Avid 1996 Annual Report Download - page 27

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AVID TECHNOLOGY, INC.
Notes to Consolidated Financial Statements
A. Organization and Operations
Avid Technology, Inc. (“Avid” or “the Company”) develops, markets, sells, and supports a wide range of disk-based systems
for creating and manipulating digital media content. Avid’s digital, nonlinear video and film editing systems are designed to
improve the productivity of video and film editors by enabling them to edit moving pictures and sound in a faster, easier,
more creative, and more cost-effective manner than traditional analog tape-based systems. Avid also develops and sells
digital editing systems and newsroom computer systems for creating content in the television broadcast news market and
digital news gathering (“DNG”) systems for delivering news content to air. Avid develops and sells digital audio systems for
the music and audio production and post-production markets. Avid’s products are used worldwide in production and post-
production facilities; film studios; network, affiliate, independent and cable television stations; recording studios; advertising
agencies; government and educational institutions; and corporate video departments. The Company’s digital editing systems
have accounted for the majority of the Company’s revenues to date.
As described in Note O, in January 1995, Avid effected a merger with Digidesign, Inc. (Digidesign). Digidesign designs,
assembles, markets, and supports random access digital audio production software and related application-specific hardware
components, some of which are used in Avid products. The merger has been accounted for as a pooling of interests and the
historical consolidated financial statements of Avid Technology, Inc. for all periods prior to the acquisition presented herein
have been restated to include the financial position, results of operations and cash flows of Digidesign.
B. Summary of Significant Accounting Policies
A summary of the Company's significant accounting policies follows:
Basis of Presentation. The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. Intercompany balances and transactions have been eliminated. Certain amounts in the prior years' financial
statements have been reclassified to conform to the current year presentation.
The Company’s preparation of financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses
during the reported periods. The most significant estimates included in these financial statements include accounts
receivable and sales allowances, inventory valuation and income tax valuation allowances. Actual results could differ from
those estimates.
Translation of Foreign Currencies. The functional currency of the Company's foreign subsidiaries is the local currency,
except for the Irish manufacturing branch and Avid Technology Sales Ltd. in Ireland, whose functional currencies are the
U.S. dollar. The assets and liabilities of the subsidiaries whose functional currencies are other than the U.S. dollar are
translated into U.S. dollars at the current exchange rate in effect at the balance sheet date. Income and expense items are
translated using the average exchange rate during the period. Cumulative translation adjustments are reflected as a separate
component of stockholders' equity. Foreign currency transaction gains and losses are included in results of operations.
The Company enters into foreign exchange forward contracts to hedge the effect of certain asset and liability positions of its
foreign subsidiaries. Gains and losses associated with currency rate changes on the contracts are recorded in results of
operations, offsetting losses and gains on the related assets and liabilities. The cash flows related to the gains and losses of
foreign currency forward contracts are classified in the statements of cash flows as part of cash flows from operations.
The market risk exposure from forward contracts is assessed in light of the underlying currency exposures and is limited by
the term of the Company’s contracts, generally one month. Credit risk from forward contracts is minimized through the
placement of contracts with multiple financial institutions. Forward contracts are revalued monthly by comparing contract
rates to month-end exchange rates.
Cash and Cash Equivalents. The Company considers all highly liquid debt instruments purchased with an original maturity
of three months or fewer to be cash equivalents. Cash equivalents consist primarily of taxable and tax-exempt money
market funds, bankers' acceptances, short-term time deposits, short-term government obligations, and commercial paper.