AVID TECHNOLOGY, INC.
Avid Technology Park
One Park West
Tewksbury, MA 01876
August 14, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, DC 20549
Re: Avid Technology, Inc.
File No. 0-21174
Quarterly Report on Form 10-Q
-----------------------------
Ladies and Gentlemen:
Pursuant to regulations of the Securities and Exchange Commission,
submitted herewith for filing on behalf of Avid Technology, Inc. is the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
2000.
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
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
Commission File Number 0-21174
AVID TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2977748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AVID TECHNOLOGY PARK
ONE PARK WEST
TEWKSBURY, MA 01876
(Address of principal executive offices)
Registrant's telephone number, including area code: (978) 640-6789
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports).
Yes X No _____
Indicate by check mark whether the registrant has been subject to such
filing requirements for the past 90 days.
Yes X No _____
The number of shares outstanding of the registrant's Common Stock as of August
10, 2000 was 25,186,689.
<PAGE>
AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
a) Condensed Consolidated Statements of Operations (unaudited)
for the three and six month periods ended June 30, 2000 and 1999.......1
b) Condensed Consolidated Balance Sheets as of
June 30, 2000 (unaudited) and December 31, 1999........................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 2000 and 1999........................3
d) Notes to Condensed Consolidated Financial Statements (unaudited).......4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......21
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders..............22
ITEM 5. Other Information................................................23
ITEM 6. Exhibits and Reports on Form 8-K.................................24
Signatures..................................................................25
EXHIBIT INDEX..............................................................26
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues $119,959 $116,353 $228,655 $227,636
Cost of revenues 57,934 50,275 111,192 94,696
----------- ------------ ----------- ------------
Gross profit 62,025 66,078 117,463 132,940
----------- ------------ ----------- ------------
Operating expenses:
Research and development 20,825 22,644 40,270 46,893
Marketing and selling 31,382 33,525 59,921 66,087
General and administrative 8,101 7,270 15,013 14,011
Amortization of acquisition-related
intangible assets 19,792 19,787 39,592 40,298
----------- ------------ ----------- ------------
Total operating expenses 80,100 83,226 154,796 167,289
----------- ------------ ----------- ------------
Operating loss (18,075) (17,148) (37,333) (34,349)
Interest and other income, net 1,233 1,263 2,277 1,863
----------- ------------ ----------- ------------
Loss before income taxes (16,842) (15,885) (35,056) (32,486)
Provision for (benefit from) income taxes 1,250 (7,849) 2,500 (12,995)
----------- ------------ ----------- ------------
Net loss ($18,092) ($8,036) ($37,556) ($19,491)
=========== ============ =========== ============
Net loss per common share - basic and diluted ($0.70) ($0.34) ($1.51) ($0.81)
=========== ============ =========== ============
Weighted average common shares
outstanding - basic and diluted 25,711 23,946 24,888 24,167
=========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
<PAGE>
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $50,932 $46,072
Marketable securities 22,466 26,733
Accounts receivable, net of allowances of $10,125 and $8,954
at June 30, 2000 and December 31, 1999, respectively 88,066 76,172
Inventories 17,111 14,969
Deferred tax assets 1,976 2,114
Prepaid expenses 6,880 5,584
Other current assets 3,455 4,795
------------- -------------
Total current assets 190,886 176,439
Property and equipment, net 30,499 32,748
Acquisition-related intangible assets 56,768 95,073
Other assets 5,204 7,764
------------- -------------
Total assets $283,357 $312,024
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $25,267 $23,998
Accrued compensation and benefits 19,407 16,955
Accrued expenses 23,726 36,022
Income taxes payable 8,739 5,073
Other current liabilities 1,268 3,789
Deferred revenues 30,443 20,258
------------- -------------
Total current liabilities 108,850 106,095
Long-term debt and other liabilities, less current portion 13,553 14,220
Purchase consideration 11,276 23,786
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock
Common stock 265 266
Additional paid-in capital 359,373 366,569
Accumulated deficit (178,299) (128,083)
Treasury stock (28,566) (66,489)
Deferred compensation (4,084) (1,853)
Accumulated other comprehensive income (loss) 989 (2,487)
------------- -------------
Total stockholders' equity 149,678 167,923
------------- -------------
Total liabilities and stockholders' equity $283,357 $312,024
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
<PAGE>
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($37,556) ($19,491)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 48,492 49,916
Provision for doubtful accounts 3,835 1,222
Compensation from stock grants and options 872 763
Changes in deferred tax assets (133)
Loss on disposal of equipment 122
Equity in (income) loss of non-consolidated companies (926) 308
Changes in operating assets and liabilities:
Accounts receivable (19,311) 8,126
Inventories (2,089) 3,340
Prepaid expenses and other current assets 1,739 (457)
Accounts payable 1,362 4,099
Income taxes payable 3,847 (13,505)
Accrued expenses, compensation and benefits (9,390) (18,821)
Deferred revenues 7,034 (1,269)
--------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,091) 14,220
--------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,640) (10,528)
Decrease (increase) in other long-term assets 1,058 (5,944)
Proceeds from disposal of assets 1,152
Investments in non-consolidated companies (2,100) (1,500)
Payment for acquisition, net of cash acquired (995)
Payments on note issued in connection with acquisition (8,000)
Purchases of marketable securities (20,941) (26,764)
Proceeds from sales of marketable securities 29,394 44,512
--------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,776 (7,072)
--------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (303)
Purchase of common stock for treasury (368) (19,518)
Proceeds from issuance of common stock 5,177 2,664
--------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,809 (17,157)
--------------------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents (634) (1,543)
--------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,860 (11,552)
Cash and cash equivalents at beginning of period 46,072 62,904
--------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $50,932 $51,352
--------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1D. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL INFORMATION
The accompanying condensed consolidated financial statements include the
accounts of Avid Technology, Inc. and its wholly owned subsidiaries
(collectively, "Avid" or the "Company"). These financial statements are
unaudited. However, in the opinion of management, the condensed consolidated
financial statements include all adjustments, consisting of only normal,
recurring adjustments, necessary for their fair presentation. Interim results
are not necessarily indicative of results expected for a full year. The
accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions for Form 10-Q and therefore do not include all
information and footnotes necessary for a complete presentation of operations,
the financial position, and cash flows of the Company, in conformity with
generally accepted accounting principles. The Company filed audited consolidated
financial statements for the year ended December 31, 1999 on Form 10-K, which
included all information and footnotes necessary for such presentation.
The Company's preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. The most significant estimates reflected in these financial statements
include accounts receivable and sales allowances, inventory valuation, the
recoverability of intangible assets including goodwill, and income tax valuation
allowances. Actual results could differ from those estimates.
2. NET LOSS PER COMMON SHARE
Diluted net loss per share excluded options and warrants to purchase 6,822,806
and 6,719,700 weighted shares of common stock outstanding for the three- and
six-month periods ended June 30, 2000, respectively. Diluted net loss per share
excluded options and warrants to purchase 6,985,670 and 6,720,175 weighted
shares of common stock outstanding for the three- and six-month periods ended
June 30, 1999, respectively. Inclusion of these options and warrants would have
been anti-dilutive for each of these periods.
4
<PAGE>
3. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
Raw materials $9,573 $9,896
Work in process 3,811 1,946
Finished goods 3,727 3,127
-------------- --------------
$17,111 $14,969
============== ==============
</TABLE>
4. INVESTMENTS IN NON-CONSOLIDATED COMPANIES
In January 1999, Avid and Tektronix, Inc. established a 50/50 owned and funded
newsroom computer system joint venture, Avstar Systems LLC ("Avstar"). The joint
venture is dedicated to providing the next generation of newsroom computer
systems products by combining both companies' newsroom computer systems
technology and certain personnel. In September 1999, Tektronix transferred its
interest in Avstar to a third party, Grass Valley Group Inc. The Company's
initial contribution to the joint venture was approximately $2.0 million,
consisting of $1.5 million of cash and $0.5 million of fixed assets and
inventory. During the fourth quarter of 1999, Avstar distributed $1.5 million to
each joint venture partner, which was recorded by Avid as a return on investment
during 1999. The Company's investment in the joint venture is being accounted
for under the equity method of accounting. The pro rata share of earnings income
(loss) of the joint venture recorded by the Company during the three-month
period ended June 30, 2000 and 1999 was approximately $0.2 million and $0.3
million, respectively. The pro rata share of earnings income (loss) of the joint
venture recorded by the Company during the six-month period ended June 30, 2000
and 1999 was approximately $0.8 million and ($0.3) million, respectively.
5. LONG-TERM DEBT AND OTHER LIABILITIES
In connection with the acquisition of Softimage Inc. ("Softimage") in August
1998, Avid issued a $5.0 million subordinated note (the "Note") to Microsoft
Corporation. The principal amount of the Note, including any adjustments
relative to Avid stock options forfeited by Softimage employees plus all unpaid
accrued interest, is due on June 15, 2003. The Note bears interest at 9.5% per
annum, payable quarterly.
In connection with the acquisition, the Company issued stock options to retained
employees. As agreed with Microsoft, the value of the Note will be increased by
$39.71 for each share underlying forfeited employee stock options. At the date
of acquisition, the Company recorded these options as Purchase Consideration on
the balance sheet at a value of $68.2 million. As these options become vested,
additional paid-in capital is increased or, alternatively, as the options are
forfeited, the Note is increased, with Purchase Consideration being reduced by a
corresponding amount in either case. Through June 30, 2000, the Note has been
increased by approximately $15.0 million for forfeited Avid stock options.
During 1999, the Company made a cash payment of $8.0 million for principal,
5
<PAGE>
resulting in a note balance of approximately $12.0 million at June 30, 2000. The
Company made cash payments for interest of $0.2 million during the three-month
periods ended June 30, 2000 and 1999. The Company made cash payments for
interest of $0.4 million during the six-month periods ended June 30, 2000 and
1999.
In the second quarter of 1999, the Company recorded reductions of $6.9 million
to the goodwill and the deferred tax liability recorded upon the acquisition,
due to the expectation of realizing tax return deductions for a greater portion
of the acquired intangible assets.
6. COMMITMENTS AND CONTINGENCIES
On June 7, 1995, the Company filed a patent infringement complaint in the United
States District Court for the District of Massachusetts against Data
Translation, Inc., a Marlboro, Massachusetts-based company. Avid is seeking
judgment against Data Translation that, among other things, Data Translation has
willfully infringed Avid's patent number 5,045,940, entitled "Video/Audio
Transmission System and Method." Avid is also seeking an award of treble damages
together with prejudgment interest and costs, Avid's costs and reasonable
attorneys' fees and an injunction to prohibit further infringement by Data
Translation. The litigation has been dismissed without prejudice (with leave to
refile) pending a decision by the U.S. Patent and Trademark Office on a reissue
patent application based on the issued patent.
On March 11, 1996, the Company was named as defendant in a patent infringement
suit filed in the United States District Court for the Western District of Texas
by Combined Logic Company, a California partnership located in Beverly Hills,
California. On May 16, 1996, the suit was transferred to the United States
District Court for the Southern District of New York on motion by the Company.
The complaint alleges infringement by Avid of U.S. patent number 4,258,385,
issued in 1981, and seeks injunctive relief, treble damages and costs, and
attorneys' fees. The Company believes that it has meritorious defenses to the
complaint and intends to contest it vigorously. However, an adverse resolution
of this litigation could have a material 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.
The Company also receives inquiries from time to time with regard to additional
possible patent infringement claims. These inquiries are generally referred to
counsel and are in various stages of discussion. If any infringement is
determined to exist, the Company may seek licenses or settlements. In addition,
from time to time 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.
6
<PAGE>
7. COMPREHENSIVE LOSS
Total comprehensive loss, net of taxes, was approximately $14.3 million and $8.5
million for the three-month periods ended June 30, 2000 and 1999, respectively,
and $34.1 million and $21.1 million for the six-month periods ended June 30,
2000 and 1999, respectively, which consists of net loss, the net changes in
foreign currency translation adjustment and the net unrealized gains and losses
on available-for-sale securities.
8. SEGMENT INFORMATION
The Company's organizational structure is based on strategic business units that
offer various products to the principal markets in which the Company's products
are sold. These business units equate to two reportable segments: Video and Film
Editing and Effects, and Professional Audio. The following is a summary of the
Company's operations by operating segment (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Video and Film Editing and Effects:
Net revenues $85,958 $93,856 $163,837 $179,880
========== ========== ========== ==========
Operating loss ($8,070) ($1,616) ($15,192) ($5,370)
========== ========== ========== ==========
Professional Audio:
Net revenues $34,001 $22,497 $64,818 $47,756
========== ========== ========== ==========
Operating income $9,787 $4,255 $17,451 $11,319
========== ========== ========== ==========
Combined Segments:
Net revenues $119,959 $116,353 $228,655 $227,636
========== ========== ========== ==========
Operating income $1,717 $2,639 $2,259 $5,949
========== ========== ========== ==========
</TABLE>
The following table reconciles total segment operating income to total
consolidated operating loss (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total operating income for reportable segments $1,717 $2,639 $2,259 $5,949
Unallocated amounts:
Amortization of acquisition-related intangible assets (19,792) (19,787) (39,592) (40,298)
---------- ---------- ---------- ----------
Consolidated operating loss ($18,075) ($17,148) ($37,333) ($34,349)
========== ========== ========== ==========
</TABLE>
The unallocated amounts represent the amortization of acquired intangible
assets, including goodwill, associated with the acquisition of Softimage.
7
<PAGE>
9. RESTRUCTURING COSTS
In November 1999, the Company announced and implemented a restructuring plan to
strategically refocus the Company and bring operating expenses in line with net
revenues. The major elements of the restructuring plan included the termination
of certain employees, the vacating of certain facilities and a decision not to
provide any future releases of a limited number of then existing products,
including stand-alone Marquee, Avid Cinema, Media Illusion and Matador. In
connection with this plan, the Company recorded a restructuring charge of $9.6
million, of which $0.6 million represented non-cash charges relating to the
disposition of certain fixed assets. The following table sets forth the activity
in the restructuring accrual accounts for the six-month period ended June 30,
2000 (in thousands):
<TABLE>
<CAPTION>
Employee Facilities Fixed
Related Related Assets Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Accrual balance at December 31, 1999 $4,421 $2,154 $541 $7,116
Cash payments (2,243) (217) (2,460)
Non-cash disposals (316) (316)
---------- ---------- ---------- ----------
Accrual balance at March 31, 2000 $2,178 $1,937 $225 $4,340
Cash payments (818) (445) (1,263)
Non-cash disposals (42) (42)
---------- ---------- ---------- ----------
Accrual balance at June 30, 2000 $1,360 $1,492 $183 $3,035
========== ========== ========== ==========
</TABLE>
The Company expects that the majority of the remaining $3.0 million accrual
balance will be expended over the next twelve months and will be funded from
working capital.
10. SUPPLEMENTAL RECONCILIATION OF NET LOSS TO TAX-EFFECTED INCOME
EXCLUDING AMORTIZATION OF ACQUISITION-RELATED INTANGIBLE ASSETS
The following table presents a calculation of tax-effected income and diluted
per share amounts excluding amortization of acquisition-related intangible
assets.
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
-------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Net loss ($18,092) ($8,036)
Adjustments:
Amortization of acquisition-related intangible assets 19,792 19,787
Tax impact of adjustment (9,059)
------------- -------------
Tax-effected income excluding amortization of
acquisition-related intangible assets $1,700 $2,692
============= =============
Tax-effected income per diluted share excluding
amortization of acquisition-related intangible assets $0.06 $0.10
============= =============
Weighted average common shares outstanding - diluted -
used for calculation 26,785 25,781
============= =============
</TABLE>
8
<PAGE>
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
--------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Net loss ($37,556) ($19,491)
Adjustments:
Amortization of acquisition-related intangible assets 39,592 40,298
Tax impact of adjustment (15,417)
------------- -------------
Tax-effected income excluding amortization of
acquisition-related intangible assets $2,036 $5,390
============= =============
Tax-effected income per diluted share excluding
amortization of acquisition-related intangible assets $0.08 $0.20
============= =============
Weighted average common shares outstanding - diluted -
used for calculation 26,390 26,407
============= =============
</TABLE>
11. SUBSEQUENT EVENT - STOCK OPTION EXCHANGE PROGRAM
In July 2000, the Company completed a program offered in June 2000 whereby
employees could elect to exchange certain "out-of-the-money" stock options for
shares of restricted stock at specified conversion ratios. In July,
approximately 118,000 shares of restricted stock were issued in exchange for
options to purchase approximately 432,000 shares of common stock at exercise
prices ranging from $9.4375 to $45.25. Restrictions imposed on holders of the
issued restricted stock as to transfers or sales lapse annually over a
three-year period. Deferred compensation of $1.4 million was recorded as a
component of stockholders' equity for the fair value of the restricted stock
upon issuance and will be recognized as compensation expense ratably over the
three-year restriction period, assuming that restrictions on all shares lapse.
12. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133 - an amendment of FASB Statement No. 133." SFAS 137 defers the
implementation of SFAS 133 by one year. SFAS 133, as amended by SFAS 137, is
effective for fiscal quarters beginning after January 1, 2001 for the Company,
and its adoption is not expected to have a material impact on the Company's
financial position or results of operations.
9
<PAGE>
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain views of the staff on applying generally
accepted accounting principles to revenue recognition in financial statements.
The staff believes that revenue is realized or realizable and earned when all of
the following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered; the seller's price to the
buyer is fixed or determinable; and collectibility is reasonably assured. In
June 2000, Staff Accounting Bulletin No. 101B, "Second Amendment: Revenue
Recognition in Financial Statements," was released. This staff accounting
bulletin delays the implementation of SAB 101 until the fourth quarter of 2000.
The Company does not expect the application of SAB 101 to have a material impact
on the Company's financial position or results of operations.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of previously fixed stock options or awards, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
10
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The text of this document may include forward-looking statements. Actual results
may differ materially from those described herein, depending on such factors as
are described herein, including under "Certain Factors That May Affect Future
Results."
Avid Technology, Inc. ("Avid" or the "Company") develops, markets, sells and
supports a wide range of software and systems for creating and manipulating
digital media content. Digital media are media elements, whether video or audio
or graphics, in which the image, sound or picture is recorded and stored as
digital values, as opposed to analog signals. Avid's digital, nonlinear video
and film editing systems are designed to improve the productivity of video and
film editors 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. To complement these systems, Avid develops and sells
a range of image manipulation products that allow users in the video and film
post-production and broadcast markets to create graphics and special effects for
use in feature films, television programs and advertising, and news programs.
Avid also develops and sells digital audio systems through its Digidesign
division. These systems have applications in music, film, television, video,
broadcast, streaming media and web development, as well as in home and hobbyist
markets. These systems are based upon proprietary Digidesign/Avid audio
hardware, software, and control surfaces, and enable users to record, edit, mix,
process, and master audio in a uniquely integrated manner. Additionally, Avid
believes that the Internet is one of the most important new content distribution
channels and is continuing to invest in this area. Avid has developed and
continues to develop products specifically designed for working in an Internet
environment. The Company also plans to enable Internet publishing across its
entire current product line. Upcoming releases of the Company's core products
are expected to include Internet video and audio streaming capabilities.
Avid's products are used worldwide in production and post-production facilities;
film studios; network, affiliate, independent, and cable television stations;
recording studios; advertising agencies; government and educational
institutions; corporate communication departments; and by Internet professionals
and audio hobbyists. Projects produced using Avid products--from major motion
picture and primetime television to music video and marquee recording
artists--have been honored with Oscars, Emmys, Grammys and a host of other
international awards.
On April 26, 2000, the Company announced that David Krall, who was the Company's
President and Chief Operating Officer, had been appointed President and Chief
Executive Officer. The Company also announced that William L. Flaherty, the
Company's Acting Chief Executive Officer and Chief Financial Officer, had
decided to leave the Company. The Company further announced that Ethan E. Jacks,
who was a Vice President and the Company's General Counsel, had been appointed
Senior Vice President, Chief Legal Officer and Acting Chief Financial Officer as
the Company conducts a search for a Chief Financial Officer.
11
<PAGE>
RESULTS OF OPERATIONS
Net Revenues
The Company's net revenues have been derived mainly from the sales of
computer-based digital, nonlinear media editing systems and related peripherals,
licensing of related software, and sales of maintenance contracts. Net revenues
increased by $3.6 million (3.1%) to $120.0 million in the quarter ended June 30,
2000 from $116.4 million for the same quarter in 1999. Net revenues increased by
$1.0 million (0.4%) to $228.7 million for the six months ended June 30, 2000
from $227.6 million for the six months ended June 30, 1999.
The revenue increase in both periods reflected sales of newer products such as
Avid Unity MediaNet, which began shipping in June 1999, Digi 001, which began
shipping in November 1999, and Avid Xpress DV, which began shipping in March
2000, as well as incremental SOFTIMAGE|DS and Digidesign audio product revenue.
These increases in revenues were offset in part by a decline in unit sales from
Macintosh-based Media Composer products, Symphony, and local storage products.
Service revenue was also lower in both periods. The Company currently expects
revenue for the full year 2000 to show modest growth versus the full year 1999.
During the second quarter of 2000, the Company began shipments of SOFTIMAGE|XSI
and the Edgestreme Cluster. During March 2000, Avid also began shipping Avid
Xpress DV on IBM IntelliStation for Windows NT.
Net revenues derived through indirect channels were approximately 87% of net
revenues for the three months ended June 30, 2000, compared to 91% of net
revenues for the same period in 1999. Indirect channel revenues were
approximately 87% of net revenues for the six months ended June 30, 2000
compared to approximately 90% for the same period in 1999. The Company made
minor changes to the channel sales strategy for certain product lines, which, as
expected, slightly reduced the percentage of indirect channel revenues compared
to total revenue.
International sales (sales to customers outside the U.S. and Canada) accounted
for approximately 51% and 50% of the Company's second quarter 2000 and 1999 net
revenues, respectively. International sales increased by approximately $3.4
million or 5.8% in the second quarter of 2000 compared to the same period in
1999. International sales accounted for approximately 53% and 52% of the
Company's net revenues for the first six months of 2000 and 1999, respectively.
International sales increased by approximately $2.4 million or 2.0% in the six
months ended June 30, 2000 from the same period in 1999. The increase in
international sales for both periods reflected increases in the Asia region,
partially offset by decreases in the Europe region.
Gross Profit
Cost of revenues consists primarily of costs associated with the procurement of
components; the assembly, test, and distribution of finished products;
warehousing; post-sales customer support costs; and provisions for inventory
obsolescence. The resulting gross profit fluctuates based on factors such as the
mix of products sold, the cost and proportion of third-party hardware included
in the systems sold by the Company, the timing of new product introductions, the
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offering of product upgrades, price discounts and other sales promotion
programs, the distribution channels through which products are sold, and sales
of aftermarket hardware products. Gross margin decreased to 51.7% in the second
quarter of 2000 compared to 56.8% in the same period of 1999 and decreased to
51.4% for the six months ended June 30, 2000 from 58.4% for the same period in
1999. These decreases were primarily related to product mix, product promotions
and discounting, as well as price reductions, all of which were partially offset
by manufacturing overhead and material cost savings. The Company currently
expects that gross margin for the remainder of 2000 will not differ materially
from that of the second quarter of 2000.
Research and Development
Research and development expenses decreased by $1.8 million (8.0%) in the second
quarter of 2000 compared to the same period in 1999 and decreased by $6.6
million (14.1%) for the six months ended June 30, 2000 compared to the same
period in 1999. These decreased expenditures were primarily due to planned
reductions in personnel-related expenditures and reduced consulting expense,
partially offset by planned investments in the Company's strategic initiatives
including products designed to address the Company's Internet strategy. For the
three-month period of 2000 relative to 1999, variations in funding by third
party partners for certain development projects caused an additional increase in
research and development expense. For the six-month periods, it caused a
decrease. Research and development expenses decreased to 17.4% of net revenues
in the second quarter of 2000 compared to 19.5% in the same quarter of 1999 and
decreased to 17.6% for the six months ended June 30, 2000 from 20.6% for the six
months ended June 30, 1999. These decreases were primarily due to the decreases
in research and development expenses noted above.
Marketing and Selling
Marketing and selling expenses decreased by approximately $2.1 million (6.4%) in
the second quarter of 2000 compared to the same period in 1999 and decreased by
$6.2 million (9.3%) for the six months ended June 30, 2000 compared to the same
period in 1999. These decreased expenditures in selling and marketing were
primarily due to planned reductions in personnel-related expenditures in the
Company's video and film editing and effects business and in discretionary
spending, partially offset by increases in the provision for bad debt. Marketing
and selling expenses decreased to 26.2% of net revenues in the second quarter of
2000 compared to 28.8% in the same quarter of 1999 and decreased to 26.2% from
29.0% for the six months ended June 30, 2000 and 1999, respectively. These
decreases were primarily due to the decreases in marketing and selling expenses
noted above.
General and Administrative
General and administrative expenses increased by $0.8 million (11.4%) in the
second quarter of 2000 compared to the same period in 1999 and increased by $1.0
million (7.1%) for the six months ended June 30, 2000 compared to the same
period in 1999. These increased expenditures in general and administrative
expenses were primarily due to executive severance benefits, partially offset by
planned reductions in personnel-related expenditures. General and administrative
expenses increased to 6.8% of net revenues in the second quarter of 2000
compared to 6.2% in the same quarter of 1999 and increased to 6.6% from 6.2% for
the six months ended June 30, 2000 and 1999, respectively. These increases were
primarily due to higher expenses noted above.
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Amortization of Acquisition-related Intangible Assets
In connection with the August 1998 acquisition of the business of Softimage, the
Company allocated $88.2 million of the total purchase price of $247.9 million to
intangible assets consisting of completed technologies, work force and trade
name, and $127.8 million to goodwill. Results for both quarters ended June 30,
2000 and June 30, 1999 reflect amortization of $19.8 million associated with
these acquisition-related intangible assets. Results for the six months ended
June 30, 2000 and June 30, 1999 reflect amortization of $39.6 million and $40.3
million, respectively, associated with these acquisition-related intangible
assets. The unamortized balance of the intangible assets relating to this
acquisition, including goodwill, was $55.4 million at June 30, 2000.
Approximately $26.9 million additional amortization is expected during the
second half of 2000 with the remaining $28.5 million expected to be amortized
through July 2001.
In the second quarter of 1999, the Company recorded reductions of $6.9 million
to the goodwill and the deferred tax liability recorded upon the acquisition,
due to the expectation of realizing tax return deductions for a greater portion
of the acquired intangible assets.
Interest and Other Income, Net
Interest and other income, net consists primarily of interest income, other
income and interest expense. Interest and other income, net for the three months
ended June 30, 2000 was $1.2 million and consistent with that of the same period
in 1999. For the six months ended June 30, 2000, interest and other income, net
increased $0.4 million as compared to the same period in 1999. The increase in
the six-month period was primarily related to the recognition of the Company's
share of equity income in Avstar in the 2000 period, as compared to an equity
loss in the 1999 period. This increase was offset by lower interest income in
2000 due to a lower average cash and investment balance.
Provision for Income Taxes
The Company recorded a tax provision of $1.3 million for each of the first and
second quarters of 2000. This provision was comprised of taxes payable by the
Company's foreign subsidiaries and state taxes. No tax benefit was provided for
the loss before income taxes in the U.S. This provision compares to a tax
benefit of $7.8 million and $13.0 million for the three- and six-month periods
ended June 30, 1999, respectively, both of which represented an effective tax
rate of 31%. This rate differed from the U.S. Federal statutory rate of 35% due
primarily to the Company's foreign subsidiaries, which are taxed in the
aggregate at a lower rate, and the U.S. Federal Research Tax Credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date through both private and public
sales of equity securities as well as through cash flows from operations. As of
June 30, 2000, the Company's principal sources of liquidity included cash, cash
equivalents and marketable securities totaling approximately $73.4 million.
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With respect to cash flows, net cash used in operating activities was $2.1
million for the six months ended June 30, 2000 compared to $14.2 million
provided by operating activities in the same period in 1999. During the six
months ended June 30, 2000, net cash used in operating activities primarily
reflects the net loss adjusted for depreciation and amortization as well as
increases in accounts receivable and deferred revenue, and decreases in accrued
expenses. During the six months ended June 30, 1999, net cash provided by
operating activities consisted primarily of the net loss adjusted for
depreciation and amortization and collections in accounts receivable, partially
offset by decreases in accrued expenses and income taxes payable.
The Company purchased $3.7 million of property and equipment during the six
months ended June 30, 2000, compared to $10.5 million in the same period in
1999. These purchases primarily included hardware and software for the Company's
information systems and equipment to support research and development
activities. During the six months ended June 30, 2000, the Company also made a
cash investment of $2.1 million in Rocket Network, Inc. In the six-month period
ended June 30, 1999, the Company utilized $8.0 million to repay a portion of the
note issued to Microsoft Corporation in connection with the acquisition of
Softimage. The remaining principal balance on the note issued to Microsoft of
approximately $12.0 million is due and payable in June 2003. Additionally, in
1999, the Company made a cash investment of $1.5 million into a joint venture
with Tektronix, Inc.
In November 1999, the Company announced and implemented a restructuring plan to
strategically refocus the Company and bring operating expenses in line with net
revenues, with the goal of restoring long-term profitability to the Company and
supporting the Company's new strategic initiatives. The major elements of the
resulting restructuring plan included the termination of certain employees and
the vacating of certain facilities. The plan also provided for no further
releases of a limited number of then existing product offerings, including
stand-alone Marquee, Avid Cinema, Media Illusion and Matador. In connection with
this plan, the Company recorded a restructuring charge of $9.6 million. The
charge included approximately $6.6 million for severance and related costs for
209 employees on a worldwide basis, $2.4 million for facility vacancy costs and
approximately $0.6 million of non-cash charges relating to the disposition of
certain fixed assets. At the time of the charge, the Company expected that the
1999 restructuring actions would result in an expense reduction of approximately
$18.0 million on an annualized basis. These savings will likely be largely
offset by incremental costs associated with new strategic initiatives intended
for the growth of the Company. During 1999 and the first half of 2000, the
Company made cash payments of $2.5 million and $3.7 million, respectively,
related to these restructuring activities. The majority of the remaining accrual
balance of $3.0 million at June 30, 2000 is expected to be paid out during the
remainder of 2000 and 2001 and will be funded from working capital.
The Company believes existing cash, cash equivalents and marketable securities,
as well as internally generated funds, will be sufficient to meet the Company's
cash requirements, including capital expenditures, for at least the next twelve
months. In the event the Company requires additional financing, the Company
believes that it would be able to obtain such financing; however, there can be
no assurance that it would be successful in doing so, or that it could do so on
terms favorable to the Company.
On October 21, 1998, the Company announced that the Board of Directors had
authorized the repurchase of up to 2.0 million shares of the Company's common
stock. Purchases have been and will be made in the open market or in privately
negotiated transactions. The Company has used and plans to continue to use any
repurchased shares for its employee stock plans. During 1999, the Company
repurchased a total of 1.2 million shares of common stock at a cost of $19.7
million, under the program announced in October 1998. As of June 30, 2000, there
were approximately 300,000 shares remaining authorized for repurchase.
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In July 2000, the Company completed a program offered in June 2000 whereby
employees could elect to exchange certain "out-of-the-money" stock options for
shares of restricted stock at specified conversion ratios. In July,
approximately 118,000 shares of restricted common stock were issued in exchange
for options to purchase approximately 432,000 shares of common stock at exercise
prices ranging from $9.4375 to $45.25. Restrictions imposed on holders of the
issued common stock as to transfers or sales lapse annually over a three-year
period. Deferred compensation of $1.4 million was recorded as a component of
stockholders' equity for the fair value of the restricted common stock upon
issuance and will be recognized as compensation expense ratably over the
three-year restriction period, assuming that restrictions on all shares lapse.
EUROPEAN MONETARY UNION
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their sovereign currencies and the
euro. As of that date, the participating countries agreed to adopt the euro as
their common legal currency. However, the legacy currencies will also remain
legal tender in the participating countries for a transition period between
January 1, 1999 and January 1, 2002. During this transition period, public and
private parties may elect to pay or charge for goods and services using either
the euro or the participating country's legacy currency.
The Company began conducting certain business transactions in the euro on
January 1, 1999, and will change its functional currencies for the affected
countries to the euro by the end of the three-year transition period. The
conversion to the euro has not had and is not expected to have a significant
operational impact or a material financial impact on the results of operations,
financial position, or liquidity of its European businesses.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133 - an amendment of FASB Statement No. 133." SFAS 137 defers the
implementation of SFAS 133 by one year. SFAS 133, as amended by SFAS 137, is
effective for fiscal quarters beginning after January 1, 2001 for the Company,
and its adoption is not expected to have a material impact on the Company's
financial position or results of operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain views of the staff on applying generally
accepted accounting principles to revenue recognition in financial statements.
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The staff believes that revenue is realized or realizable and earned when all of
the following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered; the seller's price to the
buyer is fixed or determinable; and collectibility is reasonably assured. In
June 2000, Staff Accounting Bulletin No. 101B, "Second Amendment: Revenue
Recognition in Financial Statements," was released. This staff accounting
bulletin delays the implementation of SAB 101 until the fourth quarter of 2000.
The Company does not expect the application of SAB 101 to have a material impact
on the Company's financial position or results of operations.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of previously fixed stock options or awards, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that could affect the Company's future operating
results, including, without limitation, the following:
The Company's core video editing market predominantly uses Avid products.
Therefore, future growth in this market may be limited. Accordingly, the Company
has expanded its product line to address the digital media production needs of
the television broadcast news market, online film and video finishing market and
the emerging market for multimedia production tools, including the Internet
broadcast market and the corporate market. A significant portion of the
Company's future growth will depend on customer acceptance in these and other
new markets. The Company has limited experience in serving these markets, and
there can be no assurance that the Company will be able to develop such products
successfully, that such products will achieve widespread customer acceptance, or
that the Company will be able to develop distribution and support channels to
serve these markets. Any failure of such products to achieve market acceptance,
any additional costs and expenses incurred by the Company to improve market
acceptance of such products and to develop new distribution and support
channels, or the withdrawal from the market of such products or of the Company
from such new markets could have a material adverse effect on the Company's
business and results of operations.
The Company's plans for future growth in the Internet broadcast market depend on
increased use of the Internet for the creation, use, manipulation and
distribution of media content from corporate markets to the highest-end
post-production. Such uses of the Internet are currently at an early stage of
development and the future evolution of the Internet in the media broadcast
market is not clear. Because a significant portion of the Company's business
strategy depends on its Internet initiative, its business may suffer if
commercial use of the Internet fails to grow in the future.
As another component of its Internet initiative, the Company recently launched
the Avid Production Network site (AvidProNet.com) to provide interactive
information and services to new media and post-production professionals. The
Company's plans for the Avid Production Network include content-hosting, remote
reviewing and stock footage availability. Because materials may be posted on,
and/or downloaded and subsequently distributed to others from the Avid
Production Network site, the Company may be subject to claims for defamation,
negligence, copyright or trademark infringement, personal injury, or other
theories based on the nature, content, publication and distribution of such
materials.
As a result of the Internet's popularity and increasing use, new laws and
regulations may be adopted. These laws and regulations may cover issues such as
privacy, distribution and content. The enactment of any additional laws or
regulations may impede the growth of the Internet, and the Company's
Internet-related business, and could place additional financial burdens on the
Company's business.
The Company's gross margin fluctuates based on various factors. Such factors
include the mix of products sold, the cost and the proportion of third-party
hardware included in the systems sold by the Company, the distribution channels
through which products are sold, the timing of new product introductions, the
offering of product and platform upgrades, price discounts and other sales
promotion programs, the volume of sales of aftermarket hardware products, the
costs of swapping or fixing products released to the market with errors or
flaws, provisions for inventory obsolescence, allocations of manufacturing
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overhead costs and customer support costs to cost of goods, sales of third-party
computer hardware to distributors, and competitive pressure on selling prices of
products. The Company's systems and software products typically have higher
gross margins than storage devices and product upgrades. Gross profit varies
from product to product depending primarily on the proportion and cost of
third-party hardware included in each product. The Company, from time to time,
adds functionality and features to its systems. If such additions are
accomplished through the use of more, or more costly, third-party hardware, and
if the Company does not increase the price of such systems to offset these
increased costs, the Company's gross margins on such systems would be adversely
affected.
The Company sells most of its products and services through indirect channels
such as distributors and resellers. Resellers and distributors typically
purchase software and "kits" from the Company and other turnkey components from
other vendor sources in order to produce complete systems for resale. As the
majority of the Company's sales are through the indirect channel model, it has a
significant dependence on its resellers and their third party component
suppliers. Any disruption to its resellers or their suppliers may adversely
affect the Company's revenue and gross margin.
The Company's operating expense levels are based, in part, on its expectations
of future revenues. Further, in many cases, quarterly operating expense levels
cannot be reduced 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, the Company's
operating results may be adversely affected and there can be no assurance that
the Company would be able to operate profitably.
The Company's success depends in large part upon the services of a number of key
employees. The loss of the services of one or more of these key employees could
have a material adverse effect on the Company. The Company's success will also
depend in significant part upon its ability to continue to attract highly
skilled personnel to fill a number of vacancies. On April 26, 2000, the Company
announced that David Krall, who was the Company's President and Chief Operating
Officer, had been appointed President and Chief Executive Officer. The Company
also announced that William L. Flaherty, the Company's Acting Chief Executive
Officer and Chief Financial Officer, had decided to leave the Company. The
Company further announced that Ethan E. Jacks, who was a Vice President and the
Company's General Counsel, had been appointed Senior Vice President, Chief Legal
Officer and Acting Chief Financial Officer as the Company conducts a search for
a Chief Financial Officer.
Certain of the Company's products operate only on specific computer platforms.
The Company currently relies on Apple Computer, Inc., IBM and Intergraph as the
sole manufacturers of such computer platforms. There can be no assurance that
the respective manufacturers will continue to develop, manufacture, and support
such computer platforms suitable for the Company's existing and future markets
or that the Company will be able to secure an adequate supply of computers on
the appropriate platforms, the occurrence of any of which could have a material
adverse effect on the Company's business and results of operations.
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The Company is dependent on a number of suppliers as sole source vendors of
certain key components of its products and systems. Components purchased by the
Company from sole source vendors include video compression chips manufactured by
C-Cube Microsystems; a small computer systems interface ("SCSI") accelerator
board from ATTO Technology; a 3D digital video effects board from Pinnacle
Systems; application specific integrated circuits ("ASICS") from Chip Express
and LSI Logic; digital signal processing integrated circuits from Motorola; a
fibre channel adapter card from JNI; a fibre channel storage array from the
Clariion division of EMC; and a PCI expansion chassis from Magma Inc. The
Company purchases these sole source components pursuant to purchase orders
placed from time to time. The Company also manufactures certain circuit boards
under license from a subsidiary of Pinnacle Systems. The Company generally does
not carry significant inventories of these sole source components and has no
guaranteed supply arrangements. No assurance can be given that sole source
suppliers will devote the resources necessary to support the enhancement or
continued availability of such components or that any such supplier will not
encounter technical, operating or financial difficulties that might imperil the
Company's supply of such sole source components. While the Company believes that
alternative sources of supply for sole source components could be developed, or
systems redesigned to permit the use of alternative components, its business and
results of operations could be materially affected if it were to encounter an
untimely or extended interruption in its sources of supply.
The markets for digital media editing and production systems are intensely
competitive and subject to rapid change. The Company encounters competition in
the video and film editing and effects and professional audio markets. Many
current and potential competitors of the Company have substantially greater
financial, technical, distribution, support, and marketing resources than the
Company. Such competitors may use these resources to lower their product costs
and thus be able to lower prices to levels at which the Company could not
operate profitably. Further, such competitors may be able to develop products
comparable or superior to those of the Company or adapt more quickly than the
Company to new technologies or evolving customer requirements. Accordingly,
there can be no assurance that the Company will be able to compete effectively
in its target markets or that future competition will not adversely affect its
business and results of operations.
A significant portion of the Company's business is conducted in currencies other
than the U.S. dollar. Changes in the value of major foreign currencies relative
to the value of the U.S. dollar, therefore, could adversely affect future
revenues and operating results. The Company attempts to reduce the impact of
currency fluctuations on results through the use of forward exchange contracts
that hedge foreign currency-denominated third-party and intercompany net
receivables or payable balances and cash balances. The Company has generally not
hedged specific transactions with external parties, although it periodically
reevaluates its hedging practices.
The Company is involved in various legal proceedings, including patent
litigation. An adverse resolution of any such proceedings could have a material
adverse effect on the Company's business and results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk
The Company's primary exposures to market risk are the effect of fluctuations in
interest rates earned on its cash equivalents and marketable securities and the
effect of volatility in currencies on asset and liability positions of its
international subsidiaries that are denominated in foreign currencies.
Foreign Exchange Risk
The Company derives greater than 50% of its revenues from customers outside the
United States. This business is, for the most part, transacted through
international subsidiaries and generally in the local currency. This
circumstance exposes the Company to risks associated with changes in foreign
currency that can impact revenues, net income (loss) and cash flow. The Company
enters into foreign exchange forward contracts to hedge the foreign exchange
exposure of certain forecasted receivables and payables of its foreign
subsidiaries. Gains and losses associated with currency rate changes on the
contracts are recorded in results of operations, offsetting losses and gains on
the related assets and liabilities. The success of the hedging program depends
on forecasts of transaction activity in the various currencies. To the extent
that these forecasts are over- or understated during the periods of currency
volatility, the Company could experience unanticipated currency gains or losses.
At June 30, 2000, the Company had $38.0 million of foreign exchange forward
contracts outstanding, denominated in various European, Asian and Canadian
currencies, as a hedge against forecasted foreign denominated receivables and
payables. Net losses of $0.6 million resulting from forward exchange contracts
were included in the results of operations in the second quarter of 2000, which
partially offset net gains on the related asset and liabilities of $0.4 million.
For the six-month period ended June 30, 2000, net losses of $0.2 million
resulting from forward exchange contracts were recorded in addition to net
losses of $0.7 million on the related asset and liabilities. A hypothetical ten
percent change in foreign currency rates would not have a material impact on the
Company's results of operations because the impact on the forward contracts as a
result of a ten percent change would offset the impact on the asset and
liability positions of the Company's foreign subsidiaries.
Interest Rate Risk
At June 30, 2000, the Company held $46.5 million in cash equivalents and
marketable securities, consisting of short-term government obligations, state
and municipal bonds, and commercial paper. Cash equivalents and 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
comprehensive income (loss). A hypothetical ten percent increase in interest
rates would not have a material impact on the fair market value of these
instruments due to their short maturity.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on June 7, 2000. At the
meeting, Charles T. Brumback and Nancy Hawthorne were reelected as Class I
Directors. The vote with respect to each nominee is set forth below:
Total Vote For Total Vote Withheld
Each Director From Each Director
--------------- --------------------
Mr. Brumback 23,488,600 329,184
Ms. Hawthorne 23,489,559 328,225
Additional Directors of the Company whose term of office continued after the
meeting are Peter C. Gotcher, Robert M. Halperin, Roger J. Heinen, Jr., and
William J. Warner.
The stockholders also approved an amendment of the Company's 1996 Employee Stock
Purchase Plan to increase by 500,000 shares to 1,200,000 shares of common stock,
the number of shares authorized for issuance under this Plan, by a vote of
20,543,332 shares for, 3,235,169 shares against, 39,233 shares abstaining, with
50 broker non-votes.
The stockholders also approved an amendment of the Company's 1993 Director Stock
Option Plan to increase by 250,000 shares to 470,000 shares of common stock, the
number of shares authorized for issuance under this Plan, by a vote of
17,333,992 shares for, 6,444,244 shares against, 39,498 shares abstaining, with
50 broker non-votes.
The stockholders also approved an amendment of the Company's 1997 Stock
Incentive Plan to increase by 500,000 shares to 2,500,000 shares of common
stock, the number of shares authorized for issuance under this Plan, by a vote
of 16,693,045 shares for, 7,089,291 shares against, 35,398 shares abstaining,
with 50 broker non-votes.
In addition, the stockholders ratified the selection of PricewaterhouseCoopers
LLP as the Company's independent auditors by a vote of 23,752,075 shares for,
40,781 shares against, 24,878 shares abstaining, with 50 broker non-votes.
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ITEM 5. OTHER INFORMATION
Any proposal that a stockholder wishes the Company to consider for inclusion in
the Company's proxy statement and form of proxy card for the Company's 2001
Annual Meeting of Stockholders (the "2001 Meeting") must be submitted to the
Secretary of the Company at its offices, Avid Technology Park, One Park West,
Tewksbury, Massachusetts 01876, no later than December 4, 2000.
In addition, the Company's By-laws require all stockholder proposals to be
timely submitted in advance to the Company at the above address (other than
proposals submitted for inclusion in the Company's proxy statement and form of
proxy card as described above). To be timely, the notice must be received by the
Company no later than March 24, 2001 or 60 days before the date of the 2001
Meeting, whichever is later. The Company has not yet set a date for the 2001
Meeting. However, if the 2001 Meeting is held on June 7, 2001 (the anniversary
of the 2000 Annual Meeting of Stockholders), the deadline for delivery of the
notice would be April 8, 2001.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. For the fiscal quarter ended June 30, 2000, the
Company filed no Current Reports on Form 8-K.
24
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Avid Technology, Inc.
Date: August 14, 2000 By: /s/ Ethan E. Jacks
---------------------
Ethan E. Jacks
Senior Vice President, Chief Legal Officer
and Acting Chief Financial Officer
Date: August 14, 2000 By: /s/ Carol L. Reid
---------------------
Carol L. Reid
Vice President and Corporate Controller
(Principal Accounting Officer)
25
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EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule
26
