AVID TECHNOLOGY, INC.
Avid Technology Park
One Park West
Tewksbury, MA 01876
August 13, 2003
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, DC 20549
Re: Avid Technology, Inc.
File No. 0-21174
Quarterly Report on Form 10-Q
-----------------------------
Ladies and Gentlemen:
Pursuant to regulations of the Securities and Exchange Commission,
submitted herewith for filing on behalf of Avid Technology, Inc. is the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
2003.
This filing is being effected by direct transmission to the Commission's
EDGAR System.
Very truly yours,
/s/ Carol E. Kazmer
Carol E. Kazmer
General Counsel
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
----------
Commission File Number 0-21174
AVID TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2977748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AVID TECHNOLOGY PARK
ONE PARK WEST
TEWKSBURY, MA 01876
(Address of principal executive offices)
Registrant's telephone number, including area code: (978) 640-6789
Indicate by check mark whether the registrant: (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 for 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 X No _____
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No _____
The number of shares outstanding of the registrant's Common Stock as of August
4, 2003 was 29,822,652.
AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
TABLE OF CONTENTS
-----------------
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
a) Condensed Consolidated Statements of Operations (unaudited)
for the three and six months ended June 30, 2003 and 2002 ...........1
b) Condensed Consolidated Balance Sheets as of
June 30, 2003 (unaudited) and December 31, 2002 .....................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2003 and 2002 .....................3
d) Notes to Condensed Consolidated Financial Statements (unaudited).....4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..........22
ITEM 4. Controls and Procedures.............................................23
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.................24
ITEM 5. Other Information...................................................24
ITEM 6. Exhibits and Reports on Form 8-K....................................24
SIGNATURES...................................................................25
EXHIBIT INDEX................................................................26
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net revenues $113,317 $106,094 $225,494 $198,103
Cost of revenues 50,608 52,591 102,835 100,306
------------- ------------- ------------- -------------
Gross profit 62,709 53,503 122,659 97,797
------------- ------------- ------------- -------------
Operating expenses:
Research and development 21,428 20,411 43,127 40,229
Marketing and selling 27,748 26,775 53,012 49,741
General and administrative 5,617 5,018 10,962 9,531
Restructuring and other costs, net (327) 1,783 (327)
Amortization of intangible assets 341 257 634 603
------------- ------------- ------------- -------------
Total operating expenses 55,134 52,134 109,518 99,777
------------- ------------- ------------- -------------
Operating income (loss) 7,575 1,369 13,141 (1,980)
Other income (expense), net 507 (717) 738 (452)
------------- ------------- ------------- -------------
Income (loss) before income taxes 8,082 652 13,879 (2,432)
Provision for income taxes 300 500 600 1,100
------------- ------------- ------------- -------------
Net income (loss) $7,782 $152 $13,279 ($3,532)
============= ============= ============= =============
Net income (loss) per common share - basic $0.27 $0.01 $0.47 ($0.14)
============= ============= ============= =============
Net income (loss) per common share - diluted $0.25 $0.01 $0.43 ($0.14)
============= ============= ============= =============
Weighted average common shares outstanding -
basic 28,494 26,161 28,052 26,095
============= ============= ============= =============
Weighted average common shares outstanding -
diluted 31,673 26,511 30,904 26,095
============= ============= ============= =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2003 2002
-------------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $78,915 $62,174
Marketable securities 56,151 26,860
Accounts receivable, net of allowances of
$9,913 and $10,614 at June 30, 2003 and
December 31, 2002, respectively 66,963 65,942
Inventories 36,247 38,047
Deferred tax assets, net 683 663
Prepaid expenses 7,023 4,515
Other current assets 5,801 6,741
-------------- --------------
Total current assets 251,783 204,942
Property and equipment, net 23,180 25,731
Intangible assets, net 1,458 1,513
Goodwill 1,087 1,087
Other assets 2,786 2,530
-------------- --------------
Total assets $280,294 $235,803
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $17,434 $24,297
Accrued compensation and benefits 16,947 13,425
Accrued expenses and other current liabilities 26,569 28,730
Income taxes payable 9,217 8,877
Deferred revenues 43,685 35,483
-------------- --------------
Total current liabilities 113,852 110,812
Long-term obligations under capital leases 924 1,427
-------------- --------------
Total liabilities 114,776 112,239
-------------- --------------
Contingencies (Note 5)
Stockholders' equity:
Preferred stock
Common stock 291 273
Additional paid-in capital 389,709 364,481
Accumulated deficit (222,086) (235,365)
Deferred compensation (73) (216)
Accumulated other comprehensive loss (2,323) (5,609)
-------------- --------------
Total stockholders' equity 165,518 123,564
-------------- --------------
Total liabilities and stockholders' equity $280,294 $235,803
============== ==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended June 30,
----------------------------------
2003 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $13,279 ($3,532)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 6,198 6,701
Provision for doubtful accounts 132 902
Compensation expense from stock grants and options 138 751
Equity in income of non-consolidated company (42) (133)
Gain on sale of business (327)
Write-down of investment in non-consolidated company 1,000
Changes in operating assets and liabilities:
Accounts receivable (324) 693
Inventories 1,790 (3,384)
Prepaid expenses and other current assets (1,371) (98)
Accounts payable (6,891) 9,283
Income taxes payable 398 (1,096)
Accrued expenses, compensation and benefits 321 (3,441)
Deferred revenues and deposits 8,211 885
- ---------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 21,839 8,204
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,696) (5,711)
Payments for other long-term assets (331) (132)
Dividend from non-consolidated company 59
Payments for business acquisitions (408)
Proceeds from sales of business 327
Purchase of marketable securities (34,204) (15,516)
Proceeds from sales of marketable securities 7,518 20,866
- ---------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (30,121) (107)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt (305)
Payment on note issued in connection with acquisition (13,020)
Proceeds from issuance of common stock under employee stock plans 25,251 1,062
- ---------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 24,946 (11,958)
- ---------------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents 77 656
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 16,741 (3,205)
Cash and cash equivalents at beginning of period 62,174 45,613
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $78,915 $42,408
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
PART I. FINANCIAL INFORMATION
ITEM 1D. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL INFORMATION
The accompanying condensed consolidated financial statements include the
accounts of Avid Technology, Inc. and its wholly owned subsidiaries
(collectively, "Avid" or the "Company"). These financial statements are
unaudited. However, in the opinion of management, the condensed consolidated
financial statements include all adjustments, consisting of only normal,
recurring adjustments, necessary for their fair presentation. Interim results
are not necessarily indicative of results expected for a full year. The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and therefore do not
include all information and footnotes necessary for a complete presentation of
operations, the financial position, and cash flows of the Company, in conformity
with generally accepted accounting principles. The Company filed audited
consolidated financial statements for the year ended December 31, 2002 on Form
10-K, which included all information and footnotes necessary for such
presentation. Certain amounts in the prior year's 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 amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reported periods. The most significant estimates reflected
in these financial statements include accounts receivable and sales allowances,
inventory valuation and income tax valuation allowances. Actual results could
differ from those estimates.
2. NET INCOME (LOSS) PER COMMON SHARE
Basic and diluted net income (loss) per share were as follows (in thousands,
except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income (loss) $7,782 $152 $13,279 ($3,532)
=========== =========== =========== ===========
Weighted average common shares
outstanding - basic 28,494 26,161 28,052 26,095
Weighted average potential common stock 3,179 350 2,852 -
----------- ----------- ----------- -----------
Weighted average common shares
outstanding - diluted 31,673 26,511 30,904 26,095
=========== =========== =========== ===========
Net income (loss) per common share - basic $0.27 $0.01 $0.47 ($0.14)
Net income (loss) per common share - diluted $0.25 $0.01 $0.43 ($0.14)
Common stock options and warrants that were
considered anti-dilutive securities and
excluded from the diluted net income (loss)
per share calculations were as follows, on
a weighted-average basis: 1,261 8,823 1,521 8,952
For the three and six months ended June 30, 2003 and 2002, certain stock options
and warrants have been excluded from the diluted net income (loss) per share
calculation as their effect would be anti-dilutive. For periods that the Company
reports a net loss, all potential common stock is considered anti-dilutive; for
periods when the Company reports net income, only potential common shares with
purchase prices in excess of the Company's average common stock fair value for
the related period are considered anti-dilutive.
4
3. INVENTORIES
Inventories consisted of the following (in thousands):
June 30, December 31,
2003 2002
--------------- ---------------
Raw materials $12,378 $13,402
Work in process 1,465 2,697
Finished goods 22,404 21,948
--------------- ---------------
$36,247 $38,047
=============== ===============
As of June 30, 2003 and December 31, 2002, the finished goods inventory included
deferred costs of $12.3 million and $8.6 million, respectively, associated with
product shipped to customers for which revenue had not yet been recognized.
During the three months ended March 31, 2003, in connection with an intercompany
transfer of assets resulting from a change in its selling model in Japan, the
Company recorded a charge to cost of revenues of $0.3 million related to prior
year inventory transactions.
4. 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
less the amount paid, if any, for the stock by the employee and is amortized
over the period during 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 follows the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," and SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," for
employee awards. All stock-based awards to non-employees are accounted for at
their fair value in accordance with SFAS No. 123.
The following table illustrates the effect on net income (loss) and income
(loss) per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123, to stock-based employee awards (in thousands, except
per share data).
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income (loss) as reported $7,782 $152 $13,279 ($3,532)
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects 14 93 29 186
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (3,272) (3,389) (6,573) (6,342)
-------- -------- -------- --------
Pro forma net income (loss) $4,524 ($3,144) $6,735 ($9,688)
======== ======== ======== ========
Income (loss) per share:
Basic-as reported $0.27 $0.01 $0.47 ($0.14)
======== ======== ======== ========
Basic-pro forma $0.16 ($0.12) $0.24 ($0.37)
======== ======== ======== ========
Diluted-as reported $0.25 $0.01 $0.43 ($0.14)
======== ======== ======== ========
Diluted-pro forma $0.14 ($0.12) $0.22 ($0.37)
======== ======== ======== ========
5
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model and is amortized over the
stock option's vesting period.
5. CONTINGENCIES
On March 11, 1996, Avid was named as a defendant in a patent infringement suit
filed in the United States District Court for the Western District of Texas by
Combined Logic Company, a California partnership located in Beverly Hills,
California. On May 16, 1996, the suit was transferred to the United States
District Court for the Southern District of New York on motion by the Company.
The complaint alleges infringement by Avid of U.S. patent number 4,258,385, and
seeks injunctive relief, treble damages and costs, and attorneys' fees. The
Company believes 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. The anti-trust claims against the Company and
Tektronix were dismissed by the United States District Court for the District of
California on March 23, 2001, and the remaining common law claim against Avid
was dismissed by stipulation and court order on April 6, 2001. Glen Holly is
appealing the lower court's decision. All briefing on the appeal has been
completed. The United States Court of Appeals for the Ninth Circuit heard oral
arguments on October 9, 2002, but has not yet issued its decision. Avid views
the complaint and appeal as without merit and will continue 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.
From time to time, the Company provides indemnification provisions in agreements
with customers covering potential claims by third parties that Avid products
infringe their intellectual property rights. Pursuant to these indemnification
provisions, the Company agrees to indemnify customers for losses that they
suffer or incur in connection with any valid U.S. patent or copyright
infringement claim brought by a third party with respect to Avid products. These
indemnification provisions generally offer perpetual coverage for infringement
claims based upon the products covered by the agreement. The maximum potential
amount of future payments the Company could be required to make under these
indemnification provisions is theoretically unlimited; however, the Company has
not incurred any material costs to defend lawsuits or settle claims related to
these indemnification provisions. As a result, the Company believes the
estimated fair value of these indemnification provisions is minimal.
6
As permitted under Delaware law, Avid has agreements whereby the Company
indemnifies its officers and directors for certain events or occurrences while
the officer or director is or was serving at its request in such capacity. The
term of the indemnification period is for the officer's or director's lifetime.
The maximum potential amount of future payments the Company could be required to
make under these indemnification agreements is unlimited; however, Avid has
mitigated the exposure through the purchase of directors and officers insurance,
which is intended to limit the risk and enable the Company to recover all or a
portion of any future amounts paid. As a result of this insurance policy
coverage, the Company believes the estimated fair value of these indemnification
agreements is minimal.
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, the landlord would, as of June 30,
2003 be eligible to draw against this letter of credit to a maximum of $5.1
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 $2.0 million
throughout the remaining lease period, which extends to September 2009. As of
June 30, 2003, the Company was not in default of this lease.
The Company, through a third party, provides lease financing options to its
customers, including distributors. During 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 June 30, 2003 and December 31, 2002, Avid's
maximum recourse exposure totaled approximately $15.6 million and $15.8 million,
respectively. The Company records revenue from these transactions upon the
shipment of products, provided that all other revenue recognition criteria are
met, and maintains a reserve for estimated losses under this recourse lease
program based on historical default rates. At June 30, 2003, the Company's
accrual for estimated losses was $2.9 million. To date, the Company has not
experienced significant losses under this lease financing program.
Avid provides warranty on hardware sold through its Video segment which
generally mirrors the manufacturers' warranties. The Company charges the related
material, labor and freight expense to cost of revenues in the period incurred.
With respect to the Audio business, Avid provides warranty on externally sourced
and internally developed hardware and records an accrual for the related
liability based on historical trends and actual material and labor costs. The
warranty period for all of the Company's products is generally 90 days to one
year but can extend up to five years depending on the manufacturer's warranty.
As of June 30, 2003, the Company's accrued product warranty liability was
approximately $1.3 million.
The following table sets forth the activity in the product warranty accrual
account for the six months ended June 30, 2003 (in thousands):
Accrual balance at December 31, 2002 $922
Accruals for product warranties 1,322
Cost of warranty claims (986)
--------
Accrual balance at June 30, 2003 $1,258
========
7
6. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss), net of taxes, consists of net income (loss),
the net changes in foreign currency translation adjustment and the net
unrealized gains and losses on available-for-sale securities. The following is a
summary of the Company's comprehensive income (loss), (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------
2003 2002 2003 2002
----------- ----------- ---------- -----------
Net income (loss) $7,782 $152 $13,279 ($3,532)
Net changes in:
Foreign currency translation adjustment 2,032 2,505 3,239 2,040
Unrealized gains (losses) on securities (5) 13 47 15
----------- ----------- ---------- -----------
Total comprehensive income (loss) $9,809 $2,670 $16,565 ($1,477)
=========== =========== ========== ===========
7. SEGMENT INFORMATION
The Company's organizational structure is based on strategic business units that
offer various products to the principal markets in which the Company's products
are sold. These business units equate to two reportable segments: Video and Film
Editing and Effects, and Professional Audio. The Company does not track or
report segment assets as part of the assessment of segment performance. The
following is a summary of the Company's operations by reportable segment (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ------------ ----------- ------------
Video and Film Editing and Effects:
Net revenues $77,392 $70,227 $156,731 $129,976
=========== ============ =========== ============
Operating income (loss) $2,708 ($3,080) $7,828 ($8,938)
=========== ============ =========== ============
Professional Audio:
Net revenues $35,925 $35,867 $68,763 $68,127
=========== ============ =========== ============
Operating income $5,208 $4,379 $7,730 $7,234
=========== ============ =========== ============
Combined Segments:
Net revenues $113,317 $106,094 $225,494 $198,103
=========== ============ =========== ============
Operating income (loss) $7,916 $1,299 $15,558 ($1,704)
=========== ============ =========== ============
The following table reconciles operating income (loss) for reportable segments
to total consolidated amounts for the three- and six-month period ended June 30,
2003 and 2002 (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2003 2002 2003 2002
---------- ----------- ---------- -----------
Total operating income (loss)for reportable segments $7,916 $1,299 $15,558 ($1,704)
Unallocated amounts:
Amortization of acquisition-related
intangible assets (341) (257) (634) (603)
Restructuring and other costs, net 327 (1,783) 327
---------- ----------- ---------- -----------
Consolidated operating income (loss) $7,575 $1,369 $13,141 ($1,980)
========== =========== ========== ===========
8
8. RESTRUCTURING AND OTHER COSTS, NET
In December 2002, the Company recorded a charge of $3.3 million in connection
with vacating excess space in its Tewksbury, Massachusetts; Daly City,
California; and Montreal, Canada facilities. The portion of the charge related
to Tewksbury ($0.5 million) resulted from a revision of the Company's estimate
of the timing and amount of future sublease income associated with that facility
for which a charge had previously been included in a 2001 restructuring. The
remaining portion of the charge for Daly City and Montreal was a result of the
Company's ceasing to use a portion of each facility in December 2002, and hiring
real estate brokers to assist in finding subtenants.
In March 2003, the Company implemented a restructuring program under which 48
employees worldwide were terminated, and a leased facility in California was
vacated. In connection with these actions, the Company recorded a $1.8 million
restructuring charge during the first quarter of 2003. The charge included $1.2
million for severance and related costs for terminated employees and $0.6
million for facility vacancy costs, including a $0.4 million non-cash charge
relating to the disposition of leasehold improvements.
The Company recorded the December 2002 and March 2003 charges in accordance with
the guidance of Statement of Financial Accounting Standards No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146
requires that a liability be recognized for an operating lease that is not
terminated based on the remaining lease rental costs, measured at its fair value
on a discounted cash flow basis, when the entity ceases using the rights
conveyed by the operating lease. That amount is reduced by any estimated
potential sublease rentals, regardless of whether the entity intends to enter
into a sublease. Future changes in the fair value of the Company's obligations
will be recorded through operating expenses.
The following table sets forth the activity in the restructuring accrual
accounts for the six months ended June 30, 2003 (in thousands):
Employee Facilities
Related Related Total
------------ ------------ ------------
Accrual balance at December 31, 2002 $433 $4,934 $5,367
Restructuring charge 1,177 641 1,818
Revisions of estimated liabilities (67) 32 (35)
Cash payments (1,184) (945) (2,129)
Non-cash disposals (412) (412)
------------ ------------ ------------
Accrual balance at June 30, 2003 $359 $4,250 $4,609
============ ============ ============
The Company expects that the majority of the remaining $0.4 million employee
related accrual balance will be expended over the next six months and will be
funded from working capital. The majority of the facilities-related accrual
represents lease payments due on vacated premises and estimated losses incurred
or expected to be incurred on subleases of such space. The leases extend through
2010 unless the Company is able to negotiate an earlier termination.
In December 1999, the Company entered into an agreement to sell its Italian
subsidiary to a third party. As part of that transaction, the Company extended
the buyers $0.8 million of loans, which were fully reserved through the
restructuring and other costs, net line. During the quarter ended June 30, 2002,
the Company received the third and final payment of $0.3 million under these
loans. Upon receipt of the payment, the Company recorded such amount as a credit
to restructuring and other costs, net
9. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force of the FASB reached a consensus
on Issue 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables"
("EITF 00-21"). EITF 00-21 requires that for revenue arrangements with multiple
deliverables, those deliverables be divided into separate units of accounting if
the deliverables meet certain criteria as defined by EITF 00-21. Arrangement
consideration is to be allocated among the separate units of accounting based on
9
their relative fair values and revenue recognition decisions should be
considered separately for each separate unit of accounting. EITF 00-21 is
effective for all arrangements entered into in fiscal periods beginning after
June 15, 2003, with early adoption permitted. The Company is currently
evaluating the scope of EITF 00-21 but believes that the Company's multiple
element arrangements fall within the scope of SOP 97-2 and therefore, EITF 00-21
will not be applicable to the Company.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting for derivative instruments including certain
derivative instruments embedded in other contracts and hedging activities under
SFAS No. 133. It is effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003. The
adoption of this standard is not expected to have a material impact on the
Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" which
establishes standards for how an issuer of financial instruments classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances) if, at
inception, the monetary value of the obligation is based solely or predominantly
on a fixed monetary amount known at inception, variations in something other
than the fair value of the issuer's equity shares or variations inversely
related to changes in the fair value of the issuer's equity shares. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this standard is not
expected to have a material impact on the Company's financial position or
results of operations.
10
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We develop, market, sell and support a wide range of software and
hardware for digital media production, management and distribution. Digital
media are video, audio or graphic elements in which the image, sound or picture
is recorded and stored as digital values, as opposed to analog, or tape-based,
signals. Our diverse range of product and service offerings enables customers
to "Make, Manage and Move Media."
Make Media. Our Video and Film Editing and Effects segment offers
digital, non-linear video and film editing systems and 3D and special effects
software that enable customers to manipulate moving pictures and sound in a
faster, easier, more creative, and more cost-effective manner than using
traditional analog tape-based systems. (Non-linear systems allow editors to
access material instantaneously rather than requiring them to work
sequentially.) Our Professional Audio segment, Digidesign, offers digital audio
software applications and hardware systems for 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
allow 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 MediaNetwork technology. This technology
enables users to simultaneously share and manage media assets throughout a
project or organization. The ability to effectively manage digital media assets
is a critical component of success for many broadcast and media companies with
multiple nonlinear editing workstations in a range of geographic locations. As a
result, professionals can collaborate seamlessly on all production elements, and
streamline the process for cost-effectively delivering compelling media
experiences and quickly "re-purposing" or finding new uses or markets for media
assets.
Move Media. We offer products that allow our customers to distribute
media over multiple platforms - including air, cable or satellite, or through
the Internet. In addition, we provide technology for playback directly to air
for broadcast television applications. Many of our products also support the
broadcast of streaming Internet video.
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 game developers and
Internet professionals. Projects produced using our products 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.)
During the quarter ended June 30, 2003 the Company unveiled a new family
of products called Digital Nonlinear Accelerators, or Avid DNA, a powerful
series of specialized computer hardware products engineered specifically for
media processing. When paired with Avid's next-generation nonlinear editing
software, the Avid DNA family enables professionals to achieve real-time
functionality and superior image and sound quality when capturing, editing,
finishing and outputting DV, SD and, in future releases, HD video formats. The
Avid DNA family includes Avid Media Composer Adrenaline and Avid Newscutter
Adrenaline FX, both of which began shipping in the second quarter of 2003. The
Avid Media composer Adrenaline leverages the key features of its predecessor to
offer improved quality, speed and performance in high-pressure time-sensitive
television and film editing and production environments. The Avid Newscutter
Adrenaline FX expands news editing capabilities by offering speed, reliability
and a broad range of professional news-oriented editing and workflow features in
a single, turnkey PC-based platform. The Avid DNA family also includes Avid DS
Nitris and Avid Xpress Pro with Avid Mojo, which are expected to ship in the
near future. Our results for the balance of the year will depend, in part, on
the timely shipment and market acceptance of the new products.
11
RESULTS OF OPERATIONS
Net Revenues
Our net revenues are derived mainly from the sales of computer-based
digital, nonlinear 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 is generated by sales near the end of each
quarter, which can impact our ability to accurately forecast revenues on a
quarterly basis. Increasingly, revenues are also being derived from sales of
"solutions" encompassing multiple products and networking capabilities that
enable users to share and manage media throughout a project or organization.
Such solution sales may include training and installation services, as well as
workflow management assistance, to be provided by us or a third party. Depending
upon the complexity of the arrangement and the level of our involvement, the
revenues resulting from these solution sales may be deferred for one or more
quarters while the services are being performed.
Net revenues increased by $7.2 million (6.8%) to $113.3 million for the
quarter ended June 30, 2003 from $106.1 million for the same quarter in 2002.
This increase occurred almost exclusively in our Video and Film Editing and
Effects ("Video") segment and reflected increases from Avid Unity and Broadcast
products (including those sold as part of large solutions described above) as
well as sales of Media Composer Adrenaline. Revenue from our Professional Audio
("Audio") segment increased slightly. Revenue from the combined segments
includes a positive currency translation effect of approximately $5.8 million as
compared to the quarter ended June 30, 2002, assuming revenues for the quarter
ended June 30, 2002 were expressed at current quarter exchange rates.
Net revenues increased by $27.4 million (13.8%) to $225.5 million for
the six months ended June 30, 2003 from $198.1 million for the six months ended
June 30, 2002. This increase primarily reflected increased demand across several
product families in our Video business driven in large part by an increase in
solution sales, as well as the introduction of Media Composer Adrenaline, both
mentioned above. Revenue from our Audio segment increased slightly. Revenue from
the combined segments includes a positive translation currency effect of
approximately $11.0 million as compared to the six-month period ended June 30,
2002, assuming revenues for the six-month period ended June 30, 2002 were
expressed at current exchange rates.
Net revenues derived through indirect channels were approximately 71% of
net revenues for the quarter ended June 30, 2003, compared to 82% of net
revenues for the same period in 2002. Indirect channel revenues were
approximately 75% and 82% of net revenues for the six-month periods ended June
30, 2003 and 2002, respectively.
Sales in the Americas accounted for 58% and 55% of the Company's second
quarter 2003 and 2002 net revenues, respectively. For the six-month periods
ended June 30, 2003 and 2002, sales in the Americas accounted for 56% and 55% of
net revenues, respectively. For the three- and six-month periods ended June 30,
2003, Americas sales increased by approximately $6.8 million or 11.5% and $17.7
million or 16.1%, respectively, compared to the same periods in 2002.
Sales in the Europe and Asia Pacific regions accounted for 42% and 45%
of the Company's second quarter 2003 and 2002 net revenues, respectively. For
the six-month periods ended June 30, 2003 and 2002, sales in the Europe and Asia
Pacific regions accounted for 44% and 45% of net revenues, respectively. The
dollar amount of Europe and Asia Pacific sales in the second quarter of 2003
were relatively unchanged compared to the same period in 2002, and increased by
approximately $9.7 million or 11% for the first half of 2003 compared to the
same period in 2002.
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; royalties for
third-party software included in the products; and provisions for inventory
obsolescence. The resulting gross profit fluctuates based on factors such as the
mix of products sold, the cost and proportion of third-party hardware and
software included in the systems sold, the offering of product upgrades, price
discounts and other sales promotion programs, the distribution channels through
which products are sold, the timing of new product introductions, sales of
aftermarket hardware products such as disk drives, and currency exchange rate
fluctuations.
12
Gross margin increased to 55.3% in the second quarter of 2003 from
50.4% for the same period of 2002. Margins in both the Video and Audio segments
improved, with the most significant factors being a shift in product mix,
including the introduction of Media Composer Adrenaline, which has a higher
gross margin than many of our products, and a positive impact on revenues from
currency exchange rates with no offsetting impact on cost of revenues as most of
our manufacturing costs are transacted in U.S. dollars.
Gross margin increased to 54.4% for the six months ended June 30, 2003
from 49.4% for the same period in 2002. Margins in both the Video and Audio
segments improved, with the most significant factors being more favorable
product mix in the Video segment and a positive impact from currency exchange
rates. The Audio segment was adversely affected by a change in product mix which
was partially offset by a decrease in manufacturing costs.
Research and Development
Research and development expenses increased by $1.0 million (5.0%) in
the second quarter of 2003 compared to the same period in 2002 and increased by
$2.9 million (7.2%) for the six months ended June 30, 2003 compared to the same
period in 2002. The increase was primarily the result of personnel-related
expenses and engineering outsourcing associated with the development of new
products. Research and development expenses decreased to 18.9% of net revenues
in the second quarter of 2003 compared to 19.2% in the same quarter of 2002.
Research and development expenses decreased to 19.1% of net revenues for the six
months ended June 30, 2003 from 20.3% for the same period in 2002 due to the
increased revenue base.
Marketing and Selling
Marketing and selling expenses increased by $1.0 million (3.6%) in the
second quarter of 2003 compared to the same period in 2002 and increased by $3.3
million (6.6%) for the six months ended June 30, 2003 compared to the same
period in 2002. The increase in both periods was primarily due to increased
employee compensation expenses, as well as outsourcing of certain costs
associated with our new product releases. We also experienced an increase in net
foreign exchange and hedging losses in the three- and six-month periods ended
June 30, 2003 as compared to the same periods in 2002, but in both cases these
were essentially offset by a decrease in bad debt expense. Discretionary
marketing expenses, including trade show expense, decreased in the three- and
six-month periods ended June 30, 2003 as compared to the same periods in 2002.
Marketing and selling expenses decreased to 24.5% of net revenues in the second
quarter of 2003 compared to 25.2% in the same quarter of 2002. Marketing and
selling expenses decreased to 23.5% of net revenues for the six months ended
June 30, 2003 from 25.1% for the same period in 2002 due to the increased
revenue base.
General and Administrative
General and administrative expenses increased by $0.6 million (11.9%) in
the second quarter of 2003 compared to the same period in 2002 and increased by
$1.4 million (15.0%) for the six months ended June 30, 2003 compared to the same
period in 2002. The increase in both periods was primarily due to variable
compensation-related expenses. The six-month period ended June 30, 2003 also
included increased legal and audit fees both primarily related to costs of
complying with recent legislation. General and administrative expenses increased
to 5.0% of net revenues in the second quarter of 2003 compared to 4.7% in the
same quarter of 2002 and increased to 4.9% from 4.8% of net revenues for the six
months ended June 30, 2003 and 2002, respectively due to the increased expenses
noted above.
Restructuring and Other Costs, Net
In March 2003, we implemented a restructuring program under which 48
employees worldwide were terminated, and a leased facility in California was
vacated. In connection with these actions, we recorded a $1.8 million
restructuring charge during the first quarter of 2003. The charge included $1.2
million for severance and related costs for terminated employees and $0.6
million for facility vacancy costs, including a $0.4 million non-cash charge
relating to the disposition of leasehold improvements.
In December 1999, we entered into an agreement to sell our Italian
subsidiary to a third party. As part of that transaction, we extended the buyers
$0.8 million of loans, which were fully reserved through restructuring and
other costs, net. During the quarter ended June 30, 2002, we received the
third and final payment of $0.3 million under these loans. We recorded this
payment as a credit to restructuring and other costs, net
13
Amortization of Intangible Assets
We recorded intangible assets associated with acquiring the following
businesses: Rocket Network, Inc. in 2003; iKnowledge, Inc. in 2002; iNews, LLC
in 2001; and The Motion Factory, Inc. in 2000. In connection with these
acquisitions, we allocated $4.8 million of the purchase consideration to
completed technologies which are being amortized over periods ranging from 3 to
4.5 years. Included in the operating results for each of the quarters ended June
30, 2003 and 2002 is amortization of these intangible assets of $0.3 million;
the six-month periods ended June 30, 2003 and 2002 each include amortization of
$0.6 million.
.
Other Income (Expense), Net
Other income (expense), net generally consists of interest income and
interest expense, but can also include income or losses associated with various
non-consolidated companies. Other income (expense), net for the second quarter
of 2003 increased $1.2 million to $0.5 million of income, as compared to the
loss in the same period in 2002. The increase was due to the 2002 write-off of
$1.0 million relating to an impaired investment accounted for under the cost
method. For the six-month period ended June 30, 2003, other income (expense),
net increased $1.2 million to $0.7 million of income, as compared to the loss in
the same period in 2002, for the same reason mentioned above.
Provision for Income Taxes
We recorded a tax provision of $0.3 million in each of the first two
quarters of 2003 and $0.6 million and $0.5 million for the first and second
quarters of 2002, respectively. The provision for the first and second quarters
of 2003 was substantially comprised of taxes payable by our foreign subsidiaries
with only alternative minimum tax provided on anticipated U.S taxable profits.
Regular federal income taxes resulting from anticipated U.S. profits have been
offset by the utilization of deductions from acquisition-related temporary
differences and net operating loss carry-forwards; the tax benefit of these
items is reflected in a net reduction in the deferred tax asset valuation
allowance. However, due to the remaining level of deferred tax assets and the
level of related historical taxable income, we have determined that the
uncertainty regarding the realization of these assets is sufficient to warrant
the continued establishment of a valuation allowance against our deferred tax
assets.
The provision for the first and second quarters of 2002 was generally
comprised of taxes payable by the Company's foreign subsidiaries with no tax
benefit provided on the losses before income taxes in the U.S.
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
June 30, 2003, our principal sources of liquidity included cash, cash
equivalents and marketable securities totaling $135.1 million.
Net cash provided by operating activities was $21.8 million for the six
months ended June 30, 2003 compared to $8.2 million provided by operating
activities in the same period in 2002. During the six months ended June 30,
2003, net cash provided by operating activities primarily reflects net income
adjusted for depreciation and amortization and other non-cash adjustments as
well as an increase in deferred revenue and a decrease in inventory, partially
offset by a decrease in accounts payable. During the six months ended June 30,
2002, net cash provided by operating activities primarily reflects the net loss
adjusted for depreciation and amortization and other non-cash adjustments as
well as an increase in accounts payable, offset by an increase in inventories
and a decrease in accrued expenses.
We purchased $2.7 million of property and equipment during the six
months ended June 30, 2003, compared to $5.7 million in the same period in 2002.
In both of these periods, the purchases were primarily hardware and software to
support research and development.
14
During the six months ended June 30, 2003 and 2002, we received cash
proceeds of $25.3 million and $1.1 million, respectively, from the issuance of
common stock upon stock option exercises and under our employee stock purchase
plan. In February 2002, we made a payment of $13.0 million in full satisfaction
of our outstanding note to Microsoft Corporation, issued in connection with our
1998 Softimage acquisition.
Expected uses of cash in the near future include obligations under
various past restructuring programs. We expect that the majority of the
remaining $0.4 million employee-related restructuring accrual balance will be
expended over the next six months and will be funded from working capital. We
also have facility-related cash obligations of approximately $4.2 million as a
result of required lease payments on vacated premises and losses to be incurred
or expected to be incurred on subleases of such space. These payments will be
made over the remaining terms of the leases, which have varying expiration dates
through 2010, unless we are able to negotiate earlier terminations. All
restructuring related payments will be funded through working capital.
We believe existing cash, cash equivalents, marketable securities and
funds generated from operations will be sufficient to meet our cash requirements
for at least the next 12 months. In the event we require additional financing,
we believe that we will be able to obtain such financing; however, there can be
no assurance that we would be successful in doing so, or that we could do so on
favorable terms.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force of the FASB reached a
consensus on Issue 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables" ("EITF 00-21"). EITF 00-21 requires that for revenue arrangements
with multiple deliverables, those deliverables be divided into separate units of
accounting if the deliverables meet certain criteria as defined by EITF 00-21.
Arrangement consideration is to be allocated among the separate units of
accounting based on their relative fair values and revenue recognition decisions
should be considered separately for each separate unit of accounting. EITF 00-21
is effective for all arrangements entered into in fiscal periods beginning after
June 15, 2003, with early adoption permitted. The Company is currently
evaluating the scope of EITF 00-21 but believes that the Company's multiple
element arrangements fall within the scope of SOP 97-2 and therefore, EITF 00-21
will not be applicable to the Company.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting for derivative instruments including certain
derivative instruments embedded in other contracts and hedging activities under
SFAS No. 133. It is effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003. The
adoption of this standard is not expected to have a material impact on the
Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain
Financial Instruments with Characteristics of Both Liabilities and Equity" which
establishes standards for how an issuer of financial instruments classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances) if, at
inception, the monetary value of the obligation is based solely or predominantly
on a fixed monetary amount known at inception, variations in something other
than the fair value of the issuer's equity shares or variations inversely
related to changes in the fair value of the issuer's equity shares. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this standard is not
expected to have a material impact on the Company's financial position or
results of operations.
15
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Some of the statements in this Form 10-Q relating to our future
performance constitute forward-looking statements. Such forward-looking
statements are based upon management's current expectations and involve known
and unknown risks. Realization of any of these risks may cause actual results to
differ materially from the results described in the forward-looking statements.
Certain of these risks are as follows:
Our performance will depend in part on market acceptance of our new digital
nonlinear editing products.
We recently introduced several new products, including a line of digital
nonlinear accelerators and a next-generation Media Composer system. We will need
to continue to focus marketing and sales efforts on educating potential
customers, as well as our resellers, about the uses and benefits of these
products. Our future success will depend in part on the acceptance and wide use
of these products. In addition, there are several other risks involved with
offering new products, including, without limitation, the possibility of defects
or errors, failure to meet customer expectations, delays in shipping new
products and the introduction of similar products by our competitors. At the
same time, the introduction and transition to new products could have a negative
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 or predicting customer demand
in this market.
We are currently building our presence in the broadcast market and have
augmented our NewsCutter product offering with the Avid Unity for News products,
and the server, newsroom, and browser products obtained in the Pluto and iNews
acquisitions. The broadcast market is distinguished from our traditional Video
business in that turn-key, fully integrated, complex "solutions" (including the
configuration of unique workflows), rather than discrete point products, are
frequently required by the customer. As a relatively new player in the broadcast
market, we may encounter difficulties in establishing ourselves, creating
compelling customer solutions, and developing a strong, loyal customer base.
Large, complex broadcast orders often require us to devote significant
sales, manufacturing, installation, and support resources to ensure their
successful and timely fulfillment. As the broadcast market converts from analog
to digital, our strategy has been to build our broadcast solutions team in
response to customer demand. To the extent that customer demand for our
broadcast solutions exceeds our expectations, we may encounter difficulties in
the short run meeting our customers' needs. 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 we are unsuccessful in
capturing and maintaining a share of this digital broadcast market or in
predicting and satisfying customer demand, 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. Digidesign's strong
performance in recent years reflects a series of successful product
introductions. 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 offering solutions to new markets, and our
future revenues depend in part on the success of this expansion.
Traditionally, we have been a point products company. Increasingly, we
are providing end-to-end solutions for our customers. We are expanding our
product line beyond our core video and audio editing markets to offer digital
media production solutions to the broadcast news market (including cable and
16
Internet news), the on-line film and video finishing market, and the emerging
market for multimedia production tools (including the Internet and corporate
markets). Because these markets are evolving, we must anticipate our customers'
future needs and introduce compelling new products, gain market acceptance, and
establish appropriate distribution channels, support, and maintenance. To the
extent that we fail to accurately anticipate our customers' needs, we may need
to adjust our plans accordingly, which could cause delays, unexpected expenses,
and reallocation of our resources, and which in turn could harm our business and
reduce our operating results.
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 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.
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, or marketing resources than we do. Such
competitors may use these resources to lower their product costs, allowing them
to reduce prices to levels at which we could not operate profitably. Further,
such competitors may be able to develop products comparable or superior to ours,
or adapt more quickly to new technologies or evolving customer requirements. If
we are unable to compete effectively in our target markets, our business and
results of operations could suffer.
Competition in the 3-D market has increased dramatically since our acquisition
of Softimage.
The 3-D market has changed significantly from the time we acquired our
Softimage subsidiary in August 1998. Since this acquisition, competitors'
products have eroded Softimage's market share and have contributed to downward
price pressure, which has resulted in reduced margins. In addition, we have
experienced delays in introducing new products into the 3-D animation market.
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 3-D 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 ownership and rights, exchange
rate fluctuation, political instability and unrest, natural disasters, and other
risks, which could adversely impact our revenues.
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
17
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
could threaten our supply of these components. While we believe that alternative
sources for these components could be developed, or our products could be
redesigned to permit the use of alternative components, an interruption of our
supply could damage our business and negatively affect our operating results.
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 and OSX 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 changes or that we need
to qualify and support new platforms, we could be required to expend valuable
engineering resources, which is likely to adversely affect our operating
results.
Our operating results are dependent on several unpredictable factors.
The revenue and gross profit from our products depend on many factors,
including:
o mix of products sold;
o cost and proportion of third-party hardware included in such products;
o product distribution channels;
o acceptance of our 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 competitive pressure on product prices;
o costs incurred in connection with "solution" sales, which typically have
longer selling and implementation cycles; and
o timing and delivery of "solutions" to customers.
Changes in any of these factors could affect our operating results.
Our operating results could be harmed by currency fluctuations.
A significant portion of our business is conducted in currencies other
than the U.S. dollar. Accordingly, changes in the value of major foreign
currencies (including the euro, the British pound, and the Japanese yen)
relative to the value of the U.S. dollar could lower future revenues and
operating results.
Our 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 could have the potential 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 adversely affected.
18
Poor global macroeconomic conditions could disproportionately impact our
industry.
As a result of unfavorable economic conditions and reduced capital
spending, our customers in the media, broadcast and content-creation industries
have delayed or reduced expenditures. The revenue growth and profitability of
our business depends primarily on the overall demand for our products. Softening
demand for our products resulting from ongoing economic uncertainty may result
in decreased revenues or earnings levels or growth rates. If global economic
conditions worsen, demand for our products may weaken, and our business and
results of operations could suffer.
Terrorism, acts of war, and other international conflicts may seriously harm our
business.
Terrorism or acts of war throughout the world may disrupt our business
and harm our employees, facilities, suppliers, distributors, resellers or
customers, which could significantly impact our revenue and operating results.
The potential for terrorist attacks and other threats to national security, and
the responses of the United States and other countries to such attacks or
threats, have created many economic and political uncertainties that could
adversely affect our business and stock price in ways that cannot be predicted.
We are predominantly uninsured for losses and interruptions caused by terrorism,
acts of war, and other international conflicts.
If we fail to maintain strong relationships with our resellers, distributors,
and suppliers, our ability to successfully deploy our products may be harmed.
We sell many of our Video products and services, and substantially all
of our Audio products and services, indirectly through resellers and
distributors. The resellers and distributors of our Video segment products
typically purchase Avid software and Avid - specific hardware from us, and
third-party components from various 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.
Most of the resellers and distributors of our Video products are not
granted rights to return products after purchase, and actual product returns
from them have been insignificant to date. However, our 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
returns, exchanges and credits for price protection are provided, as a reduction
of revenues, upon shipment of the related products to such distributors and
resellers, based upon our historical experience. To date, actual returns have
not differed materially from management's estimates. However, if returns of our
Audio segment products were to exceed estimated levels, our revenues and
operating results could be adversely impacted.
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 are not able to increase the price of such products to offset
these increased costs, our gross profit margin on these products could decrease
and our operating results could be adversely affected.
Our future growth could be harmed if we lose the services of our key personnel.
Our success depends upon the services of a number of key current
employees. The loss of the services of one or more of these key employees could
harm our business. Our success also depends upon our ability to attract highly
skilled new employees. Competition for such employees is intense in the
industries and geographic areas in which we operate. If we are unable to compete
successfully for such employees, our business could suffer.
19
Our websites could subject us to legal claims that could harm our business.
Some of our websites provide interactive information and services to our
customers. To the extent that materials may be posted on and/or downloaded from
these 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 or
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, they could potentially be
subject to a wide variety of international laws.
Regulations could be enacted that restrict our Internet initiatives.
Federal, state, and local authorities may adopt new laws and regulations
governing the Internet, including laws and regulations covering issues such as
privacy, distribution, and content. The enactment of any such 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
depends, 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, trademark and trade secret laws, 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 5, " Contingencies" in
our unaudited quarterly financial statements.
If we acquire other companies or businesses, we will be subject to risks that
could hurt our business.
We periodically acquire businesses, form strategic alliances, or make
debt or equity investments. The risks associated with such acquisitions,
alliances, and investments include, among others, the difficulty of assimilating
the operations and personnel of the target companies, the failure to realize
anticipated returns 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 could 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.
A portion of our sales are financed under a third-party leasing program.
We have an established leasing program with a third party that allows
certain of our customers who choose to do so to finance their purchases. If this
program ended abruptly or unexpectedly, some of our customers might be unable to
purchase our products unless or until they were able to arrange for alternative
financing, and this could adversely impact our revenues.
20
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, most 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 global macroeconomic conditions.
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 or disproportionate to any
of the factors above.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk
Our primary exposures to market risk are the effect of volatility in
currencies on asset and liability positions of our international subsidiaries
that are denominated in foreign currencies, and the effect of fluctuations in
interest rates earned on our cash equivalents and marketable securities.
Foreign Currency Exchange Risk
We generally derive nearly half of our revenues from customers outside
the United States. This business is, for the most part, transacted through
international subsidiaries and generally in the currency of the end-user
customers. Therefore, we are exposed to the risks that changes in foreign
currency could adversely impact our revenues, net income (loss) and cash flow.
To hedge against the foreign exchange exposure of certain forecasted
receivables, payables and cash balances of our foreign subsidiaries, we enter
into foreign currency forward-exchange contracts. We record gains and losses
associated with currency rate changes on these contracts 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, we could experience
unanticipated currency gains or losses.
At June 30, 2003, we had $29.9 million of forward-exchange contracts
outstanding, denominated in euros, Japanese yen, Canadian dollars, Singapore
dollars, British pounds, and Australian dollars as a hedge against forecasted
foreign currency-denominated receivables, payables and cash balances. For the
three- and six-month periods ended June 30, 2003, net losses of $2.0 million and
$3.2 million, respectively, resulting from forward-exchange contracts that were
included in the results of operations and were offset by net transaction and
translation gains on the related asset and liabilities for the same periods of
$1.9 million and $3.4 million, respectively. A hypothetical 10% change in
foreign currency rates would not have a material impact on our results of
operations, assuming the above-mentioned forecast of foreign currency exposure
is accurate, because the impact on the forward contracts as a result of a 10%
change would at least partially offset the impact on the asset and liability
positions of our foreign subsidiaries.
Interest Rate Risk
At June 30, 2003, we held $135.1 million in cash, cash equivalents and
marketable securities, including short-term U.S. and Canadian 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.
22
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures. The Company's management, with the
participation of the Company's chief executive officer and chief financial
officer, evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of June 30, 2003. In designing and evaluating the Company's disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving their objectives, and management necessarily applied its judgment
in evaluating the cost-benefit relationships of possible controls and
procedures. Based on this evaluation, the Company's chief executive officer and
chief financial officer concluded that, as of June 30, 2003, the Company's
disclosure controls and procedures were (1) designed to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to the Company's chief executive officer and chief financial officer
by others within those entities, particularly during the period in which this
report was being prepared and (2) effective, in that they provide reasonable
assurance that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms.
No change in the Company's internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
fiscal quarter ended June 30, 2003 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
23
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 21, 2003. At the
meeting, Charles Brumback and Nancy Hawthorne were reelected as Class I
Directors. The vote with respect to each nominee is set forth below:
Total Vote For Total Vote Withheld
Each Director From Each Director
-------------- -------------------
Mr. Brumback 25,115,356 598,854
Ms. Hawthorne 25,610,358 103,852
Additional Directors of the Company whose term of office continued after the
meeting are John Guttag, Robert Halperin, Pamela F. Lenehan, William Warner,
and David A. Krall.
In addition, the stockholders ratified the selection of PricewaterhouseCoopers
LLP as the Company's independent accountants by a vote of 25,450,474 shares for,
5,978 shares against, and 257,758 shares abstaining.
ITEM 5. OTHER INFORMATION
A proposal that a stockholder would like included in the Company's proxy
statement for the 2004 Annual Meeting must be received by the Secretary of the
Company at its principal office in Tewksbury, Massachusetts no later than
December 15, 2003.
If a stockholder intends to present a proposal at the 2004 Annual Meeting of
Stockholders, but not have such proposal included in the Company's proxy
statement, the proposal must be submitted to the Secretary of the Company at the
Company's principal offices no later than March 12, 2004 or 60 days before the
date of the 2004 Annual Meeting, whichever is later. The Company has not yet set
a date for the 2004 Annual Meeting; however, if the 2004 Annual Meeting is held
on May 21, 2004 (the anniversary of the 2003 Annual Meeting), the deadline for
delivery of the proposal is expected to be March 12, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
--------
31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
-------------------
A report on Form 8-K filed April 16, 2003, reporting under Item 9 the
announcement that on April 16, 2003, the Company issued a press release
regarding its financial results for the quarter ended March 31, 2003. In
accordance with Securities and Exchange Commission Release No. 33-8216, the
information contained in the Form 8-K, which was intended to be furnished under
Item 12, "Results of Operations and Financial Condition," was instead furnished
under Item 9, "Regulation FD Disclosure."
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Avid Technology, Inc.
Date: August 13, 2003 By: /s/ Paul J. Milbury
------------------------
Paul J. Milbury
Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 2003 By: /s/ Carol L. Reid
------------------------
Carol L. Reid
Vice President and Corporate Controller
(Principal Accounting Officer)
25
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
26