Annual Report on Form 10-K as filed with
the Commission on March 27, 1998, File No. 0-21174).
#10.29 1998 Non-Qualified Deferred Compensation Plan (incorporated by
reference to the Registrant's Registration Statement on Form S-8 as
filed with the Commission on December 18, 1997, File No. 33-42569).
#10.30 1998 Profit Sharing Plan (incorporated by reference to the
Registrant's Annual Report on Form 10-K as filed with the Commission
on March 27, 1998, File No. 0-21174).
#10.33 Employment Agreement between the Company and William L. Flaherty
(incorporated by reference to the Registrant's Annual Report on Form
10-K as filed with the Commission on March 27, 1998, File No.
0-21174).
#10.34 Change-in-Control Agreement between the Company and William L.
Flaherty (incorporated by reference to the Registrant's Annual Report
on Form 10-K as filed with the Commission on March 27, 1998, File No.
0-21174).
#10.36 1999 Profit Sharing Plan (incorporated by reference to the
Registrant's Annual Report on Form 10-K as filed with the Commission
on March 30, 1999, File No. 0-21174).
#10.37 1999 Executive and Senior Management Variable Compensation Plan
(incorporated by reference to the Registrant's Annual Report on Form
10-K as filed with the Commission on March 30, 1999, File No.
0-21174).
10.38 Registration Rights Agreement dated August 3, 1998 by and between
Avid Technology, Inc. and Microsoft Corporation (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q as filed
with the Commission on November 13, 1998, File No. 0-21174).
10.39 Form of Electronic Software License Agreement (incorporated by
reference to the Registrant's Annual Report on Form 10-K as filed with
the Commission on March 30, 1999, File No. 0-21174).
#10.40 Form of Employment Agreements between the Company and certain
Executive Officers (incorporated by reference to the Registrant's
Annual Report on Form 10-K as filed with the Commission on March 30,
1999, File No. 0-21174).
#10.41 Form of Change-in-Control Agreement between the Company and certain
Executive Officers (incorporated by reference to the Registrant's
Annual Report on Form 10-K as filed with the Commission on March 30,
1999, File No. 0-21174).
#10.44 1999 Stock Option Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-8 as filed with the
Commission on January 6, 2000, 1999, File No. 33-94167).
*21 Subsidiaries of the Registrant.
*23.1 Consent of PricewaterhouseCoopers LLP.
- ------------------
*documents filed herewith
#Management contract or compensatory plan identified pursuant to Item 14 (a) 3.
SUBSIDIARIES OF THE REGISTRANT AS OF DECEMBER 31, 2001
------------------------------------------------------
AVID INTERNET MEDIA GROUP, INC. (Delaware)
AVID TECHNOLOGY WORLDWIDE, INC. (Delaware)
AVID TECHNOLOGY SECURITIES CORPORATION (Massachusetts)
AVID TECHNOLOGY FSC LIMITED (Barbados)
AVID TECHNOLOGY EUROPE LIMITED (England)
AVID TECHNOLOGY IBERIA LTD (England)
AVID TECHNOLOGY S.A.R.L. (France)
AVID TECHNOLOGY G.m.b.H. (Germany)
AVID TECHNOLOGY SALES LIMITED (Ireland)
DIGIDESIGN ITALY S.R.L. (Italy)
AVID TECHNOLOGY HOLDING B.V. (Netherlands)
AVID TECHNOLOGY INTERNATIONAL B.V. (Netherlands)
AVID JAPAN K.K. (Japan)
AVID TECHNOLOGY (S.E. ASIA) PTE LTD (Singapore)
AVID TECHNOLOGY (AUSTRALIA) PTY LTD (Australia)
AVID NORTH ASIA LIMITED (Hong Kong)
SOFTIMAGE CO. (Canada)
INEWS, LLC (Delaware)
INEWS PTY. LTD (Australia)
INEWS G.m.b.H.
INEWS LTD. (England)
D-DESIGN NORDIC AB (Sweden)
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 and Form S-8 of Avid Technology, Inc. of our report dated
January 30, 2002, except for Note R which is as of February 6, 2002 relating to
the financial statements and financial statement schedule, which appears in this
Form 10-K.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 28, 2002