AVID TECHNOLOGY, INC.
Avid Technology Park
One Park West
Tewksbury, MA 01876
November 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 September
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 SEPTEMBER 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 November
4, 2003 was 30,726,430.
AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
a) Condensed Consolidated Statements of Operations (unaudited)
for the three and nine months ended September 30, 2003 and 2002........1
b) Condensed Consolidated Balance Sheets as of
September 30, 2003 (unaudited) and December 31, 2002...................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 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 Disclosure About Market Risk...........22
ITEM 4. Controls and Procedures.............................................23
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings...................................................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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net revenues $119,090 $107,832 $344,584 $305,935
Cost of revenues 52,784 53,222 155,619 153,528
----------- ----------- ----------- -----------
Gross profit 66,306 54,610 188,965 152,407
----------- ----------- ----------- -----------
Operating expenses:
Research and development 20,706 20,916 63,833 61,145
Marketing and selling 27,959 25,677 80,971 75,418
General and administrative 5,670 5,454 16,632 14,985
Restructuring and other costs, net 76 - 1,859 (327)
Amortization of intangible assets 341 257 975 861
----------- ----------- ----------- -----------
Total operating expenses 54,752 52,304 164,270 152,082
----------- ----------- ----------- -----------
Operating income 11,554 2,306 24,695 325
Other income (expense), net 592 259 1,330 (192)
----------- ----------- ----------- -----------
Income before income taxes 12,146 2,565 26,025 133
Provision for income taxes 300 300 900 1,400
----------- ----------- ----------- -----------
Net income (loss) $11,846 $2,265 $25,125 ($1,267)
=========== =========== =========== ===========
Net income (loss) per common share
- basic $0.40 $0.09 $0.88 ($0.05)
=========== =========== =========== ===========
Net income (loss) per common share
- diluted $0.35 $0.09 $0.78 ($0.05)
=========== =========== =========== ===========
Weighted average common shares outstanding
- basic 29,865 26,287 28,663 26,064
=========== =========== =========== ===========
Weighted average common shares outstanding
- diluted 33,380 26,550 32,059 26,064
=========== =========== =========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
AVID TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2003 2002
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $94,376 $62,174
Marketable securities 77,273 26,860
Accounts receivable, net of allowances of
$9,646 and $10,614 at September 30, 2003
and December 31, 2002, respectively 60,843 65,942
Inventories 38,558 38,047
Deferred tax assets, net 686 663
Prepaid expenses 5,010 4,515
Other current assets 6,470 6,741
------------- -------------
Total current assets 283,216 204,942
Property and equipment, net 22,309 25,731
Intangible assets, net 1,118 1,513
Goodwill 1,087 1,087
Other assets 2,869 2,530
------------- -------------
Total assets $310,599 $235,803
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $16,477 $24,297
Accrued compensation and benefits 19,420 13,425
Accrued expenses and other current liabilities 25,116 28,730
Income taxes payable 9,253 8,877
Deferred revenues 42,115 35,483
------------- -------------
Total current liabilities 112,381 110,812
Long-term obligations under capital leases,
net of current portion 759 1,427
------------- -------------
Total liabilities 113,140 112,239
------------- -------------
Contingencies (Note 5)
Stockholders' equity:
Preferred stock - -
Common stock 304 273
Additional paid-in capital 409,332 364,481
Accumulated deficit (210,240) (235,365)
Deferred compensation (43) (216)
Accumulated other comprehensive loss (1,894) (5,609)
------------- -------------
Total stockholders' equity 197,459 123,564
------------- -------------
Total liabilities and stockholders' equity $310,599 $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)
Nine Months Ended September 30,
--------------------------------
2003 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $25,125 ($1,267)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 9,343 9,821
Provision for doubtful accounts 418 1,350
Compensation expense from stock grants and options 169 901
Equity in income of non-consolidated company (155) (158)
Gain on sale of business - (327)
Write-down of investment in non-consolidated company - 1,000
Changes in operating assets and liabilities:
Accounts receivable 5,869 16,183
Inventories (515) (8,027)
Prepaid expenses and other current assets 84 669
Accounts payable (7,627) 7,123
Income taxes payable 610 (2,378)
Accrued expenses, compensation and benefits 742 (3,744)
Deferred revenues and deposits 6,637 1,458
- ---------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 40,700 22,604
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,578) (7,117)
Payments for other long-term assets (360) (130)
Dividend from non-consolidated company 85 59
Payments for business acquisitions (409) -
Proceeds from sale of business - 327
Purchases of marketable securities (59,181) (16,173)
Proceeds from sales of marketable securities 11,347 21,099
- ---------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (53,096) (1,935)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital leases (463) -
Payment on note issued in connection with acquisition - (13,020)
Proceeds from issuance of common stock under employee stock plans 44,887 2,032
- ---------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 44,424 (10,988)
- ---------------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents 174 573
- ---------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 32,202 10,254
Cash and cash equivalents at beginning of period 62,174 45,613
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $94,376 $55,867
- ---------------------------------------------------------------------------------------------------
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, 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 asset 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 Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2003 2002 2003 2002
----------- ---------- ---------- -----------
Net income (loss) $11,846 $2,265 $25,125 ($1,267)
=========== ========== ========== ===========
Weighted average common shares
outstanding - basic 29,865 26,287 28,663 26,064
Weighted average potential common stock 3,515 263 3,396 -
----------- ---------- ---------- -----------
Weighted average common shares
outstanding - diluted 33,380 26,550 32,059 26,064
=========== ========== ========== ===========
Net income (loss) per common share
- basic $0.40 $0.09 $0.88 ($0.05)
Net income (loss) per common share
- diluted $0.35 $0.09 $0.78 ($0.05)
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: 1,165 8,330 1,257 8,282
For the three and nine months ended September 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):
September 30, December 31,
2003 2002
---------------- -----------------
Raw materials $12,629 $13,402
Work in process 1,798 2,697
Finished goods 24,131 21,948
---------------- -----------------
$38,558 $38,047
================ =================
As of September 30, 2003 and December 31, 2002, the finished goods inventory
included deferred costs of $11.3 million and $8.6 million, respectively,
associated with product shipped to customers for which revenue had not yet been
recognized.
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. For holders of these
options or shares who are terminated, the Company ceases amortization and
reclassifies the associated deferred compensation to additional paid-in capital.
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 Nine Months Ended
September 30, September 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income (loss) as reported $11,846 $2,265 $25,125 ($1,267)
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects 35 86 64 272
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (2,737) (2,617) (9,310) (8,959)
-------- -------- -------- --------
Pro forma net income (loss) $9,144 ($266) $15,879 ($9,954)
======== ======== ======== ========
5
Net income (loss) per share:
Basic-as reported $0.40 $0.09 $0.88 ($0.05)
======== ======== ======== ========
Basic-pro forma $0.31 ($0.01) $0.55 ($0.38)
======== ======== ======== ========
Diluted-as reported $0.35 $0.09 $0.78 ($0.05)
======== ======== ======== ========
Diluted-pro forma $0.27 ($0.01) $0.50 ($0.38)
======== ======== ======== ========
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
appealed the lower court's decision. On September 9, 2003, a three-judge panel
of the U.S. Court of Appeals for the Ninth Circuit reversed in part the lower
court's dismissal and sent the antitrust claims back to the lower court for
further findings. Avid and Tektronix filed a Petition for a rehearing by the
three-judge panel and a rehearing by the full Ninth Circuit on September 23,
2003. All lower court proceedings are stayed pending a decision on rehearing.
Avid continues to view 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, to date, the
Company has not received any claims under 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 Avid's 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, in most cases, enable the
Company to recover all or a portion of any future amounts paid. As a result of
this insurance policy coverage and Avid's related payment experience to date,
the Company believes the estimated fair value of these indemnification
agreements is minimal.
The Company has a standby 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
September 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 September 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 September 30, 2003 and December 31, 2002, Avid's
maximum recourse exposure totaled approximately $14.4 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 September 30, 2003 and December
31, 2002, the Company's accrual for estimated losses was $2.9 million and $3.3
million, respectively. To date,actual losses incurred under this lease financing
program have not differed materially from management's estimate.
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 September 30, 2003, the Company's accrued product warranty liability was
approximately $1.2 million.
The following table sets forth the activity in the product warranty accrual
account for the nine months ended September 30, 2003 (in thousands):
Accrual balance at December 31, 2002 $922
Accruals for product warranties 1,813
Cost of warranty claims (1,511)
---------
Accrual balance at September 30, 2003 $1,224
=========
7
6. COMPREHENSIVE INCOME
Total comprehensive income, net of taxes, consists of net income (loss), the net
changes in foreign currency translation adjustment and net unrealized gains and
losses on available-for-sale securities. The following is a summary of the
Company's comprehensive income, (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ----------------------
2003 2002 2003 2002
----------- ----------- ---------- -----------
Net income (loss) $11,846 $2,265 $25,125 ($1,267)
Net changes in:
Foreign currency translation adjustment 436 (563) 3,675 1,478
Unrealized gains (losses) on securities (6) (5) 40 9
----------- ----------- ---------- -----------
Total comprehensive income $12,276 $1,697 $28,840 $220
=========== =========== ========== ===========
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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ------------ ----------- ------------
Video and Film Editing and Effects:
Net revenues $86,689 $73,821 $243,420 $203,797
=========== ============ =========== ============
Operating income (loss) $9,746 ($1,390) $17,574 ($10,328)
=========== ============ =========== ============
Professional Audio:
Net revenues $32,401 $34,011 $101,164 $102,138
=========== ============ =========== ============
Operating income $2,225 $3,953 $9,955 $11,187
=========== ============ =========== ============
Combined Segments:
Net revenues $119,090 $107,832 $344,584 $305,935
=========== ============ =========== ============
Operating income $11,971 $2,563 $27,529 $859
=========== ============ =========== ============
The following table reconciles operating income for reportable segments to total
consolidated amounts for the three- and nine-month period ended September 30,
2003 and 2002 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2003 2002 2003 2002
---------- ----------- ---------- -----------
Total operating income for reportable segments $11,971 $2,563 $27,529 $859
Unallocated amounts:
Amortization of acquisition-related
intangible assets (341) (257) (975) (861)
Restructuring and other costs, net (76) - (1,859) 327
---------- ----------- ---------- -----------
Consolidated operating income $11,554 $2,306 $24,695 $325
========== =========== ========== ===========
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 September 2003, the
Company revised its estimate of the timing and amount of future sublease income
associated with its Daly City facility resulting in a $0.1 million charge.
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
are recorded through operating expenses.
The following table sets forth the activity in the restructuring accrual
accounts for the nine months ended September 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 (80) 121 41
Cash payments (1,480) (1,402) (2,882)
Non-cash disposals - (412) (412)
------------ ------------ ------------
Accrual balance at September 30, 2003 $50 $3,882 $3,932
============ ============ ============
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 ("EITF") of the Financial
Accounting Standards Board ("FASB") reached a consensus on Issue 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF 00-21").
The Company determined that its multiple element arrangements fall within the
scope of SOP 97-2 and therefore EITF 00-21 is not applicable to the Company. In
July 2003, the EITF reached consensus on Issue 03-05, "Applicability of AICPA
Statement of Position 97-2 to Non-Software Deliverables in an Arrangement
9
Containing More-Than-Incidental Software" ("EITF 03-05"). EITF 03-05 concludes
that software-related elements include software-related products and services
such as those listed in paragraph 9 of SOP 97-2, as well as other deliverables
for which the software is essential to their functionality (e.g. computer
hardware). Elements included in arrangements that do not qualify as
software-related elements are to be accounted for under the guidance of EITF
00-21 and not SOP 97-2. EITF 03-05 is applicable for revenue arrangements
entered into after October 1, 2003. The Company believes that generally elements
included in its multiple element arrangements qualify as software-related
elements and therefore EITF 03-05 is not 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 did not 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 did not 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.)
In April 2003, we 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
our 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 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, and Avid Xpress Pro and Avid Mojo, which began shipping in the third
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 range of professional
news-oriented editing and workflow features in a turnkey PC-based platform. Avid
Xpress Pro software and the Avid Mojo accelerator deliver professional video,
film, and audio editing capabilities including automatic color correction,
real-time digital and analog output and are qualified to run on a wide range of
Windows-based CPUs as well as on the Power Mac G5. The Avid DNA family also
includes Avid DS Nitris which began shipping in the fourth quarter of 2003. The
Avid DS Nitris is a powerful finishing tool delivering real-time effects and
color correction. Our results for the balance of the year will depend, in part,
on market acceptance of these 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 $11.3 million (10.4%) to $119.1 million in the
quarter ended September 30, 2003 from $107.8 million for the same quarter in
2002. This increase occurred across many product lines in our Video and Film
Editing and Effects ("Video") segment, most notably in our Broadcast and Unity
Products, particularly those sold as part of large solutions described above.
These increases were partially offset by a slight decline in sales in our
Professional Audio ("Audio") segment. Revenue from the combined segments
includes a positive translation currency effect of approximately $4.8 million in
2003 versus the same period a year ago (assuming prior quarter revenues were
expressed at current quarter exchange rates), primarily due to a strengthening
of the euro.
Net revenues increased by $38.6 million (12.6%) to $344.6 million for
the nine months ended September 30, 2003 from $305.9 million for the nine months
ended September 30, 2002. The increase occurred in our Video segment with Unity
and Broadcast Products showing the most significant increases, particularly
those sold as part of large solutions described above. These increases were
slightly offset by a decline in sales in our Audio segment. Revenue from the
combined segments includes a positive translation currency effect of
approximately $15.8 million as compared to the nine month period ended September
30, 2002 (assuming prior quarter revenues were expressed at current quarter
exchange rates), primarily due to a strengthening of the euro.
Net revenues derived through indirect channels were approximately 73% of
net revenues for the three months ended September 30, 2003, compared to 81% of
net revenues for the same period in 2002. Indirect channel revenues were
approximately 74% of net revenues for the nine months ended September 30, 2003,
compared to approximately 82% for the same period in 2002. In both cases, the
decrease was due primarily to the higher proportion of Broadcast revenue in the
current period, which is sold primarily through our direct sales force.
Sales in the Americas have typically accounted for approximately 55% of
our consolidated net revenues, while sales in Europe and Asia Pacific represent
the remaining 45%. However, the relative percentages of sales among the regions
can vary based on, among other things, the impact of currency exchange rate
variations on revenues, the timing of revenue recognition of solutions sales,
and local economic conditions.
Sales in the Americas accounted for 54% and 56% of our third quarter
2003 and 2002 net revenues, respectively. For each of the nine-month periods
ended September 30, 2003 and 2002, sales in the Americas accounted for 56% and
55% of net revenues, respectively. For the three-month period ended September
30, 2003, Americas sales increased by approximately $4.4 million or 7.2%,
compared to the same period in 2002. For the nine-month period ended September
30, 2003, Americas sales increased by approximately $22.0 million or 13.0%,
compared to the same period in 2002.
Sales in the Europe and Asia Pacific regions accounted for 46% and 44%
of our third quarter 2003 and 2002 net revenues, respectively. For the
nine-month periods ended September 30, 2003 and 2002, sales in the Europe and
Asia Pacific regions accounted for 44% and 45% of net revenues, respectively.
The combined Europe and Asia Pacific sales in the third quarter of 2003
increased by approximately $6.9 million or 14.5%, compared to the same period in
2002. For the nine-month period ended September 30, 2003, sales increased by
approximately $16.6 million or 12.2%, compared to the same period in 2002.
12
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.
Gross margin increased to 55.7% in the third quarter of 2003 compared to
50.6% in the same period of 2002. This increase was primarily due to a positive
impact on revenue from currency exchange rates with no offsetting impact on
costs of revenues as most of our manufacturing costs are transacted in U.S.
dollars. Additionally, there was a favorable product mix due to the introduction
of Media Composer Adrenaline in the quarter ended June 30, 2003 which has a
higher gross margin than many of our other products.
Gross margin increased to 54.8% for the nine months ended September 30,
2003 from 49.8% for the same period in 2002. This increase was primarily due to
a positive impact from currency exchange rate fluctuations, a more favorable
product mix due to the introduction of Media Composer Adrenaline in the quarter
ended June 30, 2003, and a decrease in price reductions and discounting
primarily in the Americas.
Research and Development
Research and development expenses decreased by $0.2 million (1.0%) in
the third quarter of 2003 compared to the same period in 2002 and increased by
$2.7 million (4.4%) for the nine months ended September 30, 2003 compared to the
same period in 2002. The decrease in the three-month period ended September 30,
2003 was primarily due to decreased engineering outsourcing associated with the
development of our new DNA products, largely offset by increased variable
compensation-related expenses. The increase in the nine-month period ended
September 30, 2003 was primarily the result of variable compensation-related
expenses and engineering outsourcing associated with the development of new
products. Research and development expenses decreased to 17.4% of net revenues
in the third quarter of 2003 from 19.4% in the same quarter of 2002. Research
and development expenses decreased to 18.5% of net revenues for the nine months
ended September 30, 2003 from 20.0% for the same period in 2002. For both
periods the decrease in research and development expenses as a percentage of net
revenues is primarily due to the increased revenue base.
Marketing and Selling
Marketing and selling expenses increased by $2.3 million (8.9%) in the
third quarter of 2003 compared to the same period in 2002 and increased by $5.6
million (7.4%) for the nine months ended September 30, 2003 compared to the same
period in 2002. The increase in both periods was primarily due to increased
employee compensation expenses attributable in part to a small increase in the
number of employees, but also to variable compensation, as well as certain costs
associated with our new product releases. Marketing and selling expenses
decreased to 23.5% of net revenues in the third quarter of 2003 from 23.8% in
the same quarter of 2002. Marketing and selling expenses decreased to 23.5% of
net revenues for the nine months ended September 30, 2003 from 24.7% for the
same period in 2002. For both periods the decrease in marketing and selling
expenses as a percentage of net revenue is due to the increased revenue base.
General and Administrative
General and administrative expenses increased by $0.2 million (4.0%) in
the third quarter of 2003 compared to the same period in 2002 and increased by
$1.6 million (11.0%) for the nine months ended September 30, 2003 compared to
the same period in 2002. The increase in both periods was primarily due to
variable compensation-related expenses. The nine-month period ended September
30, 2003 also included increased legal and audit fees both primarily related to
costs of complying with recent legislation. General and administrative expenses
decreased to 4.8% of net revenues in the third quarter of 2003 from 5.1% in the
same quarter of 2002 and decreased to 4.8% from 4.9% of net revenues for the
nine months ended September 30, 2003 and 2002, respectively, due, for all
periods, to the increased revenue base.
13
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 September 2003, we
revised our estimate of the timing and amount of future sublease income
associated with our Daly City facility resulting in a $0.1 million charge.
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
Amortization of Acquisition-Related 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
September 30, 2003 and 2002 is amortization of these intangible assets of $0.3
million. For the nine-month periods ended September 30, 2003 and 2002 operating
results included amortization of $1.0 million and $0.9 million, respectively.
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 certain
non-consolidated companies. Other income (expense), net for the third quarter of
2003 increased $0.3 million to $0.6 million from the same period in 2002,
primarily due to higher interest income earned on significantly higher average
cash, cash equivalents, and marketable securities balances. For the nine-month
period ended September 30, 2003, other income (expense), net increased to $1.3
million of income compared to net expense of $0.2 million for 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 as well as higher
interest income earned in 2003.
Provision for Income Taxes
We recorded a tax provision of $0.3 million in each of the first three
quarters of 2003 and $0.6 million, $0.5 million and $0.3 million for the first,
second and third quarters of 2002, respectively. The provision for the first
three 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 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 nearly all of our
deferred tax assets.
The provision for the first three quarters of 2002 was generally
comprised of taxes payable by our 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, including stock option exercises from our employee
stock plans, as well as through cash flows from operations. As of September 30,
2003, our principal sources of liquidity included cash, cash equivalents and
marketable securities totaling $171.6 million.
14
Net cash provided by operating activities was $40.7 million for the nine
months ended September 30, 2003 compared to $22.6 million for the same period in
2002. During the nine months ended September 30, 2003, net cash provided by
operating activities primarily reflects net income adjusted for depreciation and
amortization as well as an increase in deferred revenue and a decrease in
accounts receivable, partially offset by a decrease in accounts payable. During
the nine months ended September 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 a decrease in accounts
receivable and an increase in accounts payable, partly offset by an increase in
inventory.
We purchased $4.6 million of property and equipment during the nine
months ended September 30, 2003, compared to $7.1 million in the same period in
2002. In both of these periods, the purchases were primarily hardware and
software to support research and development.
During the nine months ended September 30, 2003 and 2002, we received
net cash proceeds of $44.9 million and $2.0 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.
Our cash requirements vary depending upon factors such as obligations
under past restructuring programs, capital expenditures and the possible
acquisition of businesses or technologies complementary to our business. We
believe our existing cash, cash equivalents, marketable securities and funds
generated from operations will be sufficient to meet our operating cash
requirements for at least the next twelve 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 ("EITF") of the
Financial Accounting Standards Board ("FASB") reached a consensus on Issue
00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF
00-21"). We determined that its multiple element arrangements fall within the
scope of SOP 97-2 and therefore EITF 00-21 is not applicable to us. In July
2003, the EITF reached consensus on Issue 03-05, "Applicability of AICPA
Statement of Position 97-2 to Non-Software Deliverables in an Arrangement
Containing More-Than-Incidental Software" ("EITF 03-05"). EITF 03-05 concludes
that software-related elements include software-related products and services
such as those listed in paragraph 9 of SOP 97-2, as well as other deliverables
for which the software is essential to their functionality (e.g. computer
hardware). Elements included in arrangements that do not qualify as
software-related elements are to be accounted for under the guidance of EITF
00-21 and not SOP 97-2. EITF 03-05 is applicable for revenue arrangements
entered into after October 1, 2003. We believe that generally elements included
in its multiple element arrangements qualify as software-related elements and
therefore EITF 03-05 is not applicable to us.
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 did not have a material impact on our 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 did not have
a material impact on our 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 next-generation Media Composer and Newscutter
systems, as well as Avid Xpress Pro with Avid Mojo. In addition, Avid DS Nitris
began shipping in the fourth quarter of 2003. 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
future success of these products will also depend in part on the widespread
adoption of high definition video.
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, engineering, 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
16
media production solutions to the broadcast news market (including cable and
Internet news), the on-line film and video finishing market, and the emerging
market for multimedia production tools (including the Internet and corporate
markets). 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. In
addition, our continued growth in the broadcast market will depend in part on
the widespread adoption of all-digital production methods. If we fail to
accurately anticipate the demands of the broadcast market, 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.
The 3-D market has changed significantly since we acquired Softimage, a
3D company, in August 1998. Our competitors' products have eroded our 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.
17
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 and our ability to
continue selling and servicing products that use 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
recent worldwide economic slowdown had an impact on our 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.
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Poor global macroeconomic conditions could disproportionately impact our
industry.
As a result of recent unsettled economic conditions, 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 catastrophic events may seriously harm our
business.
Terrorism, acts of war, or other catastrophic events may disrupt our
business and harm our employees, facilities, suppliers, distributors, resellers
or customers, which could significantly impact our revenue and operating
results. The increasing presence of these threats has 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.
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
19
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 international 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 parties
have obtained, copied, and used information that we consider proprietary.
Policing the unauthorized use of our proprietary technology is costly and
time-consuming and we are unable to measure the extent to which piracy of our
software exists, 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.
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:
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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.
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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 and revenue and operating expenses
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 risk 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 short-term 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 September 30, 2003, we had $28.6 million of forward-exchange
contracts outstanding, denominated in euros, Canadian dollars, British pounds,
Japanese yen, Singapore dollars, and Australian dollars as a hedge against
forecasted foreign currency-denominated receivables, payables and cash balances.
For the three- and nine-month periods ended September 30, 2003, net losses of
$0.6 million and $3.8 million, respectively, resulting from forward-exchange
contracts were included in the results of operations. These losses were
partially offset by net transaction and translation gains on the related asset
and liabilities for the three- and nine-month periods ended September 30, 2003
of $0.1 million and $3.5 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 September 30, 2003, we held $171.6 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.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures. Our management, with the participation of
our chief executive officer and chief financial officer, evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2003. In
designing and evaluating our 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, our
chief executive officer and chief financial officer concluded that, as of
September 30, 2003, our disclosure controls and procedures were (1) designed to
ensure that material information relating to us, including our consolidated
subsidiaries, is made known to our 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 us in the
reports that we file or submit 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 our 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 September 30, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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
Avid and Tektronix, and sought lost future profits, treble damages, attorneys'
fees, and interest. The anti-trust claims against Avid 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 appealed the lower
court's decision. On September 9, 2003, a three-judge panel of the U.S. Court of
Appeals for the Ninth Circuit reversed in part the lower court's dismissal and
sent the antitrust claims back to the lower court for further findings. Avid and
Tektronix filed a Petition for Rehearing and Rehearing En Banc on September 23,
2003. All lower court proceedings are stayed pending a decision on rehearing.
Avid continues to view 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 our 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Amended and Restated 1996 Employee Stock Purchase Plan
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 furnished July 17, 2003, reporting under Item 9 the
announcement that on July 17, 2003, the Company issued a press release regarding
its financial results for the quarter ended June 30, 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."
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Avid Technology, Inc.
Date: November 13, 2003 By: /s/ Paul J. Milbury
-----------------------------------
Paul J. Milbury
Chief Financial Officer
(Principal Financial Officer)
Date: November 13, 2003 By: /s/ Carol L. Reid
-----------------------------------
Carol L. Reid
Vice President and Corporate Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Amended and Restated 1996 Employee Stock Purchase Plan
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