AVID TECHNOLOGY, INC.
Avid Technology Park
One Park West
Tewksbury, MA 01876
November 13, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, DC 20549
Re: Avid Technology, Inc.
File No. 0-21174
Quarterly Report on Form 10-Q
Ladies and Gentlemen:
Pursuant to regulations of the Securities and Exchange Commission,
submitted herewith for filing on behalf of Avid Technology, Inc. is the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September
30, 2002.
This filing is being effected by direct transmission to the Commission's
EDGAR System.
Very truly yours,
/s/ Carol E. Kazmer
Carol E. Kazmer
General Counsel
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, 2002
---------
Commission File Number 0-21174
AVID TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2977748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AVID TECHNOLOGY PARK
ONE PARK WEST
TEWKSBURY, MA 01876
(Address of principal executive offices)
Registrant's telephone number, including area code: (978) 640-6789
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports).
Yes X No _____
Indicate by check mark whether the registrant has been subject to such
filing requirements for the past 90 days.
Yes X No _____
The number of shares outstanding of the registrant's Common Stock as of November
5, 2002 was 26,526,815.
AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
PAGE
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, 2002 and 2001 .............1
b) Consolidated Balance Sheets as of September 30, 2002 (unaudited)
and December 31, 2001 ...............................................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)for
the nine months ended September 30, 2002 and 2001 ...................3
d) Notes to Condensed Consolidated Financial Statements (unaudited).....4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................12
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk ......26
ITEM 4. Controls and Procedures ........................................27
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K ...............................28
Signatures ..................................................................29
CERTIFICATION ...............................................................30
EXHIBIT INDEX ...............................................................32
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
(unaudited) (unaudited) (unaudited) (unaudited)
Net revenues $107,832 $102,281 $305,935 $329,849
Cost of revenues 53,222 50,444 153,528 160,473
------------- ------------- ------------- -------------
Gross profit 54,610 51,837 152,407 169,376
------------- ------------- ------------- -------------
Operating expenses:
Research and development 20,916 19,630 61,145 64,785
Marketing and selling 25,677 27,614 75,418 88,880
General and administrative 5,454 5,299 14,985 17,699
Restructuring and other costs, net 8,303 (327) 8,549
Amortization of acquisition-related
intangible assets 257 5,088 861 30,640
------------- ------------- ------------- -------------
Total operating expenses 52,304 65,934 152,082 210,553
------------- ------------- ------------- -------------
Operating income (loss) 2,306 (14,097) 325 (41,177)
Other income (expense), net 259 605 (192) 3,996
------------- ------------- ------------- -------------
Income (loss) before income taxes 2,565 (13,492) 133 (37,181)
Provision for income taxes 300 700 1,400 2,300
------------- ------------- ------------- -------------
Net income (loss) $2,265 ($14,192) ($1,267) ($39,481)
============= ============= ============= =============
Net income (loss) per common share - basic $0.09 ($0.55) ($0.05) ($1.55)
============= ============= ============= =============
Net income (loss) per common share - diluted $0.09 ($0.55) ($0.05) ($1.55)
============= ============= ============= =============
Weighted average shares outstanding - basic 26,287 25,745 26,064 25,513
============= ============= ============= =============
Weighted average shares outstanding - diluted 26,550 25,745 26,064 25,513
============= ============= ============= =============
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,
2002 2001
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $55,867 $45,613
Marketable securities 22,368 27,348
Accounts receivable, net of allowances of $11,552 and
$11,497 at September 30, 2002 and December 31, 2001,
respectively 62,330 78,010
Inventories 29,864 21,690
Deferred tax assets, net 745 695
Prepaid expenses 6,195 6,722
Other current assets 3,674 3,440
------------- -------------
Total current assets 181,043 183,518
Property and equipment, net 24,352 27,164
Acquisition-related intangible assets, net 1,520 3,462
Goodwill 1,087 -
Other assets 669 1,662
------------- -------------
Total assets $208,671 $215,806
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $26,340 $19,076
Accrued compensation and benefits 12,695 13,023
Accrued expenses and other current liabilities 22,550 26,125
Income taxes payable 8,686 10,932
Deferred revenues 30,489 28,872
------------- -------------
Total current liabilities 100,760 98,028
Long-term debt and other liabilities (Note 6) - 13,020
Commitments and contingencies (Note 7) Stockholders' equity:
Preferred stock
Common stock 266 266
Additional paid-in capital 355,860 357,446
Accumulated deficit (238,292) (235,926)
Treasury stock (3,368) (8,035)
Deferred compensation (343) (1,294)
Accumulated other comprehensive loss (6,212) (7,699)
------------- -------------
Total stockholders' equity 107,911 104,758
------------- -------------
Total liabilities and stockholders' equity $208,671 $215,806
============= =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30,
2002 2001
--------------- ---------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,267) ($39,481)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 9,821 42,242
Provision for doubtful accounts 1,350 1,867
Compensation from stock grants and options 901 2,178
Equity in income of non-consolidated companies (158) (1,164)
Gain on sale of businesses (327) (2,272)
Write-down of investment in non-consolidated company 1,000 1,100
Changes in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable 16,183 24,045
Inventories (8,027) (331)
Prepaid expenses and other current assets 669 (40)
Accounts payable 7,123 (12,158)
Income taxes payable (2,378) (817)
Accrued expenses, compensation and benefits and other
current liabilities (3,744) (6,190)
Deferred revenues 1,458 (1,349)
- ------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 22,604 7,630
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (7,117) (9,448)
Payments for other long-term assets (130) (361)
Dividends from non-consolidated company 59
Payments for business acquisition, net of cash acquired (5,439)
Payments on note issued in connection with acquisition (13,020)
Collections of notes receivable from sale of business 327 333
Purchases of marketable securities (16,173) (17,728)
Proceeds from sales of marketable securities 21,099 22,305
- ------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (14,955) (10,338)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock for treasury (4,155)
Proceeds from issuance of common stock 2,032 5,289
- ------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,032 1,134
- ------------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents 573 (297)
- ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 10,254 (1,871)
Cash and cash equivalents at beginning of period 45,613 64,875
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $55,867 $63,004
- ------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
PART I. FINANCIAL INFORMATION
ITEM 1D. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL INFORMATION
The accompanying condensed consolidated financial statements include the
accounts of Avid Technology, Inc. and its wholly owned subsidiaries
(collectively, "Avid" or the "Company"). These financial statements are
unaudited. However, in the opinion of management, the condensed consolidated
financial statements include all adjustments, consisting of only normal,
recurring adjustments, necessary for their fair presentation. Interim results
are not necessarily indicative of results expected for a full year. The
accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions for Form 10-Q and therefore do not include all
information and footnotes necessary for a complete presentation of operations,
the financial position, and cash flows of the Company, in conformity with
generally accepted accounting principles. The Company filed audited consolidated
financial statements for the year ended December 31, 2001 on Form 10-K, which
included all information and footnotes necessary for such presentation.
The Company's preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reported periods. The most significant estimates reflected
in these financial statements include accounts receivable and sales allowances,
inventory valuation and income tax valuation allowances. Actual results could
differ from those estimates.
2. NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share were as follows (in thousands,
except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2002 2001 2002 2001
----------- ---------- ---------- -----------
Net income (loss) $2,265 ($14,192) ($1,267) ($39,481)
=========== ========== ========== ===========
Weighted average common shares
outstanding - basic 26,287 25,745 26,064 25,513
Weighted average potential common stock 263
----------- ---------- ---------- -----------
Weighted average common shares
outstanding - diluted 26,550 25,745 26,064 25,513
=========== ========== ========== ===========
Basic net income (loss) per share $0.09 ($0.55) ($0.05) ($1.55)
Diluted net income (loss) per share $0.09 ($0.55) ($0.05) ($1.55)
Common stock options and warrants that
were considered anti-dilutive securities
and excluded from the diluted net income
(loss) per share calculations were as
follows, on a weighted-average basis: 8,330 9,034 8,907 9,010
4
For the three and nine months ended September 30, 2002 and 2001, certain stock
options and warrants have been excluded from the diluted net income (loss) per
share calculation as their effect would be anti-dilutive. For periods that the
Company reports a net loss, all potential common stock is considered
anti-dilutive; for periods when the Company reports net income, only potential
common shares with purchase prices in excess of the Company's average common
stock fair value for the related period are considered anti-dilutive.
3. INVENTORIES
Inventories consisted of the following (in thousands):
September 30, December 31,
2002 2001
---------------- ----------------
Raw materials $13,705 $13,043
Work in process 2,648 2,553
Finished goods 13,511 6,094
---------------- ----------------
$29,864 $21,690
================ ================
As of September 30, 2002 and December 31, 2001, the finished goods inventory
included deferred costs of $3.9 million and $1.5 million, respectively,
associated with product shipped to customers for which revenue had not yet been
recognized.
4. INVESTMENT IN JOINT VENTURE AND ACQUISITIONS
In January 1999, Avid and Tektronix, Inc. established a 50/50 owned and funded
newsroom computer system joint venture, AvStar Systems LLC ("AvStar"). The joint
venture was dedicated to providing the next generation of newsroom computer
systems products by combining both companies' newsroom computer systems
technologies and certain personnel. In September 1999, Tektronix transferred its
interest in AvStar to a third party, The Grass Valley Group, Inc. (now a unit of
Thomson Multimedia). In September 2000, AvStar began doing business as iNews,
LLC ("iNews").
The Company's investment in the joint venture was accounted for under the equity
method of accounting. The pro rata share of earnings of the joint venture
recorded by the Company during the nine-month period ended September 30, 2001,
related to iNews operating results for the fourth quarter of 2000, was
approximately $1.1 million. In January 2001, the Company acquired Grass Valley
Group's 50% interest in iNews for approximately $6.0 million. This acquisition
was accounted for under the purchase method of accounting. Accordingly, the
assets and liabilities that represented the acquired 50% interest were recorded
in the Company's financial statements as of the acquisition date based on their
fair values, while the assets and liabilities that represented Avid's investment
in the joint venture were recorded as of the acquisition date based on the book
values of the joint venture's assets and liabilities without adjustment. Since
the acquisition date, operating results of iNews have been included in the
5
consolidated operating results of the Company. The purchase price of $6.0
million was initially allocated to net tangible assets of $1.7 million,
completed technologies of $2.5 million and work force of $1.8 million. The
Company recorded amortization of these intangible assets of $0.2 million and
$0.6 million in the three- and nine-month periods ended September 30, 2002,
respectively, and $0.5 million and $1.2 million in the three- and nine-month
periods ended September 30, 2001, respectively. In connection with the adoption
of SFAS 142, the Company reclassified the remaining acquired work force balance,
of $1.1 million, to goodwill on January 1, 2002 (see Note 5).
5. GOODWILL AND INTANGIBLE ASSETS
In June 2001, the FASB issued Statement of Accounting Standard No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets." SFAS 142, which supersedes APB
Opinion No. 17 "Intangible Assets", addresses how acquired goodwill and other
intangible assets should be accounted for in financial statements subsequent to
their initial recognition. The provisions of SFAS 142 (1) prohibit the
amortization of goodwill and indefinite-lived intangible assets, (2) require
that goodwill and indefinite-lived intangible assets be tested annually for
impairment (and in interim periods if certain events occur indicating that the
carrying value of goodwill and/or indefinite-lived intangible assets may be
impaired), (3) require that "reporting units" be identified for the purposes of
assessing potential future impairments of goodwill and (4) remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives. SFAS No. 142 requires that goodwill not be amortized but rather be tested
for impairment at the reporting unit level at least annually and more frequently
upon the occurrence of certain events. Additionally, SFAS 142 provides guidance
about how to determine and measure goodwill impairment and requires disclosure
of information about goodwill and other intangible assets in the years
subsequent to their acquisition.
In connection with its adoption of SFAS 142 on January 1, 2002, the Company
reclassified the remaining value of acquired work force from the iNews
acquisition, of $1.1 million, to goodwill and, as a result, ceased amortizing
this amount; prior to this reclassification, the Company had no unamortized
goodwill.
SFAS 142 requires the Company to test all existing goodwill for impairment as of
January 1, 2002, on a reporting unit basis. SFAS 142 prescribes a two-phase
process of impairment testing of goodwill. The first phase, which under SFAS
142's transitional guidance was required to be completed by June 30, 2002, tests
for impairment by comparing the fair value of each reporting unit with its book
value. The second phase, which under SFAS 142's transitional guidance is
required to be completed by December 31, 2002, is not necessary if the fair
value of each reporting unit exceeds its book value, as tested in the first
phase. If the second phase is necessary the impairment of goodwill is measured
by comparing the fair value of each reporting unit's goodwill with the related
carrying amount of the goodwill. A reporting unit is an operating segment, as
defined by SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information", or one level below an operating segment. Upon adoption of
SFAS 142, the Company determined that its reporting units are its two operating
segments, Video and Film Editing and Effects, and Professional Audio. The
Company completed the first phase of the impairment analysis during the second
quarter of 2002 and found no instances of impairment of its recorded goodwill as
of January 1, 2002. Additional impairment analyses will be completed at least
annually, including as of December 31, 2002, or more frequently when events and
circumstances indicate that the recorded goodwill might be impaired.
6
Finite-lived intangible assets at September 30, 2002 and December 31, 2001
consisted only of completed technologies with a gross carrying amount of $3.9
million and $6.5 million, respectively. The related accumulated amortization was
$2.4 million and $3.1 million at September 30, 2002 and December 31, 2001,
respectively. Completed technologies are amortized on a straight-line basis over
periods ranging from 3 to 4.5 years. The Company expects amortization of these
intangible assets to be approximately $0.3 million for the remainder of 2002,
$1.0 million during 2003, and $0.2 million during 2004.
The following summary reflects the pro forma results of operations as if SFAS
142 had been retroactively applied as of January 1, 2001 (in thousands, except
per share amounts):
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ----------- -----------
Reported net income (loss) $2,265 ($14,192) ($1,267) ($39,481)
Goodwill amortization, net of tax 3,238 23,062
Amortization of work force, net of tax 989 2,790
------------ ------------ ----------- -----------
Pro forma net income (loss) $2,265 ($9,965) ($1,267) ($13,629)
============ ============ =========== ===========
Basic net income (loss) per share:
As reported $0.09 ($0.55) ($0.05) ($1.55)
Pro forma $0.09 ($0.39) ($0.05) ($0.53)
Weighted average common shares
outstanding - basic 26,287 25,745 26,064 25,513
Diluted net income (loss) per share:
As reported $0.09 ($0.55) ($0.05) ($1.55)
Pro forma $0.09 ($0.39) ($0.05) ($0.53)
Weighted average common shares
outstanding - diluted 26,550 25,745 26,064 25,513
6. LONG-TERM DEBT AND OTHER LIABILITIES
In connection with the acquisition of Softimage Inc. ("Softimage") from
Microsoft Corporation ("Microsoft") in 1998, Avid issued a $5.0 million
subordinated note (the "Note") to Microsoft. The principal amount of the Note,
including any adjustments relative to unvested Avid stock options forfeited by
Softimage employees plus all unpaid accrued interest, was due on June 15, 2003.
The Note bore interest at 9.5% per year, payable quarterly. Through December 31,
2001, the Note had been increased by approximately $16.0 million for forfeited
Avid stock options. During 1999, the Company made a principal payment of $8.0
million. On February 6, 2002, the Company made a payment of approximately $13.0
million in full satisfaction of the Company's outstanding note to Microsoft. The
Company made cash payments for interest during the three-month period ended
September 30, 2001 of $0.3 million. The Company made cash payments for interest
during the nine-month periods ended September 30, 2002 and 2001 of $20,000 and
$0.9 million, respectively.
7
7. COMMITMENTS AND CONTINGENCIES
On June 7, 1995, Avid filed a patent infringement complaint in the United States
District Court for the District of Massachusetts against Data Translation, Inc.
(now known as Media 100), a Marlboro, Massachusetts-based company. Avid is
seeking judgment against Media 100 that, among other things, Media 100 willfully
infringed Avid's U.S. patent number 5,045,940, entitled "Video/Audio
Transmission System and Method." Avid is also seeking an award of treble damages
together with prejudgment interest and costs, Avid's costs and reasonable
attorneys' fees, and an injunction to prohibit further infringement by Media
100. On January 16, 1998, the litigation was dismissed without prejudice (with
leave to refile), pending a decision by the U.S. Patent and Trademark Office on
a reissue patent application based on the issued patent.
On March 11, 1996, Avid was named as a defendant in a patent infringement suit
filed in the United States District Court for the Western District of Texas by
Combined Logic Company, a California partnership located in Beverly Hills,
California. On May 16, 1996, the suit was transferred to the United States
District Court for the Southern District of New York on motion by the Company.
The complaint alleges infringement by Avid of U.S. patent number 4,258,385, and
seeks injunctive relief, treble damages and costs, and attorneys' fees. Avid
believes that it has meritorious defenses to the complaint and intends to
contest it vigorously. However, an adverse resolution of this litigation could
have an adverse effect on the Company's consolidated financial position or
results of operations in the period in which the litigation is resolved. No
costs have been accrued for this possible loss contingency.
In March 1999, Avid and Tektronix, Inc. were sued by Glen Holly Entertainment,
Inc., a Tektronix distributor, claiming that Tektronix's discontinuance of the
Tektronix Lightworks product line was the result of a strategic alliance by
Tektronix and Avid. Glen Holly raised antitrust and common law claims against
the Company and Tektronix, and sought lost future profits, treble damages,
attorneys' fees, and interest. 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. Avid views the complaint and appeal as
without merit and intends to defend itself vigorously. However, an adverse
resolution of this litigation could have an adverse effect on the Company's
consolidated financial position or results of operations in the period in which
the litigation is resolved. No costs have been accrued for this possible loss
contingency.
Avid receives inquiries from time to time with regard to possible patent
infringement claims. If any infringement should be found to exist, the Company
may seek licenses or settlements. In addition, as a normal incidence of the
nature of the Company's business, various claims, charges, and litigation have
been asserted or commenced against the Company arising from or related to
contractual or employee relations, intellectual property rights or product
performance. Management does not believe these claims will have a material
adverse effect on the financial position or results of operations of the
Company.
8. COMPREHENSIVE 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
8
unrealized gains and losses on available-for-sale securities. The following is a
summary of the Company's comprehensive income (loss), net of taxes (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ----------------------
2002 2001 2002 2001
----------- ----------- ---------- -----------
Net income (loss) $2,265 ($14,192) ($1,267) ($39,481)
Foreign currency translation adjustment (563) 1,365 1,478 (1,023)
Unrealized gains (losses) on securities (5) (1,736) 9 (2,280)
----------- ----------- ---------- -----------
Total comprehensive income (loss) $1,697 ($14,563) $220 ($42,784)
=========== =========== ========== ===========
9. SEGMENT INFORMATION
The Company's organizational structure is based on strategic business units that
offer various products to the principle markets in which the Company's products
are sold. These business units equate to two reportable segments: Video and Film
Editing and Effects, and Professional Audio. The following is a summary of the
Company's operations by operating segment (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ----------- ------------
Video and Film Editing and Effects:
Net revenues $73,821 $76,807 $203,797 $244,047
========== ========== =========== ============
Operating loss ($1,768) ($2,650) ($11,465) ($10,662)
========== ========== =========== ============
Professional Audio:
Net revenues $34,011 $25,474 $102,138 $85,802
========== ========== =========== ============
Operating income $4,331 $1,944 $12,324 $8,674
========== ========== =========== ============
Combined Segments:
Net revenues $107,832 $102,281 $305,935 $329,849
========== ========== =========== ============
Operating income (loss) $2,563 ($706) $859 ($1,988)
========== ========== =========== ============
The following table reconciles operating income (loss) for reportable segments
to total consolidated operating income (loss) (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2002 2001 2002 2001
----------- ---------- ---------- -----------
Total operating income (loss) for reportable segments $2,563 ($706) $859 ($1,988)
Unallocated amounts:
Amortization of acquisition-related intangible assets (257) (5,088) (861) (30,640)
Restructuring and other costs, net (8,303) 327 (8,549)
----------- ---------- ---------- -----------
Consolidated operating income (loss) $2,306 ($14,097) $325 ($41,177)
=========== ========== ========== ===========
9
10. RESTRUCTURING AND OTHER COSTS, NET
During the nine months ended September 30, 2001, the Company implemented
restructuring plans resulting in the termination of 194 employees. The Company
incurred charges of approximately $10.1 million under these plans, which
included $7.5 million for severance and related costs of the terminated
employees and $2.6 million for facility vacancy costs, including a
non-cancelable lease commitment and a non-cash charge relating to the
disposition of leasehold improvements.
The following table sets forth the activity in the restructuring accrual
accounts for the nine months ended September 30, 2002 (in thousands):
Employee Facilities
Related Related Total
------------ ------------ -------------
Accrual balance at December 31, 2001 $1,471 $3,619 $5,090
Non-cash charges (1,100) (1,100)
Cash payments (834) (519) (1,353)
Revisions of estimated liabilities 70 (70) -
------------ ------------ -------------
Accrual balance at September 30, 2002 $707 $1,930 $2,637
============ ============ =============
The Company expects that the majority of the remaining $0.7 million
employee-related accrual balance will be expended over the next three months and
will be funded from working capital. The majority of the facilities-related
accrual represents estimated losses on subleases of space vacated as part of
various restructuring actions. The leases extend through 2010 unless the Company
is able to negotiate an earlier termination.
In December 1999, the Company entered into an agreement to sell its Italian
subsidiary to a third party, which established the entity as a distributor of
Avid products. The sale was completed in the first quarter of 2000. In 1999, the
Company incurred and recorded a loss of approximately $2.0 million relating to
the sale, including a reserve of $1.0 million for the Company's guarantee of the
new entity's line of credit with a bank and $0.8 million for loans extended to
the buyers in connection with the transaction. The line of credit guarantee
ended on January 31, 2001 without requiring any cash payment by Avid.
Accordingly, in the quarter ended March 31, 2001, the Company recorded a credit
of $1.0 million associated with the reversal of the reserve, which was included
under the caption restructuring and other costs, net, where the charge had
originally been recorded. In addition, in the quarter ended June 30, 2002, the
Company received a payment of $0.3 million under the note received as partial
consideration from the buyers of the Italian subsidiary. The Company also
received a payment of $0.3 million under the note in the quarter ended June 30,
2001. These payments were recorded as credits to restructuring and other costs,
net, since the note was fully reserved when received. The payment received in
the quarter ended June 30, 2002 satisfied the remaining balance of the note in
full.
In addition, in the quarter ended September 30, 2001, the Company recorded a
credit of $0.2 million to restructuring and other costs, net, associated with a
reduction in its estimated liability for executive severance related to a charge
initially recorded in 1999.
10
11. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146") which nullifies EITF Issue No.
94-3 "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred,
whereas EITF No 94-3 had allowed the liability to be recorded at the commitment
date of an exit plan. The Company is required to adopt the provisions of SFAS
146 effective for exit or disposal activities initiated after December 31, 2002,
and is currently evaluating the impact of adoption of this statement.
11
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company develops, markets, sells and supports a wide range of
software, and hardware and software systems, for digital media production,
management and distribution. Digital media are media elements, whether video,
audio or graphics, in which the image, sound or picture is recorded and stored
as digital values, as opposed to analog, or tape-based, signals. Our product and
service offerings enable customers to "Make, Manage and Move Media."
Make Media. To make media, we offer digital, non-linear video and film
editing systems to enable customers to edit moving pictures and sound in a
faster, easier, more creative, and more cost-effective manner than by use of
traditional analog tape-based systems. (Non-linear systems allow editors to
access material as needed rather than requiring them to work sequentially.) To
complement these non-linear editing systems, we develop and sell a range of
image manipulation products that allow users in the video and film
post-production and broadcast markets to create graphics and special effects for
use in feature films, television shows and advertising, and news programs. The
products include 3D and special effects software products from our Softimage
subsidiary. We also offer digital audio systems through our Digidesign division.
Digidesign's audio systems have applications in music, film, television, video,
broadcast, streaming media, and web development. These systems are based upon
proprietary Digidesign/Avid audio hardware, software, and control surfaces, and
permit users to record, edit, mix, process, and master audio in an integrated
manner.
Manage Media. We provide complete network, storage, and database
solutions based on our Avid Unity MediaNetwork technology. This technology
enables users to share and manage media assets throughout a project or
organization. The ability to effectively manage digital media assets is a
critical component of success for many broadcast and media companies with
multiple product lines and geographic locations. Accordingly, we have designed
our products to work together in the network, storage, and database environment,
allowing for the sharing of data and increasing the effectiveness of our
customers' workflow. Our key technologies help our customers to reduce costs and
increase the value of their media assets by letting them easily and quickly
"repurpose" or find new uses or markets for their assets.
Move Media. We offer products that allow customers to distribute their
final product. For example, we provide technology for playback directly to air
for broadcast television applications. In addition, because we believe that the
Internet will eventually become a critical content distribution channel, we
develop and sell Internet-ready products.
Our products are used worldwide in production and post-production
facilities, film studios, network, affiliate, independent and cable television
stations, recording studios, advertising agencies, government and educational
institutions, corporate communication departments, and by game developers and
Internet professionals. Projects produced using our products--from major motion
pictures and prime-time television to music, video, and marquee recording
artists--have been honored with Oscar(R), Emmy(R), and Grammy(R) awards, as well
as a host of other international awards. (Oscar is a registered trademark and
service mark of the Academy of Motion Picture Arts and Sciences. Emmy is a
registered trademark of ATAS/NATAS. Grammy is a registered trademark of The
National Academy of Recording Arts and Sciences, Inc.)
12
RESULTS OF OPERATIONS
Net Revenues
The Company's net revenues are derived mainly from the sales of
computer-based digital, non-linear media editing systems and related
peripherals, licensing of related software, and sales of software maintenance
contracts. This market has been, and is expected to continue to be, highly
competitive. A significant portion of these revenues 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 either by
Avid or a third party. Depending upon the complexity of the arrangement and the
level of involvement by Avid, 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 $5.5 million (5.4%) to $107.8 million in the
quarter ended September 30, 2002 from $102.3 million for the same quarter in
2001. This increase occurred primarily due to the continued demand for Pro
Tools|HD in our Professional Audio ("Audio") segment and to a very successful
Media Composer upgrade promotion for our Video and Film Editing and Effects
("Video") segment. The Audio segment also delivered third-party promotional
software for which revenue had previously been deferred. We also saw increased
demand for our Avid Xpress DV product in the Video segment. These increases were
partially offset by decreases in most other Video segment products. Revenue from
the combined segments includes a positive currency effect of approximately $2.4
million in 2002 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 decreased by $23.9 million (7.2%) to $305.9 million for the
nine months ended September 30, 2002 from $329.8 million for the nine months
ended September 30, 2001. This decrease occurred across most product families in
our Video business, in particular the Media Composer and Avid Xpress systems. We
believe that a portion of this decline was due to the general worldwide economic
slowdown. More specifically, we believe that a reduction in advertising spending
worldwide has had a negative impact on our post-production video business,
causing our customers to reduce capital spending pending an upturn in their
businesses. Revenue in our Video segment was also adversely impacted by pricing
reductions and discounts. Our Audio business contributed favorably to revenues
for the nine months ended September 30, 2002 due to strong demand for its new
flagship digital audio workstation, Pro Tools|HD, which was introduced in
January 2002.
Net revenues derived through indirect channels were approximately 81% of
net revenues for the three months ended September 30, 2002, compared to 74% of
net revenues for the same period in 2001. Indirect channel revenues were
approximately 82% of net revenues for the nine months ended September 30, 2002,
compared to approximately 80% for the same period in 2001. In both cases, the
13
increase was due primarily to the higher proportion of Audio revenue in the
current period, which is sold only through indirect channels.
Sales in the Americas accounted for 56% of each of the Company's third
quarter 2002 and 2001 net revenues. For each of the nine-month periods ended
September 30, 2002 and 2001, sales in the Americas accounted for 55% of net
revenues. For the three-month period ended September 30, 2002, Americas sales
increased by approximately $2.9 million or 5.0%, compared to the same period in
2001. For the nine-month period ended September 30, 2002, Americas sales
decreased by approximately $10.0 million or 5.6%, compared to the same period in
2001.
Sales in the Europe and Asia Pacific regions accounted for 44% of each
of the Company's third quarter 2002 and 2001 net revenues. For the nine-month
periods ended September 30, 2002 and 2001, sales in the Europe and Asia Pacific
regions accounted for 45% of net revenues. The combined Europe and Asia Pacific
sales in the third quarter of 2002 increased by approximately $2.7 million or
6.0%, compared to the same period in 2001. For the nine-month period ended
September 30, 2002, sales decreased by approximately $13.9 million or 9.3%,
compared to the same period in 2001.
Gross Profit
Cost of revenues consists primarily of costs associated with the
procurement of components; the assembly, test and distribution of finished
products; warehousing; post-sales customer support costs; royalties for
third-party software included in the products; and provisions for inventory
obsolescence. The resulting gross profit fluctuates based on factors such as the
mix of products sold, the cost and proportion of third-party hardware and
software included in the systems sold, the offering of product upgrades, price
discounts and other sales promotion programs, the distribution channels through
which products are sold, the timing of new product introductions, sales of after
market peripheral hardware products such as disk drives, and currency exchange
rate fluctuations.
Gross margin decreased to 50.6% in the third quarter of 2002 compared to
50.7% in the same period of 2001. This decrease was primarily due to price
reductions and discounting in the Video segment and higher manufacturing costs
in the Audio segment, both of which were partially offset by the positive margin
impact to Audio of delivering third-party promotional software for which revenue
had previously been deferred. Additionally, there was a positive impact from
currency exchange rate fluctuations, primarily a strengthening of the euro, for
the three-month period ended September 30, 2002, resulting in higher U.S. dollar
equivalent revenue.
Gross margin decreased to 49.8% for the nine months ended September 30,
2002 from 51.3% for the same period in 2001. This decrease was primarily due to
price reductions and discounting in the Video segment, and a less favorable
product mix, both of which were partially offset by the positive margin impact
from Audio delivering promotional software for which revenue had previously been
deferred.
Research and Development
Research and development expenses increased by $1.3 million (6.6%) in
the third quarter of 2002 compared to the same period in 2001, primarily due to
funding from a third-party received in 2001 for a particular project which
offset related research and development costs; no third-party funding was
14
received in 2002. Because the higher net spending occurred in a quarter where
revenues also increased, research and development expenses increased only
slightly as a percentage of net revenues to 19.4% in the third quarter of 2002,
compared to 19.2% in the same quarter of 2001. Research and development expenses
decreased by $3.6 million (5.6%) for the nine months ended September 30, 2002
compared to the same period in 2001. The decrease in the nine-month period ended
September 30, 2002 was primarily due to reduced personnel related costs as a
result of restructuring actions implemented in late 2001, partially offset by
the absence of third-party project funding mentioned above. Despite the lower
spending in the nine-month period ended September 30, 2002, research and
development expenses increased as a percentage of net revenues (to 20.0%, as
compared to19.6% for the nine months ended September 30, 2001) due to the
decrease in revenue for the first three quarters of 2002.
Marketing and Selling
Marketing and selling expenses decreased by $1.9 million (7.0%) in the
third quarter of 2002 compared to the same period in 2001, primarily due to
decreases in trade show expenses, provision for bad debt expense and various
marketing programs, partially offset by increased employee incentive
compensation. Due to the decrease in spending and increase in revenues,
marketing and selling expenses decreased as a percentage of net revenues to
23.8% in the third quarter of 2002, compared to 27.0% in the same quarter of
2001. Marketing and selling expenses decreased by $13.5 million (15.1%) for the
nine months ended September 30, 2002 compared to the same period in 2001. The
decrease for the nine-month period ended September 30, 2002 was primarily due to
reduced personnel-related and travel expenses, various marketing programs, trade
show expenses and a positive currency effect, due to the strengthening of the
euro. Due to the significantly lower spending in the nine-month period ended
September 30, 2002, marketing and selling expenses decreased as a percentage of
net revenues to 24.7%, as compared to 26.9% for the nine months ended September
30, 2001, despite the decrease in revenue for the first three quarters of 2002.
General and Administrative
General and administrative expenses increased by $0.2 million (2.9%) in
the third quarter of 2002 compared to the same period in 2001, primarily due to
increased personnel-related expenses (including severance payments to former
executives of the Company), partially offset by a reduction in outside legal
fees. Despite the slight increase in spending, general and administrative
expenses decreased as a percentage of net revenue to 5.1% in the third quarter
of 2002, compared to 5.2% in the same quarter of 2001, due to the increase in
revenue in the third quarter of 2002. General and administrative expenses
decreased by $2.7 million (15.3%) for the nine months ended September 30, 2002
compared to the same period in 2001. For the year-to-date periods, the decrease
was primarily due to a reduction in outside legal fees and personnel-related
expenditures. Due to the significantly lower spending in the nine-month period
ended September 30, 2002, general and administrative expenses decreased as a
percentage of net revenues to 4.9%, as compared to 5.4% for the nine months
ended September 30, 2001, despite the decrease in revenue for the first three
quarters of 2002.
Restructuring and Other Costs, Net
During the nine months ended September 30, 2001, the Company implemented
restructuring plans resulting in the termination of 194 employees. The Company
incurred charges of approximately $10.1 million under these plans, which
15
included $7.5 million for severance and related costs of the terminated
employees and $2.6 million for facility vacancy costs, including a
non-cancelable lease commitment and a non-cash charge relating to the
disposition of leasehold improvements.
In December 1999, the Company entered into an agreement to sell its
Italian subsidiary to a third party, which established the entity as a
distributor of Avid products. The sale was completed in the first quarter of
2000. In 1999, the Company incurred and recorded a loss of approximately $2.0
million relating to the sale, including a reserve of $1.0 million for the
Company's guarantee of the new entity's line of credit with a bank and $0.8
million for loans extended to the buyers in connection with the transaction. The
line of credit guarantee ended on January 31, 2001 without requiring any cash
payment by Avid. Accordingly, in the quarter ended March 31, 2001, the Company
recorded a credit of $1.0 million associated with the reversal of the reserve,
which was included under the caption restructuring and other costs, net, where
the charge had originally been recorded. In addition, in the quarter ended June
30, 2002, the Company received a payment of $0.3 million under the note received
as partial consideration from the buyers of the Italian subsidiary. The Company
also received a payment of $0.3 million under the note in the quarter ended June
30, 2001. These payments were recorded as credits to restructuring and other
costs, net, since the note was fully reserved when received. The payment
received in the quarter ended June 30, 2002 satisfied the remaining balance of
the note in full.
In addition, in the quarter ended September 30, 2001, the Company
recorded a credit of $0.2 million to restructuring and other costs, net,
associated with a reduction in its estimated liability for executive severance
related to a charge initially recorded in 1999.
Amortization of Acquisition-Related Intangible Assets
In connection with the August 1998 acquisition of the business of
Softimage, the Company allocated $88.2 million of the total purchase price of
$247.9 million to intangible assets, consisting of completed technologies, work
force and trade name, and $127.8 million to goodwill. During the second and
third quarters of 2000 and the first quarter of 2001, the Company recorded
additional intangible assets as it acquired three smaller companies: The Motion
Factory, Inc., Pluto Technologies International Inc. and iNews, LLC. In
connection with these acquisitions, the Company allocated $6.5 million to
intangible assets, consisting of completed technologies and work force. Results
for the quarter ended September 30, 2002 and 2001 reflect amortization of $0.3
million and $5.1 million, respectively, associated with these
acquisition-related intangible assets. Results for the nine-month periods ended
September 30, 2002 and 2001 reflect amortization of $0.9 million and $30.6
million, respectively, associated with these acquisition-related intangible
assets.
As of January 1, 2002, in connection with the adoption of SFAS 142, the
Company reclassified $1.1 million of previously recorded acquired work force to
goodwill and, as a result, ceased amortizing this amount. During 2002, the
Company recorded no goodwill or acquired work force amortization as compared to
approximately $4.2 million and $25.9 million in the three- and nine-month
periods ended September 30, 2001, respectively.
16
Other Income (Expense), Net
Other income (expense), net, generally consists primarily of income
associated with various non-consolidated companies, interest income, and
interest expense. Other income (expense), net, for the third quarter 2002 was
$0.3 million compared to $0.6 million for the same quarter last year, a decrease
of $0.3 million. The decrease was due primarily to a realized gain associated
with the sale of equity securities in the prior-year quarter, as well as a
decrease in interest income during 2002 as a result of lower interest rates,
partially offset by a decrease in interest expense due to the payment in full of
our previously outstanding note to Microsoft. For the nine-month period ended
September 30, 2002, other income (expense), net, decreased $4.2 million to
($0.2) million as compared to the same period in 2001, primarily due to a gain
in 2001 on the sale of Avid Sports LLC equity securities, the absence of any
equity in the net income of iNews in the 2002 period as a result of the
Company's acquisition of the remaining iNews ownership interest in the first
quarter of 2001 and reduced interest income, partially offset by a decrease in
interest expense. The Company recorded charges of $1.0 million and $1.1 million
in the nine months ended September 30, 2002 and 2001, respectively, to write off
an impaired investment accounted for under the cost method. The Company
considered evidence of recent financing transactions and reviews of operating
plans of the underlying entity in our impairment analysis.
Provision for Income Taxes
The Company recorded a tax provision of $0.3 million for the third
quarter of 2002 after recording a tax provision of $0.6 million and $0.5 million
in the first and second quarters of 2002, respectively. This compares to a tax
provision of $0.7 million recorded in the third quarter of 2001 and $0.8 million
in each of the first two quarters of 2001. In general, these provisions were
comprised of taxes payable by the Company's foreign subsidiaries. The tax
provision for the third quarter of 2002 also reflects the benefit of an
anticipated refund of prior years' U.S. Alternative Minimum Tax. No tax benefit
was recorded on the losses generated in the U.S. because utilization of net
operating loss carryforwards is not assured.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date through cash flows from
operations as well as through both private and public sales of equity
securities. As of September 30, 2002, the Company's principal sources of
liquidity included cash, cash equivalents and marketable securities totaling
approximately $78.2 million.
With respect to cash flows, net cash provided by operating activities
was $22.6 million for the nine months ended September 30, 2002, compared to $7.6
million provided by operating activities in the same period of 2001. 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. During
the nine months ended September 30, 2001, net cash provided by operating
activities primarily reflects the net loss adjusted for depreciation and
amortization and a decrease in accounts receivable, offset by decreases in
accrued expenses and accounts payable.
17
The Company purchased $7.1 million of property and equipment during the
nine months ended September 30, 2002, compared to $9.4 million in the same
period in 2001. The purchases for the nine-month period ended September 30, 2002
primarily reflects hardware and software to support research and development.
The purchases for the nine-month period ended September 30, 2001 primarily
reflect $3.4 million of computers, furniture and fixtures purchased in
connection with the move of the main Digidesign facility to Daly City,
California, as well as hardware and software to support research and development
activities and the Company's information systems.
During the nine months ended September 30, 2002, the Company made a cash
payment of approximately $13.0 million in full satisfaction of the Company's
outstanding note to Microsoft. During the nine months ended September 30, 2001,
the Company made a cash payment, net of cash acquired, of $5.4 million for the
purchase of the remaining 50% of iNews. During the nine months ended September
30, 2002 and 2001, the Company received net proceeds from the maturity and sale
of marketable securities of $4.4 million and $4.6 million, respectively.
During the nine months ended September 30, 2002 and 2001, the Company
received cash proceeds of approximately $2.0 million and $5.3 million,
respectively, from the issuance of common stock upon stock option exercises and
under the Company's employee stock purchase plan.
During 1998, the Company's board of directors authorized the repurchase
of up to 3.5 million shares of the Company's common stock. Purchases were made
in the open market or in privately negotiated transactions. During the first
quarter of 2001, 232,000 shares were repurchased at a cost of approximately $4.2
million, which completed the stock buyback program. The Company has used, and
plans to continue to use, the repurchased shares for reissuance under its
employee stock plans.
The Company believes existing cash, cash equivalents, marketable
securities and internally generated funds will be sufficient to meet the
Company's cash requirements for at least the next 12 months. In the event the
Company requires additional financing, the Company believes that it will be able
to obtain such financing; however, there can be no assurance that the Company
would be successful in doing so, or that the Company could do so on favorable
terms.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146") which nullifies EITF
Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Acitvity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred,
whereas EITF No 94-3 had allowed the liability to be recorded at the commitment
date of an exit plan. The Company is required to adopt the provisions of SFAS
146 effective for exit or disposal activities initiated after December 31, 2002
and is currently evaluating the impact of adoption of this statement.
18
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Some of the statements in this Form 10-Q relating to our future
performance constitute forward-looking statements. Such forward-looking
statements are based upon management's current expectations and involve known
and unknown risks. Realization of any of these risks may cause actual results to
differ materially from the results described in the forward-looking statements.
Certain of these risks are as follows:
Our future success will depend in part upon our ability to enhance our existing
products and introduce new products in the digital editing market.
Our core digital video and film editing market predominantly uses Avid
products, particularly Media Composer, which represents a significant portion of
our revenues, and future growth in this market could therefore be limited. Our
future growth will depend in part upon our ability to introduce new features and
functionality for Media Composer, improve upon its price/performance, respond to
competitive offerings, introduce and transition to new products, and adapt to
new industry requirements and standards. Any delay or failure to develop these
enhancements or to introduce other new products in this market could harm our
business and reduce our operating results. At the same time, the introduction
and transition to new products could have an impact on the market for our
existing products, which could adversely affect our revenues and business.
The broadcast market is large, widely dispersed, and highly competitive, and we
may not be successful in growing our customer base or predicting customer demand
in this market.
We are currently building our presence in the broadcast market and have
augmented our NewsCutter offering with the Avid Unity for News products, and
with the server, newsroom, and browser products obtained in the Pluto and iNews
acquisitions. 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. 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 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 a share of this digital broadcast market or in predicting 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. Our future success will
depend in part upon our ability to offer, on a timely and cost-effective basis,
new audio products and enhancements of our existing audio products. The timely
development of new or enhanced products is a complex and uncertain process, and
we could experience design, manufacturing, marketing, or other difficulties that
delay or prevent our development, introduction or marketing of new products or
enhancements, which, in turn, could harm our business.
19
We are expanding our product line and offering solutions to new markets, and our
future revenues depend in part on the success of this expansion.
Traditionally, we have been a point product company. Increasingly, we
are providing end-to-end solutions for our customers. We are expanding our
product line beyond our core video editing market to offer digital media
production solutions to the broadcast news market (including cable and Internet
news), the on-line film and video finishing market, and the emerging market for
multimedia production tools (including the Internet and corporate markets).
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 our customers' needs are not as we anticipate, 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.
Competition in the 3D animation market has increased dramatically since our
acquisition of Softimage.
The animation market has changed significantly from the time when we
acquired our Softimage subsidiary in August 1998. While Softimage once dominated
the higher end of the 3D market (i.e., feature films and other intensive
graphics applications), competitors' products have eroded Softimage's market
share and have contributed to downward price pressure, which has resulted in
reduced margins. In addition, we have experienced delays in introducing new
products in the 3D space. Finally, revenues in recent years have been
increasingly derived from sales to the games industry and non-traditional
markets. If these non-traditional markets were to slow or delay their purchases
of 3D tools, our revenues could be adversely affected. To the extent that these
factors continue or worsen, our business could suffer.
We use independent firms and contractors to perform some of our product
development activities.
Independent firms and contractors, some of whom are located in other
countries, perform some of our product development activities. We generally own
the software developed by these contractors. The use of independent firms and
contractors, especially those located abroad, could expose us to risks related
to governmental regulation, intellectual property ownership and rights, exchange
rate fluctuation, political instability and unrest, natural disasters, and other
risks, which could adversely impact our revenues.
Our products are complex and delays or difficulties in introducing new products
could harm our business.
Our future success will depend in part on our ability to offer products
that compete favorably with our competitors' products in terms of reliability,
performance, ease of use, range of features, product enhancements, reputation,
price, and training. Delays or difficulties in product development and
introduction may harm our business. Our products are internally complex and,
despite extensive testing and quality control, may contain errors or defects.
20
Such errors or defects could cause us to issue corrective releases and could
result in loss of revenues, increased product returns, lack of market
acceptance, and damage to our reputation.
New product announcements by our competitors and by us could have the
effect of reducing customer demand for our existing products. Some of our new
products constitute upgrades of existing products. In the past, we have offered
discounts on the price of such upgrades to existing customers, which, where
appropriate, have been based upon the return of circuit boards and system keys.
To the extent that such circuit boards and system keys are not returned, it can
decrease the revenue generated by such new products. New product introductions
require us to devote time and resources to training our sales channels in
product features and target customers, with the temporary result that the sales
channels have less time to devote to selling our products.
Qualifying and supporting our products on multiple computer platforms is time
consuming and expensive.
Our software engineers devote significant time and effort to qualify and
support our products on various computer platforms, including most notably,
Microsoft's Windows and Apple's Macintosh platforms. Computer platform
modifications and upgrades require additional time to be spent to ensure that
our products will function properly. To the extent that the current
configuration of the qualified and supported platforms change or that we need to
qualify and support new platforms, we could be required to expend valuable
engineering resources, which is likely to adversely affect our operating
results.
Our operating results are dependent on several unpredictable factors.
The revenue and gross profit on our products depend on many factors.
Such factors include:
o mix of products sold;
o the cost and the proportion of third-party hardware included in such products;
o product distribution channels;
o timing of new product introductions;
o product offers and platform upgrades;
o price discounts and sales promotion programs;
o volume of sales of aftermarket hardware products;
o costs of swapping or fixing products released to the market with defects;
o provisions for inventory obsolescence;
o allocations of manufacturing overhead and customer support costs to cost
of goods;
o sales of third-party computer hardware to distributors;
o competitive pressure on product prices;
o costs incurred in connection with "solution" sales which typically have
longer selling and implementation cycles;
o timing and delivery of "solutions" to customers; and
o currency fluctuations.
Negative changes in any of these factors could reduce our revenue and
gross profit.
21
Our operating costs are tied to projections of future revenues, which may differ
from actual results.
Our operating expense levels are based, in part, on our expectations of
future revenues. Such future revenues are difficult to predict. For example, the
current worldwide economic slowdown has had an impact on our recent results, and
if this slowdown persists, it may continue to lower our revenues. Additionally,
a significant portion of our business occurs near the end of each quarter, which
can impact our ability to precisely forecast revenues on a quarterly basis.
Further, we are generally unable to reduce quarterly operating expense levels
rapidly in the event that quarterly revenue levels fail to meet internal
expectations. Therefore, if quarterly revenue levels fail to meet internal
expectations upon which expense levels are based, our results of operations
could be adversely affected.
The markets for our products are competitive, and we expect competition to
intensify in the future.
The digital video, audio, and animation markets are competitive, with
limited barriers to entry, and are characterized by pressure to reduce prices,
incorporate new features, and accelerate the release of new products. Many of
our current and potential competitors have substantially greater financial,
technical, distribution, support, and marketing resources than we do. Such
competitors may use these resources to lower their product costs, allowing them
to reduce prices to levels at which we could not operate profitably. Further,
such competitors may be able to develop products comparable or superior to ours,
or adapt more quickly to new technologies or evolving customer requirements. If
we are unable to compete effectively in our target markets, our business and
results of operations could suffer.
Poor global macroeconomic conditions could disproportionately impact our
industry.
As a result of unfavorable economic conditions and reduced capital
spending, our customers in the media, broadcast and content-creation industries
have delayed or reduced expenditures. The revenue growth and profitability of
our business depends primarily on the overall demand for our products. Softening
demand for our products resulting from ongoing economic uncertainty may result
in decreased revenues or earnings levels or growth rates. If global economic
conditions worsen, demand for our products may weaken, and our business and
results of operations could suffer.
We depend on a number of sole source suppliers.
We are dependent on a number of specific suppliers for certain key
components of our products. We purchase these sole source components pursuant to
purchase orders placed from time to time. We generally do not carry significant
inventories of these sole source components and have no guaranteed supply
arrangements. If any of our sole source vendors failed to supply or enhance such
components, it could imperil our supply of these components. Similarly, if any
of our vendors encountered technical, operating or financial difficulties, it
might threaten our supply of these components. While we believe that alternative
sources of supply for sole source components could be developed, or our products
redesigned to permit the use of alternative components, an interruption in our
sources of supply could damage our business and negatively affect our operating
results.
22
If we fail to maintain strong relationships with our resellers, distributors,
and component suppliers, our ability to successfully deploy our products may be
harmed.
We sell many of our products and services indirectly through resellers
and distributors. These resellers and distributors typically purchase software
and "kits" from us, and other turn-key components from other vendors, in order
to produce complete systems for resale. Any disruption to our resellers and
distributors, or their third-party suppliers, could reduce our revenues.
Moreover, we are increasingly distributing our products directly, which could
put us in competition with our resellers and distributors and could adversely
affect our revenues.
If we become dependent on third-party hardware for our products, our operating
results could be harmed.
Our gross profit margin varies from product to product depending
primarily on the proportion and cost of third-party hardware included in each
product. From time to time, we add functionality and features to our products.
If we effect such additions through the use of more, or more costly, third-party
hardware, and do not increase the price of such products to offset these
increased costs, then our gross profit margin on these products could decrease.
Our future growth could be harmed if we lose the services of our key personnel.
Our success depends upon the services of a number of key current
employees. The loss of the services of one or more of these key employees could
harm our business. Our success also depends upon our ability to attract highly
skilled new employees. Competition for such employees is intense in the
industries and geographic areas in which we operate. If we are unable to compete
successfully for such employees, our business could suffer.
Our websites could subject us to legal claims that could harm our business.
Certain of our websites provide interactive information and services to
our customers. To the extent that materials may be posted on and/or downloaded
from the websites and distributed to others, we may be subject to claims for
defamation, negligence, copyright or trademark infringement, personal injury, or
other theories of liability based on the nature, content, publication and
distribution of such materials. In addition, although we have attempted to limit
our exposure by contract, we may also be subject to claims for indemnification
by end users in the event that the security of our websites is compromised. As
these websites are available on a worldwide basis, the websites could
potentially be subject to a wide variety of international laws.
Regulations could be enacted that restrict our Internet initiatives.
As a result of the increasing use and popularity of the Internet,
federal, state, and local authorities may adopt new laws and regulations
governing the Internet. These laws and regulations may cover issues such as
privacy, distribution, and content. The enactment of any additional laws or
regulations could impede the growth of the Internet, harm our Internet
initiatives, and place additional financial burdens on our business.
23
We could incur substantial costs protecting our intellectual property or
defending against a claim of infringement.
Our ability to compete successfully and achieve future revenue growth
will depend, in part, on our ability to protect our proprietary technology and
operate without infringing upon the rights of others. We rely upon a combination
of patent, copyright, and trademark laws, trade secret, confidentiality
procedures, and contractual provisions, as well as hardware security keys, to
protect our proprietary technology. However, our means of protecting our
proprietary rights may not be adequate. From time to time unauthorized persons
have obtained, copied, and used information that we consider proprietary.
Policing the unauthorized use of our proprietary technology is costly and
time-consuming, and software piracy can be expected to be a persistent problem.
We occasionally receive communications suggesting that our products may
infringe the intellectual property rights of others. It is our practice to
investigate the factual basis of such communications and negotiate licenses
where appropriate. While it may be necessary or desirable in the future to
obtain licenses relating to one or more products or relating to current or
future technologies, we may be unable to do so on commercially reasonable terms.
If we are unable to protect our proprietary technology or unable to negotiate
licenses for the use of others' intellectual property, our business could be
impaired.
We are currently involved in various legal proceedings, including patent
litigation. An adverse resolution of any such proceedings could harm our
business and reduce our results of operations. See Note 7, "Commitments and
Contingencies" in the Company's unaudited quarterly financial statements.
If we acquire other companies or businesses, we will be subject to risks that
could hurt our business.
We periodically acquire businesses, form strategic alliances, or make
debt or equity investments. The risks associated with such acquisitions,
alliances, and investments include, among others, the difficulty of assimilating
the operations and personnel of the target companies, the failure to realize
anticipated return on investment, cost savings and synergies, and the diversion
of management's time and attention. Such acquisitions, alliances, and
investments often involve significant transaction-related costs and 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.
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.
24
Our stock price may continue to be volatile.
The market price of our common stock has been volatile in the recent
past and could fluctuate substantially in the future based upon a number of
factors, some of which are beyond our control. These factors include:
o changes in our quarterly operating results;
o shortfalls in revenues or earnings compared to securities analysts'
expectations;
o changes in analysts' recommendations or projections;
o fluctuations in investors' perceptions of us or our competitors;
o shifts in the markets for our products;
o development and marketing of products by our competitors;
o changes in our relationships with suppliers, distributors, resellers,
system integrators, or customers; and
o continuing effects of the worldwide economic downturn.
Further, the stock market has witnessed unusual volatility with respect to the
price of equity securities of high technology companies generally, and this
volatility has, at times, appeared to be unrelated to any of the factors above.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk
The Company's primary exposures to market risk are the effect of
volatility in currencies on asset and liability positions of our international
subsidiaries that are denominated in foreign currencies, and the effect of
fluctuations in interest rates earned on our cash equivalents and marketable
securities.
Foreign Currency Exchange Risk
The Company derives approximately 50% of its revenues from customers
outside the United States. This business is, for the most part, transacted
through international subsidiaries and generally in the currency of the end-user
customers. This circumstance exposes the Company to risks associated with
changes in foreign currency that can impact revenues, net income (loss) and cash
flow. The Company enters into foreign currency forward-exchange contracts to
hedge the foreign exchange exposure of certain forecasted receivables, payables
and cash balances of its foreign subsidiaries. Gains and losses associated with
currency rate changes on the contracts are recorded in results of operations,
offsetting gains and losses on the related assets and liabilities. The success
of this hedging program depends on forecasts of transaction activity in the
various currencies. To the extent that these forecasts are over- or understated
during the periods of currency volatility, the Company could experience
unanticipated currency gains or losses.
At September 30, 2002, the Company had $32.1 million of forward-exchange
contracts outstanding, denominated in euros, Japanese yen, Singapore dollars,
Canadian dollars and British pounds, as a hedge against forecasted foreign
currency-denominated receivables, payables and cash balances. Net gains of $0.2
million resulting from forward-exchange contracts were included in the results
of operations in the third quarter of 2002, which partially offset net
transaction and translation losses on the related assets and liabilities for the
same period of $0.5 million. For the nine-month period ended September 30, 2002,
net losses of $2.8 million resulting from forward-exchange contracts were
included in the results of operations and were more than offset by net
transaction and translation gains on the related asset and liabilities for the
same period of $3.3 million. A hypothetical 10% change in foreign currency rates
would not have a material impact on the Company's results of operations,
assuming the above-mentioned forecast of foreign currency exposure is accurate,
because the impact on the forward contracts as a result of a 10% change would at
least partially offset the impact on the asset and liability positions of the
Company's foreign subsidiaries.
Interest Rate Risk
At September 30, 2002, the Company held $78.2 million in cash, cash
equivalents and marketable securities, including short-term government and
government agency obligations. Marketable securities are classified as
"available for sale" and are recorded on the balance sheet at market value, with
any unrealized gain or loss recorded in accumulated other comprehensive income
(loss). A hypothetical 10% increase or decrease in interest rates would not have
a material impact on the fair market value of these instruments due to their
short maturity.
26
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures. We maintain disclosure controls and
procedures designed to ensure that material information related to Avid,
including our consolidated subsidiaries, is made known to management on a
regular basis. In response to recent legislation and proposed regulations, we
reviewed our internal controls structure and our disclosure controls and
procedures. We believe our existing controls and procedures are adequate to
enable us to comply with our disclosure obligations. We also established a
disclosure committee, which consists of members of the Company's senior
management, as well as financial and legal professionals.
Changes in Controls and Procedures. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these internal controls after the date of our most recent evaluation.
27
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
The exhibits listed in the accompanying index to exhibits are filed as
part of this Quarterly Report on Form 10-Q.
(b) REPORTS ON FORM 8-K. For the fiscal quarter ended September 30, 2002,
the Company filed no current reports on Form 8-K.
28
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, 2002 By: /s/ Paul J. Milbury
--------------------------------
Paul J. Milbury
Chief Financial Officer
(Principal Financial Officer)
Date: November 13, 2002 By: /s/ Carol L. Reid
--------------------------------
Carol L. Reid
Vice President and Corporate Controller
(Principal Accounting Officer)
29
CERTIFICATION
I, David A. Krall, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Avid Technology,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrants' other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined for
purposes of Rule 13a-14 under the Securities Exchange Act of 1934, as amended)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report was prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on the
required evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and to the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls that could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ David A. Krall
-------------------------------------
David A. Krall
President and Chief Executive Officer
(principal executive officer)
30
CERTIFICATION
I, Paul J. Milbury, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Avid Technology,
Inc. (the "Company");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrants' other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined for
purposes of Rule 13a-14 under the Securities Exchange Act of 1934, as amended)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report was prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on the
required evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and to the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls that could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 /s/ Paul J. Milbury
------------------------------------------
Paul J. Milbury
Vice President and Chief Financial Officer
(principal financial officer)
31
EXHIBIT INDEX
Exhibit No. Description
10.1 Executive Employment Agreement by and between the Company and
David A. Krall, dated as of July 24, 2002.
10.2 Executive Employment Agreement by and between the Company and
Joseph Bentivegna, dated as of July 24, 2002.
10.3 Executive Employment Agreement by and between the Company and
Ethan E. Jacks, dated as of July 24, 2002.
10.4 Executive Employment Agreement by and between the Company and
David Lebolt, dated as of July 24, 2002.
10.5 Executive Employment Agreement by and between the Company and
Paul Milbury, dated as of July 24, 2002.
10.6 Executive Employment Agreement by and between the Company and
Michael Rockwell, dated as of July 24, 2002.
10.7 Executive Employment Agreement by and between the Company and
Ann C. Smith, dated as of July 24, 2002.
10.8 Executive Employment Agreement by and between the Company and
Charles L. Smith, dated as of July 24, 2002.
10.9 Change-in-Control Agreement by and between the Company and
David A. Krall, dated as of July 24, 2002.
10.10 Change-in-Control Agreement by and between the Company and
Joseph Bentivegna, dated as of July 24, 2002.
10.11 Change-in-Control Agreement by and between the Company and
Ethan E. Jacks, dated as of July 24, 2002.
10.12 Change-in-Control Agreement by and between the Company and
David Lebolt, dated as of July 24, 2002.
10.13 Change-in-Control Agreement by and between the Company and
Paul Milbury, dated as of July 24, 2002.
10.14 Change-in-Control Agreement by and between the Company and
Michael Rockwell, dated as of July 24, 2002.
32
10.15 Change-in-Control Agreement by and between the Company and
Ann C. Smith, dated as of July 24, 2002.
10.16 Change-in-Control Agreement by and between the Company and
Charles L. Smith, dated as of July 24, 2002.
99.1 Statement Pursuant to 18 U.S.C.ss.1350, dated as of November 13, 2002
33