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 MARCH 31, 2004
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Commission File Number 0-21174
AVID TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2977748 04-2977748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AVID TECHNOLOGY PARK
ONE PARK WEST
TEWKSBURY, MA 01876
(Address of principal executive offices)
Registrant's telephone number, including area code: (978) 640-6789
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No _____
The number of shares outstanding of the registrant's Common Stock as of April
29, 2004 was 31,606,942.
AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
a) Condensed Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 2004 and 2003..................1
b) Condensed Consolidated Balance Sheets as of
March 31, 2004 (unaudited)and December 31, 2003.....................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2004 and 2003..................3
d) Notes to Condensed Consolidated Financial Statements (unaudited)....4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................11
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk.........23
ITEM 4. Controls and Procedures...........................................24
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................25
ITEM 6. Exhibits and Reports on Form 8-K..................................25
SIGNATURES.................................................................26
EXHIBIT INDEX..............................................................27
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
---------------------------
2004 2003
------------ ------------
Net revenues $127,374 $112,177
Cost of revenues 54,103 52,227
------------ ------------
Gross profit 73,271 59,950
------------ ------------
Operating expenses:
Research and development 22,292 21,699
Marketing and selling 29,854 25,264
General and administrative 5,886 5,345
Restructuring and other costs, net - 1,783
Amortization of intangible assets 439 293
------------ ------------
Total operating expenses 58,471 54,384
------------ ------------
Operating income 14,800 5,566
Other income (expense), net (560) 231
------------ ------------
Income before income taxes 14,240 5,797
Provision for (benefit from) income taxes (500) 300
------------ ------------
Net income $14,740 $5,497
============ ============
Net income per common share - basic $0.47 $0.20
============ ============
Net income per common share - diluted $0.44 $0.18
============ ============
Weighted average common shares outstanding - basic 31,202 27,604
============ ============
Weighted average common shares outstanding - diluted 33,740 29,860
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2004 2003
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $80,060 $102,649
Marketable securities 89,964 93,660
Accounts receivable, net of allowances of
$8,714 and $9,161 at March 31, 2004 and
December 31, 2003, respectively 74,892 69,230
Inventories 35,818 38,292
Current deferred tax assets, net 1,065 1,032
Prepaid expenses 6,776 5,117
Other current assets 6,066 7,032
------------- -------------
Total current assets 294,641 317,012
Property and equipment, net 25,159 23,223
Intangible assets, net 8,581 1,815
Goodwill 42,147 3,335
Long-term deferred tax assets, net 2,557 -
Other assets 3,045 2,734
------------- -------------
Total assets $376,130 $348,119
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $19,843 $15,755
Accrued compensation and benefits 15,787 23,753
Accrued expenses and other current liabilities 27,585 27,452
Income taxes payable 8,564 8,504
Deferred revenues 57,871 44,943
------------- -------------
Total current liabilities 129,650 120,407
Long-term debt and other liabilities 470 607
------------- -------------
Total liabilities 130,120 121,014
------------- -------------
Contingencies (Note 6)
Stockholders' equity:
Common stock 314 311
Additional paid-in capital 424,653 419,981
Accumulated deficit (179,735) (194,476)
Deferred compensation (17) (30)
Accumulated other comprehensive income 795 1,319
------------- -------------
Total stockholders' equity 246,010 227,105
------------- -------------
Total liabilities and stockholders' equity $376,130 $348,119
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
2
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31,
-----------------------------
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $14,740 $5,497
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,277 3,086
Provision for doubtful accounts (130) 194
Compensation expense from stock grants and options 13 87
Equity in (income) loss of non-consolidated company (18) 16
Changes in operating assets and liabilities:
Accounts receivable (5,083) (2,406)
Inventories 2,369 3,152
Prepaid expenses and other current assets (1,547) (2,848)
Accounts payable 3,700 (6,715)
Income taxes payable 31 (61)
Accrued expenses, compensation and benefits (8,178) 86
Deferred revenues and deposits 8,473 11,347
- -----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,647 11,435
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,417) (1,874)
Payments for other long-term assets (10) (147)
Payments for business acquisitions, net of cash acquired (43,899) (7)
Purchases of marketable securities (8,966) (6,254)
Proceeds from sales of marketable securities 12,505 2,862
- -----------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (44,787) (5,420)
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (161) (151)
Proceeds from issuance of common stock under employee stock plans 4,675 6,821
- -----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,514 6,670
- -----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 37 (22)
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (22,589) 12,663
Cash and cash equivalents at beginning of period 102,649 62,174
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $80,060 $74,837
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
PART I. FINANCIAL INFORMATION
ITEM 1D. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL INFORMATION
The accompanying condensed consolidated financial statements include the
accounts of Avid Technology, Inc. and its wholly owned subsidiaries
(collectively, "Avid" or the "Company"). These financial statements are
unaudited. However, in the opinion of management, the condensed consolidated
financial statements include all adjustments, consisting of only normal,
recurring adjustments, necessary for their fair presentation. Interim results
are not necessarily indicative of results expected for a full year. The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and therefore do not
include all information and footnotes necessary for a complete presentation of
operations, financial position, and cash flows of the Company, in conformity
with generally accepted accounting principles. The Company filed audited
consolidated financial statements for the year ended December 31, 2003 in its
2003 Annual Report on Form 10-K, which included all information and footnotes
necessary for such presentation; the financial statements contained in this Form
10-Q should be read in conjunction with the audited consolidated financial
statements in the Form 10-K.
The Company's preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reported periods. The most significant estimates reflected
in these financial statements include accounts receivable and sales allowances,
inventory valuation and income tax asset valuation allowances. Actual results
could differ from those estimates.
2. NET INCOME PER COMMON SHARE
Basic and diluted net income per share were as follows (in thousands, except per
share data):
Three Months Ended
March 31,
-----------------------
2004 2003
----------- ----------
Net income $14,740 $5,497
=========== ==========
Weighted average common shares outstanding - basic 31,202 27,604
Weighted average potential common stock 2,538 2,256
----------- ----------
Weighted average common shares outstanding - diluted 33,740 29,860
=========== ==========
Net income per common share - basic $0.47 $0.20
Net income per common share - diluted $0.44 $0.18
Common stock options and warrants that were
considered anti-dilutive securities and
excluded from the diluted net income per share
calculations were as follows, on a
weighted-average basis: 1,312 2,832
For the three months ended March 31, 2004 and 2003, certain stock options and
warrants have been excluded from the diluted net income per share calculation,
as their effect would be anti-dilutive. For periods that the Company reports a
net loss, all potential common stock is considered anti-dilutive; for periods
when the Company reports net income, only potential common shares with purchase
prices in excess of the Company's average common stock fair value for the
related period are considered anti-dilutive.
4
3. ACQUISITION - NXN SOFTWARE AG
In January 2004, Avid acquired NXN Software AG ("NXN"), a company based in
Munich, Germany which is a leading provider of asset and production management
systems specifically targeted for the entertainment and computer graphics
industries, for cash of (euro)35 million ($43.7 million). The Company also
incurred about $1.3 million of transaction costs. The acquisition expands Avid's
offering in digital asset management by enabling the Company's film and video
postproduction, broadcast, audio and 3D animation customers to leverage the
workflow capabilities of the NXN Alienbrain(R) product line. NXN will be
reported within our Video and Film Editing and Effects ("Video") segment. The
goodwill resulting from the purchase price allocation reflects the synergies the
Company hopes to realize by integrating the NXN technology with its other
products. The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition (in thousands):
Current assets $2,049
Equipment and other long-term assets 584
Identifiable intangible assets 7,200
Deferred tax assets, net 2,480
Goodwill 38,813
---------
Total assets acquired 51,126
Current liabilities assumed (6,169)
Transaction costs incurred (1,294)
---------
Net assets acquired $43,663
=========
The identifiable intangible assets include completed technology valued at $4.3
million, customer relationships valued at $2.1 million, and a trade name valued
at $0.8 million, most of which are being amortized over a six-year period.
Accumulated amortization of these intangibles was $0.2 million at March 31,
2004. Amortization of these intangibles for the full year is expected to be $1.2
million. The $38.8 million of goodwill was assigned to the Video segment and, in
accordance with the requirements of Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets", will not be amortized.
This goodwill is not deductible for tax purposes.
Pro Forma Financial Information for Acquisition (Unaudited)
The following unaudited pro forma financial information presents the results of
operations for the quarters ended March 31, 2004 and 2003 as if the acquisition
of NXN in January 2004 occurred at the beginning of 2003. The pro forma
financial information has been prepared for comparative purposes only and is not
indicative of what actual results would have been if the acquisition had taken
place at the beginning of fiscal 2003, or of future results.
Three Months Ended March 31,
------------------------------
2004 2003
------------- -------------
(In thousands, except per share data)
Net revenues $127,844 $113,983
Net income $14,704 $4,939
Net income per share:
Basic $0.47 $0.18
Diluted $0.44 $0.17
5
4. INVENTORIES
Inventories consisted of the following (in thousands):
March 31, December 31,
2004 2003
------------ ------------
Raw materials $11,803 $12,086
Work in process 690 1,475
Finished goods 23,325 24,731
------------ ------------
$35,818 $38,292
============ ============
As of March 31, 2004 and December 31, 2003, the finished goods inventory
included deferred costs of $12.9 million and $14.0 million, respectively,
associated with product shipped to customers for which revenue had not yet been
recognized.
5. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no compensation expense is recorded for options issued to employees
in fixed amounts and with fixed exercise prices at least equal to the fair
market value of the Company's common stock at the date of grant. When the
exercise price of stock options granted to employees is less than the fair
market value of common stock at the date of grant, the Company records that
difference multiplied by the number of shares under option as deferred
compensation, which is then amortized over the vesting period of the options.
Additionally, deferred compensation is recorded for restricted stock granted to
employees based on the fair market value of the Company's stock at date of grant
less the amount paid, if any, for the stock by the employee and is amortized
over the period during which the restrictions lapse. For holders of these
options or shares who are terminated, the Company ceases amortization and
reclassifies the associated deferred compensation to additional paid-in capital.
The Company follows the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," for employee awards. All stock-based
awards to non-employees are accounted for at their fair value in accordance with
SFAS No. 123.
The following table illustrates the effect on net income and net income per
share as if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee awards (in thousands, except per share
data).
Three Months Ended March 31,
-----------------------------
2004 2003
------------- -------------
Net income as reported $14,740 $5,497
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 13 15
Deduct: Total stock-based employee
compensation expense determined under the
fair value-based method for all awards,
net of related tax effects (3,371) (3,301)
------------- -------------
Pro forma net income $11,382 $2,211
============= =============
Net income per share:
Basic-as reported $0.47 $0.20
Basic-pro forma $0.36 $0.08
Diluted-as reported $0.44 $0.18
Diluted-pro forma $0.34 $0.07
6
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model and is amortized over the
stock option's vesting period.
6. CONTINGENCIES
On March 11, 1996, Avid was named as a defendant in a patent infringement suit
filed in the United States District Court for the Western District of Texas by
Combined Logic Company, a California partnership located in Beverly Hills,
California. On May 16, 1996, upon our motion, the suit was transferred to the
United States District Court for the Southern District of New York. The
complaint alleges infringement by Avid of U.S. patent number 4,258,385, and
seeks injunctive relief, treble damages, costs, and attorneys' fees. This patent
expired on May 15, 1999 and therefore, would not be applicable to the products
currently offered by Avid. Accordingly, potential damages, if any, are limited
to the period beginning March 11, 1990 (six years prior to this date of the
complaint) and ending May 15, 1999. In its answer to the complaint, the Company
asserted that it did not infringe the patent and that the patent is invalid. The
Company is unable to quantify a range of loss in this litigation. Combined Logic
Company did not specify an alleged damage amount in its complaint. As only
limited discovery has been conducted to date by either side in the eight years
since Combined Logic Company filed its complaint, the Company believes it does
not have sufficient information to provide any meaningful estimate of the
possible range of damages that Combined Logic Company might seek. The Company
believes it has meritorious defenses to the complaint and intends to contest it
vigorously. However, an adverse resolution of this litigation could have an
adverse effect on the Company's consolidated financial position or results of
operations in the period in which the litigation is resolved. No costs have been
accrued for this possible loss contingency.
In March 1999, Avid and Tektronix, Inc. were sued by Glen Holly Entertainment,
Inc., a Tektronix distributor, claiming that Tektronix's discontinuance of the
Tektronix Lightworks product line was the result of a strategic alliance by
Tektronix and Avid. Glen Holly raised antitrust and common law claims against
Avid and Tektronix, and sought lost future profits, treble damages, attorneys'
fees, and interest. In March 2001, the United States District Court for the
District of California dismissed the anti-trust claims against both parties and
the remaining common law claim against the Company was dismissed by stipulation
and court order on April 6, 2001. Glen Holly subsequently appealed the lower
court's decision. On September 9, 2003, a three-judge panel of the U.S. Court of
Appeals for the Ninth Circuit reversed in part the lower court's dismissal and
sent the antitrust claims back to the lower court for further findings. Avid and
Tektronix filed a Petition for a rehearing by the three-judge panel and a
rehearing by the full Ninth Circuit on September 23, 2003. The Petition was
denied on December 12, 2003. On March 18, 2004, the Company entered into a
settlement agreement with Glen Holly whereby each party issued a general release
of all claims relating to the allegations made in this lawsuit. In consideration
of the settlement, Avid agreed to make a contingent payment to Glen Holly of
$1,050,000. This amount is included in other income (expense), net for the
three-month period ended March 31, 2004. On March 19, 2004, we filed a motion
with the U.S. District Court requesting that the Court make a determination that
the settlement agreement met the statutory standards of a good faith settlement,
and that Tektronix has no right to contribution or indemnification from Avid
arising from any claim asserted in the lawsuit. On April 6, 2004, Tektronix
filed an opposition to this motion. A hearing on this matter is scheduled for
May 17, 2004. In the event the Court determines that the settlement agreement
satisfies the good faith statute, or alternatively, that Tektronix is not
entitled to contribution or indemnification, Glen Holly will file a "Stipulation
of Dismissal with Prejudice" with the Court, dismissing all claims alleged
against the Company in this proceeding. Should the Court not find in Avid's
favor in this matter, Avid may elect to require that Glen Holly return
substantially all of the contingent payment, and the settlement agreement will
be deemed null and void.
Avid receives inquiries from time to time with regard to possible patent
infringement claims. If any infringement is determined to exist, the Company may
seek licenses or settlements. In addition, as a normal incidence of the nature
of the Company's business, various claims, charges, and litigation have been
asserted or commenced against the Company arising from or related to contractual
or employee relations, intellectual property rights or product performance.
Management does not believe these claims will have a material adverse effect on
the financial position or results of operations of the Company.
From time to time, the Company provides indemnification provisions in agreements
with customers covering potential claims by third parties that Avid products
infringe their intellectual property rights. Pursuant to these indemnification
provisions, the Company agrees to indemnify customers for losses that they
suffer or incur in connection with any valid U.S. patent or copyright
infringement claim brought by a third party with respect to Avid products. These
indemnification provisions generally offer perpetual coverage for infringement
claims based upon the products covered by the agreement. The maximum potential
7
amount of future payments the Company could be required to make under these
indemnification provisions is theoretically unlimited; however, to date, the
Company has not received any claims under these indemnification provisions. As a
result, the Company believes the estimated fair value of these indemnification
provisions is minimal.
As permitted under Delaware law, Avid has agreements whereby the Company
indemnifies its officers and directors for certain events or occurrences while
the officer or director is or was serving at Avid's request in such capacity.
The term of the indemnification period is for the officer's or director's
lifetime. The maximum potential amount of future payments the Company could be
required to make under these indemnification agreements is unlimited; however,
Avid has mitigated the exposure through the purchase of directors and officers
insurance, which is intended to limit the risk and, in most cases, enable the
Company to recover all or a portion of any future amounts paid. As a result of
this insurance policy coverage and Avid's related payment experience to date,
the Company believes the estimated fair value of these indemnification
agreements is minimal.
The Company has a standby letter of credit at a bank that is used as a security
deposit in connection with the Company's Daly City, California office space
lease. In the event of default on this lease, the landlord would, as of March
31, 2004 be eligible to draw against this letter of credit to a maximum of $4.3
million, subject to an annual reduction of approximately $0.8 million but not
below $2.0 million. The letter of credit will remain in effect at $2.0 million
throughout the remaining lease period, which extends to September 2009. As of
March 31, 2004, the Company was not in default of this lease.
The Company, through a third party, provides lease financing options to its
customers, including primarily end-users, and occasionally distributors. During
the terms of these leases, which are generally three years, the Company remains
liable for any unpaid principal balance upon default by the end-user, but such
liability is limited in the aggregate based on a percentage of initial amounts
funded or, in certain cases, amounts of unpaid balances. At March 31, 2004 and
December 31, 2003, Avid's maximum recourse exposure totaled approximately $15.8
million and $14.8 million, respectively. The Company records revenue from these
transactions upon the shipment of products, provided that all other revenue
recognition criteria are met. Because the Company has been providing these
financing options to its customers for many years, the Company has a substantial
history of collecting under these arrangements without providing refunds or
concessions to the end user or financing party. To date, the payment default
rate has consistently been between 2% and 4% per year. The Company maintains a
reserve for estimated losses under this recourse lease program based on these
historical default rates. At March 31, 2004 and December 31, 2003, the Company's
accrual for estimated losses was $2.6 million and $3.3 million, respectively.
Avid provides warranty on hardware sold through its Video segment which
generally mirrors the manufacturers' warranties. The Company charges the related
material, labor and freight expense to cost of revenues in the period incurred.
With respect to the Audio business, Avid provides warranty on externally sourced
and internally developed hardware and records an accrual for the related
liability based on historical trends and actual material and labor costs. The
warranty period for all of the Company's products is generally 90 days to one
year but can extend up to five years depending on the manufacturer's warranty.
The following table sets forth the activity in the product warranty accrual
account for the three months ended March 31, 2004 (in thousands):
Accrual balance at December 31, 2003 $1,355
Accruals for product warranties 1,024
Cost of warranty claims (823)
---------
Accrual balance at March 31, 2004 $1,556
=========
8
7. COMPREHENSIVE INCOME
Total comprehensive income net of taxes consists of net income, the net changes
in foreign currency translation adjustment and net unrealized gains and losses
on available-for-sale securities. The following is a summary of the Company's
comprehensive income, (in thousands):
Three Months Ended
March 31,
------------------------
2004 2003
----------- -----------
Net income $14,740 $5,497
Net changes in:
Foreign currency translation adjustment (581) 1,207
Unrealized gains on securities 57 52
----------- -----------
Total comprehensive income $14,216 $6,756
=========== ===========
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 reportable segment (in thousands):
Three Months Ended March 31,
----------------------------
2004 2003
------------- ------------
Video and Film Editing and Effects:
Net revenues $91,979 $79,339
Operating income $13,344 $5,120
Professional Audio:
Net revenues $35,395 $32,838
Operating income $1,895 $2,522
Combined Segments:
Net revenues $127,374 $112,177
Operating income $15,239 $7,642
The following table reconciles operating income for reportable segments to the
total consolidated amounts for the three months ended March 31, 2004 and 2003
(in thousands):
Three Months Ended March 31,
----------------------------
2004 2003
---------- ----------
Total operating income for reportable segments $15,239 $7,642
Unallocated amounts:
Restructuring and other costs, net - (1,783)
Amortization of acquisition-related
intangible assets (439) (293)
---------- ----------
Consolidated operating income $14,800 $5,566
========== ==========
9. RESTRUCTURING AND OTHER COSTS, NET
In December 2002, the Company recorded a charge of $3.3 million in connection
with vacating excess space in its Tewksbury, Massachusetts; Daly City,
California; and Montreal, Canada facilities. The portion of the charge related
to Tewksbury ($0.5 million) resulted from a revision of the Company's estimate
of the timing and amount of future sublease income associated with that
9
facility, for which a charge had previously been included in a 2001
restructuring. The remaining portion of the charge for Daly City and Montreal
was a result of the Company's ceasing to use a portion of each facility in
December 2002, and hiring real estate brokers to assist in finding subtenants.
The Daly City estimate was revised, and an additional charge recorded, in the
fourth quarter of 2003.
In March 2003, the Company implemented a restructuring program under which 48
employees worldwide were terminated, and a leased facility in California was
vacated. In connection with these actions, the Company recorded a charge of $1.2
million for employee terminations and $0.6 million for unutilized space in Santa
Monica that included a write-off of leasehold improvements of $0.4 million.
The Company recorded the December 2002 and March 2003 charges in accordance with
the guidance of Statement of Financial Accounting Standards No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146
requires that a liability be recognized for an operating lease that is not
terminated based on the remaining lease rental costs, measured at its fair value
on a discounted cash flow basis, when the entity ceases using the rights
conveyed by the operating lease. That amount is reduced by any estimated
potential sublease rentals, regardless of whether the entity intends to enter
into a sublease. Future changes in the fair value of the Company's obligations
are recorded through operating expenses.
The following table sets forth the activity in the restructuring and other costs
accrual, which is included in Accrued expenses and other liabilities for the
three months ended March 31, 2004 (in thousands):
Employee Facilities
Related Related Total
------------ ------------ ------------
Accrual balance at December 31, 2003 $50 $4,843 $4,893
Cash payments - (417) (417)
------------ ------------ ------------
Accrual balance at March 31, 2004 $50 $4,426 $4,476
============ ============ ============
The majority of the facilities-related accrual represents estimated losses on
subleases of space vacated as part of the Company's restructuring actions. The
leases, and charges against the amount accrued, extend through 2010 unless the
Company is able to negotiate an earlier termination.
10. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 104, or SAB No. 104, "Revenue Recognition" which revises or
rescinds portions of the interpretative guidance included in Topic 13 of the
codification of staff accounting bulletins in order to provide consistent
guidance with respect to selected revenue recognition issues. The principal
revisions relate to the rescission of material no longer necessary because of
private sector developments in U.S. generally accepted accounting principles.
The adoption of SAB No. 104 did not have a material effect on our consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). In general, a variable interest entity
is a corporation, partnership, trust or other legal structure used for business
purposes that either (a) does not have equity investors with characteristics of
a controlling financial interest or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. Additionally,
companies with significant investments in variable interest entities, even if
not required to consolidate the variable interest entity, have enhanced
disclosure requirements. As amended, this interpretation applies in the first
fiscal year or interim period beginning after December 31, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The adoption of FIN No. 46 did not have any
impact on our consolidated financial position or results of operations.
10
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We develop, market, sell and support a wide range of software and
hardware for digital media production, management and distribution. Digital
media are video, audio or graphic elements in which the image, sound or picture
is recorded and stored as digital values, as opposed to analog, or tape-based,
signals. Our diverse range of product and service offerings enables customers
to "Make, Manage and Move Media."
Make Media. Our Video and Film Editing and Effects ("Video") segment
offers digital, non-linear video and film editing systems and 3D and special
effects software that enable users to manipulate moving pictures and sound in a
faster, easier, more creative, and more cost-effective manner than using
traditional analog tape-based systems. Non-linear systems allow editors to
access material instantaneously rather than requiring them to work sequentially.
Our Professional Audio ("Audio") segment, Digidesign, offers digital audio
software applications and hardware systems for music, film, television, video,
broadcast, streaming media, and web development. These systems are based upon
proprietary Digidesign/Avid audio hardware, software, and control surfaces, and
allow users to record, edit, mix, process, and master audio in an integrated
manner.
Manage Media. We provide complete network, storage, and database
solutions based on our Avid Unity MediaNetwork technology. This technology
enables users to simultaneously share and manage media assets throughout a
project or organization. The ability to effectively manage digital media assets
is a critical component of success for many broadcast and media companies with
multiple nonlinear editing workstations in a range of geographic locations. As a
result, professionals can collaborate seamlessly on all production elements, and
streamline the process for cost-effectively delivering compelling media
experiences and quickly "re-purposing" or finding new uses or markets for media
assets.
Move Media. We offer products that allow our customers to distribute
media over multiple platforms - including air, cable or satellite, or through
the Internet. In addition, we provide technology for playback directly to air
for broadcast television applications. Many of our products also support the
broadcast of streaming Internet video.
Our products are used worldwide in production and post-production
facilities; film studios; network, affiliate, independent and cable television
stations; recording studios; advertising agencies; government and educational
institutions; corporate communication departments; and game developers and
Internet professionals. Projects produced using our products have been honored
with Oscar(R), Emmy(R), and Grammy(R) awards, as well as a host of other
international awards. In addition, we ourselves have received numerous awards
for technical innovations, including, Oscars, Emmys and a Grammy. (Oscar is a
registered trademark and service mark of the Academy of Motion Picture Arts and
Sciences. Emmy is a registered trademark of ATAS/NATAS. Grammy is a registered
trademark of The National Academy of Recording Arts and Sciences, Inc.)
In April 2003, we introduced a new family of products based on our
Digital Nonlinear Accelerator, or Avid DNA, architecture, a powerful series of
specialized computer hardware products engineered specifically for media
processing. When paired with our next-generation nonlinear editing software, the
Avid DNA family enables professionals to achieve real-time functionality and
superior image and sound quality when capturing, editing, finishing and
outputting DV, SD and HD video formats. The Avid DNA family includes Avid Media
Composer Adrenaline and Avid NewsCutter Adrenaline FX systems, both of which
began shipping in the second quarter of 2003, and Avid Xpress Pro and Avid Mojo,
which began shipping in the third quarter of 2003. The Avid Media Composer
Adrenaline system leverages the key features of its predecessor to offer
improved quality, speed and performance in high-pressure time-sensitive
television and film editing and production environments. The Avid NewsCutter
Adrenaline FX expands news editing capabilities by offering speed, reliability
and a range of professional news-oriented editing and workflow features in a
turnkey PC-based platform. Avid Xpress Pro software and the Avid Mojo
accelerator deliver professional video, film, and audio editing capabilities
including automatic color correction, real-time digital and analog output and
are qualified to run on a wide range of Windows-based CPUs as well as on the
Power Mac G5. The Avid DNA family also includes the Avid DS Nitris system which
began shipping in the fourth quarter of 2003. The Avid DS Nitris product is a
powerful finishing tool delivering real-time effects and color correction.
11
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in
conformity with U.S. generally accepted accounting principles and the Company's
discussion and analysis of its financial condition and results of operations
requires the Company's management to make judgments, assumptions, and estimates
that affect the amounts reported in its consolidated financial statements and
accompanying notes. Note 1 of the Notes to Consolidated Financial Statements in
the Company's 2003 Form 10-K describes the significant accounting policies and
methods used in the preparation of the Company's consolidated financial
statements. Management bases its estimates on historical experience and on
various other assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities. Actual results may differ from
these estimates.
Management believes the Company's critical accounting policies are those
related to revenue recognition and allowances for product returns and exchanges,
allowance for bad debts and reserves for recourse under financing transactions,
inventories and income taxes. Management believes these policies to be critical
because they are both important to the portrayal of the Company's financial
condition and results of operations, and they require management to make
judgments and estimates about matters that are inherently uncertain. Additional
information about these critical accounting policies may by found in the
Company's 2003 Form 10-K in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," under the heading "Critical
Accounting Policies and Estimates."
RESULTS OF OPERATIONS
Net Revenues
Our net revenues are derived mainly from the sales of computer-based
digital, nonlinear media editing systems and related peripherals, licensing of
related software, and sales of related software maintenance contracts. This
market has been, and we expect it to continue to be, highly competitive. A
significant portion of these revenues is generated by sales near the end of each
quarter, which can impact our ability to accurately forecast revenues on a
quarterly basis. Increasingly, revenues are also being derived from sales of
"solutions" encompassing multiple products and networking capabilities that
enable users to share and manage media throughout a project or organization.
Such solution sales may include training and installation services, as well as
workflow management assistance, to be provided by us or a third party. Depending
upon the complexity of the arrangement and the level of our involvement, the
revenues resulting from these solution sales may be deferred for one or more
quarters while the services are being performed.
Net revenues increased by $15.2 million (13.5%) to $127.4 million in the
quarter ended March 31, 2004 from $112.2 million for the same quarter in 2003.
Revenues in our Video business increased $12.6 million or 15.9%, while revenues
in our Audio business grew $2.6 million or 7.8%. The growth in the Video
business reflects increased sales volume of our products, including the new Avid
DNA family of products released in the second through fourth quarters of 2003.
Revenue growth in our Audio segment also reflects primarily increased sales
volume of our products. Revenue growth in both segments was partially offset by
lower average selling prices of certain products in 2004 as compared to 2003.
Average selling prices include the impact of price changes, discounting and mix
(higher or lower-end) of products sold. Average selling prices also include the
impact of foreign currency exchange rate changes, which had a favorable impact
in 2004 compared to 2003.
Net revenues derived through indirect channels were approximately 76% of
net revenues for the three months ended March 31, 2004, compared to 79% of net
revenues for the same period in 2003. The increase in direct selling from 2003
to 2004 was primarily due to the growth in sales to our broadcast customers. We
expect sales to broadcast customers will be an area of potential revenue growth
in the future.
Sales in the Americas have typically accounted for at or near 55% of our
consolidated net revenues, while sales in Europe and Asia Pacific represent the
remaining 45%. However, the relative percentages of sales among the regions can
vary based on, among other things, the impact of currency exchange rate
variations on revenues, the timing of revenue recognition of solutions sales,
and local economic conditions.
Sales in the Americas accounted for 56% and 55% of our first quarter
2004 and 2003 net revenues, respectively. For the three-month period ended March
31, 2004, Americas sales increased by approximately $9.7 million or 15.8%,
compared to the same period in 2003.
12
Sales in Europe and Asia Pacific regions accounted for 44% and 45% of
our first quarter 2004 and 2003 net revenues, respectively. The combined Europe
and Asia Pacific sales in the first quarter of 2004 increased by approximately
$5.5 million or 10.9%, compared to the same period in 2003, with the impact of
currency translation being a significant factor, especially in Europe.
Gross Profit
Costs of revenues consists primarily of costs associated with the
procurement of components; post-sales customer support costs related to
maintenance contract revenue and other services; the assembly, testing, and
distribution of finished products; warehousing; and royalties for third-party
software included in our products. The resulting gross margin fluctuates based
on factors such as the mix of products sold, the cost and proportion of
third-party hardware and software included in the systems sold, the offering of
product upgrades, price discounts and other sales promotion programs, the
distribution channels through which products are sold, the timing of new product
introductions, sales of aftermarket hardware products such as disk drives, and
currency exchange rate fluctuations.
Our gross margin increased to 57.5% in the first quarter of 2004
compared to 53.4% in the same period of 2003. This increase was primarily due to
a favorable product mix in the Video segment in large part due to the
introduction of the Avid DNA family of products in the second through fourth
quarters of 2003, which have higher gross margins than many of our other
products. Additionally, there was a positive impact on revenue from currency
exchange rates with no offsetting impact on costs of revenues as most of our
manufacturing costs are transacted in U.S. dollars. The Audio segment had a
lower gross margin in the first quarter of 2004 as compared to 2003, primarily
due to increased promotional revenue deferrals in the first quarter of 2004.
Research and Development
Research and development expenses increased by $0.6 million (2.7%) in
the first quarter of 2004 compared to the same period in 2003. The increase was
primarily due to higher personnel-related costs (in part due to the acquisition
of NXN), partially offset by a reduction in engineering outsourcing associated
with the development of our new products that had increased during the first
quarter of 2003. Research and development expenses decreased to 17.5% of net
revenues in the first quarter of 2004 from 19.3% in the same quarter of 2003.
The decrease in research and development expenses as a percentage of net
revenues is due to the increased revenue base.
Marketing and Selling
Marketing and selling expenses increased by $4.6 million (18.2%) in the
first quarter of 2004 compared to the same period in 2003. The increase was
primarily due to higher personnel-related costs, including salaries and related
taxes and benefits as well as expenses associated with our bonus plan,
commission expense (due to higher revenues), travel, trade shows and a European
regional sales meeting. We also had higher net foreign exchange losses
(specifically, transaction and remeasurement gains and losses on net monetary
assets denominated in foreign currencies, offset by hedging gains and losses),
which are included in marketing and selling expenses, in 2004. Marketing and
selling expenses increased to 23.4% of net revenues in the first quarter of 2004
from 22.5% in the same quarter of 2003, as a result of the factors stated above.
We expect the second quarter 2004 expenses for marketing and selling to be
higher than those incurred in the first quarter due to expenses associated with
the National Association of Broadcasters trade show, which occurs in the second
quarter.
General and Administrative
General and administrative expenses increased by $0.5 million (10.1%) in
the first quarter of 2004 compared to the same period in 2003. The increase was
primarily due to higher personnel-related costs, expenses associated with our
bonus plan and increased legal fees. General and administrative expenses
decreased to 4.6% of net revenues in the first quarter of 2004 from 4.8% in the
same quarter of 2003. The decrease in general and administrative expenses as a
percentage of net revenues is due to the increased revenue base.
13
Restructuring and Other Costs, Net
In March 2003, we implemented a restructuring program under which 48
employees worldwide were terminated, and a leased facility in California was
vacated. In connection with these actions, during the first three months of 2003
we recorded a charge of $1.2 million for employee terminations and $0.6 million
for unutilized space in Santa Monica that included a write-off of leasehold
improvements of $0.4 million. No such charges were taken in the first quarter of
2004.
Amortization of Acquisition-Related Intangible Assets
In January 2004 we acquired NXN Software AG ("NXN"), a leading provider
of asset and production management systems specifically targeted for the
entertainment and computer graphics industries, for cash of (euro)35 million
($43.7 million). As part of the purchase accounting allocation we recorded $7.2
million of identifiable intangible assets, consisting of completed technologies,
customer relationships and a trade name. The unamortized balance of the
identifiable intangible assets relating to this acquisition was $7.0 million at
March 31, 2004.
From 2000 to 2003 we recorded intangible assets as we acquired the
following companies or their assets: Rocket Network, Inc. and Bomb Factory
Digital, Inc. in 2003; iKnowledge, Inc. in 2002; iNews, LLC in 2001; and The
Motion Factory, Inc. in 2000. In connection with these acquisitions, we
allocated $7.6 million to identifiable intangible assets consisting of completed
technologies and work force, and $2.2 million to goodwill. As of January 1,
2002, in connection with the adoption of SFAS 142, we reclassified $1.1 million
of a previously recorded assembled work force intangible to goodwill and, as a
result, ceased amortizing this amount. The unamortized balance of the
identifiable intangible assets relating to these acquisitions was $1.6 million
at March 31, 2004.
Included in the operating results for each of the quarters ended March
31, 2004 and 2003 is amortization of all of these intangible assets of $0.4
million and $0.3 million, respectively.
Other Income (Expense), Net
Other income (expense), net, generally consists primarily of interest
income, net of interest expense. During the first quarter of 2004, other income
(expense), net, was a net expense amount of ($0.6) million compared to a net
income amount of $0.2 million for the first quarter of 2003 due to a charge in
2004 of $1.1 million related to reaching a pending settlement of a lawsuit. The
charge was included in other income (expense), net because the suit related to a
previous joint venture with a third party under which our 50% equity in the
income of that joint venture had been recorded as other income (expense), net.
See Note 6 to our condensed consolidated financial statements.
Provision for Income Taxes
We recorded a net tax benefit of $0.5 million in the first quarter of
2004 and a tax provision of $0.3 million for the first quarter of 2003. The net
tax benefit for the first quarter of 2004 reflected the reversal of a $1.2
million tax reserve resulting from the expiration of the statute of limitation
on that reserve item, offset partially by a tax provision of $0.7million. The
tax provisions for the first quarter of 2004 and 2003 were substantially
comprised of taxes payable by our foreign subsidiaries with only alternative
minimum tax provided on anticipated U.S taxable profits.
The tax provision in each quarter is significantly affected by net
changes in the valuation allowance against our deferred tax assets. Regular
federal income taxes resulting from anticipated U.S. profits have been offset by
the utilization of deductions from acquisition-related temporary differences and
net operating loss carry-forwards; the tax provision benefit of utilizing these
items results from the corresponding net reduction in the valuation allowance.
However, due to the remaining level of deferred tax assets and the level of
related historical taxable income, we have determined that the uncertainty
regarding the realization of these remaining assets is sufficient to warrant the
continued establishment of a valuation allowance against nearly all of our
deferred tax assets.
14
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date through both private and public
sales of equity securities, including stock option exercises from our employee
stock plans, as well as through cash flows from operations. As of March 31,
2004, our principal sources of liquidity included cash, cash equivalents and
marketable securities totaling $170.0 million.
With respect to cash flow, net cash provided by operating activities was
$17.6 million for the three months ended March 31, 2004 compared to $11.4
million for the same period in 2003. During the quarter ended March 31, 2004,
net cash provided by operating activities primarily reflects net income adjusted
for depreciation and amortization as well as an increase in deferred revenue,
partially offset by an increase in accounts receivable and a decrease in accrued
expenses. During the quarter ended March 31, 2003, net cash provided by
operating activities primarily reflects net income adjusted for depreciation and
amortization as well as an increase in deferred revenue, partially offset by an
increase in prepaid expenses and other current assets and a decrease in accounts
payable.
At March 31, 2004 and December 31, 2003, we held inventory in the
amounts of $35.8 million and $38.3 million, respectively. These balances include
stockroom, spares, demonstration equipment inventories at various locations, and
inventory at customer sites related to shipments for which we have not yet
recognized revenue. We review these balances regularly for excess quantities or
potential obsolescence and make appropriate adjustments to write-down the
inventories to reflect their estimated realizable value.
Accounts receivable increased by $5.7 million to $74.9 million at March
31, 2004 from $69.2 million at December 31, 2003, driven primarily by the
year-over-year increase in net revenues. These balances are net of allowances
for sales returns, bad debts and customer rebates, all of which we estimate and
record based on historical experience. Days sales outstanding in accounts
receivable increased from 49 days at December 31, 2003 to 53 days at March 31,
2004. The increase in days sales outstanding is primarily attributable to the
increase in revenue quarter over quarter, the timing of shipments during the
quarter, and an increase in deferred maintenance contract billings for which the
revenue will be recognized ratably in future quarters.
Net cash flow used in investing activities was $44.8 million for the
three-month period ending March 31, 2004 compared to $5.4 million for the same
period in 2003. We expended cash of $42.9 million for the purchase of NXN
Software AG, net of NXN's cash acquired of $0.8 million. Also, a second payment
of $1.0 million for our acquisition in 2003 of Bomb Factory Digital was made in
early 2004, after resolution of acquisition-related contingencies, with the
final payments totaling $0.4 million due on various dates through December 2004.
We purchased $4.4 million of property and equipment during the first quarter of
2004 compared to $1.9 million in the same period of 2003. Purchases of property
and equipment in both 2004 and 2003 were primarily of computer hardware and
software to support research and development activities and our information
systems. Our capital spending program for 2004 is currently expected to be $13
million, including purchases of hardware and software to support activities in
the research and development, information systems and manufacturing areas, as
well as for facilities renovations. However, this amount could increase in the
event we enter into strategic business acquisitions or for other reasons.
During the three months ended March 31, 2004 and 2003, we generated cash
of $4.7 million and $6.8 million, respectively, from the issuance of common
stock related to the exercise of stock options and our employee stock purchase
plan.
In connection with restructuring efforts during 2001 and prior periods,
as well as with the identification in 2003 and 2002 of excess space in various
locations, we also have cash obligations of approximately $17.2 million under
leases for which we have vacated the underlying facilities. We have an
associated restructuring accrual of $4.4 million at March 31, 2004 representing
the excess of our lease commitments on space no longer used by us over expected
payments to be received on subleases of such facilities. These payments will be
made over the remaining terms of the leases, which have varying expiration dates
through 2010, unless we are able to negotiate an earlier termination. All
restructuring related payments will be funded through working capital.
Our cash requirements vary depending upon factors such as our planned
growth, capital expenditures, the possible acquisition of businesses or
technologies complementary to our business and obligations under past
restructuring programs. We believe our existing cash, cash equivalents,
marketable securities and funds generated from operations will be sufficient to
15
meet our operating cash requirements for at least the next twelve months. In the
event we require additional financing, we believe that we will be able to obtain
such financing; however, there can be no assurance that we would be successful
in doing so, or that we could do so on favorable terms.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104, or SAB No. 104, "Revenue Recognition" which revises
or rescinds portions of the interpretative guidance included in Topic 13 of the
codification of staff accounting bulletins in order to provide consistent
guidance with respect to selected revenue recognition issues. The adoption of
SAB No. 104 did not have a material effect on our consolidated financial
statements.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). In general, a variable
interest entity is a corporation, partnership, trust or other legal structure
used for business purposes that either (a) does not have equity investors with
characteristics of a controlling financial interest or (b) has equity investors
that do not provide sufficient financial resources for the entity to support its
activities. A variable interest entity often holds financial assets, including
loans or receivables, real estate or other property. FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both.
Additionally, companies with significant investments in variable interest
entities, even if not required to consolidate the variable interest entity, have
enhanced disclosure requirements. As amended, this interpretation applies in the
first fiscal year or interim period beginning after December 31, 2003, to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The adoption of FIN No. 46 did not have any
impact on our consolidated financial position or results of operations.
16
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Some of the statements in this Form 10-Q relating to our future
performance constitute forward-looking statements. Such forward-looking
statements are based upon management's current expectations and involve known
and unknown risks. Realization of any of these risks may cause actual results to
differ materially from the results described in the forward-looking statements.
Certain of these risks are as follows:
Our performance will depend in part on continued market acceptance of our new
digital nonlinear editing products.
We recently introduced several new digital non-linear products based on
our Digital Nonlinear Accelerator architecture, including our and
next-generation Media Composer (Media Composer Adrenaline) and NewsCutter
(NewsCutter Adrenaline) systems, as well as Avid Xpress Pro with Avid Mojo and
Avid DS Nitris hardware. We will need to continue to focus marketing and sales
efforts on educating potential customers and our resellers about the uses and
benefits of these products. The future success of certain of these products,
such as Avid DS Nitris, which enable high-definition production, will also
depend on consumer demand for appliances, such as television sets and monitors,
that utilize the high definition standard. In addition, there are several other
risks involved with offering new products in general, including, without
limitation, the possibility of defects or errors, failure to meet customer
expectations, delays in shipping new products and the introduction of similar
products by our competitors. At the same time, the introduction and transition
to new products could have a negative impact on the market for our existing
products, which could adversely affect our revenues and business.
The broadcast market is large, widely dispersed, and highly competitive, and we
may not be successful in growing our customer base or predicting customer demand
in this market.
We are currently building our presence in the digital broadcast market
and have augmented our NewsCutter product offering with the Avid Unity for News
products, and the server, newsroom, and browser products obtained in the Pluto
and iNews acquisitions. The broadcast market is distinguished from our
traditional video business in that turnkey, fully integrated, complex solutions
(including the configuration of unique workflows), rather than discrete point
products, are frequently required by the customer. Success in this market will
require, among other things, creating compelling solutions and developing a
strong, loyal customer base.
In addition, large, complex broadcast orders often require us to devote
significant sales, engineering, manufacturing, installation, and support
resources to ensure their successful and timely fulfillment. As the broadcast
market converts from analog to digital, our strategy has been to build our
broadcast solutions team in response to customer demand. To the extent that
customer demand for our broadcast solutions exceeds our expectations, we may
encounter difficulties in the short run meeting our customers' needs. Meanwhile,
our competitors may devote greater resources to the broadcast market than we do,
or may be able to leverage their market presence more effectively. If we are
unsuccessful in capturing and maintaining a share of this digital broadcast
market or in predicting and satisfying customer demand, our business and
revenues could be adversely affected.
Our revenues are becoming increasingly dependent on sales of large, complex
broadcast solutions.
We expect sales of large, complex broadcast solutions to continue to
constitute a material portion of our net revenue, particularly as news stations
convert from analog, or tape-based, processes to digital formats. Our quarterly
and annual revenues could fluctuate significantly if:
o sales to one or more of our customers are delayed or are not completed within
a given quarter;
o the contract terms preclude us from recognizing revenue during that quarter;
o news stations'migration from analog processes to digital formats slows down;
o we are unable to complete complex customer installations on schedule;
o our customers reduce their capital investments in our products in response to
slowing economic growth; and
o any of our large customers terminate their relationship with us or
significantly reduce the amount of business they do with us.
17
Our products are complex, and may contain errors or defects resulting from such
complexity.
As we continue to expand our product offerings to include not only point
products but also end-to-end solutions, our products have grown increasingly
complex and, despite extensive testing and quality control, may contain errors
or defects. Such errors or defects could cause us to issue corrective releases
and could result in loss of revenues, delay of revenue recognition, increased
product returns, lack of market acceptance, and damage to our reputation.
The markets for our products are competitive, and we expect competition to
intensify in the future.
The digital video, audio, and 3D markets are highly competitive, with
limited barriers to entry, and are characterized by pressure to reduce prices,
incorporate new features, and accelerate the release of new products. Some of
our current and potential competitors have substantially greater financial,
technical, distribution, support, and marketing resources than we do. Such
competitors may use these resources to lower their product costs, allowing them
to reduce prices to levels at which we could not operate profitably. Delays or
difficulties in product development and introduction may also harm our business.
If we are unable to compete effectively in our target markets, our business and
results of operations could suffer.
In addition to price, our products must also compete favorably with our
competitors' products in terms of reliability, performance, ease of use, range
of features, product enhancements, reputation and training.
New product announcements by our competitors and by us also could have
the effect of reducing customer demand for our existing products. New product
introductions also require us to devote time and resources to training our sales
channels in product features and target customers, with the temporary result
that the sales channels have less time to devote to selling our products.
We have a significant share of the professional audio market, and therefore
growth in this market will depend in part on our ability to successfully
introduce new products.
Products from our Digidesign division have captured a significant
portion of the professional audio market. Digidesign's strong performance in
recent years reflects a series of successful product introductions. Our future
success will depend in part upon our ability to offer, on a timely and
cost-effective basis, new audio products and enhancements of our existing audio
products. The timely development of new or enhanced products and the integration
of newly acquired products, is a complex and uncertain process, and we could
experience design, manufacturing, marketing, or other difficulties that delay or
prevent our development and introduction of new or enhanced products, or our
integration of acquired products, which, in turn, could harm our business.
When we acquire other companies or businesses, we become subject to risks that
could hurt our business.
We periodically acquire businesses and form strategic alliances. For
example, in December 2003, we acquired the assets of Bomb Factory Digital, Inc.,
a company that produces digital audio processing products, and in January 2004,
we acquired NXN Software AG, a company that manufactures asset and production
management systems specifically targeted for the entertainment and computer
graphics industries. The risks associated with such acquisitions, alliances, and
investments include, among others:
o the difficulty of assimilating the operations, policies and personnel of the
target companies;
o the failure to realize anticipated returns on investment, cost savings
and synergies;
o the diversion of management's time and attention;
o the dilution existing stockholders may experience if we decide to issue shares
of our common stock or other rights to purchase our common stock as
consideration in the acquisition in lieu of cash;
o the potential loss of key employees of the target company;
o the difficulty in complying with a variety of foreign laws;
o the impairment of relationships with customers or suppliers of the target
company or our customers or suppliers; and
o unidentified issues not discovered in our due diligence process, including
product quality issues and legal contingencies.
18
Such acquisitions, alliances, and investments often involve significant
transaction-related costs and could cause short-term disruption to normal
operations. In the future we may also make debt or equity investments. If we are
unable to overcome or counter these risks, it could undermine our business and
lower our operating results.
Our use of independent firms and contractors to perform some of our product
development activities could expose us to risks that could adversely impact our
revenues.
Independent firms and contractors, some of whom are located in other
countries, perform some of our product development activities. We generally own
the software developed by these contractors. The use of independent firms and
contractors, especially those located abroad, could expose us to risks related
to governmental regulation (including tax regulation), intellectual property
ownership and rights, exchange rate fluctuation, political instability and
unrest, natural disasters, and other risks, which could adversely impact our
revenues.
An interruption of our supply of certain key components from our sole source
suppliers could hurt our business.
We are dependent on a number of specific suppliers for certain key
components of our products. We purchase these sole source components pursuant to
purchase orders placed from time to time. We generally do not carry significant
inventories of these sole source components and have no guaranteed supply
arrangements. If any of our sole source vendors should fail to supply or enhance
such components, it could imperil our supply of these components and our ability
to continue selling and servicing products that use these components. Similarly,
if any of our sole source vendors should encounter technical, operating or
financial difficulties, it could threaten our supply of these components. While
we believe that alternative sources for these components could be developed, or
our products could be redesigned to permit the use of alternative components, an
interruption of our supply could damage our business and negatively affect our
operating results.
Qualifying and supporting our products on multiple computer platforms is time
consuming and expensive.
Our software engineers devote significant time and effort to qualify and
support our products on various computer platforms, including most notably,
Microsoft and Apple platforms. Computer platform modifications and upgrades
require additional time to be spent to ensure that our products will function
properly. To the extent that the current configuration of the qualified and
supported platforms changes or we need to qualify and support new platforms, we
could be required to expend valuable engineering resources, which could
adversely affect our operating results.
Our operating results are dependent on several unpredictable factors.
The revenue and gross profit from our products depend on many factors,
including:
o mix of products sold;
o cost and proportion of third-party hardware included in such products;
o product distribution channels;
o acceptance of our new product introductions;
o product offers and platform upgrades;
o price discounts and sales promotion programs;
o volume of sales of aftermarket hardware products;
o costs of swapping or fixing products released to the market with defects;
o provisions for inventory obsolescence;
o competitive pressure on product prices;
o costs incurred in connection with "solution" sales, which typically have
longer selling and implementation cycles; and
o timing of delivery of "solutions" to customers.
Changes in any of these factors could affect our operating results.
Our operating results could be harmed by currency fluctuations.
We generally derive nearly half of our revenues from customers outside
of the United States. This business is, for the most part, transacted through
international subsidiaries and generally in the currency of the end-user
19
customers. Therefore, we are exposed to the risks that changes in foreign
currency could adversely impact our revenues, net income (loss), and cash flow.
To hedge against the foreign exchange exposure of certain forecasted
receivables, payables and cash balances of our foreign subsidiaries, we enter
into foreign currency forward-exchange contracts. We record gains, and losses
associated with currency rate exchanges on these contracts in results of
operations, offsetting gains and losses on the related assets and liabilities.
The success of this hedging program depends on forecasts of transaction activity
in the various currencies. To the extent that these forecasts are over- or
understated during the periods of currency volatility, we could experience
currency gains or losses.
Our operating costs are tied to projections of future revenues, which may differ
from actual results.
Our operating expense levels are based, in part, on our expectations of
future revenues. Such future revenues are difficult to predict. A significant
portion of our business occurs near the end of each quarter, which can impact
our ability to precisely forecast revenues on a quarterly basis. Further, we are
generally unable to reduce quarterly operating expense levels rapidly in the
event that quarterly revenue levels fail to meet internal expectations.
Therefore, if quarterly revenue levels fail to meet internal expectations upon
which expense levels are based, our results of operations could be adversely
affected.
Poor global macroeconomic conditions could disproportionately impact our
industry.
In recent years, our customers in the media, broadcast and
content-creation industries delayed or reduced their expenditures in part
because of unsettled economic conditions. The revenue growth and profitability
of our business depends primarily on the overall demand for our products. If
global economic conditions worsen, demand for our products may weaken, and our
business and results of operations could suffer.
Terrorism, acts of war, and other catastrophic events may seriously harm our
business.
Terrorism, acts of war, or other catastrophic events may disrupt our
business and harm our employees, facilities, suppliers, distributors, resellers
or customers, which could significantly impact our revenue and operating
results. The increasing presence of these threats has created many economic and
political uncertainties that could adversely affect our business and stock price
in ways that cannot be predicted. We are predominantly uninsured for losses and
interruptions caused by terrorism, acts of war, and other conflicts and events.
If we fail to maintain strong relationships with our resellers, distributors,
and suppliers, our ability to successfully deploy our products may be harmed.
We sell many of our video products and services, and substantially all
of our audio products and services, indirectly through resellers and
distributors. The resellers and distributors of our video segment products
typically purchase Avid software and Avid-specific hardware from us, and
third-party components from various other vendors, in order to produce complete
systems for resale. Any disruption to our resellers and distributors, or their
third-party suppliers, could reduce our revenues. Increasingly, we are
distributing our products directly, which could put us in competition with our
resellers and distributors and could adversely affect our revenues. In addition,
our resellers could diversify the manufacturers from whom they purchase products
to sell to the final end-users, which could lead to a weakening of our
relationships with our resellers and could adversely affect our revenues.
Most of the resellers and distributors of our video products are not
granted rights to return products after purchase, and actual product returns
from such resellers and distributors have been insignificant to date. However,
our revenue from sales of audio products is generally derived from transactions
with distributors and authorized resellers that typically allow limited rights
of return, inventory stock rotation and price protection. Accordingly, reserves
for estimated returns, exchanges and credits for price protection are provided,
as a reduction of revenues, upon shipment of the related products to such
distributors and resellers, based upon our historical experience. To date,
actual returns have not differed materially from management's estimates.
However, if returns of our audio segment products were to exceed estimated
levels, our revenues and operating results could be adversely impacted.
20
If we become dependent on third-party hardware for our products, our operating
results could be harmed.
Our gross profit margin varies from product to product depending
primarily on the proportion and cost of third-party hardware included in each
product. From time to time, we add functionality and features to our products.
If we effect such additions through the use of more, or more costly, third-party
hardware, and are not able to increase the price of such products to offset
these increased costs, our gross profit margin on these products could decrease
and our operating results could be adversely affected.
Our future growth could be harmed if we lose the services of our key personnel.
Our success depends upon the services of a number of key employees
including members of our executive team and those in certain technical
positions. The loss of the services of one or more of these key employees could
harm our business. Our success also depends upon our ability to attract highly
skilled new employees. Competition for such employees is intense in the
industries and geographic areas in which we operate. In the past, we have relied
on our ability to grant stock options as one mechanism for recruiting and
retaining highly skilled talent. Recent proposed accounting regulations
requiring the expensing of stock options may impair our future ability to
provide these incentives without incurring significant compensation costs. If we
are unable to compete successfully for our key employees, our business could
suffer.
Our websites could subject us to legal claims that could harm our business.
Some of our websites provide interactive information and services to our
customers. To the extent that materials may be posted on and/or downloaded from
these websites and distributed to others, we may be subject to claims for
defamation, negligence, copyright or trademark infringement, personal injury, or
other theories of liability based on the nature, content, publication or
distribution of such materials. In addition, although we have attempted to limit
our exposure by contract, we may also be subject to claims for indemnification
by end users in the event that the security of our websites is compromised. As
these websites are available on a worldwide basis, they could potentially be
subject to a wide variety of international laws.
Regulations could be enacted that restrict our Internet initiatives.
Federal, state, and international authorities may adopt new laws and
regulations governing the Internet, including laws and regulations covering
issues such as privacy, distribution, and content. For example, the European
Union has issued several directives regarding privacy and data protection,
including the Directive on Data Protection and the Directive on Privacy and
Electronic Communications. The enactment of legislation implementing such
directives by member countries is ongoing. The enactment of this and similar
legislation or regulations could impede the growth of the Internet, harm our
Internet initiatives, require changes in our sales and marketing practices and
place additional financial burdens on our business.
We could incur substantial costs protecting our intellectual property or
defending against a claim of infringement.
Our ability to compete successfully and achieve future revenue growth
depends, in part, on our ability to protect our proprietary technology and
operate without infringing upon the intellectual property rights of others. We
rely upon a combination of patent, copyright, trademark and trade secret laws,
confidentiality procedures, and contractual provisions, as well as required
hardware components and hardware security keys, to protect our proprietary
technology. However, our means of protecting our proprietary rights may not be
adequate. In addition, the laws of certain countries do not protect our
proprietary technology to the same extent as do the laws of the United States.
From time to time unauthorized parties have obtained, copied, and used
information that we consider proprietary. Policing the unauthorized use of our
proprietary technology is costly and time-consuming and we are unable to measure
the extent to which piracy of our software exists. We expect software piracy to
be a persistent problem.
We occasionally receive communications suggesting that our products may
infringe the intellectual property rights of others. It is our practice to
investigate the factual basis of such communications and negotiate licenses
where appropriate. While it may be necessary or desirable in the future to
obtain licenses relating to one or more products or relating to current or
future technologies, we may be unable to do so on commercially reasonable terms.
21
If we are unable to protect our proprietary technology or unable to negotiate
licenses for the use of others' intellectual property, our business could be
impaired.
We are currently involved in various legal proceedings, including patent
litigation. An adverse resolution of any such proceedings could harm our
business and reduce our results of operations. See Note I, "Commitments and
Contingencies" in our audited financial statements.
The Sarbanes Oxley Act of 2002 has caused our operating expenses to increase and
has put additional demands on our management.
The Sarbanes Oxley Act of 2002 and newly enacted rules and regulations
of the Securities and Exchange Commission and the NASDAQ stock market impose new
duties on us and our executives, directors, attorneys and independent
accountants. In order to comply with the new legislation, we have had to hire
additional personnel and use additional outside legal, accounting and advisory
services. These actions have increased our operating expenses. In addition, the
new legislation has made some corporate actions more challenging, such as
proposing new or amendments to stock option plans, which now require stockholder
approval, or obtaining affordable director and officer liability insurance. The
added demands imposed by the new legislation may also make it more difficult for
us to attract and retain qualified executive officers, key personnel and members
of our board of directors.
If we experience problems with our third-party leasing program, our revenues
could be adversely impacted.
We have an established leasing program with a third party that allows
certain of our customers who choose to do so to finance their purchases. If this
program ended abruptly or unexpectedly, some of our customers might be unable to
purchase our products unless or until they were able to arrange for alternative
financing, and this could adversely impact our revenues.
Our stock price may continue to be volatile.
The market price of our common stock has experienced volatility in the
past and could continue to fluctuate substantially in the future based upon a
number of factors, most of which are beyond our control. These factors include:
o changes in our quarterly operating results;
o shortfalls in revenues or earnings compared to securities analysts'
expectations;
o changes in analysts' recommendations or projections;
o fluctuations in investors' perceptions of us or our competitors;
o shifts in the markets for our products;
o development and marketing of products by our competitors;
o changes in our relationships with suppliers, distributors, resellers,
system integrators, or customers; and
o global macroeconomic conditions.
Further, the stock market has experienced volatility with respect to the price
of equity securities of high technology companies generally, and this volatility
has, at times, appeared to be unrelated to or disproportionate to any of the
factors above.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk
Our primary exposures to market risk are financial, including the effect
of volatility in currencies on asset and liability positions and revenue and
operating expenses of our international subsidiaries that are denominated in
foreign currencies, and the effect of fluctuations in interest rates earned on
our cash equivalents and marketable securities.
Foreign Currency Exchange Risk
We generally derive nearly half of our revenues from customers outside
the United States. This business is, for the most part, transacted through
international subsidiaries and generally in the currency of the end-user
customers. Therefore, we are exposed to the risks that changes in foreign
currency could adversely impact our revenues, net income (loss) and cash flow.
To hedge against the foreign exchange exposure of certain forecasted
receivables, payables and cash balances of our foreign subsidiaries, we enter
into short-term foreign currency forward-exchange contracts. There are two
objectives of our foreign currency forward-exchange contract program: (1) to
offset any foreign exchange currency risk associated with cash receipts expected
to be received from our customers over the next 30 day period and (2) to offset
the impact of foreign currency exchange on the Company's net monetary assets
denominated in currencies other than the U.S. dollar. These forward-exchange
contracts typically mature within 30 days of purchase. We record gains and
losses associated with currency rate changes on these contracts in results of
operations, offsetting gains and losses on the related assets and liabilities.
The success of this hedging program depends on forecasts of transaction activity
in the various currencies. To the extent that these forecasts are over- or
understated during the periods of currency volatility, we could experience
unanticipated currency gains or losses.
For the three-month period ended March 31, 2004, net gains of $0.2
million resulting from euro-based forward-exchange contracts were recorded,
partially offsetting net transaction and remeasurement losses of $0.8 million on
the related assets and liabilities. Net losses of $0.2 million resulting from
forward exchange contracts on the other currencies in which we do business
partially offset net transaction and remeasurement gains of $0.3 million on the
related assets and liabilities. A hypothetical 10% change in foreign currency
rates would not have a material impact on our results of operations, assuming
the above-mentioned forecast of foreign currency exposure is accurate, because
the impact on the forward contracts as a result of a 10% change would at least
partially offset the impact on the asset and liability positions of our foreign
subsidiaries.
Interest Rate Risk
At March 31, 2004, we held $170.0 million in cash, cash equivalents and
marketable securities, including short-term U.S. and Canadian government and
government agency obligations. Marketable securities are classified as
"available for sale" and are recorded on the balance sheet at market value, with
any unrealized gain or loss recorded in other comprehensive income (loss). A
hypothetical 10% increase or decrease in interest rates would not have a
material impact on the fair market value of these instruments due to their short
maturity.
23
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures. Our management, with the participation of
our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2004. In
designing and evaluating our disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives,
and management necessarily applied its judgment in evaluating the cost-benefit
relationships of possible controls and procedures. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that, as of March
31, 2004, our disclosure controls and procedures were (1) designed to ensure
that material information relating to us, including our consolidated
subsidiaries, is made known to our Chief Executive Officer and Chief Financial
Officer by others within those entities, particularly during the period in which
this report was being prepared and (2) effective, in that they provide
reasonable assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms.
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended March 31, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1999, Avid and Tektronix, Inc. were sued by Glen Holly Entertainment,
Inc., a Tektronix distributor, claiming that Tektronix's discontinuance of the
Tektronix Lightworks product line was the result of a strategic alliance by
Tektronix and Avid. Glen Holly raised antitrust and common law claims against
Avid and Tektronix, and sought lost future profits, treble damages, attorneys'
fees, and interest. In March 2001, the United States District Court for the
District of California dismissed the anti-trust claims against both parties and
the remaining common law claim against the Company was dismissed by stipulation
and court order on April 6, 2001. Glen Holly subsequently appealed the lower
court's decision. On September 9, 2003, a three-judge panel of the U.S. Court of
Appeals for the Ninth Circuit reversed in part the lower court's dismissal and
sent the antitrust claims back to the lower court for further findings. Avid and
Tektronix filed a Petition for a rehearing by the three-judge panel and a
rehearing by the full Ninth Circuit on September 23, 2003. The Petition was
denied on December 12, 2003. On March 18, 2004, the Company entered into a
settlement agreement with Glen Holly whereby each party issued a general release
of all claims relating to the allegations made in this lawsuit. In consideration
of the settlement, Avid agreed to make a contingent payment to Glen Holly of
$1,050,000. This amount is included in other income (expense), net for the
three-month period ended March 31, 2004. On March 19, 2004, we filed a motion
with the U.S. District Court requesting that the Court make a determination that
the settlement agreement met the statutory standards of a good faith settlement
and that Tektronix has no right to contribution or indemnification from Avid
arising from any claim asserted in the lawsuit. On April 6, 2004, Tektronix
filed an opposition to this motion. A hearing on this matter is scheduled for
May 17, 2004. In the event the Court determines that the settlement agreement
satisfies the good faith statute, or alternatively, that Tektronix is not
entitled to contribution or indemnification, Glen Holly will file a "Stipulation
of Dismissal with Prejudice" with the Court, dismissing all claims alleged
against the Company in this proceeding. Should the Court not find in Avid's
favor in this matter, Avid may elect to require that Glen Holly return
substantially all of the contingent payment, and the settlement agreement will
be deemed null and void.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
--------
31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
-------------------
No reports on Form 8-K were filed by us during the first quarter ended March 31,
2004. We furnished a Current Report on Form 8-K on January 29, 2004, reporting
under Item 12 that on January 29, 2004, we announced our financial results for
our fourth quarter and fiscal year ended December 31, 2003 and certain other
information. No financial statements were filed, although we furnished the
financial information included in the press release furnished with the Form 8-K.
25
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: May 7, 2004 By: /s/ Paul J. Milbury
-----------------------------
Paul J. Milbury
Chief Financial Officer
(Principal Financial Officer)
Date: May 7, 2004 By: /s/ Carol L. Reid
-----------------------------
Carol L. Reid
Vice President and Corporate Controller
(Principal Accounting Officer)
26
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
27
CERTIFICATION
-------------
I, David A. Krall, certify that:
1. I have reviewed this Annual Report on Form 10-Q of Avid Technology,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 7, 2004 /s/David A. Krall
------------------------------------
David A. Krall
President and Chief Executive Officer
(principal executive officer)
CERTIFICATION
-------------
I, Paul J. Milbury, certify that:
1. I have reviewed this Annual Report on Form 10-Q of Avid Technology,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 7, 2004 /s/ Paul J. Milbury
------------------------------------
Paul J. Milbury
Chief Financial Officer
(principal financial officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-Q of Avid Technologies, Inc.
(the "Company") for the period ended March 31, 2004 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), the undersigned,
David A. Krall, President and Chief Executive Officer of the Company, and Paul
J. Milbury, Chief Financial Officier of the Company, each hereby certifies,
pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: May 7, 2004 /s/ David A. Krall
-----------------------------
David A. Krall
President and Chief Executive Officer
Dated: May 7, 2004 /s/ Paul J. Milbury
----------------------
Paul J. Milbury
Chief Financial Officer