AVID TECHNOLOGY, INC.
Avid Technology Park
One Park West
Tewksbury, MA 01876
March 11, 2004
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, DC 20549
Re: Avid Technology, Inc.
File No. 0-21174
Annual Report on Form 10-K
Ladies and Gentlemen:
Pursuant to regulations of the Securities and Exchange Commission,
submitted herewith for filing on behalf of Avid Technology, Inc. (the "Company")
is the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2003.
Except as required by changes to accounting standards, the Company's
financial statements filed as part of the Form 10-K do not reflect a change from
the preceding year in any accounting principles or practices or in the method of
applying any such principles or practices.
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-K
FOR ANNUAL AND TRANSITION REPORTS PURUSANT
TO SECTIONS 13 OR 15(D) OF THE SECURITIES ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition period from to
------------ ------------
Commission File Number 0-21174
AVID TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2977748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Avid Technology Park, One Park West, Tewksbury, MA 01876
(Address of principal executive offices) (Zip Code)
(978) 640-6789
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock $.01 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES v NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) YES v NO
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $1,021,860,330 based on the closing price of the
Common Stock on the NASDAQ National Market on June 30, 2003.
The number of shares outstanding of the registrant's Common Stock as of February
26, 2004, was 31,240,112.
Documents Incorporated by Reference
Document Description 10-K Part
-------------------- ---------
Portions of the Registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held May 26, 2004............. III
This Annual Report on Form 10-K contains a number of forward-looking
statements. Any statements contained herein (including without limitation
statements to the effect that Avid Technology, Inc. (the "Company" or "Avid") or
its management "believes", "expects", "anticipates", "plans" and similar
expressions) that are not statements of historical fact should be considered
forward-looking statements. There are a number of important factors that could
cause the Company's actual results to differ materially from those indicated by
such forward-looking statements. These factors include, without limitation,
those set forth in "Certain Factors That May Affect Future Results."
PART I
ITEM 1. BUSINESS
OVERVIEW
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 ("Video") segment
offers digital, non-linear video and film editing systems and 3D and special
effects software that enable users 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 ("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. In addition, we ourselves have received numerous awards
for technical innovations, including, Oscars, Emmys and a Grammy. (Oscar is a
registered trademark and service mark of the Academy of Motion Picture Arts and
Sciences. Emmy is a registered trademark of ATAS/NATAS. Grammy is a registered
trademark of The National Academy of Recording Arts and Sciences, Inc.)
DIGITAL MEDIA CONTENT MARKETS
Digital formats and tools have largely displaced analog processes in
many markets, such as word processing, spreadsheets, publishing, graphics, and
electronic and mechanical design. Markets that use film, video and audio media
have also begun migrating to digital formats. Technical advances in digital
media content-creation tools have made this migration easier, allowing users to
create and manipulate more complex content incorporating several elements of
digital media. For example, many video games now include live-action video,
detailed 3D graphics, and high quality audio, all created, manipulated, and
played back in digital form. Feature films, such as "The Matrix Reloaded,"
"Mystic River," and "The Lord of the Rings: The Return of the King," to name a
few, integrate sophisticated computer-generated special effects into traditional
live action shots.
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We currently sell our products and services in two principal markets:
video and film editing and effects, and professional audio. Both of these
markets are transitioning from well-established analog content-creation
processes to digital content-creation tools.
Our video and film editing and effects market consists of professional
users, over-the-air broadcast and cable companies, and corporate, government,
and educational users. Professional users include independent production and
post-production companies that produce video and film material, such as feature
films, commercials, entertainment and documentary programming, industrial
videos, and music videos; professional character animators and video game
developers; and television facilities, film studios, and certain large
corporations that perform digital media production and post-production in-house.
Our customers also include a wide variety of companies that originate news
programming, including national and international broadcasters, such as the
British Broadcasting Corporation, the National Broadcasting Company,
TV Azteca of Mexico, and France Television, as well as network affiliates, local
independent television stations, web news providers and local and regional cable
operators that produce news programming. Finally, users in corporations and
various other institutional settings employ digital media tools to create and
distribute information enriched by the addition of digital media content to
their customers and employees.
Our professional audio market is comprised of professional music
studios, project studios, film and television production and post-production
facilities, television and radio broadcasters, DVD, web and other "new media"
production studios, corporate, government, and educational facilities, as well
as home-hobbyists and enthusiasts. These users range in size from individuals to
large multi-national corporations. Our audio products are employed in a wide
variety of applications, including recording, editing, mixing, processing and
mastering.
RECENT ACQUISITIONS
In January 2004 we acquired Munich-based NXN Software AG (NXN), a
leading provider of asset and production management systems. NXN develops
software to address the complexity of how digital assets are managed in the
content creation and entertainment industries. NXN's productivity-enhancing
tools have helped customers that include computer game developers, film studios
and television stations.
The NXN product line - which includes alienbrain Studio, alienbrain
Engineer, and alienbrain VFX - Combines infrastructure,
configuration, project, and workflow management capabilities. These customizable
tools are designed to manage the complexity of content creation, balancing
elements like 3D models, textures, video, audio, source code, and office
documents. With alienbrain software, creators of digital media projects have
greater version control which protects against losing critical data. We believe
that the addition of NXN will enhance Avid's film and video postproduction,
broadcast news, and 3D product lines by enriching them with a feature set that
has been proven to facilitate media creation and management. NXN will be part
of our Video segment.
In December 2003 we acquired the assets of Bomb Factory Digital, Inc.,
a manufacturer of real-time audio DSP effects plug-ins for the Digidesign
Pro Tools platform. Bomb Factory's plug-ins are used throughout the recording
industry, with customers ranging from Grammy award-winning musical artists to
major broadcasters and top-tier video game developers, to realistically emulate
the sound and look of vintage studio processors. Our plan is to deploy the Bomb
Factory assets across our Pro Tools product line.
In October 2002, we acquired iKnowledge, Inc., a privately held content
management software company. iKnowledge develops next generation asset
management and distribution technology. We are currently integrating iKnowledge
applications for broadcast and media asset management and distribution into our
Avid Unity and Avid Unity for News product lines.
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STRATEGY
Our mission is to serve the industries that Make, Manage and Move Media.
Our strategy consists of four key elements:
Continue to Deliver Best-of-Breed Products to Professional Content Creators in
Video and Audio Markets
We continue to focus on markets where digital media content creation
already takes place, and we believe we enjoy a leadership position in each of
these primary markets. These include the professional video and film editing and
effects market (film and television studios, independent production and
post-production firms, and broadcast, including hard news, long form news, and
promotion), and the audio market (music, audio production, and post-production).
We plan to strengthen our positions in these markets by continuing to enhance
our existing products and introducing new products that satisfy a broader range
of customer needs that are developed internally, jointly with third parties or
through acquisitions.
Deliver Seamlessly Integrated Workflow for Customers that Work with Multiple
Systems or Multiple Media Disciplines.
We continue to invest significant resources in enhancing the
interoperability of our broad array of products that Make, Manage and Move
Media. To satisfy the demands of the post-production and broadcast markets, we
are committed to delivering integrated solutions to our users, not just point
products. For example, with Avid Unity Network-based collaborative workgroups,
we are seeking to enable all of our products to connect to one another through
the sharing of common media production assets and information about the media,
or metadata, in a seamless workflow that encompasses all the disciplines in
content creation - acquisition, editing, image manipulation, graphics, audio,
mastering, encoding and distribution. An Avid Unity for News solution, for
example, can facilitate all the tasks required to create news stories for
broadcast by leveraging the aggregate power of all of our tools. The entire
process, including capturing news feeds, managing scripts and announcer
recordings, editing and manipulating video, audio and graphics elements,
delivering the finished product to a video server for playback, automated
repurposing of the story for web distribution, and streaming the repurposed
content to the consumer, can be accomplished seamlessly by an array of our
products working together, connected in an Avid Unity workgroup.
Support Open Standards for Media, Metadata and Application Program Interfaces
(APIs).
Beyond interoperability within the Avid family of products, we seek to
design all of our products so that they are based on and can work with a variety
of established industry-wide standards, including computer platforms, operating
systems, networking protocols, data compression, and digital media handling
formats. We have been a leader in defining and developing the Advanced Authoring
Format, or AAF, a multimedia file format that enables content creators to easily
exchange digital media and metadata, across platforms and between systems and
applications. AAF saves time, simplifies project management, and preserves
valuable metadata that can be lost when transferring media between applications.
In order to address the needs for collaboration and efficient workflow
in a local-area network (LAN) or wide-area network (WAN) environment, we offer
the Avid Unity Productivity Tools, such as Avid Unity MediaManager and Avid
Unity TransferManager products. MediaManager makes media accessible to more
people by providing a simple Web browser interface to search, view, and select
high resolution video on any desktop. TransferManager enables local or
geographically dispersed content creators to collaborate easily by facilitating
the exchange of digital media. TransferManager streamlines and automates the
task of transferring production assets between editing systems, between
collaborative Avid Unity workgroups, and between Avid Unity workgroups and
external Avid editing or video server systems.
Deliver Excellent Customer Service, Support and Training.
In order to succeed, we must provide experienced, accessible and
knowledgeable customer service. We try to create a culture at Avid that
encourages every employee to focus on exceptional customer service. We seek to
train our support staff in a broad range of applications, operating systems, and
storage and networking solutions. In addition, we work with resellers in the
major regions of the world who also have the capability to deliver various
levels of application and hardware support directly to end users. We also offer
training in all areas of content creation though a team of experienced
educational specialists throughout the world.
4
PRODUCTS
The following section describes our major products and product families
within the two markets into which they are sold. Information about our
reportable segments, including total revenues, operating income and total
assets, as well as a geographic breakdown of our revenues and long-lived assets,
can be found in Footnote N to our Consolidated Financial Statements in Item 8.
Video and Film Editing and Effects Products
Digital Nonlinear Accelerator (Avid DNA)
In April 2003, we unveiled a new family of products called the Digital
Nonlinear Accelerator, 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 enhanced products include Avid Media Composer Adrenaline,
Avid NewsCutter Adrenaline FX, Avid Xpress Pro with Avid Mojo hardware and
Avid DS Nitris, described below.
Media Composer for Windows and Macintosh Platforms
Our Media Composer family consists of digital, non-linear editing
products that are used to create high-quality productions such as television
shows and commercials, feature films, music videos, corporate videos, and other
non-broadcast finished videos. This product family, which accounted for
approximately 16%, 19% and 21% of our revenues in 2003, 2002 and 2001,
respectively, includes five Media Composer models: the Film Composer product,
the Media Composer Offline, the Media Composer 1000, the Media Composer 9000,
and the new Media Composer Adrenaline system, each of which provides various
levels of capability and functionality.
Our Media Composer products are designed primarily for use by
professional film and video editors. They convert visual and audio source
material from video tape to a digital format and store the converted material on
a range of hard disk storage devices. Once digitized, the stored media can be
previewed, edited, and played back. The Media Composer Adrenaline system
provides the real-time performance of a hardware-based system for up to eight
streams of uncompressed SD video and the platform flexibility and performance
scalability of a software-based system.
The Film Composer product is a 24 frames-per-second, or fps, editing
system for projects that originate and finish on film. Film footage can be
converted to video signals for editing, but because video runs at different
speeds, a standard 30 or 25 fps video editing system does not yield an accurate
24 fps film cut list from which to edit a final master of the film. Avid's Film
Composer product includes software that solves this problem by determining which
frames on the video tape are actual frames from the film source material.
Avid|DS for Windows Platform
Our Avid|DS product is a comprehensive, digital non-linear production
system for real-time creating, editing, and finishing effects-intensive short
projects, such as commercials and music videos. This product family consists of
four models: Avid|DS, Avid|DS HD, Avid|DS HD Editor, and the new Avid DS Nitris
system. They combine a rich set of tools for video and audio editing,
compositing, effects generation, image treatment, and project management, all
integrated within a unified architecture and common user interface, running on
the Windows NT platform. With Avid|DS, digital artists have access to a
comprehensive toolset with the capability of processing uncompressed video,
combined with a choice of third-party hardware platforms. Avid DS Nitris system
represents the high end of this product family, providing guaranteed real-time
performance plus processing power that scales with the host CPU.
Avid Symphony for Windows and Macintosh Platforms
Our Avid Symphony product is a digital, non-linear video editing system
that offers real-time on-line editing and finishing capabilities targeted at
high-end postproduction, such as primetime television programs and nationally
broadcast commercials. The Avid Symphony system is designed to finish high-end
editorial projects that are "off-lined" - i.e., put into a narrative story
format - on an Avid Media Composer system and traditionally finished in a linear
suite. The Avid Symphony system delivers all of the proven Media Composer
editing functionality, plus higher-end, real-time finishing tools such as
advanced scene-to-scene built-in color correction, motion tracking and image
stabilization, as well as Universal Editing and Mastering.
5
Avid Xpress for Windows and Macintosh Platforms
Our Avid Xpress product is a digital, non-linear video editing system
designed to meet the needs of media professionals and video/film educators
involved with video and multimedia production for a variety of distribution
mediums including videotape, CD-ROM and the Internet. Avid Xpress software has a
streamlined user interface and editing model targeted for this category of user.
As a more affordable product than the Media Composer, Symphony and Avid|DS
systems, the Avid Xpress system targets a broader potential customer base.
Avid Xpress DV and Avid Xpress Pro for Windows and Macintosh Platforms
Our Avid Xpress DV and Avid Xpress Pro products are digital, nonlinear
video editing systems designed to offer the professional quality and
sophistication of an Avid system at a lower cost. These systems are marketed to
media professionals, Internet video developers, and video/film educators
involved with video and multimedia production for a variety of distribution
mediums including videotape, CD-ROM and the Internet. Avid Xpress DV software
has a streamlined user interface and editing model, and is ideal for DV-format
based production environments where cost is a major factor. The Avid Xpress DV
system delivers the industry leading Avid-editing user interface at an
affordable price point in a portable form convenient for editing in the field or
on location. The Avid Xpress Pro system provides additional functionality
through built-in software "experts" such as AutoCorrect color correction,
AutoSave and ExpertRender. When combined with the Avid Mojo Digital Nonlinear
Accelerator (Avid DNA) product, Avid Xpress Pro provides the first and only
real-time portable video solution for notebook computers.
NewsCutter Effects for Windows Platform
Our NewsCutter Effects product is a digital, non-linear video editing
system designed to meet the real-time demands of television news production. The
NewsCutter Effects system supports the popular DVCPro 25, 50 megabyte, and
D10/IMX media compression formats, and is built on a Windows NT-based computer
platform. NewsCutter Effects enables broadcast news editors to edit news and
news features in an environment with time-critical demands. Based on the same
core technology as the Media Composer system, the NewsCutter Effects system
offers a range of editing and real-time effects features. Our NewsCutter Effects
product can operate as a stand-alone editing system or in a news production
workgroup with a playback system. The Newscutter Adrenaline FX product, released
in June 2003, provides editors and reporters with access to all their media and
even greater speed in sending news for broadcast.
NewsCutter XP
Our NewsCutter XP product is a digital, non-linear video editing system
that significantly expands the reach of our NewsCutter product line, delivering
a powerful editing suite into the hands of journalists in the field using just a
laptop computer and a portable camera. This solution includes all the editing
and creative features of the Adrenaline FX model. The Desktop version of our
NewsCutter XP product offers a lower-cost alternative to our NewsCutter Effects
product, with all of the news-specific innovation of the NewsCutter line. We
also offer NewsCutter XP Mobile, a software-only news editing system available
for use with notebook computers. This system provides increased flexibility to
broadcasters as stories can be easily created, edited and transferred back to
the newsroom for immediate broadcast. Combining the NewsCutter XP product with
the Avid Mojo accelerator provides a comprehensive input/output, I/O with
composite and S-video inputs over a FireWire connection. The addition of Avid
Mojo hardware also enhances the NewsCutter XP system with the QuickRecord
option.
Avid AirSPACE
Our AirSPACE product, together with other Avid products, provide
end-to-end broadcast solutions from ingest to editing, storage and playback.
These products are among the industry's leaders in HDTV and SDTV broadcast and
post-production server solutions. When combined with NewsCutter Effects,
NewsCutter XP and the Avid Unity for News systems, the AirSPACE product line is
a preferred server for news applications.
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Avid Xdeck
Avid Xdeck is a direct-ingest digitizing system for Avid Unity for News,
MediaNetwork, and Avid Unity LANshare shared media systems. Broadcast news
operations can ingest high-resolution material quickly and directly into Avid
Unity systems, without having to stage the media through an ingest server, tie
up nonlinear editors, or involve the inefficient shuttling of tapes, thereby
removing the "digitizing bottleneck" that has often hampered the nonlinear
workflow.
Avid iNews Products
Our Avid iNews NRCS (News Room Computer System) product is a newsroom
production and automation system designed to facilitate and integrate the
processes of news gathering, story creation, script editing, and newscast
planning and creation. The Avid iNews NRCS system features a simplified user
interface for novice users and the ability to export to the Internet and
directly access Internet news files using standard web browsers. The Avid iNews
system is scalable from 10 to 1,000 users, and its WAN capabilities allow
stories to be automatically routed from one station in a group to another.
Our Avid MediaBrowse desktop tool streamlines news production by giving
producers, journalists, and writers simultaneous access to view video assets,
select clips, and perform simple edits at their workstations. With the Avid
MediaBrowse product, media is available to multiple users even while feeds are
recording, allowing edit decisions to be automatically transferred to a
NewsCutter system. Additionally, the MediaBrowse tool can be integrated with the
Avid Unity MediaNetwork for News environment.
SOFTIMAGE Content Creation Tools
The SOFTIMAGE family of content creation tools, consisting of
SOFTIMAGE|XSI, SOFTIMAGE|3D and SOFTIMAGE|BEHAVIOR, provides users in various
industries with speed and flexibility in 3D animation, 2D cel animation,
compositing and special effects software. SOFTIMAGE|XSI software provides a wide
range of tools in a unified, integrated 3D environment, enabling users to
produce richer and more visually sophisticated results in less time, offering
clients more flexibility as well as the potential to increase the number of
projects they can complete in a given period. SOFTIMAGE|XSI v3.5 is certified
for Windows NT, Windows 2000, Windows XP, IRIX and LINUX platforms.
Our SOFTIMAGE|3D product was our initial content creation tool for 3D
character animation for the film, commercial, and games development markets.
SOFTIMAGE|3D features production-proven organic modeling, character animation
tools, and high-quality photo-realistic rendering. SOFTIMAGE|3D v4.0, is
certified for Windows NT, Windows 2000, IRIX and LINUX platforms.
The SOFTIMAGE|BEHAVIOR v1.1 product is a scalable, fully programmable
crowd simulation and behavioral animation system, incorporating a complete
Integrated Development Environment (IDE).
Avid Storage and Workgroup Services
Avid offers a broad portfolio of storage products to support the needs
of our customers. The offering scales from direct-attached storage devices for a
standalone editor to an integrated system which supports multiple users on a
network that must store, share and manage media. This product family, which
accounted for approximately 19%, 15% and 16% of our revenues in 2003, 2002 and
2001, respectively, includes Avid Unity MediaNetwork, Avid Unity LANshare EX,
Avid Unity MediaManager, Avid Unity Transfer Manager, and local media storage.
Our Avid Unity MediaNetwork and Avid Unity LANshare EX systems is
comprise a set of open networking and central, digital storage products based on
an advanced media file system that enables real-time, simultaneous sharing of
high-bandwidth digital media. These systems connect editors, artists, sound
designers, and effects specialists throughout a digital facility to the same
network, improving workflow, raising productivity, and enhancing
creativity by eliminating many of the routine, mechanical tasks associated with
managing today's part-linear, part-nonlinear post production process. The Avid
Unity MediaNetwork consists of server-assisted shared storage and networking
technologies, providing support for a wide range of applications and platforms,
including Avid Unity MediaManager and TransferManager. Avid Unity MediaManager
allows users to find, sort, and retrieve media quickly and easily while
maintaining secure project-level access control. Avid Unity TransferManager
allows for the real-time transfer of materials among workgroup members. Both
of these productivity tools provide efficient solutions by allowing production,
editing and administrative tasks to take place in parallel. Avid Unity storage
systems range in capacity from 2.88 terabytes to approximately 20 terabytes.
7
We offer a family of local digital media storage solutions for use with
our systems. These storage systems range in capacity from thirty six gigabytes
to more than 1.75 terabytes.
Avid offers a variety of storage hardware subsystems which are used to
add media editing and playback capacity, improve image quality, support
workgroup media sharing, and protect media from loss due to hardware failure.
We purchase disk drives, tape drives, and storage enclosure sub-systems from
third-party manufacturers, integrate them, enhance their performance, test, and
certify them for use with our systems. We then package these products in various
configurations.
Professional Audio Products
Pro Tools
Developed by our Digidesign audio division, Pro Tools is a multi-track,
non-linear digital audio workstation comprising a variety of hardware options
and bundled software that runs on Macintosh and Windows platforms. The Pro Tools
workstation provides solutions for the entire audio production process,
including sound synthesis, recording, editing, signal processing, integrated
surround mixing and mastering. Pro Tools users work in the, prosumer and
professional music, film, television, radio, multimedia, DVD, and Internet
production markets. Pro Tools systems support a rich third-party development
environment, with more than 100 development partners providing a variety of
additional software and hardware add-on options. The first ProTools|HD system,
which began shipping in early 2002, was further enhanced in October 2003 by the
introduction of the Pro Tools|HD Accel card which provided greatly increased
power of the DSP processing hardware that forms the base of the system.
Digidesign offers Pro Tools systems in a variety of price points and
configurations, ranging from high-end systems for professional music and
post-production, to the affordable Mbox, Digi 002, and Digi 002 Rack systems for
home production studios. The Mbox system, introduced in early 2002, is an
"all-in-one" two-channel mic/line USB audio interface, designed in cooperation
with Focusrite Audio Engineering, Ltd., a leading manufacturer of analog audio
processing equipment. Bundled with Pro Tools LE software, the Mbox system
integrates audio recording, editing and mixing in an affordable, portable
package for entry-level users, as well as professionals who wish to use
additional low cost satellite systems. The Digi 002 system, introduced in late
2002, was designed as a comprehensive home audio production studio. The Digi 002
system combines a versatile multi-channel audio interface with multiple mic/line
preamps, a full-featured and compact control surface with touch-sensitive
motorized faders, and can also act as a standalone compact digital mixer. It
communicates with the bundled Pro Tools LE software via a 1394 FireWire
connection. The Digi 002 Rack system was introduced in 2003, and is a version of
the 002 that is compact and rack-mountable without the motorized fader control
features. The Pro Tools product family accounted for approximately 25%, 27% and
19% of our revenues in 2003, 2002 and 2001, respectively.
ProControl
Our ProControl product is Digidesign's high-end, expandable hardware
control surface for hands-on access to the recording, editing, processing, and
surround mixing capabilities of Pro Tools software. The ProControl control
surface connects to the host computer (and Pro Tools software) via high-speed
Ethernet, serving as a comprehensive front end for professional Pro Tools
systems. The ProControl system allows full tactile control of Pro Tools
functions with patented touch-sensitive motorized faders and dedicated switches,
character displays and knobs. With its modular design, the ProControl system can
be customized to fit any studio, providing from 8 to 48 channels of simultaneous
control. The Edit Pack option adds integrated control of advanced editing and
surround mixing features, rounding out the ProControl product range.
Control|24
Our Control|24 product is a control surface that combines hands-on
access to Pro Tools software features and high-quality microphone pre-amplifiers
from Focusrite. The Control|24 product communicates with the host computer (and
Pro Tools software) via Ethernet, and provides tactile control of most Pro Tools
functions. The Control|24 product is a 24-fader, fixed-size control surface,
designed for music production and broadcast applications.
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AVoption|XL
The AVoption|XL hardware option for Pro Tools systems allows the user to
record, edit and process sound synchronized with Avid-format, non-linear digital
video. Designed for post-production professionals working in film, TV and video,
the AVoption|XL product enables capture, playback, and basic editing of
broadcast-quality picture from projects originating on Avid Media Composer, Film
Composer and Symphony systems. The AVoption|XL product also includes the
DigiTranslator software option that provides users with a high level of media
and metadata interchange with any compatible Avid video editing system.
SALES AND SERVICE
We market and sell our solutions through a combination of direct and
indirect sales channels, covering a range of customers throughout the world.
From our traditional presence in the high-end post-production market to
broadcast news, low-cost post-production, and streaming media solutions, we
strive for balanced market and geographic sales coverage. We target an array of
markets from our traditional customer base in high-end post-production to newer
markets in broadcast news, low-cost post-production and streaming media
solutions. We sell our products primarily through a network of more than 250
independent distributors, value-added resellers and dealers. We supplement these
channels with a team of our sales representatives directly serving select
customers and markets.
We provide customer service and support directly through regional
telephone support centers and major-market field service representatives, and
indirectly through strategically located dealers, value-added resellers and
authorized third-party service providers. Customers may choose from a variety of
support offerings, including 24-hour telephone support, quick-response on-site
assistance, hardware replacement and extended warranty and software upgrades.
Customer training is available directly from us or through field-based
authorized third-party Avid training centers around the world.
MANUFACTURING AND SUPPLIERS
Our manufacturing operations consist primarily of the testing of
subassemblies and components purchased from third parties, the duplication of
software, and the configuration, assembly and testing of board sets, software,
related hardware components and complete systems. We also rely on independent
contractors to manufacture components and subassemblies to our specifications.
Our systems undergo testing and quality assurance at the final assembly stage.
We are dependent on a number of sole source vendors for certain key hardware
components of our products. For the risks associated with our reliance upon
certain vendors, see "Certain Factors that May Affect Future Results" under Item
7.
We have manufacturing facilities in Tewksbury, Massachusetts; Dublin,
Ireland; Madison, Wisconsin; and Menlo Park, California. We also contract with
third-party manufacturing facilities for certain component parts.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on the development of
digital media content-creation tools and workgroup solutions that operate
primarily on the Macintosh and Windows platforms. We are committed to delivering
best-in-class video, film, 3D animation, and audio editing systems to meet the
needs of professionals in the television, film, music, broadcast news
production, and industrial post-production markets, and of end-users in the
educational and corporate markets. Our research and development efforts also
include networking and storage initiatives to deliver standards-based media
transfer and media asset management tools, as well as stand-alone and
network-attached media storage systems for workgroups. Increasingly, we design
our systems to be Internet-enabled with technology for encoding and streaming
media over the Internet.
Our research and development operations are primarily located in
Tewksbury, Massachusetts; Daly City, California; Madison, Wisconsin; and
Montreal and Edmonton, Canada. We also employ independent contractors in the
United States and abroad for some of our research and development activities.
COMPETITION
The markets for our products are highly competitive and subject to rapid
change. Our competition is fragmented, with a large number of suppliers
providing different types of products to different markets.
9
Video Postproduction and 3D
In the TV, video, and film postproduction markets, we compete primarily
with vendors that offer similar digital editing and effects products based on
standard computer platforms. These competitors include AJA Video Systems Inc.,
Adobe Systems Incorporated, Quantel Inc., BlackMagic Design Pty. Ltd., Discreet
(a division of Autodesk, Inc.), Apple Computer, Media 100 Inc., Pinnacle
Systems, Inc. and Sony Corporation. In the 3D/animation sector, we compete with
other manufacturers of content creation solutions for the video game, feature
film, and related markets, including Discreet, Alias (a subsidiary of Silicon
Graphics, Inc.), and NewTek, Inc.
Broadcast
In the broadcast sphere, we compete with vendors of editing and effects
products for originators of news, sports, and special programming for
television. Our broadcast competitors include the Associated Press, Sony
Corporation, Pinnacle Systems, Inc., Thomson Grass Valley, Quantel Inc. and
Leitch Technology Corporation. We also compete with broadcast vendors that
generally have offered analog-based products, such as Sony Corporation and
Matsushita Electrical Industrial Co., Ltd. We expect competition from these
analog-based vendors to increase as they develop and introduce digital media
products.
Data Storage and Digital Asset Management
Avid competes in the data storage market with companies such as EMC
Corporation, Transoft Inc., Medea Corporation, Rorke Data (a subsidiary of Bell
Microproducts), Apple Computer and Hewlett-Packard Company. In the digital asset
management industry, the alienbrain product family - which Avid acquired in
January 2004 from NXN Software AG - competes with Artesia Technologies, emotion
Inc., Documentum (a division of EMC), IBM Rational ClearCase, Perforce Software,
Inc., and Borland Software Corporation.
Audio
In the professional audio market, we compete primarily with suppliers of
traditional analog and digital recording and/or mixing systems, including
manufacturers of disk-based digital audio workstation software/hardware products
such as Emagic (a subsidiary of Apple Computer), Roland Corporation, Steinberg
Media Technologies (a subsidiary of Pinnacle), Merging Technologies, and Mark of
the Unicorn (MOTU). We also compete with manufacturers of low-cost audio I/O
hardware such as Loud Technologies, Inc. (formerly Mackie Designs), Tascam (a
division of TEAC Corporation) and Yamaha Inc., as well as mixing console
manufacturers such as Euphonix, AMS/Neve, and Solid State Logic (SSL). In
addition, companies such as Creative Technology Ltd. currently provide low-cost
digital audio playback cards targeted primarily at the personal computer game
market. There can be no assurance that these companies will not also introduce
products that are more directly competitive with our products.
EMPLOYEES
We employed 1,582 people as of December 31, 2003.
WEBSITE ACCESS
We make available free of charge on our website, www.avid.com, copies of
our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports, as soon as reasonably
practicable after such material is filed with the Securities and Exchange
Commission, and in any event on the same day. Additionally, we will provide
paper copies of all such filings free of charge upon request.
ITEM 2. PROPERTIES
Our principal administrative, sales and marketing, research and
development, support, and manufacturing facilities are located in three adjacent
buildings in an office park located in Tewksbury, Massachusetts. Our leases on
these buildings expire in June 2010. In September 2000, we subleased a portion
of this space to an unrelated company. The sublease expires in 2005. In January
2002, we vacated additional space in Tewksbury in connection with our 2001
restructuring action and are currently seeking a tenant for that space.
10
We lease facilities in Dublin, Ireland; Madison, Wisconsin; and Menlo
Park, California for the manufacture and distribution of our products. We lease
office space in Daly City, California for our Digidesign headquarters, including
its administrative, sales and marketing, and research and development
activities, and in Iver Heath, United Kingdom, for our European headquarters,
including administrative, sales, and support functions. Finally, we lease
facilities in Montreal and Edmonton, Canada, which house certain administrative,
research and development, and support operations. In December 2002, we vacated
portions of our leased space in Daly City and Montreal. In July 2003 we
subleased a portion of our space in Montreal to an unrelated company. This
sublease expires in January 2007.
In September 1995, our United Kingdom subsidiary entered into a 15-year
lease in London, England. We vacated this property in 1999 as part of our
corporate restructuring actions, and have currently sublet all of this space. We
also maintain sales and marketing support offices in leased facilities in
various other locations throughout the world.
We anticipate that our leased facilities will be adequate for our needs
during 2004.
ITEM 3. LEGAL PROCEEDINGS
On March 11, 1996, we were 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, upon our motion, the suit was transferred to the
United States District Court for the Southern District of New York. The
complaint alleges infringement by Avid of U.S. patent number 4,258,385, and
seeks injunctive relief, treble damages, costs, and attorneys' fees. This patent
expired on May 15, 1999 and therefore, would not be applicable to the products
currently offered by us. Accordingly, potential damages, if any, are limited to
the period beginning March 11, 1990 (six years prior to the date of the
complaint) and ending May 15, 1999. In our answer to the complaint, we have
asserted that we did not infringe the patent and that the patent is invalid. We
are unable to quantify a range of loss in this litigation. Combined Logic
Company did not specify an alleged damage amount in its complaint. As only
limited discovery has been conducted to date by either side in the eight years
since Combined Logic Company filed its complaint, we believe we do not have
sufficient information to provide any meaningful estimate of the possible range
of damages that Combined Logic Company might seek. We believe we have
meritorious defenses to the complaint and intend to contest it 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.
In March 1999, Avid and Tektronix, Inc. were sued by Glen Holly
Entertainment, Inc., a company that used Tektronix equipment and rented it to
others, 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. In
March 2001, the United States District Court for the District of California
dismissed the antitrust claims against both parties and the remaining common law
claim against us was dismissed without prejudice by stipulation and court order
on April 6, 2001. Glen Holly subsequently 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. The Petition was
denied on December 12, 2003. The case, including the common law claim against
Avid that had been previously dismissed, is once again pending in the United
States District Court for the District of California, and the parties are
resuming discovery as to the plaintiff's claims and alleged damages. We do not
believe that we can provide an estimate of the range of possible loss in the
Glen Holly litigation because we do not have sufficient information at this
time to make a reasonable estimate of such range. In addition, the Glen Holly
litigation involves an alleged antitrust violation and any damage award in the
case is contingent upon Glen Holly proving lost profits. In 2004, we have been
in discussion with Glen Holly regarding potential settlement of this matter;
however, no agreement has been reached and settlement is uncertain at this time.
We continue to view the complaint and appeal as without merit and will continue
to defend ourselves 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 for 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, we may seek
licenses or settlements. In addition, as a normal incidence of the nature of our
business, various claims, charges, and litigation have been asserted or
commenced against us 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 our financial
position or results of operations.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
last quarter of the fiscal year ended December 31, 2003.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is (i) the name and age of each executive officer of the
Company; (ii) the position(s) presently held by each person; and (iii) the
principal occupation held by each person for at least the past five years.
EXECUTIVE OFFICER AGE POSITION(S)
David A. Krall 43 President and Chief Executive Officer
Paul J. Milbury 55 Vice President and Chief Financial Officer
Joseph Bentivegna 43 Vice President of Video Development
and Operations
David M. Lebolt 47 Vice President and General Manager,
Digidesign
Charles L. Smith 43 Vice President of Worldwide Sales,
Marketing & Services
Michael J. Rockwell 37 Vice President of Software Engineering
and Chief Technology Officer
Carol L. Reid 56 Vice President and Corporate Controller
Ethan E. Jacks 50 Vice President of Business Development,
Chief Legal Officer and Corporate Secretary
Patricia A. Baker 56 Vice President of Human Resources
- -----------------
DAVID A. KRALL. Mr. Krall has served as President since October 1999 and Chief
Executive Officer since April 2000. Previously, he served as Avid's Chief
Operating Officer from October 1999 to April 2000. Prior to that, Mr. Krall
served in various capacities at Digidesign: Chief Operating Officer of
Digidesign from July 1998 to October 1999, Vice President of Engineering from
June 1996 to July 1998 and Director of Program Management from May 1995 to
June 1996.
PAUL J. MILBURY. Mr. Milbury has served as Vice President and Chief Financial
Officer since December 2000. Prior to joining Avid, Mr. Milbury was Chief
Financial Officer of iBelong.com, Inc. from April 2000 to December 2000, and
Chief Financial Officer of JuniorNet Corporation from October 1998 to April
2000. Prior to that, Mr. Milbury spent 19 years at Digital Equipment
Corporation (now part of Hewlett-Packard Computer Corporation), where in 1995
he became Vice President and Treasurer.
JOSEPH BENTIVEGNA. Mr. Bentivegna has served as Vice President of Video
Development and Operations since August 2001. Previously, he held a variety of
other positions at Avid, including Vice President and General Manager of Avid
Media Solutions from June 2000 to August 2001, Vice President of Worldwide
Operations from January 1999 to June 2000, Vice President and General Manager of
Asia Operations from September 1998 to January 1999 and Vice President of
Worldwide Manufacturing from June 1996 to September 1998. From November 1991 to
June 1996 Mr. Bentivegna held various other positions at Avid. Prior to that he
held various positions in operations for Access Technology, Inc., a developer of
application software.
DAVID M. LEBOLT. Mr. Lebolt has served as Vice President and General Manager of
Digidesign since July 2002. Previously, Mr. Lebolt held a variety of positions
at Digidesign, including Vice President of Product Strategy from November 1999
to July 2002, Director of Product Strategy from November 1998 to November 1999,
12
and Pro Tools Product Line Manager from February 1994 to November 1998. Before
joining Digidesign in 1994, Mr. Lebolt was a professional keyboardist, producer,
arranger and composer. He also has experience in music advertising and music
production, and has received both Clio and Emmy(R) awards for his production
work.
CHARLES L. SMITH. Mr. Smith has served as Vice President of Worldwide Sales,
Marketing and Services since November 1999. Prior to his present position, Mr.
Smith served in various capacities at Digidesign: Vice President of Sales and
Marketing from October 1996 to November 1999, Vice President of International
Sales from August 1995 to October 1996, and Managing Director Digidesign UK from
May 1993 to August 1995.
MICHAEL J. ROCKWELL. Mr. Rockwell has served as Vice President of Software
Engineering since December 2003 and as Chief Technology Officer since August
2001. Previously, Mr. Rockwell was Vice President and General Manager of Avid
Internet Solutions from June 2000 to August 2001, and Chief Architect for
Software Engineering of Digidesign from January 1997 to November 1999. Mr.
Rockwell's prior positions with Digidesign included Director of Application
Development from March 1995 to January 1997 and Director of Multi-Media Products
from April 1994 to March 1995.
CAROL L. REID. Ms. Reid has served as Vice President and Corporate Controller
since November 1998. Prior to joining the Company, Ms. Reid spent 20 years at
Digital Equipment Corporation (now part of Hewlett-Packard Computer
Corporation), where she was Vice President of Internal Audit from January 1998
to November 1998 and Assistant Treasurer/Director from October 1994 to January
1998.
ETHAN E. JACKS. Mr. Jacks has served as Vice President of Business Development
since June 1999 and Chief Legal Officer since June 2000. From May 2000 to
December 2000, Mr. Jacks also served as Acting Chief Financial Officer and
from March 1999 to June 2000 as General Counsel. Prior to joining Avid,
Mr. Jacks was Vice President and General Counsel for Molten Metal
Technology, Inc. from November 1991 to October 1998. Mr. Jacks was also engaged
in the private practice of law for eleven years, including as a partner at
McDermott, Will & Emery.
PATRICIA A. BAKER. Ms. Baker has served as Vice President of Human Resources
since November 2002. From May 1996 to November 2002, Ms. Baker was responsible
for human resource matters at Digidesign. Prior to joining Avid, Ms. Baker held
senior human resources positions at major firms specializing in the medical,
pharmaceutical, and industrial and specialty chemical industries. Ms. Baker
was also President of The Baker Group, an independent consulting firm that
focused on both strategic organizational planning and executive team building.
There are no family relationships among the named executive officers.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the Nasdaq National Market under the
symbol AVID. The table below shows the high and low sales prices of the common
stock for each calendar quarter of the fiscal years ended December 31, 2003 and
2002.
2003 High Low
---- ---- ---
First Quarter $24.15 $16.76
Second Quarter $38.15 $21.86
Third Quarter $57.95 $33.96
Fourth Quarter $59.77 $44.65
2002 High Low
---- ---- ---
First Quarter $14.25 $9.85
Second Quarter $13.95 $7.25
Third Quarter $11.79 $7.93
Fourth Quarter $23.47 $8.26
On February 26, 2004, the last reported sale price of the Nasdaq
National Market for our common stock was $42.93 per share. The approximate
number of holders of record of our common stock at February 26, 2004 was 414.
This number does not include shareholders for whom shares were held in a
"nominee" or "street" name.
We have never declared or paid cash dividends on our capital stock and
currently intend to retain all available funds for use in the operation of our
business. We do not anticipate paying any cash dividends in the foreseeable
future.
14
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected condensed consolidated
financial data. The selected consolidated financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this filing.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
In thousands (except per share data)
For the Year Ended December 31,
-----------------------------------------------------
2003 2002 2001 2000 1999
-----------------------------------------------------
Net revenues $471,912 $418,719 $434,638 $476,090 $452,555
Cost of revenues 209,373 207,236 213,572 234,424 205,877
---------- ---------- ---------- ---------- ----------
Gross profit 262,539 211,483 221,066 241,666 246,678
---------- ---------- ---------- ---------- ----------
Operating expenses:
Research and development 85,552 82,346 86,140 82,900 88,932
Marketing and selling 109,704 100,761 113,053 119,469 129,889
General and administrative 23,208 19,819 23,313 27,504 28,147
Restructuring and other costs, net 3,194 2,923 8,268 - 14,469
Amortization of intangible assets 1,316 1,153 31,168 66,872 79,879
---------- ---------- ---------- ---------- ----------
Total operating expenses 222,974 207,002 261,942 296,745 341,316
---------- ---------- ---------- ---------- ----------
Operating income (loss) 39,565 4,481 (40,876) (55,079) (94,638)
Other income, net 1,874 218 5,529 3,730 3,459
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes 41,439 4,699 (35,347) (51,349) (91,179)
Provision for income taxes 550 1,700 2,800 5,000 46,369
---------- ---------- ---------- ---------- ----------
Net income (loss) $40,889 $2,999 ($38,147) ($56,349) ($137,548)
========== ========== ========== ========== ==========
Net income (loss) per common share - basic $1.40 $0.11 ($1.49) ($2.28) ($5.75)
========== ========== ========== ========== ==========
Net income (loss) per common share - diluted $1.25 $0.11 ($1.49) ($2.28) ($5.75)
========== ========== ========== ========== ==========
Weighted average common shares outstanding - basic 29,192 26,306 25,609 24,683 23,918
========== ========== ========== ========== ==========
Weighted average common shares outstanding - diluted 32,653 26,860 25,609 24,683 23,918
========== ========== ========== ========== ==========
CONSOLIDATED BALANCE SHEET DATA:
In thousands
As of December 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
--------------------------------------------------------
Cash, cash equivalents and marketable securities $196,309 $89,034 $72,961 $83,206 $72,805
Working capital 196,605 94,130 85,490 96,585 70,344
Total assets 348,119 235,803 215,806 266,482 312,024
Long-term debt and other liabilities 607 1,427 13,020 13,449 14,220
Total stockholders' equity 227,105 123,564 104,758 137,850 167,923
15
ITEM 7. 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."
In April 2003, we unveiled a new family of products called the Digital
Nonlinear Accelerator, 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 systems, 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 system 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 the Avid DS Nitris system which began shipping in the fourth quarter of
2003. The Avid DS Nitris product is a powerful finishing tool delivering
real-time effects and color correction. Our future results will depend, in part,
on market acceptance of these new products.
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 materially impact, either positively or adversely, 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities as of the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. We regularly re-evaluate our estimates and judgments,
including those related to revenue recognition; allowances for product returns
and exchanges; allowance for bad debts; the valuation of inventories and income
tax assets; and reserves for recourse under financing transactions. We base our
estimates and judgments on historical experience and various other factors that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities and the amounts of revenue and expenses that are not readily
apparent from other sources. Actual results may differ from these estimates.
We believe the following critical accounting policies most significantly
affect the portrayal of our financial condition and involve our most difficult
and subjective judgments.
Revenue Recognition and Allowances for Product Returns and Exchanges
We recognize revenue from sales of products upon receipt of a signed
purchase order or contract and product shipment to distributors or end users,
provided that collection is reasonably assured, the fee is fixed or
determinable, and all other revenue recognition criteria of SOP 97-2, "Software
Revenue Recognition", as amended, and Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements", are met. We follow the guidance of SOP 97-2 for all of our revenue
recognition since all of our products and services are software-related.
16
We use the residual method to recognize revenues when an order includes
one or more elements to be delivered at a future date and evidence of the fair
value of all undelivered elements exists. Under the residual method, the fair
value of the undelivered element, typically maintenance and support, is deferred
and the remaining portion of the revenue is recognized. If evidence of the fair
value of one or more undelivered elements does not exist, we defer all revenues
and only recognize them when delivery of those elements occurs or when fair
value can be established. Fair value is based on the price charged when the same
element is sold separately to customers.
In most cases, our products do not require significant production,
modification or customization of software. Installation of the products is
generally routine, requires minimal effort and is not typically performed by us.
However, a growing number of transactions, those typically involving orders from
end-users of a significant number of products for a single customer site, such
as news broadcasters, may require that we perform an installation effort that we
deem to be complex and non-routine. In these situations, we do not recognize
revenue from either the products shipped or the installation services until the
installation is complete. In addition, if such orders include a customer
acceptance provision, no revenue is recognized until the customer's acceptance
of the products and services has been received or the acceptance period has
lapsed.
Telephone support, enhancements and unspecified upgrades typically are
provided at no additional charge during the product's initial warranty period
(generally between three and twelve months), which precedes commencement of the
maintenance contracts. We defer the fair value of this support period and
recognize the related revenue ratably over the initial warranty period. We also
from time to time offer certain customers free upgrades or specified future
products or enhancements. For each of these elements that is undelivered at the
time of product shipment, we defer the fair value of the specified upgrade,
product or enhancement and recognizes that revenue only upon later delivery or
at the time at which the remaining contractual terms relating to the upgrade
have been satisfied.
In 2003, approximately 75% of our revenue was derived from indirect
sales channels, including authorized resellers and distributors. Most of our
resellers and distributors are not granted rights to return products to us after
purchase, and actual product returns from them have been insignificant to date.
Within our Video segment, distributors of our Avid Xpress DV, Avid Xpress Pro
and Avid Mojo product lines have a contractual right to return a percentage of
prior quarter purchases. The return provision for these distributors has not had
a material impact on our results of operations. However, some channel partners,
particularly those who resell our Audio products, are offered limited rights of
return, stock rotation and price protection.
Channel partners within our Audio segment are granted return rights on a
case-by-case basis but are not provided a contractual right to do so. In
compliance with Statement of Financial Accounting Standards ("SFAS") No. 48,
"Revenue Recognition When Right of Return Exists", we record a provision for
estimated returns and other allowances, as a reduction of revenues, in the same
period that related revenues are recorded. Management estimates must be made and
used in connection with establishing and maintaining a sales allowance for
expected returns and other credits. In making such estimates, we analyze
historical returns and credits and the amounts of products held by major
resellers, and consider the impact of new product introductions, changes in
customer demand, current economic conditions, and other known factors. We
maintain a rolling history of returns on a product-by-product basis and analyze
returns and credits by product category. Material differences may result in the
amount and timing of our revenue for any period if our estimates of potential
product returns or other reseller credits prove to be materially different from
actual experience.
At the time of a sale transaction, we make an assessment of the
collectibility of the amount due from the customer. Revenue is only recognized
if we are reasonably assured that collection will occur. In making this
assessment, we consider customer credit-worthiness and historical payment
experience. At that same time, we assess whether the fee associated with the
order is fixed or determinable, considering the payment terms of the
transaction, our collection experience in similar transactions without making
concessions, and our involvement, if any, in third-party financing transactions,
among other factors. If a significant portion of the fee is due after our normal
payment terms, which are generally 30, but can be up to 90, days after the
invoice date, we evaluate whether we have sufficient history of successfully
collecting past transactions with similar terms. If that collection history is
successful, then revenue is recognized upon delivery of the products, assuming
the other criteria of SOP 97-2 are satisfied.
17
Allowance for Bad Debts and Reserves for Recourse under Financing Transactions
We maintain allowances for estimated bad debt losses resulting from the
inability of our customers to make required payments for products or services.
When evaluating the adequacy of the allowances, we analyze accounts receivable
balances, historical bad debts, customer concentrations, customer
credit-worthiness and current economic trends. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances could be required.
We provide third-party, lease financing options to many of our
customers. Avid is not generally a party to the leases; however, during the
terms of these leases, which are generally three years, we remain liable for any
unpaid principal balance upon default by the end-user, but such liability is
limited in the aggregate. See Footnote I to our Consolidated Financial
Statements in Item 8. We record revenue from these transactions upon the
shipment of our products since we believe that our collection experience with
similar transactions supports our assessment that the fee is fixed or
determinable. We have operated these programs for over eight years and to date
defaults under the program have consistently ranged between 2% and 4%. We
maintain reserves for estimated recourse losses under this financing program
based on these historical default rates. While we have experienced insignificant
losses from defaults to date under this program, deterioration in the financial
condition of our customers who participate in the program could require
additional reserves.
Inventories
Inventory in the digital media market, including our inventory, is
subject to rapid technological change or obsolescence. We regularly review
inventory quantities on hand and write down inventory to its realizable value to
reflect estimated obsolescence or unmarketability based upon assumptions about
future inventory demand (generally for the following twelve months), and market
conditions. If actual future demand or market conditions are less favorable than
estimates by management, additional inventory write-downs may be required.
Income Tax Assets
We record deferred tax assets and liabilities based on the net tax
effects of tax credits, operating loss carryforwards and temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. We then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and if it is more likely than not that the asset will not be realized, we
then establish an appropriate valuation allowance. Based on the level of the
deferred tax assets as of December 31, 2003 and the level of historical U.S.
taxable income, management has determined that the uncertainty regarding the
realization of these assets in the U.S. is sufficient to warrant the
establishment of a full valuation allowance. If results of operations in the
future indicate that some or all of the deferred tax assets will be recovered,
the reduction of the valuation allowance will be recorded as a tax benefit
during one period or over many periods.
RESULTS OF OPERATIONS
The following table sets forth certain items from our consolidated
statements of operations as a percentage of net revenues for the periods
indicated:
For the Year Ended December 31,
--------------------------------------
2003 2002 2001
--------------------------------------
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 44.4% 49.5% 49.1%
------------ ------------ ------------
Gross profit 55.6% 50.5% 50.9%
------------ ------------ ------------
Operating expenses:
Research and development 18.1% 19.7% 19.8%
Marketing and selling 23.2% 24.0% 26.0%
General and administrative 4.9% 4.7% 5.4%
Restructuring and other costs, net 0.7% 0.7% 1.9%
Amortization of intangible assets 0.3% 0.3% 7.2%
------------ ------------ ------------
Total operating expenses 47.2% 49.4% 60.3%
------------ ------------ ------------
Operating income (loss) 8.4% 1.1% (9.4%)
Other income (expense), net 0.4% 0.0% 1.3%
------------ ------------ ------------
Income (loss) before income taxes 8.8% 1.1% (8.1%)
Provision for income taxes 0.1% 0.4% 0.7%
------------ ------------ ------------
Net income (loss) 8.7% 0.7% (8.8%)
============ ============ ============
18
Net Revenues
Our 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 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 12.7% from $418.7 million in 2002 to $471.9
million in 2003. Revenues in our Video business increased $48.0 million or
17.0%, while revenues in our Audio business grew by $5.2 million or 3.8%. We
estimate that approximately 73%, or $35.3 million, of the growth in the Video
segment during 2003 relates to increased sales volume of our products, including
the new Avid DNA family of products released during 2003. The remaining 27%, or
$12.7 million, of growth is attributed to higher average selling prices of our
various products, which in 2003 was particularly impacted by favorable foreign
currency exchange rates, especially with respect to the euro. Average selling
prices also include the impact of price changes, discounting, and mix (higher or
lower-end) of products sold. For the Audio segment, the revenue growth in 2003
is primarily the result of higher average selling prices of our products,
including the impact of foreign currency exchange rate changes.
Net revenues decreased 3.7% from $434.6 million in 2001 to $418.7
million in 2002. Revenues in our Video business declined $40.4 million or 12.5%,
while revenues in our Audio business grew by $24.5 million or 22.0%. For 2002,
we believe that a portion of the Video business decline was due to the general
worldwide economic slowdown. More specifically, we believe that a reduction in
advertising spending worldwide had a negative impact on 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, driven in part by the introduction of new
lower-end products by us and our competitors. Our Audio business contributed
favorably to revenues during 2002 due primarily to increased volume associated
with strong demand for our new flagship digital audio workstation, Pro Tools|HD,
which was introduced in January 2002. We generally see an increase in revenues
when we introduce a significant new product or product enhancement.
Net revenues derived through indirect channels were approximately 75%
for 2003, compared to 81% for 2002 and 79% for 2001. The increase in direct
selling from 2002 to 2003 was due primarily to the growth in sales to our
broadcast customers, which generally require a longer selling cycle with more
direct support. We expect sales to broadcast customers will be an area of
potential revenue growth in the future.
Sales in the Americas have typically accounted for approximately 53% of
our consolidated net revenues, while sales in Europe and Asia Pacific represent
the remaining 47%. 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.
International sales (i.e., sales to customers outside the United States
and Canada) accounted for 47% of our 2003 and 2002 net revenues, compared to 48%
for 2001. International sales increased by approximately $25.2 million or 12.9%
in 2003 compared to 2002, and decreased by $11.9 million or 5.8% in 2002
compared to 2001. The increase in international sales in 2003 occurred
principally in Europe, with the impact of currency translation being a factor.
Half of the decrease in international sales in 2002 compared to 2001 occurred in
Europe, with the remainder occurring in the Asia Pacific region and Latin
America. Management believes these declines were attributable to the economic
climate and, in Asia, also to the impact of currency translation.
19
Gross Margin
Costs of revenues consists primarily of costs associated with the
procurement of components; post-sales customer support costs related to
maintenance contract revenue and other services; the assembly, testing, and
distribution of finished products; warehousing; and royalties for third-party
software included in our products. The resulting gross margin 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.
Our gross margin increased to 55.6% in 2003 compared to 50.5% in 2002,
which had decreased from 50.9% in 2001. The gross margin increase in 2003
reflects primarily a positive impact from higher average selling prices of our
products, which in 2003 was particularly impacted by favorable foreign currency
exchange rates, especially with respect to the euro. Average selling prices also
include the impact of price changes, discounting, and mix (higher or lower-end)
of products sold. We also achieved reduced material and manufacturing overhead
costs in the Video segment in 2003 as compared to 2002. The decrease in gross
margin during 2002 primarily reflects the impact of price reductions, discounts
and promotions and higher manufacturing costs, primarily in the Audio segment,
partially offset by a favorable product mix, a positive margin impact from the
Audio segment delivering third-party promotional software for which revenue had
previously been deferred, and a positive impact from currency exchange rate
fluctuations.
Research and Development
Research and development expenses increased by $3.2 million or 3.9% in
2003 compared to 2002, and decreased by $3.8 million, or 4.4%, in 2002 compared
to 2001. The increase in expenditures in 2003 was primarily due to higher
personnel-related costs, in particular accrued expenses associated with our 2003
bonus plan. These costs were somewhat offset by reductions in other spending
categories. The decrease in expenditures in 2002 was primarily due to lower
personnel-related costs in the Video business as a result of restructuring
actions taken during 2001, as well as lower depreciation expense, partially
offset by higher hardware development costs and the absence of third-party
funding of certain research and development projects which occurred in 2001.
Research and development expenses decreased slightly as a percentage of net
revenues, to 18.1% in 2003 from 19.7% in 2002, primarily as a result of the
higher revenue base in 2003. Research and development expenses decreased
slightly as a percentage of net revenues, to 19.7% in 2002 from 19.8% in 2001,
primarily due to the decreased expenses noted above.
Marketing and Selling
Marketing and selling expenses increased $8.9 million or 8.9% in 2003
compared to 2002, and decreased by $12.3 million, or 10.9% in 2002 compared to
2001. The increase in 2003 was primarily due to higher personnel-related costs,
including salaries and related taxes and benefits as well as expenses associated
with our bonus plan and commissions expense (due to higher revenues). We also
had higher net foreign exchange losses (specifically, remeasurement gains and
losses on net monetary assets denominated in foreign currencies, offset by
hedging gains and losses), which are included in marketing and selling expenses,
in 2003. These increases were partially offset by lower marketing expenses such
as advertising and direct mailings. The decrease in 2002 was primarily due to
lower marketing expenditures for such items as trade shows, advertising and
direct mailings, as well as lower personnel-related expenses resulting from
various restructuring actions that occurred in 2001. Marketing and selling
expenses decreased as a percentage of net revenues to 23.2% in 2003 from 24.0%
in 2002, primarily due to the higher revenue base in 2003. Marketing and selling
expenses decreased as a percentage of net revenues to 24.0% in 2002 from 26.0%
in 2001, primarily due to the decreased expenses noted above.
General and Administrative
General and administrative expenses increased by $3.4 million or 17.1%
in 2003 compared to 2002, and decreased by $3.5 million, or 15.0% in 2002
compared to 2001. The increase in expenditures in 2003 was primarily due to
higher personnel-related costs, in particular expenses associated with our 2003
bonus plan and, to a lesser extent, higher insurance costs and external legal
fees as a result of complying with the Sarbanes-Oxley Act of 2002. The decrease
in 2002 occurred primarily as a result of reduced external legal fees, lower
personnel-related expenses and depreciation, partially offset by expense related
to executive severance benefits incurred in 2002. General and administrative
expenses increased as a percentage of net revenues to 4.9% in 2003 from 4.7% in
2002, primarily due to the increases in expenses discussed above. General and
administrative expenses decreased as a percentage of net revenues to 4.7% in
2002 from 5.4% in 2001, primarily due to the reductions in expenses discussed
above.
20
Restructuring and Other Costs
Our restructuring actions during 2003 consisted of severance and
facility charges made to increase efficiencies and reduce expenses, and a
revision to a previous restructuring charge recorded on unutilized space. In the
first quarter of 2003, we recorded a charge of $1.2 million for employee
terminations and $0.6 million for unutilized space in Santa Monica, California
that included a write-off of leasehold improvements of $0.4 million. Also during
2003, we recorded charges of $1.5 million related to a revision of our estimate
of the timing and amount of future sublease income associated with the Daly City
facility discussed below based on working with a real estate broker during the
year to attempt to sublease the space.
In December 2002, we recorded a charge of approximately $3.3 million in
connection with vacating excess space in our Daly City, California; Tewksbury,
Massachusetts; and Montreal, Canada facilities. The Tewksbury charge of $0.5
million was a revision of our estimate related to the August 2001 restructuring
action discussed below, based on our attempts to sublet the related space during
2002. The remaining portion of the charge for Daly City and Montreal was the
result of our ceasing to use a portion of each facility in December 2002 and
hiring real estate brokers to assist in finding subtenants. We believe the Daly
City charge of $2.4 million reflects a depressed real-estate market in the area.
During 2001, we implemented various restructuring plans to decrease
costs through the consolidation of operations and the reduction of approximately
194 jobs worldwide. In connection with these plans, we recorded charges to
operating expenses totaling $10.0 million. The restructuring charges included
approximately $7.4 million for severance and related costs of terminated
employees and $2.6 million for facility vacancy costs, of which $1.0 million
represented non-cash charges relating to the disposition of leasehold
improvements that were abandoned upon vacating the related properties in 2001
and 2002. These restructuring actions were expected to result in annual cost
savings of approximately $11.0 million, and management believes that these
savings were achieved. In connection with these and prior plans, we made cash
payments in 2001 of $6.2 million related to personnel severance-related costs
and $0.6 million related to vacated facilities. In 2002, we made severance
related payments of $1.2 million, facilities-related payments of $0.7 million
and wrote off $1.0 million of leasehold improvements. In 2003 we made
severance-related payments of $1.5 million and facilities-related payments of
$1.7 million.
As of December 31, 2003 we have an aggregate obligation under leases for
which we have vacated the underlying facilities of approximately $17.9 million,
including facilities in Daly City, California; Tewksbury, Massachusetts; London,
England and Montreal; Canada. We have a remaining restructuring accrual balance
for vacated facilities at December 31, 2003 of $4.8 million, which represents
the difference between this aggregate obligation and expected future subleases
income under actual or estimated potential sublease agreements. See Notes I and
M to our Consolidated Financial Statements.
In December 1999, in connection with the resignation of two executive
officers, we incurred and recorded a charge of $2.9 million for termination
benefits as specified in the employment contracts of the officers. Through
December 31, 2001, cash payments of approximately $2.4 million had been made in
full satisfaction of our obligations. As a result, in 2001, we recorded a credit
of $0.5 million to restructuring and other costs, net, associated with a
reduction in the estimated liability.
Also in December 1999, we entered into an agreement to sell our 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, we
recorded a loss of approximately $2.0 million related to the sale, including a
reserve of $1.0 million for our guarantee of the new entity's line of credit
with a bank. This guarantee ended on January 31, 2001 without requiring any cash
payment by us. Accordingly, in the quarter ended March 31, 2001, we recorded a
credit associated with the reversal of the reserve, which was included under the
caption restructuring and other cost, net, where the charge was originally
recorded. In addition, during each of the quarters ended June 30, 2002 and 2001,
we received payments of $0.3 million in full satisfaction of a note received as
partial consideration from the buyers of the Italian subsidiary. These payments
were recorded as credits to restructuring and other costs, net as the note was
fully reserved when initially recorded.
21
Amortization of Acquisition-related Intangible Assets
In connection with our August 1998 acquisition of Softimage, we
allocated $88.2 million of the purchase price to intangible assets consisting of
completed technologies, work force, and trade name and recorded $120.9 million
as goodwill. Included in the operating results for 2001 is amortization of these
intangible assets and goodwill of $28.5 million. As of December 31, 2001, these
intangible assets, including goodwill, were fully amortized.
From 2000 to 2003 we recorded additional intangible assets as we
acquired the following companies or their assets: Rocket Network, Inc. and Bomb
Factory Digital, Inc. in 2003; iKnowledge, Inc. in 2002; iNews, LLC in 2001; and
The Motion Factory, Inc. and Pluto Technologies International Inc. in 2000. In
connection with these acquisitions, we allocated $8.4 million to identifiable
intangible assets consisting of completed technologies and work force, and $2.2
million to goodwill. Included in the operating results for 2003, 2002 and 2001
is amortization of these intangible assets of $1.3 million, $1.1 million and
$2.8 million, respectively. As of January 1, 2002, in connection with the
adoption of SFAS 142, we reclassified $1.1 million of a previously recorded
assembled work force intangible to goodwill and, as a result, ceased amortizing
this amount. During 2003 and 2002, we recorded no goodwill or assembled work
force amortization as compared to approximately $1.5 million in 2001 for these
acquisitions. The unamortized balance of the identifiable intangible assets
relating to these acquisitions was $1.8 million at December 31, 2003. We expect
amortization of these intangible assets to be approximately $0.8 million in
2004, $0.6 million in 2005 and $0.4 million in 2006.
Other Income and Expense, Net
Other income and expense, net, generally consists of interest income,
interest expense and equity in income of non-consolidated companies. During
2003, other income and expense, net, increased $1.7 million from $0.2 million in
2002. This increase was due to increased interest income earned on higher
average cash and investment balances, as well as to the absence in 2003 of a
$1.0 impairment charge recorded in 2002, discussed below.
During 2002, other income and expense, net, decreased $5.3 million, from
$5.5 million in 2001. This decrease was primarily due to two items in 2001 that
did not recur in 2002: a net gain of $4.0 million recorded upon the sale of all
the common stock received as consideration for our investment in Avid Sports
LLC, and our equity in the net income of iNews related to their fourth quarter
2000 operations of $1.1 million (we acquired iNews in January 2001).
Additionally, interest income decreased in 2002 due to a decline in interest
rates and, to a lesser extent, lower average cash and investment balances on
hand. Offsetting these decreases in interest and other income, net, was reduced
interest expense in 2002 compared to 2001, as a result of the prepayment in
February 2002 of a note payable to Microsoft in connection with our 1998
acquisition of Softimage. We recorded impairment charges of $1.0 million during
2002 and $1.1 million in 2001 for an investment in an unconsolidated entity
accounted for under the cost method; after these charges, our investment was
fully written-off.
Provision for Income Taxes
Our effective tax rate was 1%, 36%, and (8%), respectively, for 2003,
2002, and 2001. The tax rate in each year is significantly affected by net
changes in the valuation allowance against our deferred tax assets. Based on the
level of deferred tax assets as of December 31, 2003 and the level of historical
U.S. and foreign taxable income and losses, we have determined that the
uncertainty regarding the realization of these assets is sufficient to warrant
the establishment of a full valuation allowance against the U.S. net deferred
tax assets and a majority of the foreign net deferred tax assets. Excluding the
impact of the valuation allowance, our effective tax rate would have been 26%
for 2003. This differs from the Federal statutory rate of 35% due primarily to
our foreign subsidiaries, which are taxed at different rates.
Excluding the impact of the valuation allowance, our effective tax rate
would have been 43% for 2002. This differs from the Federal statutory rate of
35% due primarily to state taxes, while savings due to the U.S. Federal Research
Tax Credit more than offset a higher level of taxes from our foreign
subsidiaries, which are taxed at different rates.
Excluding the impact of the valuation allowance, our effective tax rate
would have been (34%) for 2001. This differs slightly from the Federal statutory
rate of (35%), as savings due to the U.S. Federal Research Tax Credit offset a
higher level of taxes from our foreign subsidiaries, which are taxed at
different rates.
22
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 December 31,
2003, our principal sources of liquidity included cash, cash equivalents and
marketable securities totaling $196.3 million.
With respect to cash flow, net cash provided by operating activities was
$58.6 million in 2003 compared to $25.4 million in 2002 and $8.7 million in
2001. In each case, cash generated from operating activities primarily reflects
net income after adjustment for depreciation and amortization. In addition, in
2003, cash flows also reflect cash generated through increases in deferred
revenues and accrued expenses, partially offset by a decrease in accounts
payable. In 2002, cash flows also reflect cash generated through a decrease in
accounts receivable and increases in accounts payable and deferred revenues.
This was partially offset by an increase in inventories during 2002. For 2001,
cash flows also reflect a decrease in accounts receivable, partially offset by
reductions in accounts payable and accrued expenses.
At December 31, 2003 and 2002, we held inventory in the amounts of
$38.3 million and $38.0 million, respectively. These balances include stockroom,
spares, demonstration equipment inventories at various locations, and inventory
at customer sites related to shipments for which we have not yet recognized
revenue. We review these balances regularly for excess quantities or potential
obsolescence and make appropriate adjustments to write-down the inventories to
reflect their estimated realizable value.
Accounts receivable increased by $3.3 million to $69.2 million at
December 31, 2003 from $65.9 million at December 31, 2002, driven primarily by
the year-over-year increase in net revenues. These balances are net of
allowances for sales returns, bad debts and customer rebates, all of which we
estimate and record based on historical experience. Days sales outstanding in
accounts receivable decreased from 53 days at December 31, 2002 to 49 days at
December 31, 2003. The decline in days sales outstanding is primarily
attributable to strong collection efforts and payment terms on "solution" sales
where cash collections often precede revenue recognition.
Net cash flow used in investing activities was $73.8 million in 2003,
compared to $9.0 million in 2002 and $27.9 million in 2001. In 2003 we purchased
marketable securities in the amount of $63.5 million, net of proceeds from sales
of marketable securities, as part of our program for investing excess cash. The
marketable securities in which we invest typically include corporate
obligations, asset backed securities, commercial paper, taxable municipal
obligations and U.S. Treasuries and other governmental obligations. We also
expended cash of about $2.3 million for the purchase of Rocket Network, Inc. and
as initial payment for our purchase of the assets of Bomb Factory Digital, Inc.
in 2003. A second payment of approximately $1.0 million for Bomb Factory was
made in early 2004, after resolution of acquisition-related contingencies, with
the final payments totaling $0.4 million due on various dates through December
2004. We purchased $8.0 million of property and equipment during 2003, compared
to $9.4 million in 2002 and $15.5 million in 2001. We also acquired $1.9 million
of property and equipment under capital leases during 2002. Purchases of
property and equipment in both 2003 and 2002 were primarily of computer hardware
and software to support research and development activities and our information
systems. Purchases of property and equipment in 2001 were primarily of computers
and furniture and fixtures purchased in connection with the relocation of the
Digidesign facility to Daly City, California and hardware and software to
support research and development activities and our information systems. Our
capital spending program for 2004 is currently expected to be approximately $13
million, including purchases of hardware and software to support activities in
the research and development, information systems and manufacturing areas, as
well as for facilities renovations. However, this amount could increase in the
event we enter into strategic business acquisitions or for other reasons. As
discussed in Note R to our consolidated financial statements, in January 2004,
we acquired NXN Software AG for a purchase price of 35 million euros
(approximately $43.9 million).
During 2002, we made a cash payment of approximately $0.4 million to
acquire selected assets of iKnowledge, Inc. As part of the purchase agreement,
we may be required to make certain contingent cash payments, depending upon the
future revenues of the products acquired from iKnowledge through December 2004.
As of December 31, 2003, contingent payments paid to date or owed were
immaterial. During 2001, we also made a cash payment, net of cash acquired, of
$5.4 million for the purchase of the remaining 50% ownership interest in iNews.
Also during 2001, we received $4.0 million in cash upon the sale of all the
common stock received as consideration for our investment in Avid Sports LLC.
During 2000, we purchased the assets of two companies, Pluto Technologies and
The Motion Factory, for a total of approximately $2.0 million in cash and $0.3
million of guaranteed bonuses paid in 2001. In connection with the acquisition
of The Motion Factory, we may be required to make future contingent cash
payments limited in the aggregate to $10.0 million, depending upon future
revenues and/or gross margin levels through December 2004 of the products
including technology we acquired from The Motion Factory. To date no contingent
payments have been paid or are owed.
23
During 2003, 2002 and 2001, we generated cash of approximately $54.7
million, $12.7 million and $1.2 million, respectively, net of common stock
repurchases, from the issuance of common stock related to the exercise of stock
options and our employee stock purchase plan. The level of cash generated in
2003 represents an unusual amount of stock option exercise activity due to a
significant increase in our stock price and is not necessarily expected to recur
within the next few years. In 2002, we made a prepayment in full satisfaction of
a $13.0 million note to Microsoft.
In connection with restructuring efforts during 2001 and prior periods,
as well as with the identification in 2003 and 2002 of excess space in various
locations, we also have cash obligations of approximately $17.9 million under
leases for which we have vacated the underlying facilities. We have an
associated restructuring accrual of $4.8 million at December 31, 2003
representing losses to be incurred or expected to be incurred on subleases of
space or lease vacancies. These payments will be made over the remaining terms
of the leases, which have varying expiration dates through 2010, unless we are
able to negotiate an earlier termination. All restructuring related payments
will be funded through working capital. See Notes I and M to our consolidated
financial statements.
Our cash requirements vary depending upon factors such as our planned
growth, capital expenditures, the possible acquisition of businesses or
technologies complementary to our business and obligations under past
restructuring programs. 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.
CONTRACTUAL AND COMMERCIAL OBLIGATIONS INCLUDING OFF-BALANCE SHEET ARRANGEMENTS
The following table sets forth future payments that we are obligated to
make, as of December 31, 2003, under existing debt agreements, leases and other
arrangements (in thousands):
Less than After
Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years
------------ ----------- ------------ ------------ -----------
Capital lease obligations $1,335 $699 $587 $49 -
Operating leases 102,156 18,920 34,240 27,842 $21,154
Unconditional purchase obligations 28,100 28,100 - - -
------------ ----------- ------------ ------------ -----------
$131,591 $47,719 $34,827 $27,891 $21,154
============ =========== ============ ============ ===========
Other contractual arrangements that may result in cash payments consist
of the following (in thousands):
Total Year Less than 1 1 - 3 Years
------------- ---------------- -------------
Transactions with recourse $14,792 $14,792 -
Stand-by letter of credit 4,300 - $4,300
------------- ---------------- -------------
$19,092 $14,792 $4,300
============= ================ =============
Through a third party, we offer lease financing options to our
customers. During the terms of these financing arrangements, which are generally
for three years, we remain liable for any unpaid principal balance in the event
of a default on the lease by the end-user. Our liability is limited in the
aggregate based on a percentage of initial amounts funded or, in certain cases,
amounts of unpaid balances. As of December 31, 2003, our maximum exposure under
this program was $14.8 million.
We have a stand-by letter of credit at a bank that is used as a security
deposit in connection with our Daly City, California office space lease. In the
event of a default on our lease the landlord would, as of December 31, 2003, be
eligible to draw against this letter of credit to a maximum of $4.3 million,
subject to an annual reduction of approximately $0.8 million but not below $2.0
million. The letter of credit will remain at $2.0 million throughout the
remaining lease period, which runs through September 2009. As of December 31,
2003, we were not in default of this lease.
We conduct our business globally and, consequently, our results from
operations are exposed to movements in foreign currency exchange rates. We enter
into forward exchange contracts, which generally have one-month maturities, to
reduce exposures associated with the foreign exchange exposures of certain
forecasted third-party and intercompany receivables, payables and cash balances.
At December 31, 2003, we are in a sell position with respect to the euro,
24
Japanese yen, British pound, Canadian dollar and Australian dollar and in a buy
position with respect to the Singapore dollar. Our currency position at December
31, 2003 is summarized as follows (in thousands):
Approximate
U.S. Dollar Equivalent
----------------------
euro $14,389
Japanese yen 6,529
British pound 1,788
Singapore dollar 1,060
Canadian dollar 850
Australian dollar 644
--------
$25,260
========
NEW 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 have determined that our 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 the elements included in our
multiple element arrangements all qualify as software-related elements and
therefore EITF 03-05 is not applicable to us.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). In general, a variable
interest entity is a corporation, partnership, trust or other legal structure
used for business purposes that either (a) does not have equity investors with
characteristics of a controlling financial interest or (b) has equity investors
that do not provide sufficient financial resources for the entity to support its
activities. A variable interest entity often holds financial assets, including
loans or receivables, real estate or other property. FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both.
Additionally, companies with significant investments in variable interest
entities, even if not required to consolidate the variable interest entity, have
enhanced disclosure requirements. As amended, this interpretation applies in the
first fiscal year or interim period beginning after December 31, 2003, to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The adoption of FIN No. 46 did not have any
impact on our financial position or results of operations.
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 2003.
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 in 2003.
25
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Some of the statements in this Form 10-K relating to our future
performance constitute forward-looking statements. Such forward-looking
statements are based upon management's current expectations and involve known
and unknown risks. Realization of any of these risks may cause actual results to
differ materially from the results described in the forward-looking statements.
Certain of these risks are as follows:
Our performance will depend in part on continued market acceptance of our new
digital nonlinear editing products.
We recently introduced several new digital non-linear products,
including the Digital Nonlinear Accelerator and next-generation Media
Composer and Newscutter systems, as well as Avid Xpress Pro with Avid Mojo and
Avid DS Nitris hardware. We will need to continue to focus marketing and sales
efforts on educating potential customers and our resellers about the uses and
benefits of these products. The future success of certain of these products,
such as Avid DS Nitris, which enable high-definition production, will also
depend on consumer demand for appliances, such as television sets and monitors,
that utilize the high definition standard. In addition, there are several other
risks involved with offering new products in general, including, without
limitation, the possibility of defects or errors, failure to meet customer
expectations, delays in shipping new products and the introduction of similar
products by our competitors. At the same time, the introduction and transition
to new products could have a negative impact on the market for our existing
products, which could adversely affect our revenues and business.
The broadcast market is large, widely dispersed, and highly competitive, and we
may not be successful in growing our customer base or predicting customer demand
in this market.
We are currently building our presence in the digital 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. Success in
this market will require, among other things, creating compelling solutions and
developing a strong, loyal customer base.
In addition, 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.
Our revenues are becoming increasingly dependent on sales of large, complex
broadcast solutions.
We expect sales of large, complex broadcast solutions to continue to
constitute a material portion of our net revenue, particularly as news stations
convert from analog, or tape-based, processes to digital formats. Our quarterly
and annual revenues could fluctuate significantly if:
o sales to one or more of our customers are delayed or are not completed within
a given quarter;
o the contract terms preclude us from recognizing revenue during that quarter;
o news stations'migration from analog processes to digital formats slows down;
o we are unable to complete complex customer installations on schedule;
o our customers reduce their capital investments in our products in response to
slowing economic growth; and
o any of our large customers terminate their relationship with us or
significantly reduce the amount of business they do with us.
Our products are complex, and may contain errors or defects resulting from such
complexity.
As we continue to expand our product offerings to include not only point
products but also end-to-end solutions, our products have grown increasingly
26
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, delay of revenue recognition, increased
product returns, lack of market acceptance, and damage to our reputation.
The markets for our products are competitive, and we expect competition to
intensify in the future.
The digital video, audio, and 3D markets are highly competitive, with
limited barriers to entry, and are characterized by pressure to reduce prices,
incorporate new features, and accelerate the release of new products. Some 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. Delays or
difficulties in product development and introduction may also harm our business.
If we are unable to compete effectively in our target markets, our business and
results of operations could suffer.
In addition to price, our products must also compete favorably with our
competitors' products in terms of reliability, performance, ease of use, range
of features, product enhancements, reputation and training.
New product announcements by our competitors and by us also could have
the effect of reducing customer demand for our existing products. New product
introductions also 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.
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.
Products from 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. To that end, we recently acquired the assets of Bomb Factory Digital,
Inc., a company that produces digital audio processing products that complement
or "plug in" to our Pro Tools product line. The timely development of new or
enhanced products and the integration of newly acquired products, such as Bomb
Factory Digital, Inc.'s audio processing product, is a complex and uncertain
process, and we could experience design, manufacturing, marketing, or other
difficulties that delay or prevent our development and introduction of new or
enhanced products, or our integration of acquired products, which, in turn,
could harm our business.
When we acquire other companies or businesses, we become subject to risks that
could hurt our business.
We periodically acquire businesses and form strategic alliances. For
example, in December 2003, we acquired the assets of Bomb Factory Digital, Inc.,
a company that produces digital audio processing products, and in January 2004,
we acquired NXN Software AG, a company that manufactures asset and production
management systems specifically targeted for the entertainment and computer
graphics industries. The risks associated with such acquisitions, alliances, and
investments include, among others:
o the difficulty of assimilating the operations and personnel of the target
companies;
o the failure to realize anticipated returns on investment, cost savings and
synergies;
o the diversion of management's time and attention;
o the dilution existing stockholders may experience if we decide to issue shares
of our Common Stock or other rights to purchase our Common Stock as
consideration in the acquisition in lieu of cash;
o the potential loss of key employees of the target company;
o the difficulty in complying with a variety of foreign laws;
o the impairment of relationships with customers or suppliers of the target
company or our customers or suppliers; and
o unidentified issues not discovered in our due diligence process, including
product quality issues and legal contingencies.
Such acquisitions, alliances, and investments often involve significant
transaction-related costs and could cause short-term disruption to normal
operations. In the future we may also make debt or equity investments. If we are
unable to overcome or counter these risks, it could undermine our business and
lower our operating results.
27
Our use of independent firms and contractors to perform some of our product
development activities could expose us to risks that could adversely impact our
revenues.
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 (including tax regulation), intellectual property
ownership and rights, exchange rate fluctuation, political instability and
unrest, natural disasters, and other risks, which could adversely impact our
revenues.
An interruption of our supply of certain key components from our sole source
suppliers could hurt our business.
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 should fail 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 sole source vendors should encounter 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 and Apple 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 we need to qualify and support new platforms, we
could be required to expend valuable engineering resources, which could
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 of 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.
We generally derive nearly half of our revenues from customers outside
of the United States. This business is, for the most part, transacted through
international subsidiaries and generally in the currency of the end-user
customers. Therefore, we are exposed to the risks that changes in foreign
currency could adversely impact our revenues, net income (loss), and cash flow.
To hedge against the foreign exchange exposure of certain forecasted
receivables, payables and cash balances of our foreign subsidiaries, we enter
into foreign currency forward-exchange contracts. We record gains, and losses
associated with currency rate exchanges 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
currency gains or losses.
28
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. 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.
Poor global macroeconomic conditions could disproportionately impact our
industry.
In recent years, our customers in the media, broadcast and
content-creation industries delayed or reduced their expenditures in part
because of unsettled economic conditions. The revenue growth and profitability
of our business depends primarily on the overall demand for our products. 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. Increasingly, we are
distributing our products directly, which could put us in competition with our
resellers and distributors and could adversely affect our revenues. In addition,
our resellers could diversify the manufacturers from whom they purchase products
to sell to the final end-users, which could lead to a weakening of our
relationships with our resellers 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 such resellers and distributors 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 employees
including members of our executive team and those in certain technical
positions. 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
29
skilled new employees. Competition for such employees is intense in the
industries and geographic areas in which we operate. In the past, we have relied
on our ability to grant stock options as one mechanism for recruiting and
retaining highly skilled talent. Recent proposed accounting regulations
requiring the expensing of stock options may impair our future ability to
provide these incentives without incurring significant compensation costs. If we
are unable to compete successfully for our key 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
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. For example, the European
Union has issued several directives regarding privacy and data protection,
including the Directive on Data Protection and the Directive on Privacy and
Electronic Communications. The enactment of legislation implementing such
directives by member countries is ongoing. The enactment of this and similar
legislation or regulations could impede the growth of the Internet, harm our
Internet initiatives, require changes in our sales and marketing practices 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 intellectual property rights of others. We
rely upon a combination of patent, copyright, trademark and trade secret laws,
confidentiality procedures, and contractual provisions, as well as required
hardware components and hardware security keys, to protect our proprietary
technology. However, our means of protecting our proprietary rights may not be
adequate. In addition, the laws of certain countries do not protect our
proprietary technology to the same extent as do the laws of the United States.
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. We expect software piracy to
be a persistent problem.
We occasionally receive communications suggesting that our products may
infringe the intellectual property rights of others. It is our practice to
investigate the factual basis of such communications and negotiate licenses
where appropriate. While it may be necessary or desirable in the future to
obtain licenses relating to one or more products or relating to current or
future technologies, we may be unable to do so on commercially reasonable terms.
If we are unable to protect our proprietary technology or unable to negotiate
licenses for the use of others' intellectual property, our business could be
impaired.
We are currently involved in various legal proceedings, including patent
litigation. An adverse resolution of any such proceedings could harm our
business and reduce our results of operations. See Note I, "Commitments and
Contingencies" in our audited financial statements.
The Sarbanes Oxley Act of 2002 has caused our operating expenses to increase and
has put additional demands on our management.
The Sarbanes Oxley Act of 2002 and newly enacted rules and regulations
of the Securities and Exchange Commission and the NASDAQ stock market impose new
duties on us and our executives, directors, attorneys and independent
accountants. In order to comply with the new legislation, we have had to hire
additional personnel and use additional outside legal, accounting and advisory
services. These actions have increased our operating expenses. In addition, the
new legislation has made some corporate actions more challenging, such as
proposing new or amendments to stock option plans, which now require stockholder
30
approval, or obtaining affordable director and officer liability insurance. The
added demands imposed by the new legislation may also make it more difficult for
us to attract and retain qualified executive officers, key personnel and members
of our board of directors.
If we experience problems with our third-party leasing program, our revenues
could be adversely impacted.
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 experienced volatility in the
past and could continue to fluctuate substantially in the future based upon a
number of factors, most of which are beyond our control. These factors include:
o changes in our quarterly operating results;
o shortfalls in revenues or earnings compared to securities analysts'
expectations;
o changes in analysts' recommendations or projections;
o fluctuations in investors' perceptions of us or our competitors;
o shifts in the markets for our products;
o development and marketing of products by our competitors;
o changes in our relationships with suppliers, distributors, resellers,
system integrators, or customers; and
o global macroeconomic conditions.
Further, the stock market has experienced 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.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk
Our primary exposures to market risk are financial, including 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 risks that changes in foreign
currency could adversely impact our revenues, net income (loss) and cash flow.
To hedge against the foreign exchange exposure of certain forecasted
receivables, payables and cash balances of our foreign subsidiaries, we enter
into short-term foreign currency forward-exchange contracts. There are two
objectives of our foreign currency forward-exchange contract program: (1) to
offset any foreign exchange currency risk associated with cash receipts expected
to be received from our customers over the next 30 day period and (2) to offset
the impact of foreign currency exchange on the Company's net monetary assets
denominated in currencies other than the U.S. dollar. These forward-exchange
contracts typically mature within 30 days of purchase. 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 December 31, 2003, we had $25.2 million of forward-exchange contracts
outstanding, denominated in euros, Japanese yen, British pounds, Singapore
dollars, Canadian dollars, and Australian dollars, as hedges against forecasted
foreign currency-denominated receivables, payables and cash balances. For the
year ended December 31, 2003, net losses of $5.7 million resulting from
forward-exchange contracts were recorded, which offset net transaction and
translation gains of $5.1 million on the related assets and liabilities. 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 December 31, 2003, we held $196.3 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.
32
AVID TECHNOLOGY, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2003
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION
33
AVID TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITEM 8:
Report of Independent Auditors....................................... 35
Consolidated Statements of Operations for the years
ended December 31, 2003, 2002 and 2001.............................. 36
Consolidated Balance Sheets as of December 31, 2003 and 2002......... 37
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2003, 2002 and 2001.................................... 38
Consolidated Statements of Cash Flows for the years
ended December 31, 2003, 2002 and 2001.............................. 39
Notes to Consolidated Financial Statements........................... 40
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE INCLUDED IN ITEM 15(d):
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 2003, 2002 and 2001 F-1
Schedules other than that listed above have been omitted since the required
information is not present, or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements or the notes thereto.
34
Report of Independent Auditors
To the Board of Directors and Stockholders
of Avid Technology, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Avid
Technology, Inc. and its subsidiaries at December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and the financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 2 to the consolidated financial statements, on January 1,
2002, upon the adoption of Statement of Financial Accounting Standards No. 142,
the Company changed its method of accounting for goodwill.
Boston, Massachusetts
January 28, 2004, except
as to the eleventh sentence
of the eighth paragraph of
Note I for which the date is
March 11, 2004
35
AVID TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Year Ended December 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Net revenues $471,912 $418,719 $434,638
Cost of revenues 209,373 207,236 213,572
---------- ---------- ----------
Gross profit 262,539 211,483 221,066
---------- ---------- ----------
Operating expenses:
Research and development 85,552 82,346 86,140
Marketing and selling 109,704 100,761 113,053
General and administrative 23,208 19,819 23,313
Restructuring and other costs, net 3,194 2,923 8,268
Amortization of intangible assets 1,316 1,153 31,168
---------- ---------- ----------
Total operating expenses 222,974 207,002 261,942
---------- ---------- ----------
Operating income (loss) 39,565 4,481 (40,876)
Interest income 2,011 1,163 2,546
Interest expense (318) (203) (1,473)
Other income (expense), net 181 (742) 4,456
---------- ---------- ----------
Income (loss) before income taxes 41,439 4,699 (35,347)
Provision for income taxes 550 1,700 2,800
---------- ---------- ----------
Net income (loss) $40,889 $2,999 ($38,147)
========== ========== ==========
Net income (loss) per common share - basic $1.40 $0.11 ($1.49)
========== ========== ==========
Net income (loss) per common share - diluted $1.25 $0.11 ($1.49)
========== ========== ==========
Weighted average common shares outstanding - basic 29,192 26,306 25,609
========== ========== ==========
Weighted average common shares outstanding - diluted 32,653 26,860 25,609
========== ========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
36
AVID TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
December 31,
-----------------------------------
2003 2002
--------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $102,649 $62,174
Marketable securities 93,660 26,860
Accounts receivable, net of allowances of $9,161 and
$10,614 at December 31, 2003 and 2002, respectively 69,230 65,942
Inventories 38,292 38,047
Deferred tax assets, net 1,032 663
Prepaid expenses 5,117 4,515
Other current assets 7,032 6,741
--------------- -----------------
Total current assets 317,012 204,942
Property and equipment, net 23,223 25,731
Intangible assets, net 1,815 1,513
Goodwill 3,335 1,087
Other assets 2,734 2,530
--------------- -----------------
Total assets $348,119 $235,803
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $15,755 $24,297
Accrued compensation and benefits 23,753 13,425
Accrued expenses and other current liabilities 27,452 28,730
Income taxes payable 8,504 8,877
Deferred revenues 44,943 35,483
--------------- -----------------
Total current liabilities 120,407 110,812
--------------- -----------------
Long-term debt and other liabilities 607 1,427
--------------- -----------------
Total liabilities 121,014 112,239
--------------- -----------------
Commitments and contingencies (Notes H and I)
Stockholders' equity:
Preferred stock, $.01 par value, 1,000 shares
authorized; no shares issued or outstanding - -
Common stock, $.01 par value, 50,000 shares authorized;
31,063 and 27,268 shares issued and outstanding
at December 31, 2003 and 2002, respectively 311 273
Additional paid-in capital 419,981 364,481
Accumulated deficit (194,476) (235,365)
Deferred compensation (30) (216)
Accumulated other comprehensive income (loss) 1,319 (5,609)
--------------- -----------------
Total stockholders' equity 227,105 123,564
--------------- -----------------
Total liabilities and stockholders' equity $348,119 $235,803
=============== =================
The accompanying notes are an integral part of the consolidated
financial statements.
37
AVID TECHNOLOGY, INC.
Consolidated Statements of
Stockholders' Equity
(in thousands)
Accumulated
Other Total
Shares of Common Additional Compre- Stock-
Common Stock Stock Paid-in Accumulated Treasury Deferred hensive holders'
Issued In Treasury Issued Capital Deficit Stock Compensation Income(Loss) Equity
------------------------------------------------------------------------------------------------
Balances at December 31, 2000 26,591 (924) $266 $359,103 ($197,779) ($15,622) ($4,752) ($3,366) $137,850
Purchase of treasury stock (291) (5,054) (5,054)
Stock issued pursuant to employee
stock plans 756 (6,417) 12,641 6,224
Cancellation of options issued at
below fair market value (150) 150
Conversion of purchase consideration 5,519 5,519
Restricted stock grants canceled
and compensation expense (47) (609) 3,308 2,699
Comprehensive loss:
Net loss (38,147) (38,147)
Net change in unrealized loss
on marketable securities (1,733) (1,733)
Translation adjustment (2,600) (2,600)
-------
Other comprehensive loss (4,333)
-------
Comprehensive loss (42,480)
------------------------------------------------------------------------------------------------
Balances at December 31, 2001 26,591 (506) 266 357,446 (235,926) (8,035) (1,294) (7,699) 104,758
Stock issued pursuant to employee
stock plans 677 510 7 7,085 (2,438) 8,035 12,689
Restricted stock grants canceled
and compensation expense (4) (50) 1,078 1,028
Comprehensive income:
Net income 2,999 2,999
Net change in unrealized loss
on marketable securities (20) (20)
Translation adjustment 2,110 2,110
-------
Other comprehensive income 2,090
-------
Comprehensive income 5,089
------------------------------------------------------------------------------------------------
Balances at December 31, 2002 27,268 - 273 364,481 (235,365) - (216) (5,609) 123,564
Stock issued pursuant to employee
stock plans 3,802 38 54,680 54,718
Restricted stock grants canceled
and compensation expense (7) (5) 186 181
Tax benefits on tock options 825 825
Comprehensive income:
Net income 40,889 40,889
Net change in unrealized loss
on marketable securities 44 44
Translation adjustment 6,884 6,884
-------
Other comprehensive income 6,928
-------
Comprehensive income 47,817
------------------------------------------------------------------------------------------------
Balances at December 31, 2003 31,063 - $311 $419,981 ($194,476) - ($30) $1,319 $227,105
================================================================================================
The accompanying notes are an integral part of the consolidated
financial statements.
38
AVID TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Year Ended December 31,
--------------------------------------
2003 2002 2001
----------- ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $40,889 $2,999 ($38,147)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 12,391 12,974 47,287
Provision for doubtful accounts and recourse obligations 624 1,073 1,635
Compensation expense from stock grants and options 181 1,028 2,699
Changes in deferred tax assets and liabilities (280) 104 (329)
Tax benefit of stock option exercises 603 - -
Equity in income of non-consolidated company (192) (199) (1,252)
Gain on sales of business - (327) (4,359)
Provision for restructuring charges, non-cash portion - - 1,030
Write-down of investment in non-consolidated company - 1,000 1,100
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (668) 13,370 21,396
Inventories (209) (16,170) (498)
Prepaid expenses and other current assets (358) 346 389
Accounts payable (8,574) 4,969 (10,677)
Income taxes payable (207) (1,936) (991)
Accrued expenses, compensation and benefits 5,016 (232) (10,175)
Deferred revenues and deposits 9,429 6,399 (422)
- ------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 58,645 25,398 8,686
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (7,951) (9,356) (15,522)
Payments for other long-term assets (300) (196) (358)
Dividend from non-consolidated company 196 59 -
Proceeds from sales of business - 327 4,359
Payments for business acquisitions (2,282) (425) (5,439)
Purchases of marketable securities (86,388) (27,600) (38,762)
Proceeds from sales of marketable securities 22,911 28,152 27,803
- ------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (73,814) (9,039) (27,919)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock for treasury - - (5,054)
Payments on capital leases (619) - -
Payments on note issued in connection with acquisition - (13,020) -
Proceeds from issuance of common stock under employee stock plans 54,718 12,689 6,224
- ------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 54,099 (331) 1,170
- ------------------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents 1,545 533 (1,199)
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 40,475 16,561 (19,262)
Cash and cash equivalents at beginning of year 62,174 45,613 64,875
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $102,649 $62,174 $45,613
======================================================================================================
See Notes G, H and Q for supplemental disclosures.
The accompanying notes are an integral part of the consolidated
financial statements.
39
AVID TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND OPERATIONS
Avid Technology, Inc. ("Avid" or the "Company") develops, markets, sells and
supports a wide range of software and 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 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 include major motion pictures and prime-time television,
music, video, and other recordings.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies follows:
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. Intercompany balances and transactions have been
eliminated. Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year presentation.
The Company's preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported 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 revenue recognition, accounts receivable
and sales allowances, inventory valuation and income tax valuation allowances.
Actual results could differ from those estimates.
Translation of Foreign Currencies
The functional currency of each of the Company's foreign subsidiaries is the
local currency, except for the Irish manufacturing branch whose functional
currency is the U.S. dollar. The assets and liabilities of the subsidiaries
whose functional currencies are other than the U.S. dollar are translated into
U.S. dollars at the current exchange rate in effect at the balance sheet date.
Income and expense items for these entities are translated using the average
exchange rate for the period. Cumulative translation adjustments are included in
accumulated other comprehensive income (loss), which is reflected as a separate
component of stockholders' equity.
The Irish manufacturing branch and the U.S parent company, both of whose
functional currency is the U.S. dollar, carry monetary assets and liabilities
denominated in currencies other than the U.S. dollar. These assets and
liabilities typically include cash, accounts receivable, and intercompany
balances denominated in euros, pounds sterling, Japanese yen, Canadian dollars
and Australian dollars. These assets and liabilities are remeasured into the U.S
dollar at the current exchange rate in effect at the balance sheet date. Foreign
currency transaction and remeasurement gains and losses are included in results
of operations.
Cash and Cash Equivalents
Cash equivalents consist primarily of government and government agency
obligations. The Company considers all debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Marketable Securities
Marketable securities consist of U.S. and Canadian government and government
agency obligations and corporate equity securities (see Note C). The Company
classifies its marketable securities as "available for sale" and reports them at
fair value, with unrealized gains and losses excluded from earnings and reported
as an adjustment to other comprehensive income (loss), which is reflected as a
separate component of stockholders' equity. The Company generally invests in
securities that mature within one year from the date of purchase.
40
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market value. Our management regularly reviews inventory quantities on
hand and writes down inventory to its realizable value to reflect estimated
obsolescence or unmarketability based upon assumptions about future inventory
demand (generally for the following twelve months), and market conditions.
Inventory in the digital media market, including the Company's inventory, is
subject to rapid technological change or obsolescence; therefore, utilization of
existing inventory may differ from the Company's estimates.
Property and Equipment
Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful life of the asset. Leasehold
improvements are amortized over the shorter of the useful life of the
improvement or the remaining term of the lease. Property and equipment held
under capital leases is stated at the lower of the fair market value of the
related asset or the present value of the minimum lease payments at the
inception of the lease and are amortized on a straight-line basis over the
shorter of the life of the related asset or the term of the lease. Expenditures
for maintenance and repairs are expensed as incurred. Upon retirement or other
disposition of assets, the cost and related accumulated depreciation are
eliminated from the accounts and the resulting gain or loss is reflected in
results of operations. A significant portion of the property and equipment is
subject to rapid technological obsolescence; as a result, the depreciation and
amortization periods could ultimately be shortened to reflect changes in future
technology.
Acquisition-related Intangible Assets and Goodwill
Acquisition-related intangible assets, which consist primarily of completed
technology, result from the Company's acquisitions of the following companies or
their assets: The Motion Factory, Pluto, iNews, iKnowledge, Rocket Network,
Inc., and Bomb Factory Digital, Inc. (see Note F), which were accounted for
under the purchase method. Acquisition-related intangible assets are reported at
fair value, net of accumulated amortization. Identifiable intangible assets are
amortized on a straight-line basis over their estimated useful lives of two to
four and a half years.
Goodwill is the amount by which the cost of acquired net assets exceeded the
fair value of those net assets on the date of acquisition. Through December 31,
2001, the Company amortized goodwill on a straight-line basis over its expected
useful life of five years. As of January 1, 2002, the Company ceased amortizing
goodwill in compliance with Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets".
The Company assesses goodwill for impairment at least annually, on a reporting
unit basis, or more frequently when events and circumstances occur indicating
that the recorded goodwill may be impaired. If the book value of a reporting
unit exceeds its fair value, the implied fair value of goodwill is compared with
the carrying amount of goodwill. If the carrying amount of goodwill exceeds the
implied fair value, an impairment loss is recorded in an amount equal to that
excess. Through December 31, 2003, the Company has not recorded any goodwill
impairment charges.
Long-Lived Assets
The Company periodically evaluates its long-lived assets, other than goodwill,
for events and circumstances that indicate a potential impairment. A long-lived
asset is assessed for impairment when the undiscounted expected cash flows
derived from that asset are less than its carrying value. The cash flows used
for this analysis take into consideration a number of factors including past
operating results, budgets and economic projections, market trends and product
development cycles. The amount of any impairment would be equal to the
difference between the estimated fair value of the asset and its carrying value.
Revenue Recognition
The Company recognizes revenue from sales of product upon receipt of a signed
purchase order or contract and product shipment to distributors or end users,
provided that collection is reasonably assured, the fee is fixed or
determinable, and all other revenue recognition criteria of SOP 97-2, "Software
Revenue Recognition," as amended, and Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
41
Statements", are met. The Company follows the guidance of SOP-97-2 for all of
its revenue recognition since all of the Company's products and services are
software-related.
In connection with many of the Company's sales transactions, customers typically
purchase a one-year maintenance and support agreement. The Company recognizes
revenue from maintenance contracts on a ratable basis over their term. The
Company recognizes revenue from training, installation or other services as the
services are performed. Revenues from services were less than 10% of total
revenues for all periods presented.
The Company uses the residual method to recognize revenues when an order
includes one or more elements to be delivered at a future date and evidence of
the fair value of all undelivered elements exists, including arrangements that
include both products and maintenance contracts. Under the residual method, the
fair value of the undelivered elements is deferred and the remaining portion of
the arrangement fee is recognized as revenues. If evidence of the fair value of
one or more undelivered elements does not exist, revenues are deferred and
recognized when delivery of those elements occurs or when fair value can be
established. Fair value is based on the price charged when the same element is
sold separately to customers.
In most cases the Company's products do not require significant production,
modification or customization of software. Installation of the products is
generally routine, requires minimal effort and is not typically performed by the
Company. However, a growing number of transactions, those typically involving
orders from end-users of a significant number of products for a single customer
site, such as news broadcasters, may require that we perform an installation
effort that we deem to be non-routine and complex. In these situations, the
Company does not recognize revenue from either the products shipped or the
installation services until the installation is complete. In addition, if such
orders include a customer acceptance provision, no revenue is recognized until
the customer's acceptance of the products and services has been received or the
acceptance period has lapsed.
Telephone support, enhancements and unspecified upgrades typically are provided
at no additional charge during the product's initial warranty period (generally
between three and twelve months), which precedes commencement of the maintenance
contracts. The Company defers the fair value of this support period and
recognizes the related revenue ratably over the initial warranty period. The
Company also from time to time offers certain customers free upgrades or
specified future products or enhancements. For each of these elements that are
undelivered at the time of product shipment, the Company defers the fair value
of the specified upgrade, product or enhancement and recognizes that revenue
only upon later delivery or at the time at which the remaining contractual terms
relating to the upgrade have been satisfied.
Most of the Company's resellers and distributors of Video and Film Editing and
Effects products are not granted rights to return products after purchase, and
actual product returns from them have been insignificant to date. However, the
Company's revenue from sales of Professional 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 the Company's
historical experience. To date, actual returns have not differed materially from
management's estimates.
The Company from time to time offers rebates on purchases of certain products or
rebates based on purchasing volume, which are accounted for as offsets to
revenue upon shipment of related products or expected achievement of purchasing
volumes. In accordance with EITF 01-09, consideration given to customers or
resellers under the rebate program is recorded as a reduction to revenue unless
the Company receives an identifiable benefit that is sufficiently separable from
the sale of the Company's products and the Company can reasonably estimate the
fair value of the benefit received. If those conditions are met, the Company
records consideration given to customers as an expense. The Company has
determined that its rebate program does not meet the criteria to be recorded as
expense and, as a result, rebate amounts are recorded as a reduction of revenue.
Accounts receivable allowances include an allowance for bad debts as well as the
sales allowances referred to above for expected future product returns, rebates
and credits.
The Company records as revenue all amounts billed to customers for shipping and
handling cost and records its actual shipping costs as a component of cost of
revenues. The Company records reimbursements received from customers for
out-of-pocket expenses as revenue, with offsetting costs recorded as cost of
revenues.
42
In some customer arrangements, the Company is able to invoice the customer under
a billing plan in advance of providing services or maintenance and support. In
these instances, the Company records invoiced amounts and cash payments received
prior to revenue recognition as deferred revenue.
Advertising Expenses
All advertising costs are expensed as incurred and are classified as selling and
marketing expenses. Advertising expenses during 2003, 2002 and 2001 were $6.0
million, $6.9 million and $8.2 million, respectively.
As part of its advertising initiatives, the Company maintains a cooperative
marketing program for certain resellers in the Video and Film Editing and
Effects segment. Under this program, participating resellers can earn
reimbursement credits of up to 1% of qualified purchases from Avid.
Consideration given to these resellers is included in selling and marketing
expense in accordance with EITF 01-09, Accounting for Consideration Given by a
Vendor to a Customer (including a Reseller of the Vendor's Products), as the
Company receives an identifiable benefit that is sufficiently separable from the
sale of the Company's products, and can reasonably estimate the fair value of
that benefit. The Company records the cooperative marketing credit earned by the
reseller at the date the related revenue is recognized based on an estimate of
claims to be made. To date, actual claims have not differed materially from
management's estimates.
Research and Development Costs
Research and development costs are expensed as incurred, except for costs of
internally developed or externally purchased software that qualify for
capitalization. Development costs for software to be sold that are incurred
subsequent to the establishment of technological feasibility, but prior to the
general release of the product, are capitalized. Upon general release, these
costs are amortized using the straight-line method over the expected life of the
related products, generally 12 to 24 months. The straight-line method generally
results in approximately the same amount of expense as that calculated using the
ratio that current period gross product revenues bear to total anticipated gross
product revenues. The Company evaluates the net realizable value of capitalized
software at each balance sheet date, considering a number of business and
economic factors.
Computation of Net Income (Loss) Per Common Share
Net income (loss) per common share is presented for both basic earnings per
share ("Basic EPS") and diluted earnings per share ("Diluted EPS"). Basic EPS is
based upon the weighted average number of common shares outstanding during the
period, excluding unvested restricted stock held by employees. Diluted EPS is
based upon the weighted average number of common and potential common shares
outstanding during the period. Potential common shares result from the assumed
exercise of outstanding stock options and warrants as well as unvested
restricted stock, the proceeds of which are then assumed to have been used to
repurchase outstanding common stock using the treasury stock method. For periods
that the Company reports a net loss, all potential common stock is considered
anti-dilutive and is excluded from calculations of diluted net loss per common
share. 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 and are excluded from
calculations of diluted net income per common share (see Note P).
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other
comprehensive income (loss), which includes foreign currency translation
adjustments and unrealized gains and losses on certain investments. For the
purposes of comprehensive income (loss) disclosures, the Company does not record
tax provisions or benefits for the net changes in the foreign currency
translation adjustment, as the Company intends to permanently reinvest
undistributed earnings in its foreign subsidiaries.
Accounting for Stock-Based Compensation
The Company has several stock-based employee compensation plans, which are
described more fully in Note K. 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
43
restricted stock granted to employees based on the fair market value of the
Company's stock at date of grant and is amortized over the period in which the
restrictions lapse. The Company reverses deferred compensation associated with
options issued at below fair market value as well as restricted stock upon the
cancellation of such options or shares for terminated employees. The Company
provides the disclosures required by SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". 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 earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee awards. See Note K for additional disclosure.
For the Year Ended December 31,
-----------------------------------------
2003 2002 2001
------------ ----------- ----------
Net income (loss) as reported $40,889 $2,999 ($38,147)
Add: Stock-based employee compensation expense
included in reported net income (loss) 77 288 764
Deduct: Total stock-based employee compensation
expense determined under fair value-based
method for all awards (11,772) (11,469) (13,459)
------------ ----------- ----------
Pro forma net income (loss) $29,194 ($8,182) ($50,842)
============ =========== ==========
Income (loss) per common share:
Basic-as reported $1.40 $0.11 ($1.49)
============ =========== ==========
Basic-pro forma $1.00 ($0.31) ($1.99)
============ =========== ==========
Diluted-as reported $1.25 $0.11 ($1.49)
============ =========== ==========
Diluted-pro forma $0.89 ($0.30) ($1.99)
============ =========== ==========
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
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 the elements
included in its multiple element arrangements all qualify as software-related
elements and therefore EITF 03-05 is not applicable to the Company.
In December 2002, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). In general, a variable interest entity
is a corporation, partnership, trust or other legal structure used for business
purposes that either (a) does not have equity investors with characteristics of
a controlling financial interest or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. Additionally,
companies with significant investments in variable interest entities, even if
not required to consolidate the variable interest entity, have enhanced
44
disclosure requirements. As amended, this interpretation applies in the first
fiscal year or interim period beginning after December 31, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The adoption of FIN No. 46 did not have any
impact on the Company's financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". 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 was 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 was effective for financial instruments entered into or modified after
May 31, 2003, and otherwise was 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.
C. MARKETABLE SECURITIES
The cost (amortized cost of debt instruments) and fair value of marketable
securities as of December 31, 2003 and 2002 are as follows (in thousands):
Gross
Unrealized Fair
Cost Gains (Losses) Value
------------ ---------------- ----------
2003
----
Government and government agency obligations $25,999 $9 $26,008
Corporate obligations 67,647 5 67,652
------------ ---------------- ----------
$93,646 $14 $93,660
============ ================ ==========
2002
----
Corporate obligations $26,890 ($30) $26,860
All federal, state and municipal obligations held at December 31, 2003 and 2002
mature within one year. The Company calculates realized gains and losses on a
specific identification basis. Except for the investment discussed below,
realized gains and losses from the sale of marketable securities were immaterial
for the years ended December 31, 2003, 2002 and 2001.
At December 31, 2000, the company held common stock of a U.S. public company
that was received in June 2000 in exchange for the Company's minority ownership
interest in Avid Sports LLC. The Company recorded an unrealized gain in
stockholders' equity of $1.7 million during 2000 associated with that
transaction. In June 2001, additional shares of common stock of the same U.S.
public company were received upon settlement of certain claims arising after the
sale. Upon the receipt of such shares, the Company recorded a realized gain of
$1.9 million in other income (expense) in the statement of operations. During
2001, the Company sold all of its shares of this common stock for proceeds of
$4.0 million and realized an additional net gain of $2.1 million in other income
(expense).
D. INVENTORIES
Inventories consist of the following (in thousands):
December 31,
-------------------------------
2003 2002
----------- ----------
Raw materials $12,086 $13,402
Work in process 1,475 2,697
Finished goods 24,731 21,948
----------- ----------
$38,292 $38,047
=========== ==========
45
As of December 31, 2003 and 2002, the finished goods inventory included deferred
costs of $14.0 million and $8.6 million, respectively, associated with product
shipped to customers for which revenue had not yet been recognized.
E. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
December 31,
Depreciable ----------------------
Life 2003 2002
------------ --------- ---------
Computer and video equipment and software 2 to 5 years $82,813 $75,460
Office equipment 3 years 7,004 6,925
Furniture and fixtures 3 years 6,458 5,960
Leasehold improvements 3 to 10 years 19,470 20,195
--------- ---------
115,745 108,540
Less accumulated depreciation and amortization 92,522 82,809
--------- ---------
$23,223 $25,731
========= =========
Depreciation and amortization expense related to property and equipment was
$10.9 million, $11.6 million and $15.6 million for the years ended December 31,
2003, 2002 and 2001, respectively. The Company wrote off fully depreciated
assets with gross values of $2.1 million, $42.4 million and $3.0 million in
2003, 2002 and 2001, respectively.
Included in Computer and video equipment and software is equipment purchased
under capital leases of approximately $1.9 million, with accumulated
amortization of $0.7 million for the year ended December 31, 2003.
F. ACQUISITIONS AND INVESTMENTS
Softimage
On August 3, 1998, the Company acquired from Microsoft Corporation ("Microsoft")
the common stock of Softimage and certain assets relating to the business of
Softimage. In connection with the acquisition, Avid paid $79.0 million in cash
to Microsoft and issued to Microsoft (i) a subordinated note (the "Note") in the
amount of $5.0 million, due June 2003 (paid in full in February 2002), (ii)
2,394,813 shares of common stock, valued at $64.0 million, and (iii) a ten-year
warrant to purchase 1,155,235 shares of common stock at an exercise price of
$47.65 per share, valued at $26.2 million. In addition, Avid issued to Softimage
employees 40,706 shares of common stock, valued at $1.5 million, as well as
stock options with a nominal exercise price to purchase up to 1,820,817 shares
of common stock, valued at $68.2 million.
As a result of the purchase price allocation, $216.0 million was recorded as the
value of intangible assets including work force, trade name and goodwill. The
intangible assets were amortized over periods ranging from two to three years,
resulting in amortization expense of $28.4 million in 2001. As of December 31,
2001, these intangible assets were fully amortized.
iNews, LLC
In January 2001, the Company acquired The Grass Valley Group's 50% interest in
iNews LLC, a developer of next generation newsroom computer systems, for
approximately $6.0 million in cash. iNews LLC had previously been operated as a
joint venture between Avid and The Grass Valley Group. The pro rata share of
earnings of the joint venture recorded by Avid during 2001 was approximately
$1.1 million. Since the acquisition date, operating results of iNews have been
included in the consolidated operating results of the Company.
This acquisition was accounted for under the purchase method of accounting.
Accordingly, the assets and liabilities acquired that represented the acquired
50% interest were recorded in the Company's financial statements as of the
acquisition date based on their fair values, while the assets and liabilities
that represented Avid's investment in the joint venture were recorded as of the
acquisition date based on the book values of the joint venture's assets and
liabilities without adjustment. The purchase price of $6.0 million was allocated
to net tangible assets of $1.7 million, completed technologies of $2.5 million
and work force of $1.8 million. On January 1, 2002, the remaining balance of
work force of $1.1 million was reclassified to goodwill in connection with the
Company's adoption of SFAS 142 and is not subject to further periodic
amortization. This goodwill has been allocated to the Company's Video and Film
46
Editing and Effects segment. Identifiable intangible assets were being amortized
on a straight-line basis over a three-year period. The Company recorded
amortization on these intangibles of $0.8 million, $0.8 million and $1.6 million
in 2003, 2002 and 2001, respectively. As of December 31, 2003, these intangible
assets were fully amortized.
Bomb Factory Digital, Inc.
In December 2003, the Company acquired Bomb Factory Digital, Inc., a
manufacturer of real-time audio effects for the Digidesign Pro Tools platform
for approximately $3.3 million in cash. The Company allocated $1.1 million of
the purchase price to identifiable intangible assets and recorded goodwill of
$2.2 million. The goodwill has been allocated to the Company's Audio segment.
Identifiable intangible assets will be amortized on a straight-line basis over a
three-year period beginning in January 2004.
Other Acquisitions
The Company also recorded intangible assets associated with acquiring the
following businesses: Rocket Network, Inc. in 2003; iKnowledge, Inc. in 2002;
and The Motion Factory, Inc. ("TMF") and Pluto Technologies International, Inc.
in 2000. In connection with these acquisitions, the Company allocated $3.0
million to identifiable intangible assets, which have been or are being
amortized over periods ranging from 18 months to 4.5 years. Included in the
operating results for 2003, 2002 and 2001 is amortization of these intangible
assets of $0.5 million, $0.3 million and $1.2 million, respectively. The
Company's pro forma statements of operations giving effect to these acquisitions
as if they had occurred at the beginning of the reported periods would not
differ materially from the reported results.
As part of the TMF purchase agreement, the Company may be required to make
certain contingent cash payments, limited in the aggregate up to an additional
$10.0 million, dependent upon future revenues and/or gross margin levels through
December 2004 of products including technologies acquired from TMF. As part of
the iKnowledge purchase agreement, the Company may be required to make certain
contingent cash payments, dependent upon the future revenues of the products
acquired from iKnowledge through December 2004. Any future contingent payments
will be recorded as additional purchase price, allocated to identifiable
intangible assets or goodwill, as appropriate, and amortized over the remaining
amortization period of the original intangible assets. Through December 31,
2003, contingent payments made or owed were immaterial.
As a result of all of the acquisitions described above, identifiable intangible
assets consisted of the following (in thousands):
For the Year Ended December 31,
--------------------------------
2003 2002
------------- -------------
Completed technology $5,318 $3,701
Less: Accumulated amortization 3,503 2,188
------------- -------------
Net completed technology $1,815 $1,513
============= =============
The Company expects amortization of these intangible assets to be approximately
$0.8 million during 2004, $0.6 million during 2005 and $0.4 million during 2006,
at which point they will be fully amortized.
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 Year Ended December 31,
-----------------------------------------
2003 2002 2001
------------ ----------- -----------
Reported net income (loss) $40,889 $2,999 ($38,147)
Goodwill amortization, net of tax - - 23,061
Amortization of work force, net of tax - - 3,313
------------ ----------- -----------
Pro forma net income (loss) $40,889 $2,999 ($11,773)
============ =========== ===========
Basic net income (loss) per common share:
As reported $1.40 $0.11 ($1.49)
Pro forma $1.40 $0.11 ($0.46)
Weighted average common shares
Outstanding - basic 29,192 26,306 25,609
Diluted net income (loss) per common share:
As reported $1.25 $0.11 ($1.49)
Pro forma $1.25 $0.11 ($0.46)
Weighted average common shares
Outstanding - diluted 32,653 26,860 25,609
47
G. INCOME TAXES
Income (loss) before income taxes and the components of the income tax provision
(benefit) for the years ended December 31, 2003, 2002 and 2001 are as follows
(in thousands):
2003 2002 2001
---------- ---------- ----------
Income (loss) before income taxes:
United States $27,105 $7,288 ($25,103)
Foreign 14,334 (2,589) (10,244)
---------- ---------- ----------
Total income (loss) before income taxes $41,439 $4,699 ($35,347)
========== ========== ==========
Provisions for (benefit from) income taxes:
Current tax expense (benefit):
Federal $250 ($459) $200
State 200 200 200
Foreign 381 1,927 2,729
---------- ---------- ----------
Total current tax expense 831 1,668 3,129
Deferred tax expense (benefit):
Federal - - -
State - - -
Foreign (281) 32 (329)
---------- ---------- ----------
Total deferred tax expense (benefit) (281) 32 (329)
---------- ---------- ----------
Total provision for income taxes $550 $1,700 $2,800
========== ========== ==========
Net cash payments for income taxes in 2003, 2002 and 2001 were approximately
$0.2 million, $3.9 million and $2.4 million respectively.
The cumulative amount of undistributed earnings of subsidiaries, which is
intended to be permanently reinvested and for which U.S. income taxes have not
been provided, totaled approximately $30.4 million at December 31, 2003.
Net deferred tax assets are comprised of the following (in thousands):
December 31,
-----------------------
2003 2002
---------- ----------
Tax credit and net operating loss carryforwards $73,589 $39,923
Allowances for bad debts 752 961
Difference in accounting for:
Revenue 4,237 5,667
Costs and expenses 16,249 13,435
Inventories 3,411 2,958
Intangible assets 55,099 60,844
Foreign related items 4,549 5,098
Other (3,634) (1,733)
---------- ----------
Net deferred tax assets before valuation allowance 154,252 127,153
Valuation allowance (153,220) (126,490)
---------- ----------
Net deferred tax assets after valuation allowance $1,032 $663
========== ==========
48
Deferred tax assets reflect the net tax effects of the tax credits, operating
loss carryforwards and temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. The ultimate realization of the deferred tax assets is
dependent upon the generation of sufficient future taxable income in the
applicable tax jurisdictions.
For U.S. Federal income tax purposes at December 31, 2003, the Company has tax
credit carryforwards of approximately $24.8 million, which will expire between
2004 and 2022, and net operating loss carryforwards of approximately $128.3
million, which will expire between 2018 and 2023. Based on the level of the
deferred tax assets as of December 31, 2003 and the level of historical U.S.
taxable income, management has determined that the uncertainty regarding the
realization of these assets is sufficient to warrant the establishment of a full
valuation allowance. Accordingly, a valuation allowance of approximately $115.9
million has been established against the U.S.-related deferred tax assets. In
the event that the related tax benefit is realized, such benefit will reduce
future provisions for income taxes. In addition, a valuation allowance of $33.8
million has been established for U.S. tax return carryforwards resulting from
stock option compensation deductions. The tax benefit associated with the stock
option compensation deductions will be credited to equity when realized.
For foreign income tax purposes at December 31, 2003, the Company has net
operating loss carryforwards of approximately $28.8 million, which can be
carried forward indefinitely. Due to the similar uncertainty regarding the
realization of this asset, the Company has established a valuation allowance of
approximately $3.5 million which relates to this entire carryforward amount. The
net deferred tax assets of $1.0 million and $0.7 million at December 31, 2003
and 2002 are related to foreign deferred tax assets deemed realizable in certain
jurisdictions.
A reconciliation of the Company's income tax provision (benefit) to the
statutory federal tax rate follows:
2003 2002 2001
---------- ---------- ----------
Statutory rate 35% 35% (35%)
Tax credits (3) (69) (9)
Foreign operations (8) 65 9
State taxes, net of federal benefit 2 12 1
---------- ---------- ----------
Effective tax rate before valuation 26 43 (34)
allowance
Tax provision increase (decrease) in
valuation allowance (25) (7) 42
---------- ---------- ----------
Effective tax rate 1% 36% 8%
========== ========== ==========
Consolidated results of operations include results of manufacturing operations
in Ireland. Income from the sale of products manufactured or developed in
Ireland is subject to a 10% Irish tax rate through the year 2010. There was no
Irish tax benefit realized in 2003, 2002 and 2001 due to net losses recorded for
the Irish manufacturing operations during that period.
H. LONG-TERM DEBT AND OTHER LIABILITIES
Subordinated Note
In connection with the acquisition of 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 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,
Avid made a principal payment of $8.0 million. In February 2002, Avid made a
payment of approximately $13.0 million in full satisfaction of the outstanding
Note to Microsoft. The Company also made cash interest payments of $20,000 and
$1.2 million during 2002 and 2001, respectively.
49
Capital Leases
During 2002 and 2001, the Company entered into vendor-financed equipment leases
at various interest rates (ranging from 5.3% to 8.7%) for certain information
system purchases, which were assessed as operating leases for accounting
purposes. In 2002, due to changes in certain of the agreements' terms, including
consolidation of various lease schedules and an extension of the term, certain
of these arrangements were determined to be capital leases for accounting
purposes. As of December 31, 2003, future minimum lease payments under capital
leases are due as follows (in thousands):
Year
--------
2004 $699
2005 480
2006 107
2007 49
---------
Total minimum lease payments 1,335
Less amount representing interest 87
---------
Present value of minimum lease payments 1,248
Less current portion 641
---------
Long-term portion of capital lease obligations $607
=========
The current portion of these capital lease obligations is recorded in accrued
expenses and other current liabilities at December 31, 2003.
I. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases its office space and certain equipment under non-cancelable
operating leases. The future minimum lease commitments under these
non-cancelable leases at December 31, 2003 are as follows (in thousands):
Year
---------
2004 $18,920
2005 17,639
2006 16,601
2007 14,411
2008 13,431
Thereafter 21,154
---------
Total $102,156
=========
The total of future minimum rentals to be received by the Company under
non-cancelable subleases related to the above leases is $13.5 million. Such
sublease income amounts are not reflected in the schedule of minimum lease
payments above. Included in our operating lease commitments above are
obligations under leases for which we have vacated the underlying facilities as
part of various restructuring plans. These leases expire at various dates
between 2004 and 2010, and represent an aggregate obligation of $17.9 million
through 2010. The Company has a restructuring accrual of $4.8 million at
December 31, 2003 which represents the difference between this aggregate future
obligation and expected future sublease income under actual or estimated
potential sublease agreements, on a net present value basis. See Note M.
The Company's two leases for corporate office space in Tewksbury, Massachusetts,
expiring in June 2010, contain renewal options to extend the respective terms of
each lease for an additional 60 months. The Company has other leases for office
space that have termination options, which if exercised by the Company, would
result in a penalty of approximately $0.5 million in the aggregate. The future
minimum lease commitments above include the Company's obligations through the
original lease terms and do not include these penalties.
The Company has a 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 December
31, 2003, be eligible to draw against this letter of credit to a maximum of $4.3
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
December 31, 2003, the Company was not in default of this lease.
50
The accompanying consolidated results of operations reflect rent expense on a
straight-line basis over the term of the leases. Total rent expense under
operating leases, net of operating sub-leases, was approximately $14.2 million,
$14.3 million and $13.8 million for the years ended December 31, 2003, 2002 and
2001, respectively. Total rent received from our operating sub-leases was
approximately $3.2 million, $3.3 million and $3.1 million for the years ended
December 31, 2003, 2002 and 2001, respectively.
Purchase Commitments
As of December 31, 2003, the Company has entered into non-cancelable purchase
commitments for certain inventory components used in its normal operations. The
purchase commitments covered by these agreements are generally less than one
year and aggregate approximately $28.1 million.
Transactions with Recourse
The Company, through a third party, provides lease financing options to its
customers, including primarily end-users, and occasionally 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 December 31, 2003
and 2002, Avid's maximum recourse exposure totaled approximately $14.8 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. Because the Company has been providing these
financing options to its customers for many years, the Company has a substantial
history of collecting under these arrangements without providing refunds or
concessions to the end user or financing party. To date, the payment default
rate has consistently been between 2% and 4% per year. The Company maintains a
reserve for estimated losses under this recourse lease program based on these
historical default rates. At December 31, 2003, the Company's accrual for
estimated losses was $3.3 million.
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, upon our motion, the suit was transferred to the
United States District Court for the Southern District of New York. The
complaint alleges infringement by Avid of U.S. patent number 4,258,385, and
seeks injunctive relief, treble damages, costs, and attorneys' fees. This patent
expired on May 15, 1999 and therefore, would not be applicable to the products
currently offered by Avid. Accordingly, potential damages, if any, are limited
to the period beginning March 11, 1990 (six years prior to this date of the
complaint) and ending May 15, 1999. In our answer to the complaint, the Company
has asserted that it did not infringe the patent and that the patent is invalid.
The Company is unable to quantify a range of loss in this litigation. Combined
Logic Company did not specify an alleged damage amount in its complaint. As only
limited discovery has been conducted to date by either side in the eight years
since Combined Logic Company filed its complaint, the Company believes it does
not have sufficient information to provide any meaningful estimate of the
possible range of damages that Combined Logic Company might seek. 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 company that used Tektronix equipment and rented it to others, 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. In March
2001, the United States District Court for the District of California dismissed
the antitrust claims against both parties and the remaining common law claim
against Avid was dismissed without prejudice by stipulation and court order on
April 6, 2001. Glen Holly subsequently 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. The Petition was
denied on December 12, 2003. The case, including the common law claim against
Avid that had been previously dismissed, is once again pending in the
United States District Court for the District of California, and the parties are
resuming discovery as to the plaintiff's claims and alleged damages.
The Company does not believe that it is in a position to provide an
estimate of a range of possible loss in the Glen Holly litigation because the
Company does not have sufficient information at this time to make a reasonable
estimate of such range. In addition, the Glen Holly litigation involves an
alleged antitrust violation and any damage award in such a case is contingent
51
upon Glen Holly proving lost profits. In 2004, Avid has been in discussion with
Glen Holly regarding potential settlement of this matter; however, no agreement
has been reached and settlement is uncertain at this time. 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 for 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.
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.
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.
The following table sets forth the activity in the product warranty accrual
account for the year ended December 31, 2003 (in thousands):
Accrual balance at December 31, 2002 $925
Accruals for product warranties 2,332
Cost of warranty claims (1,902)
---------
Accrual balance at December 31, 2003 $1,355
=========
J. CAPITAL STOCK
Preferred Stock
The Company has authorized up to one million shares of preferred stock, $.01 par
value per share for issuance. Each series of preferred stock shall have such
rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges, and liquidation
preferences, as shall be determined by the Board of Directors.
52
Shareholder Rights Plan
In February 1996, the Board of Directors approved a Shareholder Rights Plan. The
rights were distributed in March 1996 as a dividend at the rate of one right for
each share of Common Stock outstanding. No value was assigned to these rights.
The rights may be exercised to purchase shares of a new series of $.01 par
value, junior participating preferred stock or to purchase a number of shares of
the Company's common stock which equals the exercise price of the right, $115,
divided by one-half of the then-current market price, upon occurrence of certain
events, including the purchase of 20% or more of the Company's common stock by a
person or group of affiliated or associated persons. The rights expire on
February 28, 2006 and may be redeemed by the Company for $.01 each at any time
prior to the tenth day following a change in control and in certain other
circumstances.
Common Stock
In 2000, 1999 and 1997, the Company granted shares of restricted common stock to
certain employees under Company stock option and award plans. The grants totaled
260,000 shares, 50,000 shares, and 347,200 shares, respectively. Unvested
restricted shares may not be sold, transferred or assigned and are subject to
forfeiture in the event that an employee ceases to be employed by the Company.
The shares under the 1997 award vested (and restrictions lapsed) annually in 20%
increments, and an additional 20% of the restricted stock became vested on May
1, 1998 due to the attainment of specific stock performance goals established by
the Board of Directors. There were no unvested shares outstanding under the 1997
award as of December 31, 2001. The shares under the 1999 and 2000 awards vested
40% on the first anniversary and 60% on the second anniversary of the awards.
There were no unvested shares outstanding under the 1999 award as of December
31, 2002. The Company initially recorded in 2000, 1999 and 1997, as a separate
component of stockholders' equity, deferred compensation of approximately $3.2
million, $0.6 million and $9.1 million, respectively, with respect to this
restricted stock. During 2000, the Company also completed a Stock Option
Exchange Program whereby employees could request that certain outstanding stock
options be exchanged for shares of restricted common stock according to
specified exchange ratios. The Company granted 118,115 shares of restricted
common stock in exchange for stock options to purchase 431,836 shares of common
stock with exercise prices ranging from $9.44 to $45.25 per share. The awards
vested (and restrictions lapsed) annually over three years from date of grant.
The Company initially recorded, as a separate component of stockholders' equity,
deferred compensation of approximately $1.4 million with respect to this
restricted stock. There were no unvested shares outstanding under the Stock
Option Exchange Program as of December 31, 2003. The deferred compensation
amounts for all restricted stock awards represent the fair value of the
Company's common stock at the date of the award less par value, which represents
the purchase price paid by the holders, and are recorded as compensation expense
ratably as the shares vest. For the years ended December 31, 2003, 2002 and
2001, $0.2 million, $1.0 million and $2.7 million, respectively, was recorded as
compensation expense under all of these plans.
During 1998, the Company announced that the Board of Directors had authorized
the repurchase of up to 3.5 million shares of the Company's common stock.
Purchases were made in the open market or in privately negotiated transactions.
During 2001, the Company repurchased approximately 232,000 shares at a cost of
$4.1 million. As of December 31, 2003 and 2002, there were no shares remaining
authorized for repurchase. The Company purchased and used treasury shares for
its employee stock plans.
The Company generally allows employees to satisfy any withholding tax obligation
under certain award plans by tendering to the Company a portion of the common
stock received under the award. During the years ended December 31, 2003, 2002
and 2001, the Company received approximately 6,332 shares, 53,000 shares and
59,000 shares of its common stock for $0.2 million, $0.5 million and $0.9
million, respectively, in connection with these non-cash transactions.
Warrants
In connection with the acquisition of Softimage Inc., the Company issued to
Microsoft a ten-year warrant to purchase 1,155,235 shares of the Company's
common stock, valued at $26.2 million. The warrant became exercisable on August
3, 2000, at a price of $47.65 per share, and expires on August 3, 2008.
K. STOCK PLANS
Employee Stock Purchase Plan
The Company's 1996 Employee Stock Purchase Plan, as amended through May 25,
2003, authorizes the issuance of a maximum of 1,700,000 shares of common stock
in quarterly offerings to employees at a price equal to 95% of the closing price
53
on the applicable offering termination date. As of December 31, 2003, 382,825
shares remain available for issuance under this plan.
Stock Option and Award Plans
The Company has several stock-based compensation plans under which employees,
officers, directors and consultants may be granted stock awards or options to
purchase the Company's common stock generally at the fair market value on the
date of grant. Certain plans allow for options to be granted at below fair
market value under certain circumstances. Options become exercisable over
various periods, typically two to four years for employees and immediately to
four years for officers and directors. The options have a maximum term of ten
years. As of December 31, 2003, a maximum of 14,813,287 shares of common stock
have been authorized for issuance under the Company's stock-based compensation
plans, of which 2,188,769 shares remain available for future grants. Shares
available for future grants at December 31, 2003 are net of 632,259 shares that
have been issued as grants of restricted stock.
Information with respect to options granted under all stock option plans is as
follows:
2003 2002 2001
---------------------- ---------------------- -----------------------
Wtd.Avg. Wtd.Avg. Wtd.Avg.
Price Price Price
Shares per Share Shares per Share Shares Per Share
----------- ---------- ----------- ---------- ------------ ----------
Options outstanding at January 1, 6,842,557 $14.46 7,093,183 $14.34 7,056,233 $15.01
Granted, at fair value 1,263,413 $25.43 1,289,187 $13.31 2,334,439 $13.00
Exercised (3,614,122) $14.41 (1,008,860) $11.19 (544,920) $7.96
Canceled (258,371) $16.27 (530,953) $16.47 (1,752,569) $17.21
----------- ----------- ------------
Options outstanding at December 31, 4,233,477 $17.58 6,842,557 $14.46 7,093,183 $14.34
=========== =========== ============
Options exercisable at December 31, 1,943,057 $16.27 4,308,706 $15.18 4,152,591 $14.87
=========== =========== ============
Options available for future
grant at December 31, 2,188,769 3,213,214 3,974,794
=========== =========== ============
The following table summarizes information about stock options outstanding at
December 31, 2003:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------- -----------------------------
Weighted-Average
Remaining
Range of Number Contractual Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Life Exercise Price Exercisable Price
- ---------------------- ------------ ---------------- ---------------- ------------ ----------------
$0.01 to $10.50 409,901 7.10 $8.60 145,390 $6.69
$10.63 to $12.80 1,024,941 6.87 $12.21 620,617 $12.00
$12.81 to $13.60 85,573 6.59 $13.16 56,091 $13.13
$13.63 to $20.25 1,220,251 6.88 $15.30 600,305 $15.81
$20.44 to $22.01 1,089,790 8.31 $21.88 335,901 $21.66
$22.63 to $58.79 403,021 6.73 $36.63 184,753 $30.78
------------ ------------
$0.01 to $58.79 4,233,477 7.25 $17.58 1,943,057 $16.27
============ ============
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for the awards under these
plans consistent with the methodology prescribed under SFAS No. 123, the
Company's net income (loss) and earnings (loss) per share would have been
adjusted to the pro forma amounts as indicated in Note B - "Summary of
Significant Accounting Policies," as required under SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure."
54
Under SFAS 123, the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions and results:
Stock Options Stock Purchase Plan
------------------------------ -------------------------------
2003 2002 2001 2003 2002 2001
------------------------------ -------------------------------
Expected dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Risk-free interest rate 1.96% 3.8% 4.3% 1.10% 3.8% 4.3%
Expected volatility 69.0% 73.0% 77.0% 71% 73.0% 77.0%
Expected-life (in years) 3.51 3.44 3.49 0.43 0.5 0.5
Weighted-average fair
value of options granted $12.30 $6.94 $7.16 $7.97 $3.79 $4.89
L. EMPLOYEE BENEFIT PLANS
Employee Benefit Plans
The Company has a defined contribution employee benefit plan under section
401(k) of the Internal Revenue Code covering substantially all U.S. employees.
The 401(k) plan allows employees to make contributions up to a specified
percentage of their compensation. The Company may, upon resolution by the Board
of Directors, make discretionary contributions to the plan. The Company's
contribution to the plan is 50% of up to the first 6% of an employee's salary
contributed to the plan by the employee. The Company's contributions to this
plan totaled $2.1 million, $1.5 million and $2.0 million in 2003, 2002 and 2001,
respectively.
As part of the iNews acquisition in 2001, the Company assumed an employee
benefit plan under section 401(k) of the Internal Revenue Code. Under this plan,
the Company contribution was 100% of up to the first 4% of an employee's salary
contributed to the plan by the employee. In 2001, the Company made related
contributions of approximately $0.2 million. The plan was merged into the Avid
401(k) plan in January 2002.
In addition, the Company has various retirement and post-employment plans
covering certain international employees. Certain of the plans require the
Company to match employee contributions up to a specified percentage as defined
by the plans. The Company made related contributions of approximately $1.4
million, $1.1 million and $1.0 million in 2003, 2002 and 2001, respectively.
Nonqualified Deferred Compensation Plan
The Board of Directors has approved a nonqualified deferred compensation plan
(the "Deferred Plan"). The Deferred Plan covers senior management and members of
the Board of Directors as approved by the Company's Compensation Committee. The
plan provides for a trust to which participants can contribute varying
percentages or amounts of eligible compensation for deferred payment. Payouts
are made upon the earlier of the election of the employee or termination of
employment with the Company. The benefit payable under the Deferred Plan
represents an unfunded and unsecured contractual obligation of the Company to
pay the value of the deferred compensation in the future, adjusted to reflect
the trust's investment performance. The assets of the trust, as well as the
corresponding obligations, were approximately $0.8 million and $0.7 million as
of December 31, 2003 and 2002, respectively, and were recorded in other current
assets and accrued compensation and benefits at those dates.
M. RESTRUCTURING AND OTHER COSTS, NET
The Company's restructuring actions during 2003 consisted of severance and
facility charges to increase efficiencies and reduce expenses and a revision to
a previous restructuring charge recorded on unutilized space. In the first
quarter of 2003, the Company recorded a charge of $1.2 million for employee
terminations and $0.6 million for unutilized space in Santa Monica that included
a write-off of leasehold improvements of $0.4 million. Also, during 2003, the
Company recorded charges of $1.5 million related to a revision of the Company's
estimate of the timing and amount of future sublease income associated with the
Daly City facility discussed below.
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
55
of the timing and amount of future sublease income associated with that facility
for which a charge had previously been included in the 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.
The Company recorded the 2003 and 2002 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 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.
In 2001, the Company announced and implemented restructuring plans to further
decrease costs through the consolidation of operations and the reduction of
approximately 194 jobs worldwide. In connection with these plans, the Company
recorded a charge to operating expenses of $10.0 million for the year. The
restructuring charge included approximately $7.4 million for severance and
related costs of terminated employees and $2.6 million for facility vacancy
costs, of which $1.0 million represented non-cash charges relating to the
disposition of leasehold improvements.
The following table sets forth the activity in the restructuring and other costs
accrual, which is included in Accrued expenses and other liabilities, in 2001,
2002 and 2003 (in thousands):
Employee Facilities
Related Related Total
--------------------------------------
Accrual balance at December 31, 2000 $399 $1,454 $1,853
Restructuring charge in 2001 7,396 2,625 10,021
Cash payments made in 2001 (6,196) (588) (6,784)
Revisions of estimated liabilities (128) 128 -
--------------------------------------
Accrual balance at December 31, 2001 1,471 3,619 5,090
Charge for vacated facilities - 2,812 2,812
Cash payments made in 2002 (1,201) (743) (1,944)
Non-cash disposals - (1,030) (1,030)
Revisions of estimated liabilities 163 276 439
--------------------------------------
Accrual balance at December 31, 2002 433 4,934 5,367
Restructuring charge in 2003 1,177 641 1,818
Cash payments made in 2003 (1,483) (1,773) (3,256)
Non-cash disposals - (412) (412)
Revisions of estimated liabilities (77) 1,453 1,376
--------------------------------------
Accrual balance at December 31, 2003 $50 $4,843 $4,893
======================================
The remaining $0.1 million employee-related accrual balance at December 31, 2003
will be expended over the next 12 months and will be funded from working
capital. The majority of the facilities-related accrual represents estimated
losses on subleases of space vacated as part of prior restructuring actions and
the 2003 change in estimate of those prior restructuring charges. The leases,
and payment on the amount accrued, extend through 2010 unless the Company is
able to negotiate an earlier termination. The 2003 non-cash disposal of $0.4
million related to the write-off of certain leasehold improvements on property
included in the 2003 restructuring and abandoned in the first quarter of 2003.
The 2002 non-cash disposal of $1.0 million related to the write-off of certain
leasehold improvements on property included in the 2001 restructuring and
abandoned in the first quarter of 2002.
In December 1999, the Company entered into an agreement to sell its Italian
subsidiary to a third party, which established the entity as a distributor of
Avid products. The sale was completed in the first quarter of 2000. The Company
incurred and recorded a loss of approximately $2.0 million relating to the sale,
including a reserve of $1.0 million for the Company's guarantee of the new
entity's line of credit with a bank. This guarantee ended on January 31, 2001
without requiring any cash payment by Avid. Accordingly, in the quarter ended
March 31, 2001, the Company recorded a credit of $1.0 million associated with
the reversal of the reserve, which was included under the caption restructuring
and other costs, net, where the charge was originally recorded. In addition, in
each of the quarters ended June 30, 2002 and 2001, the Company received a
56
payment of $0.3 million under the note received as partial consideration from
the buyers of the Italian subsidiary. These payments were recorded as credits to
restructuring and other costs, net, since the note was fully reserved when
received. The June 2002 payment satisfied the loan balance in full. Also in
1999, in connection with the resignation of two executive officers, the Company
incurred and recorded a charge of $2.9 million for the termination benefits as
specified in the employment contracts of the officers. During 2001 and 2000,
cash payments of approximately $0.8 million and $1.4 million were made and, at
December 31, 2001, there was no remaining obligation. The excess of the original
charge over actual cash payments of $0.5 million was recorded as a credit to
restructuring and other costs, net, during 2001 when determined.
N. SEGMENT INFORMATION
The Company's organizational structure is based on strategic business units that
offer various products to the principle markets in which the Company's products
are sold. These business units equate to two reportable segments: Video and Film
Editing and Effects, and Professional Audio.
The Video and Film Editing and Effects segment produces non-linear video and
film editing systems to improve the productivity of video and film editors and
broadcasters by enabling them to edit moving pictures and sound in a faster,
easier, more creative, and more cost-effective manner than by use of traditional
analog tape-based systems. The products in this operating segment are designed
to provide capabilities for editing and finishing feature films, television
shows, broadcast news programs, commercials, music videos, and corporate and
home videos. This segment includes the Media Composer family of products, which
accounted for approximately 16%, 19% and 21% of our revenues in 2003, 2002 and
2001, respectively. Also within this segment are products that 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 Professional Audio
segment produces digital audio systems for the professional audio market. This
operating segment includes products developed to provide audio recording,
editing, signal processing, and automated mixing. This segment includes the Pro
Tools product family, which accounted for approximately 25%, 27% and 19% of our
revenues in 2003, 2002 and 2001, respectively.
The accounting policies of each of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based on profit and loss from operations before income taxes,
interest income, interest expenses and other income, excluding the effects of
restructuring and other costs, net and amortization of intangible assets
associated with acquisitions. Common costs not directly attributable to a
particular segment are allocated between segments based on management's best
estimates.
The following is a summary of the Company's operations by reportable segment (in
thousands):
For the Year Ended December 31,
---------------------------------
2003 2002 2001
--------- --------- ---------
Video and Film Editing and Effects:
Net revenues $330,859 $282,864 $323,286
========= ========= =========
Depreciation $8,419 $9,006 $14,182
========= ========= =========
Operating income (loss) $28,357 ($6,804) ($8,074)
========= ========= =========
Assets at December 31, $111,682 $107,221 $105,484
========= ========= =========
Professional Audio:
Net revenues $141,053 $135,855 $111,352
========= ========= =========
Depreciation $2,484 $2,610 $1,433
========= ========= =========
Operating income $15,718 $15,361 $6,634
========= ========= =========
Assets at December 31, $34,978 $36,948 $33,936
========= ========= =========
Combined Segments:
Net revenues $471,912 $418,719 $434,638
========= ========= =========
Depreciation $10,903 $11,616 $15,615
========= ========= =========
Operating income (loss) $44,075 $8,557 ($1,440)
========= ========= =========
Assets at December 31, $146,660 $144,169 $139,420
========= ========= =========
57
The following table reconciles income (loss) for reportable segments to total
consolidated amounts for the years ended December 31, 2003, 2002 and 2001 (in
thousands):
2003 2002 2001
---------- ----------- ----------
Total operating income (loss) for reportable segments $44,075 $8,557 ($1,440)
Unallocated amounts:
Restructuring and other costs, net (3,194) (2,923) (8,268)
Amortization of acquisition-related intangible assets (1,316) (1,153) (31,168)
---------- ----------- ----------
Consolidated operating income (loss) $39,565 $4,481 ($40,876)
========== =========== ==========
The following table reconciles assets for reportable segments to total
consolidated amounts as of December 31, 2003, 2002 and 2001 (in thousands):
2003 2002 2001
---------- ----------- ----------
Total assets for reportable segments $146,660 $144,169 $139,420
Unallocated amounts:
Cash, cash equivalents and marketable securities 196,309 89,034 72,961
Acquisition-related intangible assets 5,150 2,600 3,425
---------- ----------- ----------
Total assets $348,119 $235,803 $215,806
========== =========== ==========
The following table summarizes the Company's revenues and long-lived assets,
excluding deferred tax assets, by country (in thousands):
For the Year Ended December 31,
-------------------------------------
2003 2002 2001
----------- ---------- ----------
Revenues:
United States $238,340 $210,599 $213,481
Other countries 233,572 208,120 221,157
----------- ---------- ----------
Total revenues $471,912 $418,719 $434,638
=========== ========== ==========
The above categorization of revenue is based on the country in which the sales
originate.
December 31,
------------------------------
2003 2002
------------ ------------
Long-lived assets:
United States $20,722 $23,891
Other countries 5,235 4,370
------------ ------------
Total long-lived assets $25,957 $28,261
============ ============
O. FINANCIAL INSTRUMENTS
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist of temporary cash investments and trade receivables. The
Company places its excess cash in marketable investment grade securities. There
are no significant concentrations in any one issuer of debt securities. The
Company places its cash, cash equivalents and investments with financial
institutions with high credit standing. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer base, and their dispersion across different
regions. The Company also maintains reserves for potential credit losses and
such losses have been within management's expectations.
58
Forward-Exchange Contracts
As of December 31, 2003 and 2002, the Company had approximately $25.3 million
and $33.7 million, respectively, of foreign currency forward-exchange contracts
outstanding, denominated in euros, Japanese yen, British pounds, Singapore
dollars, Canadian dollars and Australian dollars, as a hedge against the foreign
exchange exposure of certain forecasted third-party and intercompany
receivables, payables and cash balances. The following table summarizes the
Company's currency positions and approximate U.S. dollar equivalents (in
thousands) at December 31, 2003. The Company is in a sell position with respect
to the euro, Japanese yen, Canadian dollar and Australian dollar, and in a buy
position with respect to the British pound and Singapore dollar:
Approximate
Local Currency Amount U.S. Dollar Equivalent
--------------------- ----------------------
euro 11,400 $14,389
Japanese yen 700,000 6,529
British pound 1,000 1,788
Singapore dollar 1,800 1,060
Canadian dollar 1,100 850
Australian dollar 860 644
--------
$25,260
========
There are two objectives of the Company's foreign currency forward-exchange
contract program: (1) to offset any foreign exchange currency risk associated
with cash receipts expected to be received from our customers over the next 30
day period and (2) to offset the impact of foreign currency exchange on the
Company's net monetary assets denominated in currencies other than the U.S.
dollar. These forward-exchange contracts typically mature within 30 days of
purchase.
The changes in fair value of the forward-exchange contracts intended to offset
foreign currency exchange risk on forecasted cash flows are recorded as gains or
losses in the Company's statement of operations in the period of change, because
they do not meet the criterion of SFAS No.133, Accounting for Derivative
Instruments and Hedging Activities, to be treated as hedges for accounting
purposes.
The forward-exchange contracts associated with offsetting the impact of foreign
currency exchange risk on the Company's net monetary assets are accounted for as
fair value hedges under SFAS No. 133. Specifically, the forward-exchange
contracts are recorded at fair value at the origination date, and gains or
losses on the contracts are recognized in earnings; the changes in fair value of
the net monetary assets attributable to changes in foreign currency are an
adjustment to the carrying amount and are recognized in earnings in the period
of change.
Net realized and unrealized gains (losses) of ($0.6) million, $0.5 million and
$1.8 million resulting from forward-exchange contracts were included in results
of operations for the years ended December 31, 2003, 2002 and 2001,
respectively.
P. NET INCOME (LOSS) PER COMMON SHARE
Basic and diluted net income (loss) per share were as follows (in thousands,
except per share data):
For the Year Ended December 31,
-----------------------------------
2003 2002 2001
----------- ---------- -----------
Net income (loss) $40,889 $2,999 ($38,147)
=========== ========== ===========
Weighted average common shares outstanding - basic 29,192 26,306 25,609
Weighted average potential common stock 3,460 554 -
----------- ---------- -----------
Weighted average common shares outstanding - diluted 32,652 26,860 25,609
=========== ========== ===========
Net income (loss) per common share - basic $1.40 $0.11 ($1.49)
Net income (loss) per common share - diluted $1.25 $0.11 ($1.49)
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: 1,187 6,325 5,994
59
Q. SUPPLEMENTAL CASH FLOW INFORMATION
The following table reflects supplemental cash flow investing activities related
to the acquisitions of Rocket Network, Inc. and Bomb Factory Digital, Inc. in
2003, iKnowledge in 2002 and iNews in 2001.
Year Ended December 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
Fair value of:
Assets acquired and goodwill $3,866 $425 $10,734
Accrual for contingent payments
to be made in 2004 (1,369) - -
Liabilities assumed (215) - (4,734)
---------- ---------- ----------
Cash paid 2,282 425 6,000
Less: cash acquired - - (561)
---------- ---------- ----------
Net cash paid for acquisitions $2,282 $425 $5,439
========== ========== ==========
In January 2004 the Company paid $1.1 million of the contingent payments related
to Bomb Factory, after resolution of the contingencies as specified in the
purchase agreement. The remaining payments are due through December 2004.
During 2002, the Company acquired equipment under capital leases totaling $1.9
million.
R. SUBSEQUENT EVENTS
In January 2004, Avid acquired Munich-based NXN Software AG ("NXN"), a leading
provider of asset and production management systems for the entertainment and
computer graphics industries for a purchase price of 35 million euros
(approximately $43.9 million). NXN develops software to address the complexity
of how digital assets are managed in the content creation and entertainment
industries. NXN's productivity-enhancing tools have helped establish them as a
global leader in asset management solutions, with marquee customers that include
computer game developers such as Electronic Arts, film studios such as Sony
Pictures Imageworks, and television stations such as China Central Television.
The NXN product line - which includes alienbrain Studio, alienbrain
Engineer, and alienbrain VFX - Combines infrastructure,
configuration, project, and workflow management capabilities. These customizable
tools are designed to manage the complexity of content creation, balancing
elements like 3D models, textures, video, audio, source code, and office
documents. With alienbrain, creators of digital media projects have greater
version control which protects against losing critical data. The Company
believes that the addition of the NXN products will enhance Avid's film and
video postproduction, broadcast news, and 3D product lines by enriching them
with a feature set that has been proven to facilitate media creation and
management. NXN will be part of the Company's Video segment.
In the first quarter of 2004, the Company recorded a $1.2M tax benefit from the
reversal of a tax reserve. The reversal resulted from the expiration of the
statute of limitation on the reserve item.
60
S. QUARTERLY RESULTS (UNAUDITED)
The following information has been derived from unaudited consolidated financial
statements that, in the opinion of management, include all normal recurring
adjustments necessary for a fair presentation of such information.
In thousands, except per share data:
Quarters Ended
-------------------------------------------------------------------------
2003 2002
------------------------------------ ------------------------------------
Dec. 31 Sept.30 June 30 Mar. 31 Dec. 31 Sept.30 June 30 Mar. 31
------------------------------------ ------------------------------------
Net revenues $127,328 $119,090 $113,317 $112,177 $112,784 $107,832 $106,094 $92,009
Cost of revenues 53,754 52,784 50,608 52,227 53,708 53,222 52,591 47,715
------------------------------------ ------------------------------------
Gross profit 73,574 66,306 62,709 59,950 59,076 54,610 53,503 44,294
------------------------------------ ------------------------------------
Operating expenses:
Research & development 21,719 20,706 21,428 21,699 21,201 20,916 20,411 19,818
Marketing & selling 28,733 27,959 27,748 25,264 25,343 25,677 26,775 22,966
General & administrative 6,576 5,670 5,617 5,345 4,834 5,454 5,018 4,513
Restructuring and other costs, net 1,335 76 - 1,783 3,250 - (327) -
Amortization of intangible assets 341 341 341 293 293 257 257 346
------------------------------------ ------------------------------------
Total operating expenses 58,704 54,752 55,134 54,384 54,921 52,304 52,134 47,643
------------------------------------ ------------------------------------
Operating income (loss) 14,870 11,554 7,575 5,566 4,155 2,306 1,369 (3,349)
Other income (expense), net 544 592 507 231 411 259 (717) 265
------------------------------------ ------------------------------------
Income (loss) before income taxes 15,414 12,146 8,082 5,797 4,566 2,565 652 (3,084)
Provision (benefit) for income taxes (350) 300 300 300 300 300 500 600
------------------------------------ ------------------------------------
Net income (loss) $15,764 $11,846 $7,782 $5,497 $4,266 $2,265 $152 ($3,684)
==================================== ====================================
Net income (loss) per share - basic $0.51 $0.40 $0.27 $0.20 $0.16 $0.09 $0.01 ($0.14)
==================================== ====================================
Net income (loss) per share - diluted $0.47 $0.35 $0.25 $0.18 $0.15 $0.09 $0.01 ($0.14)
==================================== ====================================
Weighted average common
shares outstanding - basic 30,764 29,865 28,494 27,604 26,738 26,287 26,161 26,029
==================================== ====================================
Weighted average common
shares outstanding - diluted 33,864 33,380 31,673 29,860 28,268 26,550 26,511 26,029
==================================== ====================================
High common stock price $59.77 $57.95 $38.15 $24.15 $23.47 $11.79 $13.95 $14.25
Low common stock price $44.65 $33.96 $21.86 $16.76 $8.26 $7.93 $7.25 $9.85
The Company's quarterly operating results fluctuate as a result of a number of
factors including, without limitation, the timing of new product introductions,
the timing of, and costs incurred in association with, the recognition of
"solutions" sales to customers, marketing expenditures, promotional programs,
and periodic discounting due to competitive factors. The Company's operating
results may fluctuate in the future as a result of these and other factors,
including the Company's success in developing and introducing new products, its
products and customer mix and the level of competition which it experiences.
Quarterly sales and operating results generally depend on the volume and timing
of orders received and recognized as revenue during the quarter. The Company's
expense levels are based in part on its forecasts of future revenues. If
revenues are below expectations, the Company's operating results may be
adversely affected. Accordingly, there can be no assurance that the Company will
be profitable in any particular quarter.
61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 December 31, 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
December 31, 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 December 31, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
62
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We have adopted a Code of Business Conduct and Ethics applicable to all our
employees, including our principal executive officer, principal financial
officer and principal accounting officer. We will provide any person, without
charge, with a copy of our Code of Business Conduct and Ethics upon written
request to Avid Technology, Inc., Avid Technology Park, One Park West,
Tewksbury, MA 01876, Attention: Corporate Secretary.
The remainder of the response to this item is contained under the caption
"EXECUTIVE OFFICERS OF THE COMPANY" in Part I hereof, and in the Company's Proxy
Statement for its Annual Meeting of Stockholders to be held on May 26, 2004 (the
"2004 Proxy Statement") under the captions "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" all of which is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is contained in the Company's 2004 Proxy Statement
under the captions "Election of Directors - Directors' Compensation" and
"Executive Compensation" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The response to this item is contained in the Company's 2004 Proxy Statement
under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.
The disclosures required for securities authorized for issuance under equity
compensation plans are contained in the Company's 2004 Proxy Statement under the
caption "Equity Compensation Plan Information" and are incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The response to this item is contained in the Company's 2004 Proxy Statement
under the caption "Independent Accountant's Fees and Other Matters" and is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements are included in Item 8:
- Report of Independent Auditors
- Consolidated Statements of Operations for the years ended December 31,
2003, 2002 and 2001
- Consolidated Balance Sheets as of December 31, 2003 and 2002
- Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2003, 2002 and 2001
- Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001
- Notes to Consolidated Financial Statements
(a) 2. FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statement schedule is included in Item
15(d):
Schedule II - Valuation and Qualifying Accounts
Schedules other than that listed above have been omitted since the required
information is not present, or not present in amounts sufficient to require
63
submission of the schedule, or because the information required is included in
the consolidated financial statements or the notes thereto.
64
(a) 3. LISTING OF EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Stock and Asset Purchase Agreement among Microsoft Corporation,
Softimage Inc. and Avid Technology, Inc. dated as of June 15, 1998
together with all material exhibits thereto (incorporated by reference
to the Registrant's Quarterly Report a Form 10-Q as filed with the
Commission on August 12, 1998, File No. 0-21174).
3.1 Certificate of Amendment of the Third Amended and Restated Certificate
of Incorporation of the Registrant (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q as filed with the Commission
on May 15, 1995, File No. 0-21174).
3.2 Third Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to the Registrant's Registration
Statement on Form S-8 as filed with the Commission on June 9, 1993, File
No. 33-64126).
3.3 Amended and Restated By-Laws of the Registrant (incorporated by
reference to the Registrant's Registration Statement on Form S-1 as
declared effective by the Commission on March 11, 1993, File
No. 33-57796).
3.4 Certificate of Designations establishing Series A Junior Participating
Preferred Stock (the "Certificate of Designations") (incorporated by
reference to the Registrant's Current Report on Form 8-K as filed with
the Commission on March 8, 1996).
3.5 Certificate of Correction to the Certificate of Designations
(incorporated by reference to the Registrant's Current Report on Form
8-K as filed with the Commission on March 8, 1996).
4.1 Specimen Certificate representing the Registrant's Common Stock
(incorporated by reference to the Registrant's Registration Statement on
Form S-1 as declared effective by the Commission on March 11, 1993, File
No. 33-57796).
4.2 Rights Agreement, dated as of February 29, 1996, between the Registrant
and The First National Bank of Boston, as Rights Agent (incorporated by
reference to the Registrant's Current Report on Form 8-K as filed with
the Commission on March 8, 1996, File No. 0-21174).
4.3 Common Stock Purchase Warrant dated August 3, 1998 by and between Avid
Technology, Inc. and Microsoft Corporation (incorporated by reference to
the Registrant's Quarterly Report a Form 10-Q as filed with the
Commission on November 13, 1998, File No. 0-21174).
10.1 Lease dated September 29, 1995 between Allied Dunbar Insurance PLC and
Avid Technology Limited (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q as filed with the Commission on November
14, 1995, File No. 0-21174).
10.3 Lease between MGI Andover Street, Inc. and Avid Technology, Inc. dated
March 21, 1995 (incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q as filed with the Commission on May 15,1995, File
No. 0-21174).
10.4 Amended and Restated lease dated as of June 7, 1996 between MGI One Park
West, Inc. and Avid Technology, Inc. (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q as filed with the Commission
on August 14, 1996, File No. 0-21174).
10.15 Form of Distribution Agreement (incorporated by reference to the
Registrant's Registration Statement on Form S-1 as declared effective by
the Commission on March 11, 1993, File No. 33-57796).
10.16 Form of Purchase and License Agreement (incorporated by reference to the
Registrant's Registration Statement on Form S-1 as declared effective by
the Commission on March 11, 1993, File No. 33-57796).
65
10.17 Form of Software Only License Agreement (incorporated by reference to
the Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
#10.18 1989 Stock Option Plan (incorporated by reference to the Registrant's
Registration Statement on Form S-1 as declared effective by the
Commission on March 11, 1993, File No. 33-57796).
#10.19 1993 Stock Incentive Plan (incorporated by reference to the Registrant's
Registration Statement on Form S-1 as declared effective by the
Commission on March 11, 1993, File No. 33-57796).
#10.20 1993 Director Stock Option Plan, as amended (incorporated by reference
to the Registrant's Proxy Statement as filed with the Commission on
April 27, 1995, File No. 0-21174).
#10.21 1993 Executive Compensation Agreement (incorporated by reference to the
Registrant's Registration Statement on Form S-1 as declared effective by
the Commission on March 11, 1993, File No. 33-57796).
#10.22 1993 Employee Stock Purchase Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-8 as filed with the
Commission on June 9, 1993, File No. 33-64130).
#10.23 1994 Stock Option Plan, as amended (incorporated by reference to the
Registrant's Registration Statement on Form S-8 as filed with the
Commission on October 27, 1995, File No. 33-98692).
#10.25 1995 Executive Variable Compensation Program (incorporated by reference
to the Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on May 15, 1995, File No. 0-21174).
#10.26 1998 Executive and Senior Management Variable Compensation Plan
(incorporated by reference to the Registrant's Annual Report on Form
10-K as filed with the Commission on March 27, 1998, File No. 0-21174).
#10.27 1997 Stock Option Plan (incorporated by reference to the Registrant's
Annual Report on Form 10-K as filed with the Commission on March 27,
1998, File No. 0-21174).
#10.28 Amended and Restated 1996 Employee Stock Purchase Plan(incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q as filed
with the Commission on November 13, 2003, File No. 0-21174).
*#10.29 Amended and Restated Avid Technology, Inc. Non-Qualified Deferred
Compensation Plan as amended
#10.30 1998 Profit Sharing Plan (incorporated by reference to the Registrant's
Annual Report on Form 10-K as filed with the Commission on March 27,
1998, File No. 0-21174).
#10.36 1999 Profit Sharing Plan (incorporated by reference to the Registrant's
Annual Report on Form 10-K as filed with the Commission on March 30,
1999, File No. 0-21174).
#10.37 1999 Executive and Senior Management Variable Compensation Plan
(incorporated by reference to the Registrant's Annual Report on Form
10-K as filed with the Commission on March 30, 1999, File No. 0-21174).
10.38 Registration Rights Agreement dated August 3, 1998 by and between Avid
Technology, Inc. and Microsoft Corporation (incorporated by reference to
the Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on November 13, 1998, File No. 0-21174).
10.39 Form of Electronic Software License Agreement (incorporated by reference
to the Registrant's Annual Report on Form 10-K as filed with the
Commission on March 30, 1999, File No. 0-21174).
#10.44 1999 Stock Option Plan (incorporated by reference to the Registrant's
Registration Statement on Form S-8 as filed with the Commission on
January 6, 2000, 1999, File No. 33-94167).
#10.45 Executive Employment Agreement by and between the Company and David A.
Krall, dated as of July 24, 2002.
#10.46 Executive Employment Agreement by and between the Company and Joseph
Bentivegna, dated as of July 24, 2002.
66
#10.47 Executive Employment Agreement by and between the Company and Ethan E.
Jacks, dated as of July 24, 2002.
#10.48 Executive Employment Agreement by and between the Company and David
Lebolt, dated as of July 24, 2002.
#10.49 Executive Employment Agreement by and between the Company and Paul
Milbury, dated as of July 24, 2002.
#10.50 Executive Employment Agreement by and between the Company and Michael
Rockwell, dated as of July 24, 2002.
#10.51 Executive Employment Agreement by and between the Company and Ann C.
Smith, dated as of July 24, 2002.
#10.52 Executive Employment Agreement by and between the Company and Charles L.
Smith, dated as of July 24, 2002.
#10.53 Change-in-Control Agreement by and between the Company and David A.
Krall, dated as of July 24, 2002.
#10.54 Change-in-Control Agreement by and between the Company and Joseph
Bentivegna, dated as of July 24, 2002.
#10.55 Change-in-Control Agreement by and between the Company and Ethan E.
Jacks, dated as of July 24, 2002.
#10.56 Change-in-Control Agreement by and between the Company and David Lebolt,
dated as of July 24, 2002.
#10.57 Change-in-Control Agreement by and between the Company and Paul Milbury,
dated as of July 24, 2002.
#10.58 Change-in-Control Agreement by and between the Company and Michael
Rockwell, dated as of July 24, 2002.
#10.60 Change-in-Control Agreement by and between the Company and Charles L.
Smith, dated as of July 24, 2002.
*10.61 Executive Employment Agreement by and between the Company and Trish
Baker, dated as of May 21, 2003.
*10.62 Change-in-Control Agreement by and between the Company and Trish Baker,
dated as of May 21, 2003.
*21 Subsidiaries of the Registrant.
*23.1 Consent of PricewaterhouseCoopers LLP.
*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.
- --------------------
*documents filed herewith
#Management contract or compensatory plan identified pursuant to Item 15 (a) 3.
(b) REPORTS ON FORM 8-K
A report on Form 8-K furnished October 16, 2003, reporting under Item 9 the
announcement that on October 16, 2003, the Company issued a press release
regarding its financial results for the quarter ended September 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."
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AVID TECHNOLOGY, INC.
(Registrant)
By: /s/ David A. Krall
-------------------------------
David A. Krall
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 11, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ David A. Krall By: /s/ Paul J. Milbury By: /s/ Carol L. Reid
-------------------- ------------------------ ------------------------
David A. Krall Paul J. Milbury Carol L. Reid
President and Chief Chief Financial Officer Vice President and
Executive Officer (Principal Financial Corporate Controller
(Principal Executive Officer) (Principal Accounting
Officer) Officer)
Date: March 11, 2004 Date: March 11, 2004 Date: March 11, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ Charles T. Brumback Director March 4, 2004
-------------------------
Charles T. Brumback
/s/ John Guttag Director March 10, 2004
-------------------------
John Guttag
/s/ Robert M. Halperin Director March 2, 2004
-------------------------
Robert M. Halperin
/s/ Nancy Hawthorne Director March 5, 2004
-------------------------
Nancy Hawthorne
/s/ David A. Krall Director March 11, 2004
-------------------------
David A. Krall
/s/ Pamela F. Lenehan Director March 8, 2004
-------------------------
Pamela F. Lenehan
/s/ William J. Warner Director March 9, 2004
-------------------------
William J. Warner
68
AVID TECHNOLOGY, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2003
ITEM 15(d)
FINANCIAL STATEMENT SCHEDULE
69
AVID TECHNOLOGY, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2003, 2002 and 2001
(in thousands)
Additions
-----------------------
Balance at Charged to Charged to Balance at
beginning of costs and other end of
Description period expenses accounts Deductions period
- --------------------------------------------------------------------------------------------------
Allowance for doubtful accounts
December 31, 2003 $6,237 $10 ($1,534)(a) $4,713
December 31, 2002 8,566 534 (2,863)(a) 6,237
December 31, 2001 9,806 619 (1,859)(a) 8,566
Sales returns and allowances
December 31, 2003 $4,377 $6,669(b) ($6,598)(c) $4,448
December 31, 2002 2,931 9,481(b) (8,035)(c) 4,377
December 31, 2001 1,578 9,086(b) (7,733)(c) 2,931
Allowance for transactions with recourse
December 31, 2003 $3,304 $614 $810(b) ($1,458)(d) $3,270
December 31, 2002 3,862 539 471(b) (1,568)(d) 3,304
December 31, 2001 5,026 1,016 1,090(b) (3,270)(d) 3,862
Deferred tax asset valuation allowance
December 31, 2003 $126,490 $30,247 ($3,517)(e) $153,220
December 31, 2002 131,428 (303) (4,635)(e) 126,490
December 31, 2001 115,962 14,733 733 131,428
(a) Amount represents write-offs, net of recoveries.
(b) Provisions for sales returns, volume rebates and a portion of the provision
for transactions with recourse are charged directly against revenue.
(c) Amount represents credits for returns, volume rebates and promotions.
(d) Amount represents defaults, net of recoveries.
(e) Amount represents tax return to accrual adjustments.
F-1
Index to Exhibits
Exhibit No. Description
- --------------------------------------------------------------------------------
2.1 Stock and Asset Purchase Agreement among Microsoft Corporation,
Softimage Inc. and Avid Technology, Inc. dated as of June 15, 1998
together with all material exhibits thereto (incorporated by reference
to the Registrant's Quarterly Report a Form 10-Q as filed with the
Commission on August 12, 1998, File No. 0-21174).
3.1 Certificate of Amendment of the Third Amended and Restated Certificate
of Incorporation of the Registrant (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q as filed with the Commission
on May 15, 1995, File No. 0-21174).
3.2 Third Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to the Registrant's Registration
Statement on Form S-8 as filed with the Commission on June 9, 1993, File
No. 33-64126).
3.3 Amended and Restated By-Laws of the Registrant (incorporated by
reference to the Registrant's Registration Statement on Form S-1 as
declared effective by the Commission on March 11, 1993, File
No. 33-57796).
3.4 Certificate of Designations establishing Series A Junior Participating
Preferred Stock (the "Certificate of Designations") (incorporated by
reference to the Registrant's Current Report on Form 8-K as filed with
the Commission on March 8, 1996).
3.5 Certificate of Correction to the Certificate of Designations
(incorporated by reference to the Registrant's Current Report on Form
8-K as filed with the Commission on March 8, 1996).
4.1 Specimen Certificate representing the Registrant's Common Stock
(incorporated by reference to the Registrant's Registration Statement on
Form S-1 as declared effective by the Commission on March 11, 1993, File
No. 33-57796).
4.2 Rights Agreement, dated as of February 29, 1996, between the Registrant
and The First National Bank of Boston, as Rights Agent (incorporated by
reference to the Registrant's Current Report on Form 8-K as filed with
the Commission on March 8, 1996, File No. 0-21174).
4.3 Common Stock Purchase Warrant dated August 3, 1998 by and between Avid
Technology, Inc. and Microsoft Corporation (incorporated by reference to
the Registrant's Quarterly Report a Form 10-Q as filed with the
Commission on November 13, 1998, File No. 0-21174).
10.1 Lease dated September 29, 1995 between Allied Dunbar Insurance PLC and
Avid Technology Limited (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q as filed with the Commission on November
14, 1995, File No. 0-21174).
10.3 Lease between MGI Andover Street, Inc. and Avid Technology, Inc. dated
March 21, 1995 (incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q as filed with the Commission on May 15,1995, File
No. 0-21174).
10.4 Amended and Restated lease dated as of June 7, 1996 between MGI One Park
West, Inc. and Avid Technology, Inc. (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q as filed with the Commission
on August 14, 1996, File No. 0-21174).
10.15 Form of Distribution Agreement (incorporated by reference to the
Registrant's Registration Statement on Form S-1 as declared effective by
the Commission on March 11, 1993, File No. 33-57796).
10.16 Form of Purchase and License Agreement (incorporated by reference to the
Registrant's Registration Statement on Form S-1 as declared effective by
the Commission on March 11, 1993, File No. 33-57796).
10.17 Form of Software Only License Agreement (incorporated by reference to
the Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
#10.18 1989 Stock Option Plan (incorporated by reference to the Registrant's
Registration Statement on Form S-1 as declared effective by the
Commission on March 11, 1993, File No. 33-57796).
#10.19 1993 Stock Incentive Plan (incorporated by reference to the Registrant's
Registration Statement on Form S-1 as declared effective by the
Commission on March 11, 1993, File No. 33-57796).
#10.20 1993 Director Stock Option Plan, as amended (incorporated by reference
to the Registrant's Proxy Statement as filed with the Commission on
April 27, 1995, File No. 0-21174).
#10.21 1993 Executive Compensation Agreement (incorporated by reference to the
Registrant's Registration Statement on Form S-1 as declared effective by
the Commission on March 11, 1993, File No. 33-57796).
#10.22 1993 Employee Stock Purchase Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-8 as filed with the
Commission on June 9, 1993, File No. 33-64130).
#10.23 1994 Stock Option Plan, as amended (incorporated by reference to the
Registrant's Registration Statement on Form S-8 as filed with the
Commission on October 27, 1995, File No. 33-98692).
#10.25 1995 Executive Variable Compensation Program (incorporated by reference
to the Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on May 15, 1995, File No. 0-21174).
#10.26 1998 Executive and Senior Management Variable Compensation Plan
(incorporated by reference to the Registrant's Annual Report on Form
10-K as filed with the Commission on March 27, 1998, File No. 0-21174).
#10.27 1997 Stock Option Plan (incorporated by reference to the Registrant's
Annual Report on Form 10-K as filed with the Commission on March 27,
1998, File No. 0-21174).
#10.28 Amended and Restated 1996 Employee Stock Purchase Plan(incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q as filed
with the Commission on November 13, 2003, File No. 0-21174).
*#10.29 Amended and Restated Avid Technology Inc. Non-Qualified Deferred
Compensation Plan as amended
#10.30 1998 Profit Sharing Plan (incorporated by reference to the Registrant's
Annual Report on Form 10-K as filed with the Commission on March 27,
1998, File No. 0-21174).
#10.36 1999 Profit Sharing Plan (incorporated by reference to the Registrant's
Annual Report on Form 10-K as filed with the Commission on March 30,
1999, File No. 0-21174).
#10.37 1999 Executive and Senior Management Variable Compensation Plan
(incorporated by reference to the Registrant's Annual Report on Form
10-K as filed with the Commission on March 30, 1999, File No. 0-21174).
10.38 Registration Rights Agreement dated August 3, 1998 by and between Avid
Technology, Inc. and Microsoft Corporation (incorporated by reference to
the Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on November 13, 1998, File No. 0-21174).
10.39 Form of Electronic Software License Agreement (incorporated by reference
to the Registrant's Annual Report on Form 10-K as filed with the
Commission on March 30, 1999, File No. 0-21174).
#10.44 1999 Stock Option Plan (incorporated by reference to the Registrant's
Registration Statement on Form S-8 as filed with the Commission on
January 6, 2000, 1999, File No. 33-94167).
#10.45 Executive Employment Agreement by and between the Company and David A.
Krall, dated as of July 24, 2002.
#10.46 Executive Employment Agreement by and between the Company and Joseph
Bentivegna, dated as of July 24, 2002.
#10.47 Executive Employment Agreement by and between the Company and Ethan E.
Jacks, dated as of July 24, 2002.
#10.48 Executive Employment Agreement by and between the Company and David
Lebolt, dated as of July 24, 2002.
#10.49 Executive Employment Agreement by and between the Company and Paul
Milbury, dated as of July 24, 2002.
#10.50 Executive Employment Agreement by and between the Company and Michael
Rockwell, dated as of July 24, 2002.
#10.51 Executive Employment Agreement by and between the Company and Ann C.
Smith, dated as of July 24, 2002.
#10.52 Executive Employment Agreement by and between the Company and Charles L.
Smith, dated as of July 24, 2002.
#10.53 Change-in-Control Agreement by and between the Company and David A.
Krall, dated as of July 24, 2002.
#10.54 Change-in-Control Agreement by and between the Company and Joseph
Bentivegna, dated as of July 24, 2002.
#10.55 Change-in-Control Agreement by and between the Company and Ethan E.
Jacks, dated as of July 24, 2002.
#10.56 Change-in-Control Agreement by and between the Company and David Lebolt,
dated as of July 24, 2002.
#10.57 Change-in-Control Agreement by and between the Company and Paul Milbury,
dated as of July 24, 2002.
#10.58 Change-in-Control Agreement by and between the Company and Michael
Rockwell, dated as of July 24, 2002.
#10.60 Change-in-Control Agreement by and between the Company and Charles L.
Smith, dated as of July 24, 2002.
*10.61 Executive Employment Agreement by and between the Company and Trish
Baker, dated as of May 21, 2003.
*10.62 Change-in-Control Agreement by and between the Company and Trish Baker,
dated as of May 21, 2003.
*21 Subsidiaries of the Registrant.
*23.1 Consent of PricewaterhouseCoopers LLP.
*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.
- ------------------
*documents filed herewith
#Management contract or compensatory plan identified pursuant to Item 15 (a) 3.