AVID TECHNOLOGY, INC.
Avid Technology Park
One Park West
Tewksbury, MA 01876
November 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 September
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 SEPTEMBER 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 November
10, 2000 was 25,391,195.
<PAGE>
AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 nine-month periods ended
September 30, 2000 and 1999 ..........................................1
b) Condensed Consolidated Balance Sheets as of
September 30, 2000 (unaudited) and December 31, 1999..................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 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..............................12
ITEM 3. Quantitative and Qualitative Disclosures About Market Ris0.......21
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................................23
Signatures.................................................................24
EXHIBIT INDEX..............................................................25
<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 Nine Months Ended
September 30, September 30,
----------------------- ------------------------
2000 1999 2000 1999
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues $121,292 $113,279 $349,946 $340,915
Cost of revenues 60,303 55,310 171,495 150,006
----------- ----------- ----------- -----------
Gross profit 60,989 57,969 178,451 190,909
----------- ----------- ----------- -----------
Operating expenses:
Research and development 20,890 20,623 61,160 67,516
Marketing and selling 29,989 33,564 89,909 99,651
General and administrative 6,070 6,598 21,083 20,609
Amortization of acquisition-related
intangible assets 14,862 19,789 54,454 60,087
----------- ----------- ----------- -----------
Total operating expenses 71,811 80,574 226,606 247,863
----------- ----------- ----------- -----------
Operating loss (10,822) (22,605) (48,155) (56,954)
Interest and other income, net 849 739 3,126 2,602
----------- ----------- ----------- -----------
Loss before income taxes (9,973) (21,866) (45,029) (54,352)
Provision for (benefit from)income taxes 1,250 (8,746) 3,750 (21,741)
----------- ----------- ----------- -----------
Net loss ($11,223) ($13,120) ($48,779) ($32,611)
=========== =========== =========== ===========
Net loss per common share - basic
and diluted ($0.45) ($0.56) ($1.99) ($1.36)
=========== =========== =========== ===========
Weighted average common shares
outstanding - basic and diluted 24,794 23,614 24,480 23,981
=========== =========== =========== ===========
</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>
September 30, December 31,
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $55,822 $46,072
Marketable securities 18,352 26,733
Accounts receivable, net of allowances of $9,981
and $8,954 at September 30, 2000 and December 31,
1999, respectively 84,460 76,172
Inventories 21,601 14,969
Deferred tax assets 1,915 2,114
Prepaid expenses 6,060 5,584
Other current assets 3,575 4,795
------------- -------------
Total current assets 191,785 176,439
Property and equipment, net 28,106 32,748
Acquisition-related intangible assets 42,715 95,073
Other assets 4,565 7,764
------------- -------------
Total assets $267,171 $312,024
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $28,252 $23,998
Accrued compensation and benefits 19,816 16,955
Accrued expenses 23,870 36,022
Income taxes payable 8,988 5,073
Other current liabilities 155 3,789
Deferred revenues 24,642 20,258
------------- -------------
Total current liabilities 105,723 106,095
Long-term debt, less current portion 14,066 14,220
Purchase consideration 6,457 23,786
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock
Common stock 265 266
Additional paid-in capital 359,670 366,569
Accumulated deficit (190,213) (128,083)
Treasury stock (21,561) (66,489)
Deferred compensation (4,230) (1,853)
Accumulated other comprehensive loss (3,006) (2,487)
------------- -------------
Total stockholders' equity 140,925 167,923
------------- -------------
Total liabilities and stockholders' equity $267,171 $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>
Nine Months Ended September 30,
-------------------------------
2000 1999
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($48,779) ($32,611)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 67,670 75,096
Provision for doubtful accounts 5,312 2,293
Compensation from stock grants and options 1,539 1,063
Changes in deferred tax assets (22,120)
Loss on disposal of equipment 56
Equity in income of non-consolidated companies (1,124)
Changes in operating assets and liabilities, net of acquitistions:
Accounts receivable (18,230) 9,332
Inventories (6,113) (1,709)
Prepaid expenses and other current assets 3,494 (937)
Accounts payable 4,426 3,533
Income taxes payable 4,179 (1,467)
Accrued expenses, compensation and benefits (9,344) (17,101)
Deferred revenues 1,004 (20)
-----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,034 15,408
-----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment and other assets (5,783) (19,190)
Proceeds from disposal of assets 1,324
Investments in non-consolidated companies (2,100) (1,500)
Payments for acquisitions, net of cash acquired (1,990)
Payments on note issued in connection with acquisition (8,000)
Purchases of marketable securities (23,840) (33,989)
Proceeds from sales of marketable securities 34,325 57,367
-----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 612 (3,988)
-----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (656)
Purchase of common stock for treasury (421) (19,742)
Proceeds from issuance of common stock 6,694 4,463
-----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 6,273 (15,935)
-----------------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents (1,169) (811)
-----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 9,750 (5,326)
Cash and cash equivalents at beginning of period 46,072 62,904
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $55,822 $57,578
-----------------------------------------------------------------------------------------------------
</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 excludes the effect of options and warrants to
purchase 6,080,430 and 6,354,606 weighted shares of common stock outstanding for
the three- and nine-month periods ended September 30, 2000, respectively.
Diluted net loss per share excludes the effect of options and warrants to
purchase 7,380,493 and 6,987,178 weighted shares of common stock outstanding for
the three- and nine-month periods ended September 30, 1999, respectively.
Inclusion of these options and warrants would be anti-dilutive for each of these
periods.
3. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- ---------------
<S> <C> <C>
Raw materials $14,687 $9,896
Work in process 1,990 1,946
Finished goods 4,924 3,127
-------------- ---------------
$21,601 $14,969
============== ===============
</TABLE>
4
<PAGE>
4. INVESTMENT IN JOINT VENTURE
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 of the
joint venture recorded by the Company during the three-month periods ended
September 30, 2000 and 1999 was approximately $0.2 million and $0.3 million,
respectively. The pro rata share of earnings of the joint venture recorded by
the Company during the nine-month periods ended September 30, 2000 and 1999 was
approximately $1.0 million and $0, respectively. In September 2000, Avstar
changed its name to iNEWS LLC.
5. ACQUISITIONS
During the second and third quarters of 2000, the Company acquired selected
assets and liabilities of two companies, The Motion Factory, Inc. ("TMF") and
Pluto Technologies International, Inc. ("Pluto"), respectively, for cash
payments totaling approximately $2.0 million and guaranteed bonus payments of
$0.3 million. TMF specializes in applications for the creation, delivery and
playback of interactive-rich 3-D media for character-driven games and the web.
Pluto is a provider of video storage and networking solutions for broadcast
news, post-production and other bandwith-intensive markets. The acquisitions
were accounted for using the purchase method of accounting. Accordingly, the
fair market values of the acquired assets and assumed liabilities have been
included in the Company's financial statements as of the acquisition dates, and
the results of operations of TMF and Pluto have been included in the Company's
financial statements thereafter. The purchase prices, aggregating $2.3 million,
were allocated to net tangible assets of $0.1 million, completed technologies of
$1.2 million and acquired workforce of $1.0 million. As part of the purchase
agreements, the Company may be required to make certain contingent cash
payments, limited in the aggregate up to an additional $13.5 million, dependent
upon future revenues and/or gross margin levels of products acquired from TMF
and Pluto through December 2004. Any 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 intangible asset or goodwill. The Company's pro forma statements of
operations prior to the acquisitions would not differ materially from reported
results.
Based on the acquisition dates, amortization of the acquisition-related
intangibles began in July 2000, and accordingly, the Company recognized $0.1
million of amortization during the three months ended September 30, 2000. The
unamortized balance of acquisition-related intangible assets of approximately
$2.0 million at September 30, 2000 will be amortized through 2004.
5
<PAGE>
6. 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 (as described
below), 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 September 30, 2000, the Note has
been increased by approximately $15.5 million for forfeited Avid stock options.
During the nine-month period ended September 30, 1999, the Company made a
principal payment of $8.0 million resulting in a note balance of approximately
$12.5 million at September 30, 2000. The Company made interest payments of $0.3
million and $0.1 million during the three-month periods ended September 30, 2000
and 1999, respectively. The Company made interest payments of $0.8 million and
$0.5 million during the nine-month periods ended September 30, 2000 and 1999,
respectively.
7. 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
6
<PAGE>
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.
8. COMPREHENSIVE LOSS
Total comprehensive loss, net of taxes, was approximately $15.2 million and
$11.4 million for the three-month periods ended September 30, 2000 and 1999,
respectively, and $49.3 million and $32.4 million for the nine-month periods
ended September 30, 2000 and 1999, respectively, which consisted of net losses,
the net changes in foreign currency translation adjustment and the net
unrealized gains and losses on available-for-sale securities.
9. SEGMENT INFORMATION
The Company's organizational structure is based on strategic business units that
offer various products to the principle markets in which the Company's products
are sold. These business units equate to two reportable segments: Video and Film
Editing and Effects, and Professional Audio. The following is a summary of the
Company's operations by operating segment (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Video and Film Editing and Effects:
Net revenues $92,613 $92,250 $256,450 $272,131
========== ========== ========== ==========
Operating income (loss) $1,516 ($7,158) ($13,676) ($12,529)
========== ========== ========== ==========
Professional Audio:
Net revenues $28,679 $21,029 $93,497 $68,784
========== ========== ========== ==========
Operating income $2,524 $4,342 $19,975 $15,662
========== ========== ========== ==========
Segment Totals:
Net revenues $121,292 $113,279 $349,946 $340,915
========== ========== ========== ==========
Operating income (loss) $4,040 ($2,816) $6,299 $3,133
========== ========== ========== ==========
</TABLE>
7
<PAGE>
The following table reconciles total segment operating income to total
consolidated operating loss (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Month Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Total operating income (loss) for reportable
segments $4,040 ($2,816) $6,299 $3,133
Unallocated amounts:
Amortization of acquisition-related
intangible assets (14,862) (19,789) (54,454) (60,087)
--------- --------- --------- ---------
Consolidated operating loss ($10,822) ($22,605) ($48,155) ($56,954)
========= ========= ========= =========
</TABLE>
The unallocated amounts represent the amortization of acquired intangible
assets, including goodwill, associated primarily with the Company's acquisition
of Softimage.
10. 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 nine-month period ended September
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
Cash payments (638) (116) (754)
Non-cash disposals (168) (168)
---------- ---------- ---------- ----------
Accrual balance at September 30, 2000 $722 $1,376 $15 $2,113
========== ========== ========== ==========
</TABLE>
The Company expects that the majority of the remaining $2.1 million accrual
balance will be expended over the next nine months and will be funded from
working capital.
8
<PAGE>
11. 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.
<TABLE>
<CAPTION>
In thousands, except per share data: Quarters Ended
------------------------------
Sept. 30, June 30, Mar. 31,
------------------------------
2000
------------------------------
<S> <C> <C> <C>
Net revenues $121,292 $119,959 $108,696
Cost of revenues 60,303 57,934 53,258
------------------------------
Gross profit 60,989 62,025 55,438
------------------------------
Operating expenses:
Research & development 20,890 20,825 19,445
Marketing & selling 29,989 31,382 28,539
General & administrative 6,070 8,101 6,912
Amortization of acquisition-related
intangible assets 14,862 19,792 19,800
------------------------------
Total operating expenses 71,811 80,100 74,696
------------------------------
Operating loss (10,822) (18,075) (19,258)
Other income, net 849 1,233 1,044
------------------------------
Loss before income taxes (9,973) (16,842) (18,214)
Provision for (benefit from) income taxes 1,250 1,250 1,250
------------------------------
Net loss (11,223) (18,092) (19,464)
==============================
Net loss per share - basic and diluted ($0.45) ($0.74) ($0.81)
==============================
Weighted average common
shares outstanding - basic and diluted 24,794 24,578 24,065
==============================
</TABLE>
The following table presents a calculation of tax-effected income and diluted
per share amounts excluding amortization of acquisition-related intangible
assets.
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------
(in thousands, except per share data) Sept. 30, June 30, Mar. 31,
-------------------------------
2000
-------------------------------
<S> <C> <C> <C>
Net loss ($11,223) ($18,092) ($19,464)
Adjustments:
Amortization of acquisition-related intangible assets 14,862 19,792 19,800
-------------------------------
Tax-effected income loss excluding amortization of
acquisition-related intangible assets $3,639 $1,700 $336
===============================
Tax-effected income per diluted share excluding
amortization of acquisition-related intangible assets $0.14 $0.07 $0.01
===============================
Weighted average common shares outstanding - diluted,
used for calculation 26,177 25,652 25,850
===============================
</TABLE>
9
<PAGE>
12. 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. Approximately 118,000
shares of restricted stock were issued in exchange for the cancellation of
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 and ratably 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 is being recognized as compensation expense ratably over the
three-year restriction period, assuming that restrictions on all shares lapse.
During the three months ended September 30, 2000, the Company recognized $0.1
million of compensation expense related to the lapsing of the restrictions.
13. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000 and 1999, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Nos. 138 and 137 ("SFAS 138" and "SFAS 137"),
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an Amendment of FASB Statement No. 133." SFAS 138 clarifies certain provisions
of SFAS 133, and SFAS 137 defers the implementation of SFAS 133 by one year.
SFAS 133, as amended by SFAS 137 and SFAS 138, 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 September 2000, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 140 ("SFAS 140"), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
Replacement of FASB Statement No. 125." SFAS 140 revises the standards of
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, and reiterates many of SFAS 125's
provisions. SFAS 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001. SFAS
140 is effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. The Company does not expect the
application of SFAS 140 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.
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, as amended, to have a
material impact on the Company's financial position or results of operations.
10
<PAGE>
In October 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-10,
"Accounting for Shipping and Handling Fees and Costs." EITF 00-10 requires
shipping and handling costs associated with amounts billed to customers to be
included in revenues and cost of revenues and not offset against each other.
EITF 00-10 is effective for the fourth quarter of 2000. The Company does not
expect the application of EITF 00-10 to have a material impact on the Company's
financial position or results of operations.
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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 an 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 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 Oscar, Emmy, and Grammy awards and a host of
other international awards.
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 $8.0 million (7.0%) to $121.3 million in the quarter ended September
30, 2000 from $113.3 million for the same quarter in 1999. Net revenues
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increased by $9.0 million (2.6%) to $349.9 million for the nine months ended
September 30, 2000, from $340.9 million for the nine months ended September 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, the Trilligent Cluster, which began shipping in
April 2000, and Avid Xpress DV, which began shipping in March 2000. Also
contributing to the increase in revenue for the quarter ended September 30, 2000
were greater sales of Macintosh-and Windows NT-based Media Composer upgrades,
Macintosh-based Xpress systems, Newscutter systems and Digidesign audio products
other than Digi 001, partially offset by lower sales of Macintosh-and Windows
NT-based Media Composer systems, Windows NT-based Xpress, DS, local storage
products and service revenue. For the nine months ended September 30, 2000
greater sales of Macintosh-and Windows NT-based Media Composer upgrades, Windows
NT-based Xpress, DS, Newscutter and Digidesign audio products other than Digi
001 were partially offset by lower sales of Media Composer systems, Symphony
systems, local storage products and service revenue. The Company currently
expects revenue for the full year 2000 to exhibit modest growth as compared to
the full year 1999.
During the third quarter of 2000, the Company began shipments of Avid Unity for
News, Avid Symphony 3.0 and Media Composer 10.0.
Net revenues derived through indirect channels were approximately 85% of net
revenue for the three months ended September 30, 2000, compared to approximately
91% of net revenue for the same period in 1999. Indirect channel revenues were
approximately 86% of net revenue for the nine months ended September 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 revenue compared
to total revenue.
International sales (sales to customers outside the U.S. and Canada) accounted
for approximately 50% and 47% of the Company's third quarter 2000 and 1999 net
revenues, respectively. International sales increased by approximately $7.0
million or 13.1% in the third quarter of 2000 compared to the same period in
1999. International sales accounted for approximately 52% and 51% of the
Company's net revenues for the first nine months of 2000 and 1999, respectively.
International sales increased by $9.4 million or 5.5% in the nine months ended
September 30, 2000 from the same period in 1999. The increase in international
sales reflected increases in both the Asia and Europe regions.
Gross Profit
Cost of revenues consists primarily of costs associated with the acquisition 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
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 50.3% in the third
quarter of 2000 compared to 51.2% in the third quarter of 1999 and decreased to
51.0% for the nine months ended September 30, 2000 from 56.0% for the same
period in 1999. These decreases were primarily related to a product mix shift to
lower-end offerings, and the impact of a strong US dollar, both of which were
partially offset by material cost savings.
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Research and Development
Research and development expenses increased by $0.3 million (1.3%) in the third
quarter of 2000 compared to the same period in 1999. These increased
expenditures were primarily due to profit sharing expense, decreased funding by
third party partners for certain development projects and costs of employee
retention programs, largely offset by decreased salary and related expenses due
to a reduction in personnel. For the nine months ended September 30, 2000,
research and development expenses decreased by $6.4 million (9.4%) 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 increased profit sharing expense and planned
investments in the Company's strategic initiatives, including products designed
to address the Company's Internet strategy. Research and development expenses
decreased to 17.2% of net revenues in the third quarter of 2000 compared to
18.2% in the same quarter of 1999 and decreased to 17.5% for the nine months
ended September 30, 2000 from 19.8% for the nine months ended September 30,
1999. For the third quarter of 2000, this decrease was due to growth in research
and development expenses occuring at a lower rate than revenue growth. For the
nine-month period ended September 30, 2000, these decreases were primarily due
to the decreases in research and development expenses noted above.
Marketing and Selling
Marketing and selling expenses decreased approximately $3.6 million (10.7%) in
the third quarter of 2000 compared to the same period in 1999 and decreased $9.7
million (9.8%) for the nine months ended September 30, 2000 compared to the same
period in 1999. These decreased expenditures in selling and marketing were
primarily due to reduced program-related expenses in the Company's video and
film editing and effects business, partially offset by increases in the
provision for bad debts and profit sharing expense. Marketing and selling
expenses decreased to 24.7% of net revenues in the third quarter of 2000
compared to 29.6% in the same quarter of 1999 and decreased to 25.7% from 29.2%
for the nine months ended September 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 decreased $0.5 million (8.0%) in the third
quarter of 2000 compared to the same period in 1999 and increased $0.5 million
(2.3%) for the nine months ended September 30, 2000 compared to the same period
in 1999. The decreased expenditures in general and administrative expenses for
the third quarter were primarily due to planned reductions in personnel-related
expenditures. The increase for the nine-month period was primarily due to
executive severance benefits, profit sharing expense and retention programs,
partially offset by planned reductions in personnel-related expenditures and
consulting expenses. General and administrative expenses decreased to 5.0% of
net revenues in the third quarter of 2000 compared to 5.8% in the same quarter
of 1999 and remained unchanged at 6.0% for both of the nine-month periods ended
September 30, 2000 and 1999, respectively. These changes were primarily due to
the changes in expenses noted above.
Amortization of Acquisition-Related Intangible Assets
In connection with the August 1998 acquisition of the business of Softimage, the
Company allocated $88.2 million of the total purchase price of $247.9 million to
intangible assets consisting of completed technologies, work force and trade
name, and $127.8 million to goodwill. During the second and third quarters of
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2000, the Company acquired the assets of two companies, The Motion Factory, Inc.
and Pluto Technologies International, Inc., for cash payments aggregating
approximately $2.0 million, plus a commitment to make guaranteed bonus payments
of $0.3 million in 2001. The Company allocated approximately $2.2 million of the
total purchase price to intangible assets consisting of completed technologies
and workforce. Results for the quarter ended September 30, 2000 and September
30, 1999 reflect amortization of $14.9 million and $19.8 million, respectively,
associated with these acquisition-related intangible assets. Results for the
nine months ended September 30, 2000 and September 30, 1999 reflect amortization
of $54.5 million and $60.1 million, respectively, associated with these
acquisition-related intangible assets. The unamortized balance of the intangible
assets relating to these acquisitions, including goodwill, was $42.7 million at
September 30, 2000. Approximately $12.4 million additional amortization is
expected during the fourth quarter of 2000. An additional $28.9 million is
expected to be amortized through July 2001, with the remaining $1.4 million to
be amortized through December 2004.
Interest and Other Income, Net
Interest and other income, net consists primarily of interest income, equity in
income of non-consolidated companies and interest expense. Interest and other
income, net for the three months ended September 30, 2000 increased $0.1 million
as compared to the same period in 1999. For the nine months ended September 30,
2000, interest and other income, net increased $0.5 million as compared to the
same period in 1999. For the third quarter, the increase was primarily due to a
higher rate of return on the Company's cash and investment balances. The
increase for the nine months ended September 30, 2000 as compared to the same
period in 1999 was primarily related to the recognition of the Company's share
of equity income in Avstar (now iNEWS LLC), partially offset by less interest
income due to lower average cash and investment balances.
Provision for Income Taxes
The Company recorded a tax provision of $1.3 million for each of the three
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 $8.7
million and $21.7 million for the three- and nine-month periods ended September
30, 1999, respectively, both of which represented an effective tax rate of 40%.
This rate was different 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
September 30, 2000, the Company's principal sources of liquidity included cash,
cash equivalents and marketable securities totaling approximately $74.2 million.
With respect to cash flows, net cash provided by operating activities was $4.0
million for the nine months ended September 30, 2000 compared to $15.4 million
provided by operating activities in the same period in 1999. During the nine
months ended September 30, 2000, net cash provided by operating activities
primarily reflects the net loss adjusted for depreciation and amortization and
provisions for doubtful accounts, offset by increases in accounts receivable and
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inventories and decreases in accrued expenses, compensation and benefits. During
the nine months ended September 30, 1999, net cash provided by operating
activities consisted primarily of the net loss adjusted for depreciation and
amortization, increases in long-term deferred tax assets, collections of
accounts receivable and a decrease in accrued expenses, compensation and
benefits.
The Company purchased $5.5 million of property and equipment and other assets
during the nine months ended September 30, 2000, compared to $19.2 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 nine months ended September 30, 2000, the
Company also made a cash investment of $2.1 million in Rocket Network, Inc., and
purchased the assets of two companies, The Motion Factory, Inc. and Pluto
Technologies International, Inc., for a total of approximately $2.0 million in
cash and $0.3 million in guaranteed bonus payments to be made in 2001. In the
nine-month period ended September 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 $12.5 million is due and payable in June 2003.
Additionally, in 1999, the Company made a cash investment of $1.5 million in a
joint venture with Tektronix, Inc.
In connection with the acquisitions of The Motion Factory, Inc. and Pluto
Technologies International, Inc., the Company may be required to make certain
contingent cash payments, limited in the aggregate to an additional $13.5
million, dependent upon future revenues and/or gross margin levels of products
acquired from these companies through December 2004.
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. As expected, these savings were partially
offset by incremental costs associated with new strategic initiatives intended
for the growth of the Company. During 1999 and the first three quarters of 2000,
the Company made cash payments of $2.5 million and $4.5 million, respectively,
related to these restructuring activities. The majority of the remaining accrual
balance of $2.1 million at September 30, 2000 is expected to be paid out during
the remainder of 2000 and the first half of 2001 and will be funded from working
capital.
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. As of September 30, 2000, there were approximately 263,000 shares
remaining authorized for repurchase.
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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.
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 effected
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 the Company's European businesses.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000 and 1999, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Nos. 138 and 137 ("SFAS 138" and "SFAS 137"),
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of FASB Statement No. 133." SFAS 138 clarifies certain provisions
of SFAS 133, and SFAS 137 defers the implementation of SFAS 133 by one year.
SFAS 133, as amended by SFAS 137 and SFAS 138, remains 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 September 2000, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 140 ("SFAS 140"), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement of FASB Statement No. 125." SFAS 140 revises the standards of
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, and reiterates many of SFAS 125's
provisions. SFAS 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001. SFAS
140 is effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. The Company does not expect the
application of SFAS 140 to have a material impact on the Company's financial
position or results of operations.
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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, as amended, to have a
material impact on the Company's financial position or results of operations.
In October 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-10,
"Accounting for Shipping and Handling Fees and Costs." EITF 00-10 requires
shipping and handling costs associated with amounts billed to customers to be
included in revenues and cost of revenues and offset against each other. EITF
00-10 is effective for the fourth quarter of 2000. The Company does not expected
the application of EITF 00-10 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 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. There can be no assurance that the Company will be successful
in its search for a new Chief Financial Officer or in attracting and/or
retaining key employees generally.
Certain of the Company's products operate only on specific computer platforms.
The Company currently relies on Apple Computer, Inc., IBM and Silicon Graphics
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.
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
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk
The Company's primary exposures to market risk are the effect of volatility in
currencies on asset and liability positions of its international subsidiaries
that are denominated in foreign currencies and the effect of fluctuations in
interest rates earned on its cash equivalents and marketable securities.
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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 currency of the end user
customers. This circumstance exposes the Company to risks associated with
changes in foreign currency that can impact revenues, net income (loss) and cash
flow. The Company enters into foreign 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 September 30, 2000, the Company had $33.5 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 gains of $0.8 million resulting from forward exchange contracts
were included in the results of operations in the third quarter of 2000, which
partially offset net losses on the related assets and liabilities of $1.1
million. Net gains of $0.7 million resulting from forward exchange contracts
were included in the results of operations for the nine-month period ended
September 30, 2000, which partially offset net losses on the related assets and
liabilities of $1.8 million. A hypothetical 10% change in foreign currency rates
would not have a material impact on the Company's results of operations,
assuming the above-mentioned forecast of foreign currency exposure is accurate,
because the impact on the forward contracts as a result of a 10% change would
offset the impact on the asset and liability positions of the Company's foreign
subsidiaries.
Interest Rate Risk
At September 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 10% increase in interest rates would
not have a material impact on the fair market value of these instruments due to
their short maturity.
22
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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 September 30, 2000,
the Company filed no current reports on Form 8-K.
23
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Avid Technology, Inc.
Date: November 14, 2000 By: /s/ Ethan E. Jack
-------------------
Ethan E. Jacks
Senior Vice President, Chief Legal Officer
and Acting Chief Financial Officer
Date: November 14, 2000 By: /s/ Carol L. Reid
-------------------
Carol L. Reid
Vice President and Corporate Controller
(Principal Accounting Officer)
24
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EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule
25
