AVID TECHNOLOGY, INC.
Avid Technology Park
One Park West
Tewksbury, MA 01876
March 30, 1999
OFIS Filer Support
SEC Operations Center
6432 General Green Way
Alexandria, VA 22312-2413
Re: Avid Technology, Inc.
File No. 0-21174
ANNUAL REPORT ON FORM 10-K
Ladies and Gentlemen:
Pursuant to regulations of the Securities and Exchange Commission,
submitted herewith for filing on behalf of Avid Technology, Inc. is the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
This filing is being effected by direct transmission to the Commission's
EDGAR System.
Very truly yours,
/s/ Ethan E. Jacks
Ethan E. Jacks
Chief Legal Officer
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from to
Commission File Number 0-21174
AVID TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2977748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Avid Technology Park, One Park West, Tewksbury, MA 01876
(Address of principal executive offices) (Zip Code)
(978) 640-6789
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of The Act:
None
Securities Registered Pursuant to Section 12(g) of The Act:
Common Stock $.01 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $546,205,830 based on the closing price of the
Common Stock on the NASDAQ National Market on March 26, 1999.
The number of shares outstanding of the registrant's Common Stock as of March
26, 1999, was 24,597,598.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT DESCRIPTION 10-K PART
Portions of the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held June 2, 1999... III
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PART I
ITEM 1. BUSINESS
Avid Technology, Inc. ("Avid" or "the Company") develops, markets, sells and
supports a wide range of software and systems for creating and manipulating
digital media content. Digital media are media elements, whether video or audio
or graphics, in which the image, sound or picture is recorded and stored as
digital values, as opposed to analog signals. Avid's digital, nonlinear video
and film editing systems are designed to improve the productivity of video and
film editors by enabling them to edit moving pictures and sound in a faster,
easier, more creative, and more cost-effective manner than traditional analog
tape-based systems. To complement these systems, Avid develops and sells a range
of image manipulation products that allow users in the video and film
post-production and broadcast markets to create graphics and special effects for
use in feature films, television programs and advertising, and news programs.
Additionally, Avid develops and sells digital audio systems for the professional
audio market. Avid's products are used worldwide in production and
post-production facilities; film studios; network, affiliate, independent, and
cable television stations; recording studios; advertising agencies; government
and educational institutions; corporate communication departments; and by
individual home users.
In August 1998, Avid acquired the common stock of Softimage Inc. ("Softimage")
as well as certain assets related to its business. Softimage is a leading
developer of three-dimensional ("3D") animation, video production,
two-dimensional ("2D") cel animation (a cel in 2D cel animation consists of
layers of 2D artwork changed on a frame by frame basis creating an illusion of
motion) and compositing software solutions and technologies.
In October 1998, Avid formed a strategic alliance with Tektronix, Inc.
("Tektronix"), principally designed to serve the needs of broadcast newsrooms,
which includes three key initiatives: a distribution agreement, the formation of
a joint venture and a technology development alliance. Avid and Tektronix
formally organized a 50/50 owned and funded newsroom computer system joint
venture, AvStar Systems LLC ("AvStar"), on January 27, 1999. The joint venture
is dedicated to providing the next generation of digital news production
products by combining both companies' newsroom computer systems technology and
certain personnel.
The text of this document may include forward-looking statements. Actual results
may differ materially from those described herein, depending on such factors as
are described herein, including under "Certain Factors That May Affect Future
Results."
DIGITAL MEDIA CONTENT MARKETS
Digital media are media elements, whether video or audio or graphics, in which
the image, sound or picture is recorded and stored as digital values, as opposed
to analog signals. For example, a letter prepared on a computer using word
processing software is the digital media representation of a typewritten letter.
The word-processed letter example also illustrates some of the characteristics
of digital media, such as flexible editing, the ability to create different
versions, simple production of multiple identical copies, and easy integration
with other digital media types, such as charts and graphics. These
characteristics generally provide digital formats with advantages over their
analog equivalents. However, creating and manipulating digital content typically
requires new digital content creation tools; for example, the typewriter has
given way to dedicated word processors and, more recently, to desktop computers
running word processing software.
Digital formats and tools have largely displaced analog formats and tools in
many markets, such as word processing, electronic spreadsheets, desktop
publishing, graphics, and electronic and mechanical design. Because of more
challenging technical and cost hurdles in handling digital forms of film, video
and audio signals, markets that rely on these media types have begun to migrate
to digital formats and tools only in recent years.
As technical advances in digital media content creation tools have made this
migration possible, users have become able to create more complex content that
may incorporate several elements of digital media. For example, many video games
now include live action video, detailed 3D graphics, and high quality audio, all
created, manipulated, and played back in digital form. Feature films, such as
Armageddon or Titanic, integrate sophisticated computer-generated special
effects into traditional live action shots.
The Company participates currently in two principal end-user markets in which
there are well-established analog, or tape-based, content creation processes and
which are transitioning to digital, or disk-based, content creation tools. These
two markets are (i) video and film editing and effects and (ii) professional
audio.
Avid's video and film editing and effects market consists of professional users,
over-the-air and cable broadcast companies and users in the corporate office,
government, education, and consumer markets. Professional users produce video
and film material, such as feature films, commercial spots, entertainment and
documentary programming, industrial videos, and music videos. Professional users
also include professional character animators and video game developers. These
users are typically employed in independent production or post-production
companies, which are firms that rent out production and post-production
equipment and professionals on a project basis. Professional users are also
found in television facilities, film studios, and certain large corporations
that perform digital media production and post-production in-house. Over-the-air
and cable broadcast companies originate news programming, and include national
and international broadcasters, such as the British Broadcasting Corporation
(BBC), the Cable News Network (CNN), and the National Broadcasting Company
(NBC), as well as network affiliates, local independent television stations, and
local and regional cable operators who produce news programming. Users in
corporations and various other institutions use digital media content tools to
distribute information enriched by the addition of digital media content to
their customers and employees. Educational users and home consumers use content
creation tools to enrich school and home presentations.
Avid's professional audio market is comprised of professional music recording
studios, project studios, radio broadcasters, and home studios. Music recording
and project studios operate in the same manner as the independent video and film
production and post-production firms, as described above. This market also
includes audio production and post-production in video and film.
STRATEGY
Avid's mission is to be the leading provider of powerful digital content
creation tools used to entertain and inform the world. The Company's strategy
consists of four key elements:
Maintain A Leading Position in Existing Markets:
The Company continues to focus its activities on markets where digital media
content creation already takes place, and management believes that the Company
enjoys a leadership position in each of these primary markets. These include
professional video and film editing, including film and television studios and
independent production and post-production firms, the music and audio production
and post-production markets, and 3D (three-dimensional) animation. The Company
plans to strengthen these positions by enhancing its existing products; by
developing and introducing new products that satisfy a broader range of customer
needs in these markets, through internal development, joint development with
third parties or through acquisitions; and by providing excellent customer
service, support and training. To this end, in August 1998, Avid acquired the
common stock of Softimage as well as certain assets related to its business.
Softimage is a leading developer of 3D animation, video production, 2D cel
animation (a cel in 2D cel animation consists of layers of 2D artwork changed on
a frame by frame basis creating an illusion of motion) and compositing software
solutions and technologies. Additionally, in October 1998, Avid formed a
strategic alliance with Tektronix, principally designed to serve the needs of
broadcast newsrooms, which includes three key initiatives: a distribution
agreement, the intent to form a joint venture and a technology development
alliance.
Extend Technology to Market Sectors That Are Still Primarily Analog-based:
The Company believes that it has established unit and revenue market share
leadership positions in the professional video and film digital editing markets,
the digital audio market, and the markets for digital news editing and broadcast
newsroom computer systems. To strengthen these positions and further increase
overall market share, the Company is specifically targeting those market sectors
that are currently mainly analog-based. As an example, the Company believes that
expansion opportunity exists in television online editing, which is the final
piece of the post-production process that today is still mainly tape-based. The
Company believes that because digital solutions address the needs of this
editing process, tape will be replaced by digital solutions. Market sectors that
are mainly analog-based, and which the Company intends to aggressively pursue,
also include broadcast news, corporate and industrial video and audio mixing,
mastering and tracking.
Provide Digital Media Composition Tools for Emerging Media Applications:
The Company believes that many business communications needs, including employee
and customer training, new product introduction and management communications,
can be enriched by integrating digital media elements, including video and
audio. As a result, the Company intends to target users in corporations,
educational and government institutions, and small businesses who, if offered
digital media content creation tools appropriate to their skill levels, price
constraints, and other business requirements, could use digital media
presentations in their daily operations to improve the power and scope of their
business communications. Other emerging markets on which the Company intends to
focus include individual users interested in tools for editing home video
productions, as well as creators of web-based video.
Drive and Support Open Industry Standards:
The Company designs its products so that they are based on and can co-exist with
major industry-wide standards, including computer platforms, operating systems,
networking protocols, data compression, and digital media handling formats. In
addition, in response to growing customer demand for open standards that enable
the seamless integration of analog and digital media tools from different
vendors, the Company has undertaken an initiative to establish the Open Media
Framework Interchange ("OMFI") as an industry standard media file interchange
format to facilitate the transfer of various media types, such as video, audio,
animation, film, and graphics, among various systems and applications used in
the media production processes. The Company has published the OMFI file format
and is seeking to promulgate it as an industry standard. Hundreds of vendors and
end users endorse the OMFI standard and more than 40 vendors are supporting the
OMFI standard in their products.
In addition to OMFI, Avid is supporting the development and promulgation of the
Advanced Authoring Format, or AAF, which is based on the OMFI standard. AAF is
an industry-driven, cross-platform, openly published multimedia content-creation
process format that will allow interchange of media and compositional
information between AAF-compliant applications. AAF applications will include
Avid's Media Composer, Avid Cinema and SOFTIMAGE|DS, as well as content-creation
tools from other vendors. The AAF format is being promoted by a group of
companies called the MultiMedia Task Force which is comprised of Avid,
Microsoft, Adobe, Sonic Foundry, Matrox, Pinnacle Systems and its subsidiary,
Truevision. The AAF format is also being offered as an open standard to such
formal standards groups as the Society of Motion Picture and Television
Engineers (SMPTE), the Audio Engineering Society (AES) and the Moving Picture
Experts Group (MPEG) Committee.
PRODUCTS
The following lists the Company's products within the two principal markets in
which they are sold. A description follows of the major products and product
families in each of these categories.
Video and Film Editing and Effects
Media Composer:
The Media Composer product is Avid's original product offering and still
accounts for a significant portion of its revenues. The Company believes that
the Media Composer product line holds a greater unit market share than any other
digital non-linear editing system in professional video editing markets. The
Media Composer is a computer-based digital, nonlinear editing system designed
primarily for use by professional film and video editors. The Media Composer
system converts visual and audio source material on tape to a digital format and
stores the converted material on a range of hard disk storage devices. Once
digitized, the stored media can be previewed, edited, and played back. The Media
Composer family of products is used to create high-quality productions such as
television shows and commercials, feature films, music videos, corporate videos,
and other non-broadcast finished videos. The Media Composer product line now
includes four models (the Media Composer Off-line, 1000, 9000 and Media Station)
which provide various levels of capability and functionality.
Symphony:
Avid's Symphony product is an editing and finishing system that has the
capability to handle uncompressed digital versions of visual and audio source
material. Such uncompressed media allow users to work with higher quality
digital images and sound. Avid Symphony uses the Windows NT operating system and
delivers all of the proven Media Composer editing functionality using two
streams of uncompressed video and a graphics channel. Avid Symphony is targeted
towards completing primetime television programs.
Film Composer:
The Film Composer product is a 24 frames per second ("fps") editing system for
projects that originate and finish on film. Film footage can be converted to
video signals for editing, but because video runs at different speeds, 30 fps in
the United States, and at 25 fps in other countries, a standard 30 or 25 fps
video editing system will not yield an accurate 24 fps film cut list from which
to cut a master. The Film Composer includes software that determines which
frames on the videotape are actual frames from the film source material and
allows the creation of a frame accurate cut list. The Film Composer software
also includes special features to meet the specific needs of film editors. The
Company believes that Film Composer holds a greater unit market share than any
other digital non-linear editing system in professional film editing markets.
SOFTIMAGE|DS:
The SOFTIMAGE|DS product is a comprehensive, nonlinear production system for
creating, editing and finishing such short-form, effects-intensive projects as
commercials and music videos. It combines a rich set of tools for video and
audio editing, compositing, effects generation, image treatment and project
management, all seamlessly integrated within a unified architecture and common
user interface. With SOFTIMAGE|DS, digital artists have access to a
comprehensive toolset with uncompressed capabilities, combined with a choice of
third-party hardware platforms. SOFTIMAGE|DS runs on the Windows NT platform.
Avid Xpress for Macintosh and Windows NT:
The Avid Xpress product is a digital, nonlinear video editing system designed to
meet the needs of professional media entrepreneurs and video/film educators
involved with video and multimedia production for a variety of distribution
mediums including videotape, CD-ROM and the Internet. Avid Xpress has a
streamlined user interface and editing model targeted for this category of user.
MCXpress for Windows NT:
The MCXpress for Windows NT product is a digital, nonlinear video editing system
designed for corporate and institutional video production. It is a professional
system with capabilities geared to first-time users of digital video and
multimedia as compared, for example, to the Avid Xpress product which offers a
higher level of capability for experienced digital video producers.
NewsCutter DV:
Avid's NewsCutter DV product is a computer-based digital, nonlinear video
editing system designed to meet the demands of television news production. The
NewsCutter DV system uses the popular DVCPro media compression format and is
built on a Windows NT-based computer platform. NewsCutter DV enables broadcast
news editors to edit news, features, and news series. The user interface for
NewsCutter DV has been designed for fast, easy editing to meet the time-critical
demands of daily news deadlines. Based on the same core technology as the Media
Composer system, the NewsCutter DV system offers a range of editing and effects
features, including dissolves, wipes and graphics, and character generation.
NewsCutter DV can operate as a stand alone editing system or in a news
production workgroup with a playback system.
Avid MediaServer:
Avid's MediaServer product is a workgroup video production server that provides
simultaneous access to a central computer-based library of video and audio media
files. Based on the Silicon Graphics family of servers, Avid MediaServer
supports multiple editing and/or playback workstations. The Avid MediaServer
system is designed to allow television broadcasters to capture electronic news
feeds, edit stories, and play them to air all in a computer-based environment.
AvidNews:
Newsroom computer systems are the management information systems for television
newsrooms. AvidNews provides a computer-based process of news production: story
assignment and resource scheduling, story research, story creation and
collaboration. Journalists use the system to access wire stories, schedule,
script, edit text portions of stories, and send and receive mail and messages.
Producers use the system to assign journalists and crews to stories and to
review work-in-progress. In connection with the joint venture with Tektronix,
Avid granted to AvStar an exclusive license to use AvidNews for the primary
purpose of developing, marketing and selling next generation newsroom automation
computer systems in the worldwide broadcast market.
Avid Cinema:
The Avid Cinema product is a desktop editing product designed for people who
have had little or no previous digital video editing experience. Avid Cinema is
targeted at users in home, school, and corporate environments. A simple
interface guides users through the process of making their own, near-VHS-quality
movies to save to videotape, put in a slide presentation, or post on a web page.
These movies can include video, transition effects, narration, titles and music.
Avid Cinema currently employs Apple's QuickTime technology and allows users to
save QuickTime files for various distribution formats. Avid Cinema products are
available for both Apple Macintosh and Windows 95/98 operating systems.
Media Illusion:
The Media Illusion product is Avid's digital compositing, layering and special
effects software solution running on Silicon Graphics computers. It provides
comprehensive, nonlinear compositing based on an intuitive, interactive process
tree, that enables powerful and efficient effects creation. Media Illusion is
used by professionals in both video and film post-production.
SOFTIMAGE|3D:
The SOFTIMAGE|3D product is a complete, end-to-end 3D production system
including modeling, animation and rendering tools, designed for integration into
a production workflow. SOFTIMAGE|3D has revolutionized animation production and
established a suite of tools that encompasses the entire 3D-production process.
Matador:
The Matador product is a 2D post-production paint software solution. Matador
provides the user with painting, image treatment, rotoscoping, tracking, and
multi-layered 2D animation in a single resolution, independent system.
Elastic Reality:
Avid's Elastic Reality product is a software solution that provides tools for
performing 2D and 3D hierarchical animation, character animation, warping and
morphing of shapes and images, color correction and matte making, and
compositing. Elastic Reality is based on Avid's proprietary "shape-to-shape"
morphing interface. The Company believes that Elastic Reality holds a greater
unit market share than any other morphing and warping software in professional
film and video special effects markets.
Marquee:
Avid's Marquee product is a resolution-independent, title-animation software
package for Silicon Graphics and Windows NT workstations. Targeted at
professionals in television post-production and broadcast design, Marquee allows
users to quickly create sophisticated, layered title animation using a unique
and powerful editing timeline, real-time interactive light sources, animated
textures, and true 3D text.
Storage Systems:
Avid offers a family of media storage solutions for use with its systems.
Storage systems are used to add media editing or playback capacity, improve
image quality, support workgroup media sharing, and protect media from loss due
to hardware failure. Avid purchases disk drives, tape drives, and storage
enclosure sub-systems from third-party manufacturers, integrates them, enhances
their performance, tests and certifies them for use with Avid systems, and
packages them in various configurations. These storage systems range in capacity
from nine gigabytes to well over one terabyte (1,000 gigabytes).
Professional Audio
Pro Tools:
The Pro Tools product is a multi-track, nonlinear digital audio workstation
which runs on Power Macintosh and Windows NT/Intel Architecture-based personal
computers. Pro Tools is developed by Digidesign for the professional music,
film, television, radio, multimedia, DVD and web production markets. Pro Tools
features include audio recording, editing, signal processing and automated
mixing. Pro Tools provides an open architecture in which more than 100
Digidesign Development Partners provide additional solutions that expand the
functionality of the system, enhancing its appeal to customers.
ProControl:
In 1998, Digidesign began selling ProControl, a modular, expandable, tactile
hardware control surface for Pro Tools systems. ProControl is a modular hardware
control surface that adds high-quality tactile recording, mixing and editing
capabilities to ProTools systems. ProControl connects via ethernet, and
interacts with Pro Tools software via patented DigiFader moving faders, 25 high
resolution, 8 character scribble strips and dedicated switch and encoder
controls. ProControl serves as a comprehensive front-end for Pro Tools' mixing,
editing and DSP (digital signal processing), and can serve as the only mix
controller in the user's work environment.
AudioVision:
The AudioVision product is a high performance, digital audio workstation
designed to meet the needs of the audio post-production professional working
with film and video. AudioVision is compatible with projects originating on
Avid's Media Composer and Film Composer systems. Typical applications include
sound editing for feature film and television programming, ADR (automatic
dialogue replacement), and commercial spot production. AudioVision allows the
user to record, edit and process sound in sync with Avid-format digital video.
AudioVision includes project management and database tools, integrated DSP
(digital signaling processing) and the ability to edit audio and video together.
The system offers a high level of interchange with other Avid systems, including
Pro Tools and Media Composer.
SALES AND SERVICE
Avid sells its products through a combination of direct and, to a greater
extent, indirect sales channels. Since late 1996, the Company has increasingly
emphasized its indirect channel, including independent distributors, value-added
resellers ("VARs") and dealers, providing for broad market coverage. As a result
of the shifting of emphasis to the indirect sales channel, the Company has
increased its support of top customers, while the proportion of revenues
generated through its indirect channels has been increased.
The Company maintains sales offices in 31 cities in 15 countries and has
relationships with more than 500 distributors, VARs and dealers throughout the
world.
Pro Tools|24 and other Digidesign-developed products are sold generally through
dealers and distributors. Because this channel tends to focus on music-related
products, there is, currently, little overlap between this channel and Avid's
video and film market sales channel.
Avid currently provides direct customer support through regional telephone
support centers and field service representatives in major markets. Support
offerings include up to 24-hour, seven day-per-week options for both telephone
support and on-site representation, hardware replacement and software upgrades.
In addition, customer support is provided by VARs and distributors and other
authorized providers.
Customer training is provided directly by Avid and through a network of 42
authorized third-party Avid training centers in 11 countries.
MANUFACTURING AND SUPPLIERS
Avid's manufacturing operations consist primarily of the testing of
subassemblies and components purchased from third parties, the duplication of
software and the configuration, assembly and testing of board sets, software,
related hardware components, and complete systems. Avid relies on independent
contractors to manufacture components and subassemblies to Avid's
specifications. Avid's systems undergo testing and quality assurance at the
final assembly stage.
The Company is dependent upon sole source suppliers for certain key components
used in its products. Products purchased by the Company or its VARs and
distributors from sole source vendors include computers from Apple, SGI, IBM and
Intergraph; video compression chips manufactured by C-Cube Microsystems; a small
computer systems interface ("SCSI") accelerator board from ATTO Technology; a 3D
digital video effects board from Pinnacle Systems; application specific
integrated circuits ("ASIC") from Chip Express and LSI Logic; digital signal
processing integrated circuit from Motorola; a fibre channel adapter from JNI; a
fibre channel storage array from Data General's Clariion division; and a PCI
expansion chassis from Magma Inc. The Company purchases these sole source
components pursuant to purchase orders placed from time to time. The Company
also manufactures certain circuit boards under license from Truevision (a
subsidiary of Pinnacle Systems). The Company generally does not carry
significant inventories of these sole source components and has no guaranteed
supply arrangements. These purchasing arrangements can result in delays in
obtaining products from time to time. No assurance can be given that sole source
suppliers will devote the resources necessary to support the enhancement or
continued availability of such components or that any such supplier will not
encounter financial difficulties. While the Company believes that alternative
sources of supply for its sole source components could be developed, its
business and results of operations could be materially adversely affected if it
were to encounter an interruption in its sources of supply.
Avid has manufacturing facilities in Tewksbury, Massachusetts; Dublin, Ireland;
and Palo Alto and Menlo Park, California.
RESEARCH AND DEVELOPMENT
Avid's research and development efforts are focused on the development of
digital media content creation tools and workgroup solutions that operate on
Windows-based, IRIX-based and Apple computers. This includes the development and
enhancement of best-in-class video, film, 3D animation and audio editing systems
to meet the needs of professionals in the television, film, music, broadcast
news production, and industrial post-production markets, and of end-users in the
consumer, educational and corporate markets. As these digital tools proliferate,
all-digital production cycles are becoming possible. Avid's research and
development efforts therefore also include networking and storage initiatives to
deliver standards-based media transfer and media asset management tools, as well
as standalone and network-attached media storage systems for workgroups. The
Company undertakes research and development activities in Tewksbury,
Massachusetts; Palo Alto, California; Santa Monica, California; Montreal,
Quebec; and London, England.
COMPETITION
The markets for Avid's products are highly competitive and subject to rapid
change. Competition is fragmented with a large number of suppliers providing
different types of products to different markets.
In the video and film editing and effects markets, Avid encounters competition
primarily from vendors that offer similar digital production and post-production
editing products based on standard computer platforms. Avid also competes with
vendors that offer editing and effects products for originators of broadcast
news. These companies include Discreet Logic, Kinetix (a subsidiary of
Autodesk), Media 100 (formerly known as Data Translation, Inc.), Quantel (a
subsidiary of Carlton Communications PLC), Alias/Wavefront (a subsidiary of
Silicon Graphics), Panasonic (a subsidiary of Matsushita) and Sony. Avid also
competes with vendors, such as Sony and Matsushita, that generally have offered
analog-based products. Avid expects that competition from these vendors will
increase to the extent that such vendors develop and introduce digital media
products as well as new versions of their analog products.
In the professional audio markets, the Company competes primarily with
traditional analog and digital recording and/or mixing system suppliers
including Alesis, Euphonix, Mackie, and Yamaha as well as other disk-based
digital audio system suppliers including Fairlight, Roland, Steinberg,
Studio/Audio/Video (SADie), and others. In addition, companies such as Creative
Technology currently provide low cost (under $500) digital audio playback cards
targeted primarily at the personal computer game market. There can be no
assurance that these companies will not introduce products that are more
directly competitive with the Company's products.
The Company may face competition in any or all of these markets in the future
from computer manufacturers, such as Compaq, Hewlett-Packard, IBM, and Silicon
Graphics, as well as from software vendors, such as Oracle and Sybase. All of
these companies have announced their intentions to enter some or all of the
Company's target markets, including specifically the broadcast news and special
effects sectors of the video and film editing and effects market. In addition,
certain developers of shrink-wrapped digital media software products, such as
Adobe and Macromedia, either offer or have announced video and audio editing
products which may compete with certain of the Company's products.
The primary competitive factors in all of the Company's market sectors are
price/performance, functionality, product quality, reputation, product line
breadth, access to distribution channels, customer service and support, brand
name awareness, and ease of use.
EMPLOYEES
The Company employed 1,929 people as of December 31, 1998.
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing, research and
development, support, and manufacturing facilities are located in three
buildings adjacent to one another in an office park located in Tewksbury,
Massachusetts. The Company's leases on such buildings expire in June 2010.
The Company also leases a facility in Dublin, Ireland, for the manufacture and
distribution of its products and in Palo Alto, California, which houses
Digidesign headquarters and certain other research and development operations.
Additionally, the Company leases a facility in Montreal, Canada, which houses
certain administrative, research and development, and support operations.
In September 1995, the Company's United Kingdom subsidiary entered into a
15-year lease in London, England.
The Company also maintains sales and marketing support offices in leased
facilities in various other locations throughout the world.
See Note K - "Commitments and Contingencies" in the Notes to Consolidated
Financial Statements for information concerning the Company's obligations under
all operating leases as of December 31, 1998.
The Company anticipates no difficulty in retaining occupancy of any of its
manufacturing, office or sales and marketing support facilities through lease
renewals prior to expiration or through month-to-month occupancy, or in
replacing them with equivalent facilities.
ITEM 3. LEGAL PROCEEDINGS
Data Translation, Inc.
On June 7, 1995, the Company filed a patent infringement complaint in the United
States District Court for the District of Massachusetts against Data
Translation, Inc., a Marlboro, Massachusetts-based company. Avid is seeking
judgment against Data Translation that, among other things, Data Translation has
willfully infringed Avid's patent number 5,045,940, entitled "Video/Audio
Transmission System and Method." Avid is also seeking an award of treble damages
together with prejudgment interest and costs, Avid's costs and reasonable
attorneys' fees, and an injunction to prohibit further infringement by Data
Translation. The litigation has been dismissed without prejudice (with leave to
refile) pending a decision by the U.S. Patent and Trademark Office on a reissue
patent application based on the issued patent.
Combined Logic Company
On March 11, 1996, the Company was named as defendant in a patent infringement
suit filed in the United States District Court for the Western District of Texas
by Combined Logic Company, a California partnership located in Beverly Hills,
California. On May 16, 1996, the suit was transferred to the United States
District Court for the Southern District of New York on motion by the Company.
The complaint alleges infringement by Avid of U.S. patent number 4,258,385,
issued in 1981, and seeks injunctive relief, treble damages and costs, and
attorneys' fees. The Company believes that it has meritorious defenses to the
complaint and intends to contest it vigorously. However, an adverse resolution
of this litigation could have 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.
Other
The Company also receives inquiries from time to time with regard to additional
possible patent infringement claims. These inquiries are generally referred to
counsel and are in various stages of discussion. If any infringement is
determined to exist, the Company may seek licenses or settlements. In addition,
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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the
last quarter of the fiscal year ended December 31, 1998.
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is (i) the name and age of each present executive officer of the
Company; (ii) the position(s) presently held by each person named; and (iii) the
principal occupation held by each person named for at least the past five years.
EXECUTIVE OFFICER AGE POSITION(S)
William J. Miller 53 Chairman of the Board and
Chief Executive Officer
Clifford A. Jenks 47 President and Chief Operating
Officer
William L. Flaherty 51 Senior Vice President of
Finance, Chief Financial Officer
and Treasurer
David R. Froker 43 Senior Vice President and
General Manager of Digidesign
C. Edward Hazen 48 Senior Vice President and
General Manager of Office and
Consumer Products
Rose G. O'Donnell 55 Senior Vice President of
Technical Strategies
David E. Olson 49 Senior Vice President
Judith M. Oppenheim 57 Senior Vice President of Human
Resources and Corporate Services
Jean Proulx 56 Senior Vice President
Carol L. Reid 51 Vice President and Corporate
Controller
- ---------------
WILLIAM J. MILLER. Mr. Miller joined the Company in April 1996 and has been
Chairman and Chief Executive Officer since September 1996. From September 1996
to February 1999, Mr. Miller was President in addition to Chairman and Chief
Executive Officer. Prior to April 1996, Mr. Miller was Chief Executive Officer
of Quantum Corporation (1992-1995).
CLIFFORD A. JENKS. Mr. Jenks joined the Company in October 1996 and was named
President and Chief Operating Officer in February 1999. From December 1997 to
February 1999, Mr. Jenks was Executive Vice President and General Manager of
Editing and Effects. From January 1997 to December 1997, Mr. Jenks was Senior
Vice President of Worldwide Sales and Marketing. He was Vice President Worldwide
Sales and Marketing from October 1996 to January 1997. Mr. Jenks was Chief
Operating Officer of Zenith Data Systems (1992-1996), and Vice President Sales
and Marketing Operations of Apple Computer, Inc. (1989-1992).
WILLIAM L. FLAHERTY. Mr. Flaherty joined the Company in September 1996 and has
been Senior Vice President of Finance and Chief Financial Officer since January
1997 and Treasurer since December 1997. He was Vice President of Finance and
Chief Financial Officer from September 1996 to January 1997. Prior to joining
Avid, Mr. Flaherty was Senior Vice President, Finance and Chief Financial
Officer (February - September 1996), and Vice President, Finance and Chief
Financial Officer (1993 - February 1996), of Gibson Greetings Inc., and was Vice
President and Treasurer of FMR Corp., the parent company of Fidelity Investments
Group (1989-1992).
DAVID R. FROKER. Mr. Froker has been Senior Vice President and General Manager
of Digidesign since January 1997. Mr. Froker was General Manager of Digidesign
from March 1996 to January 1997. Prior to that time, he was Vice President,
Business Development of Digidesign, Inc. (1994-1995). He was Product Group
Manager at Amdahl (1988-1993).
C. EDWARD HAZEN. Mr. Hazen has been Senior Vice President and General Manager of
Office and Consumer Products since December 1997. He was Senior Vice President
of Business Development and Corporate Treasurer from January 1997 to December
1997. He was Vice President, Finance and Treasurer from January 1996 to January
1997, Vice President, Chief Financial Officer and Treasurer from November 1995
to January 1996, and Vice President and Treasurer from March 1993 to January
1996. Mr. Hazen was a Managing Director of Robertson, Stephens & Company
(1987-1993).
ROSE G. O'DONNELL. Ms. O'Donnell has been Senior Vice President of Technical
Strategies since April 1997. Ms. O'Donnell was Senior Vice President of
Engineering from January 1997 to April 1997. She was Vice President, Engineering
from November 1994 to January 1997. Ms. O'Donnell was General Manager of the
Media Technology Division of Hewlett-Packard (1989-1994).
DAVID E. OLSON. Mr. Olson is a Senior Vice President of the Company. From
November 1997 to February 1999, Mr. Olson was Senior Vice President and General
Manager, Digital News Production. Mr. Olson was Senior Vice President of
Worldwide Operations of the Company and Chief Operating Officer of Digidesign
from January 1997 to November 1997. He was Vice President of Worldwide
Operations for Avid from June 1996 to January 1997. Mr. Olson was Vice President
of Operations at Digidesign, Inc. from August 1991 to June 1996.
JUDITH M. OPPENHEIM. Ms. Oppenheim has been Senior Vice President of Human
Resources and Corporate Services since January 1997. She was Vice President of
Human Resources from November 1992 to January 1997. Ms. Oppenheim was Vice
President, Human Resources at The Forum Corporation (1989- 1992).
JEAN PROULX. Ms. Proulx is a Senior Vice President of the Company. From December
1997 to January 1999, Ms. Proulx was Senior Vice President and General Manager
of Professional Products. She was Senior Vice President of Engineering from May
1997 to December 1997. She was Vice President of Emerging Business at IBM from
October 1995 to May 1997, was the Vice President of Network Software Business
Unit at Digital Equipment Corporation from January 1994 to October 1995, and was
Director of the modern Macintosh Operating Group at Apple Computer from August
1992 to November 1993.
CAROL L. REID. Ms. Reid joined the Company in November 1998 as Vice President
and Corporate Controller. Prior to that time, she was Vice President of Internal
Audit for Digital Equipment Corporation from January 1998 to November 1998 and
Assistant Treasurer/Director from October 1994 to January 1998.
There are no family relationships among the named officers.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq National Market under the
symbol AVID. The table below shows the high and low sales prices of the Common
Stock for each calendar quarter the fiscal years ended December 31, 1998 and
1997.
1998 HIGH LOW
---- ---- ---
First Quarter $41.250 $26.000
Second Quarter $47.750 $28.375
Third Quarter $38.875 $18.625
Fourth Quarter $27.000 $11.063
1997 HIGH LOW
---- ---- ---
First Quarter $14.000 $9.000
Second Quarter $28.125 $12.375
Third Quarter $38.000 $22.000
Fourth Quarter $33.000 $23.000
The approximate number of holders of record of the Company's Common Stock at
March 26, 1999, was 602. This number does not include shareholders for whom
shares were held in a "nominee" or "street" name.
The Company has never declared or paid cash dividends on its capital stock and
currently intends to retain all available funds for use in the operation of its
business. The Company therefore does not anticipate paying any cash dividends in
the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected condensed consolidated financial data
for Avid. Included in the Company's financial statements and selected financial
data are the results of operations of Softimage, which the Company acquired on
August 3, 1998. The Company accounted for this acquisition as a purchase and,
accordingly, the results of operations of Softimage are included as of the date
of acquisition. In January 1995, the Company completed a merger with Digidesign
that was accounted for as a pooling of interests and, accordingly, all financial
data presented was restated to include the combined results of Avid and
Digidesign as though the merger had occurred retroactively. The selected
consolidated financial data below should be read in conjunction with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this filing.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
In thousands (except per share data)
For the Year ended
December 31,
------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------
Net revenues $482,377 $471,338 $429,009 $406,650 $233,633
Cost of revenues 190,249 221,553 238,808 198,841 108,057
------------------------------------------------
Gross profit 292,128 249,785 190,201 207,809 125,576
------------------------------------------------
Operating expenses:
Research and development 88,787 73,470 69,405 53,841 28,223
Marketing and selling 125,280 120,394 127,006 107,780 61,366
General and administrative 28,549 25,808 24,203 18,085 12,575
Nonrecurring costs 28,373 28,950 5,456
Amortization of acquisition
-related assets 34,204
------------------------------------------------
Total operating expenses 305,193 219,672 249,564 185,162 102,164
------------------------------------------------
Operating income (loss) (13,065) 30,113 (59,363) 22,647 23,412
Other income and expense, net 8,636 8,125 3,416 1,380 1,675
------------------------------------------------
Income (loss) before income
taxes (4,429) 38,238 (55,947) 24,027 25,087
Provision for (benefit from)
income taxes (796) 11,854 (17,903) 8,588 7,294
-----------------------------------------------
Net income (loss) ($3,633) $26,384 ($38,044) $15,439 $17,793
===============================================
Net income (loss) per common
share - basic ($0.15) $1.14 ($1.80) $0.81 $1.10
===============================================
Net income (loss) per common
share - diluted ($0.15) $1.08 ($1.80) $0.77 $0.99
===============================================
Weighted average common shares
outstanding - basic 23,644 23,065 21,163 19,010 16,238
===============================================
Weighted average common shares
outstanding - diluted 23,644 24,325 21,163 20,165 17,921
===============================================
CONSOLIDATED BALANCE SHEET DATA:
In thousands
As of December 31,
------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------
Working capital $118,965 $186,474 $145,320 $162,260 $86,513
Total assets 486,715 356,805 300,979 331,604 182,174
Long-term obligations 13,261 403 1,186 2,945 2,369
Total stockholders' equity 290,311 241,794 213,415 247,966 127,887
SUPPLEMENTAL PRO FORMA INFORMATION:
The following table presents pro forma net income, as well as the related pro
forma per share amounts, excluding the tax-effected impact of nonrecurring costs
and amortization of acquisition-related intangible assets.
In thousands (except per share data)
For the Year ended
December 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------
Pro forma net income,
excluding nonrecurring
costs and amortization
of acquisition-related
intangible assets $40,123 $26,384 ($14,518) $18,869 $17,793
======= ======= ======== ======= =======
Pro forma net income per
common share, excluding
nonrecurring costs and
amortization of
acquisition-related
intangible assets - diluted $1.56 $1.08 ($0.69) $0.94 $0.99
======= ======= ======== ======= =======
Weighted average common
shares outstanding -
diluted - used for pro
forma calculations 25,704 24,325 21,163 20,165 17,921
======= ======= ======== ======= =======
See Note R for supplemental pro forma calculations of net income (unaudited).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The text of this document may include forward-looking statements. Actual results
may differ materially from those described herein, depending on such factors as
are described herein, including under "Certain Factors That May Affect Future
Results."
Avid develops and provides digital film, video and audio editing and special
effects software and hardware technologies to create media content for
information and entertainment applications. Integrated with the Company's
digital storage and networking solutions, Avid's products are used worldwide in
video and audio production and post-production facilities; film studios;
network, affiliate, independent and cable television stations; recording
studios; advertising agencies; government and educational institutions;
corporate communications departments; and by individual home users.
In August 1998, the Company acquired the common stock of Softimage and certain
assets related to the business of Softimage for total consideration of $247.9
million. Softimage is a leading developer of 3D animation, video production, 2D
cel animation and compositing software solutions and technologies. The
acquisition was recorded as a purchase and, accordingly, the results of
operations of Softimage are included in the Company's financial statements as of
the acquisition date. The Company's results of operations for the year ended
December 31, 1998 include a pre-tax charge of $28.4 million for the value of
acquired in-process research and development and amortization of $34.2 million
related to intangible assets recorded as a result of the acquisition. Excluding
this one-time charge and amortization, pro forma net income was $40.1 million,
or $1.56 per diluted share, for the year ended December 31, 1998.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statements of operations as a percentage of net revenues for the periods
indicated:
For the Year ended December 31,
--------------------------------
1998 1997 1996
--------------------------------
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 39.4% 47.0% 55.7%
-------- -------- --------
Gross profit 60.6% 53.0% 44.3%
-------- -------- --------
Operating expenses:
Research and development 18.4% 15.6% 16.2%
Marketing and selling 26.0% 25.5% 29.6%
General and administrative 5.9% 5.5% 5.6%
Nonrecurring costs 5.9% 6.7%
Amortization of acquisition-related
intangible assets 7.1%
-------- -------- --------
Total operating expenses 63.3% 46.6% 58.1%
-------- -------- --------
Operating income (loss) (2.7)% 6.4% (13.8)%
Other income and expense, net 1.8% 1.7% 0.8%
-------- -------- --------
Income (loss) before income taxes (0.9)% 8.1% (13.0)%
Provision for (benefit from)
income taxes (0.2)% 2.5% (4.1)%
-------- -------- --------
Net income (loss) (0.7)% 5.6% (8.9)%
======== ======== ========
Excluding nonrecurring costs of 5.9% of revenues and amortization of acquisition
related intangible assets of 7.1% of revenues, both of which are related to the
acquisition of Softimage, pro forma net income was 8.3% of 1998 revenues.
Net Revenues
The Company's net revenues have been derived mainly from the sales of
computer-based digital, nonlinear media editing systems and related peripherals,
licensing of related software, and sales of related software maintenance
contracts. Net revenues increased by $11.1 million (2.3%) to $482.4 million in
the year ended December 31, 1998 from $471.3 million in 1997. Net revenues for
the year ended December 31, 1997 of $471.3 million increased by $42.3 million
(9.9%) from $429.0 million in 1996. The increase in net revenues during 1998 was
primarily attributable to incremental revenue related to product lines acquired
in the Softimage transaction, increased unit sales of Avid Xpress products for
Macintosh and NT platforms, and increased sales of Media Composer products,
partially offset by decreases in sales of system upgrades and Avid Cinema. The
increase in net revenues during 1997 was primarily the result of growth in unit
sales of MCXpress products for Macintosh and NT platforms, storage systems, and
digital audio products. During 1998, the Company introduced numerous new
products, including Symphony, Media Composer 9000, SOFTIMAGE|DS 2.1, Avid
Express for Windows NT, Pro Tools|24 Mix, and Marquee. Additionally, the Company
introduced numerous version updates of existing products, including version 7.0
of Media Composer and Film Composer, version 2.0 and 1.6 of Avid Xpress and
MCXpress, respectively, and version 1.1 of the Media Browse module of AvidNews.
During 1997, the Company began shipments of new versions of MCXpress and Avid
Xpress, AudioVision 4.0, Pro Tools|24, AvidNews and Mediashare Fibre Channel. To
date, product returns of all products have been immaterial.
The Company continues to shift an increasing proportion of its sales through
indirect channels, such as distributors and resellers. Net revenues derived
through indirect channels were greater than 70% of net revenue for the year
ended December 31, 1998, compared to greater than 60% of net revenue for 1997
and 40% for 1996.
International sales (sales to customers outside North America) accounted for
49.3% of the Company's 1998 net revenues, compared to 48.6% for 1997 and 49.5%
for 1996. International sales increased by 3.8% in 1998 compared to 1997 and by
4.9% in 1997 compared to 1996. The increase in international sales for 1998
compared to 1997 and the increase for 1997 compared to 1996 reflected increases
in Europe, partly offset by lower sales in the Asia Pacific region.
Gross Profit
Cost of revenues consists primarily of costs associated with the procurement of
components; the assembly, test, and distribution of finished products;
provisions for inventory obsolescence; warehousing; and post-sales customer
support costs. The resulting gross profit fluctuates based on factors such as
the mix of products sold, the cost and proportion of third-party hardware
included in the systems sold by the Company, the distribution channels through
which products are sold, the timing of new product introductions, the offering
of product upgrades, price discounts and other sales promotion programs, and
sales of aftermarket hardware products. Gross margin increased to 60.6% in 1998,
compared to 53.0% in 1997 and 44.3% in 1996. The increase during 1998 was
primarily due to lower vendor material costs, improved service margins and a
favorable product mix. The increase during 1997 was primarily due to lower
material costs and manufacturing efficiencies, reduced discounts and other sales
promotion programs, and a favorable product mix. The Company currently expects
gross margins during 1999 to be consistent with the 1998 levels.
Research and Development
Research and development expenses increased by $15.3 million (20.8%) in the year
ended December 31, 1998 compared to 1997 and increased by $4.1 million (5.9%) in
the year ended December 31, 1997 compared to 1996. The increased expenditures in
1998 were primarily due to five months of incremental Softimage costs as well as
additions to the Company's engineering staff for the continued development of
new and existing products. The increased expenditures in 1997 were primarily due
to provisions resulting from the Company's profit sharing plan and additions to
the Company's engineering staff for the continued development of new and
existing products. Offsetting the 1997 increase was the allocation in 1997 of
product marketing costs to sales and marketing expenses rather than to research
and development expenses, as that allocation more appropriately reflected the
activities of that function. Research and development expenses increased as a
percentage of net revenues to 18.4% in 1998 from 15.6% in 1997 primarily due to
the increases in research and development expenses for 1998 noted above. The
decrease to 15.6% in 1997 from 16.2% in 1996 was due to the allocation of
product marketing costs to sales and marketing and the increase in net revenues,
offset by increased expenditures due to continued development of new and
existing products.
Marketing and Selling
Marketing and selling expenses increased by $4.9 million (4.1%) in the year
ended December 31, 1998 compared to 1997 and decreased by $6.6 million (5.2%) in
the year ended December 31, 1997 compared to 1996. The increased expenditures in
1998 were primarily due to five months of incremental Softimage costs as well as
an increase in marketing programs, offset by ongoing savings in selling expenses
as a result of the shift to an indirect sales model. The decrease in sales and
marketing expense in 1997 was primarily due to the effect of the restructuring
of the Company's sales and marketing operations during the first quarter of 1997
to an indirect sales model. The Company had shifted its primary distribution
emphasis from a direct sales force to indirect sales channels, which reduced
certain costs including direct sales compensation and office overhead expenses
in 1997 and 1998. The reduction in 1997 costs was partially offset by the
allocation in 1997 of product marketing costs to sales and marketing rather than
to research and development. Marketing and selling expenses increased as a
percentage of net revenues to 26.0% in 1998 from 25.5% in 1997, and decreased as
a percentage of net revenues from 29.6% in 1996. The increase in 1998 was
primarily due to the increases in selling and marketing expenses noted above.
The decrease in 1997 was primarily due to the increase in net revenues in 1997
compared to 1996.
General and Administrative
General and administrative expenses increased $2.7 million (10.6%) in the year
ended December 31, 1998 compared to 1997 and increased by $1.6 million (6.6%) in
the year ended December 31, 1997 compared to 1996. The increased expenditures in
1998 were primarily due to five months of incremental Softimage costs as well as
higher compensation related costs. The increase in general and administrative
expenses for 1997 compared to 1996 was primarily due to provisions resulting
from the Company's profit sharing plan. General and administrative expenses
increased as a percentage of net revenues to 5.9% in 1998 from 5.5% in 1997, and
from 5.6% in 1996. The increase in 1998 was primarily due to the increases in
general and administrative expenses noted above.
Nonrecurring Costs and Amortization of Acquisition-related Intangible Assets
In connection with the August 1998 acquisition of the business of Softimage, the
Company allocated $28.4 million to in-process research and development; $88.2
million to intangible assets consisting of completed technologies, work force
and trade name; and $127.8 million to goodwill. In-process research and
development represented development projects in areas that had not reached
technological feasibility and had no alternative future use. Accordingly, its
value of $28.4 million was expensed as of the acquisition date and is reflected
as a nonrecurring charge to operations in 1998. Results for the year ended
December 31, 1998 also reflect amortization of $34.2 million associated with the
acquired intangible assets, including goodwill, as well as a tax benefit of $8.2
million related to the charge for in-process research and development (see Note
O and Q to the Consolidated Financial Statements).
The amounts allocated to identifiable tangible and intangible assets, including
acquired in-process research and development, were based on results of an
independent appraisal. The values of completed technologies and in-process
research and development were determined using a risk-adjusted, discounted cash
flow approach.
In-process research and development projects identified at the acquisition date
included next-generation three-dimensional modeling, animation and rendering
software, and new graphic, film and media management capabilities for
effects-intensive, on-line finishing applications for editing. A description of
each project follows:
Next Generation Three-Dimensional Modeling, Animation and Rendering Software.
The efforts required to develop this project into a commercially viable
product principally relate to completion of the animation and real-time
playback architecture, completion and integration of architectural software
components, validation of the resulting architecture, and finalization of the
feature set. As of the acquisition date, the Company assessed that the
overall project was 81% complete and calculated a value of $25.7 million for
this in-process research and development. The estimated costs to complete
this project as of the acquisition date were $5.1 million, of which $3.2
million has been incurred through December 31, 1998. The Company currently
expects to incur $4.4 million of additional costs during fiscal year 1999.
Development costs through December 31, 1998 and as expected to be incurred in
the future are higher than originally anticipated due to challenges
encountered in the development process. Anticipated completion of this
project is expected during the second half of 1999, at which time the Company
expects to begin to benefit economically.
New Graphics, Film and Media Management Capabilities for Effects-Intensive,
On-line Finishing. The efforts required to develop this project into a
commercially viable product principally relate to the rebuilding of the
framework architecture, the rewriting of software code of the compositing
engine to accommodate significant new features, and the rewriting of software
code of the titling component. As of the acquisition date, the Company
assessed that the overall project was 6% complete and calculated a value of
$2.7 million for this in-process research and development. The estimated
costs to complete this project as of the acquisition date were $3.8 million,
of which $2.5 million has been incurred through December 31, 1998. The
Company currently expects to incur $3.2 million of additional costs during
fiscal year 1999. Development costs through December 31, 1998 and as expected
to be incurred in the future are higher than originally anticipated due to
the addition of features and functionality, which has expanded the scope of
the original project. Anticipated completion of this project is expected
during the second half of 1999, at which time the Company expects to begin to
benefit economically.
The value of in-process research and development, specifically, was determined
by estimating the costs to develop the in-process projects into commercially
viable products, estimating the resulting net cash flows from such projects,
discounting the net cash flows back to their present values, and adjusting that
result to reflect each project's stage of completion. The expected cash flows of
the in-process projects were adjusted to reflect the contribution of completed
and core technologies.
Total revenues from these in-process projects were forecast to peak in 2002 and
to decline from 2002 to 2004 as new products are expected to be introduced by
the Company. These revenue forecasts were based on management's estimate of
market size and growth, expected trends in technology, and the expected timing
of new product introductions. A discount rate of 21% was used for valuing the
in-process research and development. The discount rate was higher than the
Company's implied weighted average cost of capital due to the inherent
uncertainties surrounding the successful development of the in-process research
and development and the related risk of realizing cash flows from products that
have not yet reached technological feasibility, among other factors.
Total revenues from the completed technologies were forecasted to peak in 1999
and to decline through 2001. The Company discounted the net cash flows of the
completed technology to their present value using a discount rate of 16%.
The Company believes that the assumptions used in the forecasts were reasonable
at the date of acquisition. The Company cannot be assured, however, that the
underlying assumptions used to estimate expected product sales, development
costs or profitability, or the events associated with such projects, will
transpire as estimated. Accordingly, actual results may vary from the projected
results.
The Company currently expects to complete the in-process projects. However, risk
is associated with the completion of the projects, and the Company cannot be
assured that the projects will meet with either technological or commercial
success. If these projects are not successfully developed or commercially
viable, the sales and profitability of the Company may be adversely affected in
future periods.
During the first quarter of 1996, the Company recorded charges for nonrecurring
costs consisting of $7.0 million for restructuring charges related to February
1996 staffing reductions of approximately 70 employees primarily in the U.S.,
the Company's concurrent decision to discontinue certain products and
development projects, and $13.2 million for product transition costs in
connection with the transition from NuBus to PCI bus technology in certain of
its product lines. Included in the $7.0 million for restructuring charges were
approximately $5.0 million of cash payments and $2.0 million of non-cash
charges. During the third quarter of 1996, the Company recorded charges for
costs of $8.8 million, associated primarily with the Company's decision not to
release the Avid Media Spectrum product line. Approximately $7.2 million of the
$8.8 million nonrecurring charge related to non-cash items associated with the
write-off of assets. The Company has completed the related restructuring
actions. In the first quarter of 1995, the Company acquired Digidesign, Inc.,
Parallax Software Limited, 3 Space Software Limited and Elastic Reality, Inc. In
connection with these acquisitions, the Company recorded merger costs of
approximately $5.5 million, of which $3.9 million represented direct transaction
expenses and $1.6 million consisted of various restructuring charges.
Other Income and Expense, Net
Interest and other income, net, consists of interest income, other income and
interest expense. Interest and other income, net, for 1998, which consisted
primarily of interest income, increased approximately $511,000 from 1997 which,
in turn, increased $4.7 million from 1996. For the years ended December 31, 1998
and December 31, 1997, interest and other income, net, increased primarily due
to higher cash and investment balances.
Provision for (Benefit from) Income Taxes
The Company's effective tax rate was 18%, 31%, and 32%, respectively, for 1998,
1997, and 1996. The tax rate for 1998 includes a benefit of $8.2 million related
to the pre-tax charge of $28.4 for in-process technology associated with the
Company's acquisition of Softimage Inc. A portion of the charge is not
deductible for U.S. Federal tax purposes. Excluding the charge and related tax
benefit, the Company's effective tax rate would have been 31% for 1998. The pro
forma 1998 and actual 1997 effective tax rate of 31% is different from the
Federal statutory rate of 35% due primarily to the Company's foreign
subsidiaries, which are taxed in the aggregate at a lower rate, and the U.S.
Federal Research Tax Credit. The 1996 effective tax rate is different from the
Federal statutory rate of 35.0% primarily due to the impact of the Company's
foreign subsidiaries, which are taxed in the aggregate at a lower rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date through both private and public
sales of equity securities as well as through cash flows from operations. As of
December 31, 1998, the Company's principal sources of liquidity included cash,
cash equivalents, and marketable securities totaling approximately $111.8
million.
With respect to cash flow, net cash provided by operating activities was $68.2
million in 1998 compared to $111.2 million in 1997 and $40.9 million in 1996.
During the twelve months ended December 31, 1998 net cash provided by operating
activities primarily reflects net income after adjustment for the charge for
in-process research and development in connection with the acquisition of
Softimage and depreciation and amortization. During the twelve months ended
December 31, 1997 net cash provided by operating activities primarily reflects
net income adjusted for depreciation, as well as increases in accounts payable
and income taxes payable and reductions in inventory. In 1997, the increase in
accrued expenses was primarily due to provisions for profit sharing while the
reduction in inventory resulted from improved inventory turns. (See Consolidated
Statements of Cash Flow)
The Company purchased $15.9 million of property and equipment and other assets
during 1998, compared to $15.7 million and $28.2 million in 1997 and 1996,
respectively. These purchases were primarily of hardware and software for the
Company's information systems and equipment to support research and development
activities. The Company also utilized cash of $78.4 million in its acquisition
of Softimage in 1998.
In 1995, the Company entered into an unsecured line of credit agreement with a
group of banks which provides for up to $35.0 million in revolving credit. The
line of credit agreement was renewed on June 30, 1998 to expire on June 29,
1999, and certain covenants were amended on September 30, 1998. Under the terms
of the agreement, the Company must pay an annual commitment fee of 1/4% of the
average daily unused portion of the facility, payable quarterly in arrears. The
Company has two loan options available under the agreement: the Base Rate Loan
and the LIBOR Rate Loan. The interest rates to be paid on the outstanding
borrowings for each loan annually are equal to the Base Rate or LIBOR plus
1.25%, respectively. Additionally, the Company is required to maintain certain
financial ratios and is bound by covenants over the life of the agreement,
including a restriction on the payment of dividends. The Company has in certain
periods prior to 1997 been in default of certain financial covenants. On these
occasions the defaults have been waived by the banks. There can be no assurance
that the Company will not default in future periods or that, if in default, it
will be able to obtain such waivers. The Company had no borrowings against the
line and was not in default of any financial covenants as of December 31, 1998.
The Company believes existing cash and marketable securities, internally
generated funds and available borrowings under its bank credit line will be
sufficient to meet the Company's cash requirements, including capital
expenditures, at least through the end of 1999. In the event the Company
requires additional financing, the Company believes that it would be able to
obtain such financing; however, there can be no assurance that it would be
successful in doing so, or that it could do so on terms favorable to the
Company.
On October 23, 1997, February 5, 1998 and October 21, 1998, the Company
announced that the Board of Directors had authorized the repurchase of up to 1.0
million, 1.5 million and 2.0 million shares respectively, of the Company's
common stock. Purchases have been and will be made in the open market or in
privately negotiated transactions. The Company has used and plans to continue to
use any repurchased shares for its employee stock plans. As of December 31,
1997, the Company had repurchased a total of 1.0 million shares at a cost of
$28.8 million, which completed the program announced in October 1997. As of
December 31, 1998, the Company had repurchased approximately 1.9 million
additional shares of common stock at a cost of $61.8 million, which completed
the program announced during February 1998 and initiated the program announced
in October 1998. These purchases include the repurchase of 500,000 shares from
Intel Corporation ("Intel"). Intel originally purchased approximately 1.6
million shares of Avid common stock in March 1997.
Other planned uses of cash include the efforts to develop the purchased
in-process research and development related to the Softimage acquisition into
commercially viable products. As of December 31, 1998, the estimated costs to be
incurred to complete the development of in-process research and development
projects total approximately $7.6 million through the second half of 1999.
Additionally, the note issued to Microsoft Corporation in connection with the
acquisition is due and payable in June 2003 (See Note O to the Notes to
Consolidated Financial Statements).
YEAR 2000 READINESS DISCLOSURE
The Company has a worldwide program in place to address its exposure to the Year
2000 issue. This program is designed to minimize the possibility of significant
Year 2000 interruptions. Possible worst case scenarios include the interruption
of significant parts of the Company's business as a result of critical business
systems failures or failures experienced by suppliers, resellers, or customers.
Any such interruption may have a material adverse impact on future results.
Since the possibility of such interruptions cannot be eliminated, the Company
has involved a significant number of cross-functional resources with technical,
business, legal, and financial expertise in order to achieve Year 2000
readiness.
In 1998, the Company established the worldwide program to address its software
and hardware product and customer concerns, its internal business systems,
including technology infrastructure and embedded technology systems, and the
compliance of its suppliers. This program includes the following phases:
identification, assessment, testing, remediation, and contingency planning.
With respect to its products, the Company has created categories to describe the
status of its products. More than 70% of the products that the Company has
considered for testing have been classified as "Year 2000 Ready." The "Year 2000
Ready" category indicates that the Company has determined that the product, when
used in its designated manner, will not terminate abnormally or give incorrect
results with respect to date data before, during or after December 31, 1999,
provided that all products used in conjunction with the Avid product accurately
exchange formatted information with the Avid product. The Company intends to
continue testing the majority of the remaining 30% of its designated products
and to provide updates such as software patches, workarounds, or other solutions
for such designated products where necessary to make them Year 2000 ready. In
certain cases, for older products, the Company has or may deem it inappropriate
to test or provide upgrade paths for Year 2000 readiness.
The readiness status of the Company's hardware and software products is
available on the Company's web site, which is updated from time to time. This
web site has been and will continue to be the Company's primary method for
communicating information about its products to the public. Because all customer
situations cannot be anticipated, the Company may see a change in demand or an
increase in warranty or service claims as a result of the Year 2000 transition.
Such events, should they occur, could have a material adverse impact on future
results.
With respect to the Company's efforts to address the Year 2000 readiness of its
internal business systems the identification and assessment phases have, for the
most part, been completed; the remainder of these efforts will occur in the
second quarter of 1999. These identification and assessment phases involved
evaluation of substantially all of the Company's internal information systems
and other infrastructure areas including communication systems, building
security systems and embedded technologies in areas such as manufacturing and
customer support processes. Testing of certain existing internal information
systems is currently underway and is scheduled to be substantially completed in
the second quarter of 1999. Those systems which are already known or are shown
not to be Year 2000 ready are scheduled for remediation during the second or
third quarter of 1999. Remediation may involve upgrades or replacements of
non-ready systems. Certain of the Company's business systems were already
scheduled to be replaced in the normal course of business for reasons unrelated
to potential Year 2000 issues. Those systems will be tested for Year 2000 issues
as part of the normal installation and testing process.
The Company has initiated communications with mission critical third party
suppliers and service providers, such as inventory suppliers, equipment
suppliers, financial institutions, landlords, and resellers, to determine the
extent to which the Company's operations are vulnerable to those third parties'
failure to remediate their own Year 2000 issues. Suppliers of software, hardware
or other products that might contain embedded processors were requested to
provide certification regarding the Year 2000 readiness status of their products
and business processes. Suppliers of services were also requested to provide
certification or other appropriate information regarding their Year 2000
readiness status. For service suppliers who interface with the Company via
electronic means, the Company intends to test mission critical interfaces where
possible or appropriate. In addition, in order to protect against the
acquisition of additional products or services that may not be Year 2000 ready,
the Company is implementing a policy that requires sufficient assurances that
such products and services are Year 2000 ready. With respect to the Company's
resellers, the Company has requested or is in the process of requesting from
them appropriate assurances regarding Year 2000 readiness status of their
business processes.
The Company's efforts with respect to third party suppliers and service
providers is scheduled for completion during the second quarter of 1999. The
Company does not anticipate any related delays that will significantly impact
its Year 2000 readiness as a whole. However, the Company does face a risk with
respect to third party suppliers who may prove unable to address and remediate
their Year 2000 issues. The Company is developing contingency plans to address
the products or services obtained from those third parties who fail to provide
the requested information or whose responses are inadequate.
The costs of the readiness program are primarily costs of existing internal
resources and expertise combined with small incremental external spending. The
entire cost of the program is estimated at $3.2 million, of which approximately
50% has been incurred through March 31, 1999. Costs for business system
replacements or upgrades unrelated to Year 2000 issues are not included in this
estimate. No future material product readiness costs are anticipated. However,
milestones and implementation dates and the costs of the Company's Year 2000
readiness program are subject to change based on new circumstances that may
arise or new information becoming available.
Based on the Company's ongoing evaluation of internal information and other
systems, the Company does not anticipate significant business interruptions.
However, satisfactorily addressing a particular Year 2000 issue on a timely
basis is dependent on many factors, some of which are not completely within the
Company's control, such as those involving third parties. Additionally, there
remains the risk that errors or defects related to the Year 2000 issue may
remain undetected. Should business interruptions occur, or should a significant
Year 2000 issue go undetected, there could be a material adverse impact on
future results.
EUROPEAN MONETARY UNION
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their sovereign currencies and the
euro. As of that date, the participating countries agreed to adopt the euro as
their common legal currency. However the legacy currencies will also remain
legal tender in the participating countries for a transition period between
January 1, 1999 and January 1, 2002. During this transition period, public and
private parties may elect to pay or charge for goods and services using either
the euro or the participating country's legacy currency.
During 1998, the Company developed a plan which includes testing and evaluating
system capabilities, determining euro and legacy currency pricing strategies and
analyzing the effects on the Company's currency exposure and hedging practices.
The Company's plan will determine whether the Company will be able to process
euro-denominated transactions such as invoices, purchases, payments and cash
receipts, and whether such transactions will be properly translated into the
legacy and reporting currencies. The Company does not expect the system and
equipment conversion costs to be material. Due to numerous uncertainties, the
Company cannot reasonably estimate the effects one common currency will have, if
any, on the Company's financial condition or results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair values. Changes in
the fair values of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether or not a derivative is
designated as part of a hedge transaction and, if it is, depending on the type
of hedge transaction. SFAS 133 is effective for fiscal quarters beginning after
January 1, 2000 for the Company, and its adoption is not expected to have a
material impact on the Company's financial position or results of operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that could affect the Company's future operating
results, including, without limitation, the following:
The Company recently began shipping its Avid Symphony product, which is based on
Intel Architecture ("IA") computers and the Microsoft Windows NT operating
system, and its SOFTIMAGE|DS and Pro Tools|24 Mix products. The Company expects
that a significant portion of its future revenues will be attributable to sales
of these newly introduced products. However, if these products fail to achieve
anticipated levels of market acceptance, the Company's revenues and results of
operations could be adversely affected. In addition, the Company from time to
time develops new products or upgraded existing products to incorporate advances
in enabling technologies. For example, the Company is continuing to develop
additional products that operate using IA - based computers and the Windows NT
operating system. There can be no assurance that customers will not defer
purchases of existing Apple-based and other products in anticipation of the
release of such new products, that the Company will be successful in developing
additional new products or that they will gain market acceptance, if developed.
Any deferral by customers of purchases of existing Apple-based or other products
or any failure by the Company to develop such new products in a timely way or to
gain market acceptance for them could have a material adverse effect on the
Company's business and results of operations.
Certain of the Company's products operate only on specific computer platforms.
The Company currently relies on Apple Computer, Inc., IBM and Intergraph as the
sole manufacturers of such computer platforms. There can be no assurance that
customers will not purchase competitors' products based on other computer
platforms, that the respective manufacturers will continue to develop,
manufacture, and support such computer platforms suitable for the Company's
existing and future markets or that the Company will be able to secure an
adequate supply of computers, the occurrence of any of which could have a
material adverse effect on the Company's business and results of operations.
The Company has expanded its product line to address the digital media
production needs of the television broadcast news market, online film and video
finishing market and the emerging market for multimedia production tools,
including the corporate and home user market. The Company has limited experience
in serving these markets, and there can be no assurance that the Company will be
able to develop such products successfully, that such products will achieve
widespread customer acceptance, or that the Company will be able to develop
distribution and support channels to serve these markets. A significant portion
of the Company's future growth will depend on customer acceptance in these and
other new markets. Any failure of such products to achieve market acceptance,
additional costs and expenses incurred by the Company to improve market
acceptance of such products and to develop new distribution and support
channels, or the withdrawal from the market of such products or of the Company
from such new markets could have a material adverse effect on the Company's
business and results of operations.
The Company's gross margin may fluctuate based on factors such as the mix of
products sold, cost and the proportion of third-party hardware included in the
systems sold by the Company, the distribution channels through which products
are sold, the timing of new product introductions, the offering of product and
platform upgrades, price discounts and other sales promotion programs, the
volume of sales of aftermarket hardware products, the costs of swapping or
fixing products released to the market with errors or flaws, provisions for
inventory obsolescence, allocations of overhead costs to manufacturing and
customer support costs to cost of goods, sales of third-party computer hardware
to its distributors, and competitive pressure on selling prices of products. The
Company's systems and software products typically have higher gross margins than
storage devices and product upgrades. Gross profit varies from product to
product depending primarily on the proportion and cost of third-party hardware
included in each product. The Company, from time to time, adds functionality and
features to its systems. If such additions are accomplished through the use of
more, or more costly, third-party hardware, and if the Company does not increase
the price of such systems to offset these increased costs, the Company's gross
margins on such systems would be adversely affected. In addition, during 1998,
the Company installed server-based, all-digital broadcast newsroom systems at
certain customer sites. Some of these systems have been accepted by customers,
and the resulting revenues and associated costs were recognized by the Company.
Others of these systems have not yet been accepted by customers. The Company
believes that such installations, when and if fully recognized as revenue on
customer acceptance, will be profitable. However, the Company is unable to
determine whether and when the systems will be accepted. In any event, the
Company believes that, because of the high proportion of third-party hardware,
including computers and storage devices, included in such systems, the gross
margins on such sales will be lower than the gross margins generally on the
Company's other systems.
The Company has shifted an increasing proportion of its sales through indirect
channels such as distributors and resellers. The Company believes the overall
shift to indirect channels has resulted in an increase in the number of software
and circuit board "kits" sold through indirect channels in comparison with
turnkey systems consisting of CPUs, monitors, and peripheral devices, including
accompanying software and circuit boards, sold by the Company through its direct
sales force to customers. Resellers and distributors typically purchase software
and "kits" from the Company and other turnkey components from other vendor
sources in order to produce complete systems for resale. Therefore, to the
extent the Company increases its sales through indirect channels, its revenue
per unit sale will be less than it would have been had the same sale been made
directly by the Company. In the event the Company is unable to increase the
volume of sales in order to offset this decrease in revenue per unit sale or is
unable to continue to reduce its costs associated with such sales, profits could
be adversely affected.
The Company's operating expense levels are based, in part, on its expectations
of future revenues. In recent quarters approximately half of the Company's
revenues for the quarter have been recorded in the third month of the quarter.
Further, in many cases, quarterly operating expense levels cannot be reduced
rapidly in the event that quarterly revenue levels fail to meet internal
expectations. Therefore, if quarterly revenue levels fail to meet internal
expectations upon which expense levels are based, the Company's operating
results may be adversely affected and there can be no assurance that the Company
would be able to operate profitably. Reductions of certain operating expenses,
if incurred, in the face of lower than expected revenues could involve material
one-time charges associated with reductions in headcount, trimming product
lines, eliminating facilities and offices, and writing off certain assets.
The Company has significant deferred tax assets. The deferred tax assets reflect
the net tax effects of tax credit and operating loss carryforwards and temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax asset will be realized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income are reduced.
The Company is dependent on a number of suppliers as sole source vendors of
certain key components of its products and systems. Components purchased by the
Company from sole source vendors include; video compression chips manufactured
by C-Cube Microsystems; a small computer systems interface ("SCSI") accelerator
board from ATTO Technology; a 3D digital video effects board from Pinnacle
Systems; application specific integrated circuits ("ASICS") from Chip Express
and LSI Logic; digital signal processing integrated circuits from Motorola; a
fibre channel adapter card from JNI; a fibre channel storage array from Data
General's Clariion division; and a PCI expansion chassis from Magma Inc. The
Company purchases these sole source components pursuant to purchase orders
placed from time to time. The Company also manufactures certain circuit boards
under license from Truevision (a subsidiary of Pinnacle Systems). The Company
generally does not carry significant inventories of these sole source components
and has no guaranteed supply arrangements. No assurance can be given that sole
source suppliers will devote the resources necessary to support the enhancement
or continued availability of such components or that any such supplier will not
encounter technical, operating or financial difficulties that might imperil the
Company's supply of such sole source components. While the Company believes that
alternative sources of supply for sole source components could be developed, or
systems redesigned to permit the use of alternative components, its business and
results of operations could be materially affected if it were to encounter an
untimely or extended interruption in its sources of supply.
The markets for digital media editing and production systems are intensely
competitive and subject to rapid change. The Company encounters competition in
the video and film editing and effects and professional audio markets. Many
current and potential competitors of the Company have substantially greater
financial, technical, distribution, support, and marketing resources than the
Company. Such competitors may use these resources to lower their product costs
and thus be able to lower prices to levels at which the Company could not
operate profitably. Further, such competitors may be able to develop products
comparable or superior to those of the Company or adapt more quickly than the
Company to new technologies or evolving customer requirements. Accordingly,
there can be no assurance that the Company will be able to compete effectively
in its target markets or that future competition will not adversely affect its
business and results of operations.
A significant portion of the Company's business is conducted in currencies other
than the U.S. dollar. Changes in the value of major foreign currencies relative
to the value of the U.S. dollar, therefore, could adversely affect future
revenues and operating results. The Company attempts to reduce the impact of
currency fluctuations on results through the use of forward exchange contracts
that hedge foreign currency-denominated intercompany net receivables or payable
balances. The Company has generally not hedged transactions with external
parties, although it periodically reevaluates its hedging practices.
The Company is involved in various legal proceedings, including patent
litigation; an adverse resolution of any such proceedings could have a material
adverse effect on the Company's business and results of operations. See Item 3.
Legal Proceedings and Note K to Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
AVID TECHNOLOGY, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1998
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION
AVID TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITEM 8:
Report of Independent Accountants..................................... 27
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996................................................. 28
Consolidated Balance Sheets as of December 31, 1998 and 1997.......... 29
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996.................................... 30
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996................................................. 31
Notes to Consolidated Financial Statements............................ 32
Consolidated Financial Statement Schedule for the years ended
December 31, 1998, 1997 and 1996 included in Item 14(d):
Schedule II - Supplemental Valuation and Qualifying Accounts.......... F-1
Schedules other than that listed above have been omitted since the required
information is not present, or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements or the notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Avid Technology, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Avid
Technology, Inc. (the "Company") at December 31, 1998 and 1997, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule listed
in Item 14(d) of this Form 10-K presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 3, 1999
AVID TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Year
Ended December 31,
-------------------------------
1998 1997 1996
-------- -------- --------
Net revenues $482,377 $471,338 $429,009
Cost of revenues 190,249 221,553 238,808
-------- -------- --------
Gross profit 292,128 249,785 190,201
-------- -------- --------
Operating expenses:
Research and development 88,787 73,470 69,405
Marketing and selling 125,280 120,394 127,006
General and administrative 28,549 25,808 24,203
Nonrecurring costs 28,373 28,950
Amortization of acquisition-related
intangible assets 34,204
-------- -------- --------
Total operating expenses 305,193 219,672 249,564
-------- -------- --------
Operating income (loss) (13,065) 30,113 (59,363)
Interest and other income 8,986 8,291 3,786
Interest expense (350) (166) (370)
-------- -------- --------
Income (loss) before income taxes (4,429) 38,238 (55,947)
Provision for (benefit from) income taxes (796) 11,854 (17,903)
-------- -------- --------
Net income (loss) ($3,633) $26,384 ($38,044)
======== ======== ========
Net income (loss) per common share -
basic ($0.15) $1.14 ($1.80)
======== ======== ========
Net income (loss) per common share -
diluted ($0.15) $1.08 ($1.80)
======== ======== ========
Weighted average common shares
outstanding - basic 23,644 23,065 21,163
======== ======== ========
Weighted average common shares
outstanding - diluted 23,644 24,325 21,163
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
AVID TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
-------------------------
1998 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $62,904 $108,308
Marketable securities 48,922 78,654
Accounts receivable, net of allowances of
$7,171 and $7,529 in 1998 and 1997,
respectively 89,754 79,773
Inventories 11,093 9,842
Deferred tax assets 17,771 17,160
Prepaid expenses 6,095 4,645
Other current assets 5,108 2,700
--------- ---------
Total current assets 241,647 301,082
Property and equipment, net 35,398 38,917
Long-term deferred tax assets 23,891 14,820
Acquisition-related intangible assets 181,631
Other assets 4,148 1,986
--------- ---------
Total assets $486,715 $356,805
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $24,311 $22,166
Current portion of long-term debt 398 783
Accrued compensation and benefits 29,031 23,837
Accrued expenses 32,708 30,149
Income taxes payable 13,715 11,210
Deferred revenues 22,519 26,463
--------- ---------
Total current liabilities 122,682 114,608
--------- ---------
Long-term debt and other liabilities,
less current portion 13,261 403
Purchase consideration 60,461
Commitments and contingencies (Note K)
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized; no shares issued
Common stock, $.01 par value, 50,000,000
shares authorized; 26,591,457 and
24,156,938 shares issued and 24,393,795
and 23,199,636 shares outstanding at
December 31, 1998 and 1997, respectively 265 242
Additional paid-in capital 349,289 252,307
Retained earnings 14,338 27,286
Treasury stock, at cost, 2,197,662 and 957,302
shares at December 31, 1998 and 1997,
respectively (68,024) (27,548)
Deferred compensation (3,773) (8,034)
Accumulated other comprehensive income (loss) (1,784) (2,459)
--------- ---------
Total stockholders' equity 290,311 241,794
--------- ---------
Total liabilities and stockholders' equity $486,715 $356,805
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
AVID TECHNOLOGY, INC.
Consolidated Statements of
Stockholders' Equity
(in thousands, except share data)
Accumulated
Other
Compre- Total
Shares of Common Additional hensive Stock-
Common Stock Stock Paid-in Retained Treasury Deferred Income holders'
Issued In Treasury Issued Capital Earnings Stock Compensation (Loss) Equity
----------------------------------------------------------------------------------------------
Balances at December
31, 1995 20,935,145 $209 $208,918 $39,495 ($656) $247,966
Exercise of stock options 260,055 3 1,185 1,188
Sale of common stock under
Employee Stock Purchase Plan 143,169 1 2,371 2,372
Comprehensive income (loss):
Net income (38,044) (38,044)
Other comprehensive income (loss):
Net unrealized losses on
marketable securities (24) (24)
Translation adjustment (43) (43)
--------
Other comprehensive
income (loss) (67)
--------
Comprehensive income (loss) (38,111)
----------------------------------------------------------------------------------------------
Balances at December
31, 1996 21,338,369 213 212,474 1,451 (723) 213,415
Sale of common stock 1,552,632 16 14,712 14,728
Acquisition of shares of common
stock for treasury (1,000,000) ($28,776) (28,776)
Exercise of stock options and
related tax benefits 715,600 42,698 8 14,006 (549) 1,228 14,693
Sale of common stock under
Employee Stock Purchase Plan 204,137 2 1,989 1,991
Issuance of restricted stock 347,200 3 9,152 ($9,152) 3
Restricted stock grants canceled
and compensation expense (1,000) (26) 1,118 1,092
Comprehensive income (loss):
Net income 26,384 26,384
Other comprehensive income (loss):
Net unrealized gains on
marketable securities 12 12
Translation adjustment (1,748) (1,748)
--------
Other comprehensive income (loss) (1,736)
--------
Comprehensive income 24,648
----------------------------------------------------------------------------------------------
Balances at December
31, 1997 24,156,938 (957,302) 242 252,307 27,286 (27,548) (8,034) (2,459) 241,794
Acquisition of shares of common
stock for treasury (1,953,487) (61,822) (61,822)
Exercise of stock options and
related tax benefits 650,420 3,094 (9,059) 18,717 12,752
Sale of common stock under
Employee Stock Purchase Plan 91,507 (256) 2,629 2,373
Issuance of common stock in
connection with acquisition 2,435,519 24 65,463 65,487
Issuance of warrants to purchase
common stock in connection
with acquisition 26,196 26,196
Issuance of stock options in
connection with acquisition 2,544 2,544
Restricted stock grants canceled
and compensation expense (1,000) (28,800) (1) (315) 4,261 3,945
Comprehensive income (loss):
Net loss (3,633) (3,633)
Other comprehensive income (loss):
Net unrealized gains on
marketable securities 5 5
Translation adjustment 670 670
--------
Other comprehensive income 675
--------
Comprehensive income (loss) (2,958)
----------------------------------------------------------------------------------------------
Balances at December
31, 1998 26,591,457 (2,197,662) $265 $349,289 $14,338 ($68,024) ($3,773) ($1,784) $290,311
==============================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
AVID TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Year Ended
December 31,
------------------------
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($3,633) $26,384 ($38,044)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Charge for acquired in-process research and
development, net of tax benefit 20,155
Depreciation and amortization 55,928 25,380 29,641
Compensation from stock grants and options 3,945 2,119
Provision for doubtful accounts 2,018 3,304 6,627
Changes in deferred tax assets (4,412) (617) (18,384)
Tax benefit of stock option exercises 3,829 3,658
Provision for product transition costs and
nonrecurring inventory write-offs,
non-cash portion 18,750
Provision for other nonrecurring costs,
non-cash portion 7,048
(Gain) loss on disposal of equipment (133) 222 1,410
Changes in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable (2,801) (2,215) 13,836
Inventories (2,769) 22,514 14,479
Prepaid expenses and other current assets (2,126) 663 147
Accounts payable 814 (2,940) (3,819)
Income taxes payable 2,404 7,556 (3,206)
Accrued expenses, compensation and benefits 716 23,047 9,107
Deferred revenues (5,700) 2,119 3,356
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 68,235 111,194 40,948
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment and
other assets (15,913) (15,685) (28,219)
Acquisition of business, net of cash acquired (78,416)
Capitalized software development costs (20) (107) (2,295)
Proceeds from disposal of equipment 1,309 2,227 1,550
Purchases of marketable securities (166,580) (147,960) (29,430)
Proceeds from sales of marketable securities 196,317 87,564 58,786
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (63,303) (73,961) 392
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (610) (1,726) (2,000)
Purchase of common stock for treasury (61,822) (28,776)
Proceeds from issuance of common stock 10,901 26,729 3,560
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (51,531) (3,773) 1,560
- --------------------------------------------------------------------------------
Effects of exchange rate changes on cash and
cash equivalents 1,195 (947) 48
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (45,404) 32,513 42,948
Cash and cash equivalents at beginning of year 108,308 75,795 32,847
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $62,904 $108,308 $75,795
================================================================================
Non-cash Financing and Investing Activities:
- -------------------------------------------
See supplemental cash flow information in Note S
The accompanying notes are an integral part of the consolidated financial
statements.
AVID TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
A. ORGANIZATION AND OPERATIONS
Avid Technology, Inc. ("Avid" or "the Company") develops, markets, sells and
supports a wide range of software and systems for creating and manipulating
digital media content. Digital media are media elements, whether video or audio
or graphics, in which the image, sound or picture is recorded and stored as
digital values, as opposed to analog signals. Avid's digital, nonlinear video
and film editing systems are designed to improve the productivity of video and
film editors by enabling them to edit moving pictures and sound in a faster,
easier, more creative, and more cost-effective manner than traditional analog
tape-based systems. To complement these systems, Avid develops and sells a range
of image manipulation products that allow users in the video and film
post-production and broadcast markets to create graphics and special effects for
use in feature films, television programs and advertising, and news programs.
Additionally, Avid develops and sells digital audio systems for the professional
audio market. Avid's products are used worldwide in production and
post-production facilities; film studios; network, affiliate, independent, and
cable television stations; recording studios; advertising agencies; government
and educational institutions; corporate communication departments; and by
individual home users.
As described in Note O, in August 1998, the Company acquired the common stock of
Softimage Inc. ("Softimage") and certain assets related to the business of
Softimage for total consideration of $247.9 million. Softimage is a leading
developer of three-dimensional ("3D") animation, video production,
two-dimensional ("2D") cel animation and compositing software solutions and
technologies. The acquisition was recorded as a purchase and, accordingly, the
results of operations of Softimage have been included in the Company's financial
statements as of the acquisition date.
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, the
recoverability of intangible assets including goodwill 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 included in accumulated other comprehensive income, which is 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 intercompany receivables and payables (asset and liability positions)
of its foreign subsidiaries. Gains and losses associated with currency rate
changes on the contracts are currently 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. (See also Note L).
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less 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.
Marketable Securities
Marketable securities consist primarily of state and municipal bonds and
commercial paper. The Company has classified its debt securities as "available
for sale" and reports them at fair value, with unrealized gains and losses
excluded from earnings and reported as an adjustment to other comprehensive
income, which is reflected as a separate component of stockholders' equity.
Inventories
Inventories, principally purchased components, are stated at the lower of cost
(determined on a first-in, first-out basis) or market value. Inventory in the
digital media market, including the Company's inventory, is subject to rapid
technological change or obsolescence; therefore, utilization of existing
inventory may differ from the Company's estimates.
Property and Equipment
Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful life of the asset. Leasehold
improvements are amortized over the shorter of the useful life of the
improvement or the remaining term of the lease. Expenditures for maintenance and
repairs are expensed as incurred. Upon retirement or other disposition of
assets, the cost and related accumulated depreciation are eliminated from the
accounts and the resulting gain or loss is reflected in income. A significant
portion of the property and equipment is subject to rapid technological
obsolescence; as a result, the depreciation and amortization periods could
ultimately shorten to reflect the change in future technology.
Acquisition-related Intangible Assets
Acquisition-related intangible assets result from the Company's acquisitions of
businesses accounted for under the purchase method and consist of the values of
identifiable intangible assets including completed technology, work force and
trade name as well as goodwill. Goodwill is the amount by which the cost of
acquired net assets exceeded the fair values of those net assets on the date of
purchase. Acquisition-related intangible assets are reported at cost, net of
accumulated amortization. Identifiable intangible assets are amortized on a
straight-line basis over their estimated useful lives of two and three years.
Goodwill is amortized on a straight-line basis over three years. The Company
periodically evaluates the existence of intangible asset impairments.
Recoverability of these assets is assessed based on undiscounted expected cash
flows, considering a number of factors including past operating results, budgets
and economic projections, market trends and product development cycles.
Purchase Consideration
In conjunction with the acquisition of Softimage (see Note O), the Company
issued stock options to retained employees. As agreed with the seller, the value
of the note payable to the seller will be increased by $39.71 for each share
underlying options that become forfeited by employees. At the date of
acquisition, the Company recorded these options as purchase consideration on the
balance sheet at a value of $68.2 million. As these options become vested,
additional paid-in capital is increased or, alternatively, as the options are
forfeited, the note payable to the seller is increased, with purchase
consideration being reduced by a corresponding amount in either case.
Revenue Recognition
Effective January 1, 1998, the Company adopted the guidelines of Statement of
Position (SOP) 97-2, "Software Revenue Recognition" ("SOP 97-2"), which provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. SOP 97-2 requires that revenue recognized from
software transactions be allocated to each element of the transaction based on
the relative fair values of the elements, such as software products, specified
upgrades, enhancements, post contract customer support, installation or
training. The determination of fair value is based upon vendor specific
objective evidence. If evidence of fair value for each element of the
transaction does not exist, all revenue from the transaction is generally
deferred until evidence of each element's fair value does exist or until all
elements of the transaction are delivered. According to the guidelines, revenue
allocated to software products, specified upgrades and enhancements is generally
recognized upon delivery of each of the related products, upgrades or
enhancements. Revenue allocated to post contract customer support is generally
recognized ratably over the term of the support, and revenue allocated to
service elements is generally recognized as the services are performed.
The Company recognizes revenue from sales of software or products including
proprietary software upon product shipment to distributors and end users and
upon receipt of a signed purchase order or contract, provided that collection is
probable and all other revenue recognition criteria of SOP 97-2 are met. The
Company's products do not require significant production, modification or
customization of software. Installation of the products is generally routine,
requires insignificant effort and is not essential to the functionality of the
product. The Company recognizes revenue from maintenance ratably and from
training or other related services as the services are performed. Revenue from
services has been insignificant in relation to product revenue for all periods
presented.
Included in accounts receivable allowances are sales allowances provided for
expected returns and credits and an allowance for bad debts. Actual returns have
not differed materially from management's estimates and have not been
significant. In addition, the Company offers from time to time rebates on
purchases of certain products or rebates based on purchasing volume, which are
accounted for as offsets to revenue upon shipment of related products or
expected achievement of purchasing volumes. When telephone support is provided
at no additional charge during the product's initial warranty period and no
other product enhancements or upgrades are provided, the revenue allocated to
the telephone support is recognized at time of product shipment, with the costs
of providing the support being accrued.
Warranty Expense
The Company provides a warranty reserve at the time of sale for the estimated
cost to repair or replace defective hardware products.
Research and Development Costs
Research and development costs are expensed as incurred except for costs of
internally developed or externally purchased software that qualify for
capitalization. Capitalized costs are amortized using the straight-line method
upon general release, over the expected life of the related products, generally
12 to 24 months. The straight-line method generally results in approximately the
same amount of expense as that calculated using the ratio that current period
gross product revenues bear to total anticipated gross product revenues. The
Company evaluates the net realizable value of capitalized software on an ongoing
basis, relying on a number of business and economic factors which could result
in shorter amortization periods.
Computation of Net Income (Loss) Per Common Share
Net income per common share is presented for both basic earnings per share
("Basic EPS") and diluted earnings per share ("Diluted EPS"). Basic EPS is based
upon the weighted average number of common shares outstanding during the period.
Diluted EPS is based upon the weighted average number of common and common
equivalent shares outstanding during the period. Common stock equivalent shares
are included in the Diluted EPS calculation where the effect of their inclusion
would be dilutive. Common equivalent shares result from the assumed exercise of
outstanding stock options and warrants, the proceeds of which are then assumed
to have been used to repurchase outstanding common stock using the treasury
stock method. Net loss per common share, both basic and dilutive, is based upon
the weighted average number of common shares outstanding during the period.
Comprehensive Income (Loss)
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130
requires the reporting of comprehensive income in addition to net income.
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the calculation of net income (loss). The adoption of SFAS
130 had no impact on the Company's net income (loss) or stockholders' equity.
For the purpose of SFAS 130 disclosures, the Company does not record tax
provisions or benefits for the net changes in foreign currency translation
adjustment, as the Company intends to permanently reinvest undistributed
earnings in its foreign subsidiaries.
Recent Accounting Pronouncements
On June 15, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair values. Changes in
the fair values of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether or not a derivative is
designated as part of a hedge transaction and, if it is, depending on the type
of hedge transaction. SFAS 133 is effective for fiscal quarters beginning after
January 1, 2000 for the Company and its adoption is not expected to have a
material impact on the Company's financial position or results of operations.
C. MARKETABLE SECURITIES
The amortized cost, including accrued interest, and fair value of marketable
securities as of December 31, 1998 and 1997 are as follows (in thousands):
Amortized Fair
1998 Cost Value
---- --------- --------
Federal, State, and Municipal Obligations $48,904 $48,922
========= ========
1997
----
Federal, State, and Municipal Obligations $78,641 $78,654
========= =========
Gross realized and unrealized gains and losses which are calculated on a
specific identification basis, for the years ended December 31, 1998 and 1997
were immaterial. All marketable securities held at December 31, 1998 mature
within one year.
D. INVENTORIES
Inventories consist of the following (in thousands):
December 31,
---------------------
1998 1997
------- -------
Raw materials $6,193 $5,488
Work in process 2,081 674
Finished goods 2,819 3,680
------- -------
$11,093 $9,842
======= =======
E. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized purchased and internally developed software costs, included in other
assets at December 31, 1998 and 1997, consist of the following (in thousands):
December 31,
1998 1997
------ ------
Capitalized software development costs $6,443 $6,424
Less accumulated amortization 5,677 5,483
------ ------
$766 $941
====== ======
Software development costs capitalized during 1998, 1997 and 1996 amounted to
approximately $20,000, $107,000 and $2.3 million, respectively. Amortization of
software development costs during those periods was approximately $194,000,
$893,000, and $3.2 million, respectively. During 1996 as part of the
nonrecurring costs, described in Note N, capitalized software costs of $829,000
and accumulated amortization of $334,000 were written off.
F. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
December 31,
--------------------
Depreciable
Life 1998 1997
------------- -------- --------
Computer and video equipment 2 to 5 years $85,365 $75,042
Office equipment 3 to 5 years 4,874 4,652
Furniture and fixtures 3 to 5 years 7,138 6,820
Leasehold improvements 3 to 10 years 15,287 13,105
-------- --------
112,664 99,619
Less accumulated depreciation
and amortization 77,266 60,702
-------- --------
$35,398 $38,917
======== ========
As of December 31, 1998 and 1997, property and equipment included approximately
$2.4 million of equipment under capital leases.
G. LONG-TERM DEBT
Capital Leases
During November 1994 and January 1995, the Company entered into equipment
financing arrangements with a bank for aggregate borrowings of up to $10.0
million, at various interest rates (ranging from 4.6% to 8.1%) determined at the
borrowing date. This equipment financing arrangement expired in March 1996 and
was not renewed. As of December 31, 1998 and 1997, approximately $398,000 and
$1.2 million, respectively, was outstanding as capital leases under these
arrangements. Borrowings are collateralized by certain assets of the Company. As
of December 31, 1998, future minimum lease payments under capital leases totaled
$407,000 due in 1999, of which $9,000 represents the payment of interest. Total
cash payments for interest in 1998, 1997, and 1996 were approximately $48,000,
$136,000, and $311,000, respectively.
Line of Credit
In 1995, the Company entered into an unsecured line of credit agreement with a
group of banks which provides for up to $35.0 million in revolving credit. The
line of credit agreement was renewed on June 30, 1998 to expire on June 29,
1999, and certain covenants were subsequently amended on September 30, 1998.
Under the terms of the agreement, the Company must pay an annual commitment fee
of 1/4% of the average daily unused portion of the facility, payable quarterly
in arrears. The Company has two loan options available under the agreement: the
Base Rate Loan and the LIBOR Rate Loan. The interest rates to be paid on the
outstanding borrowings for each loan annually are equal to the Base Rate or
LIBOR plus 1.25%, respectively. Additionally, the Company is required to
maintain certain financial ratios and is bound by covenants over the life of the
agreement, including a restriction on the payment of dividends. The Company had
no borrowings against this facility as of December 31, 1998 or 1997.
Four of the Company's international subsidiaries have unsecured overdraft
facilities that permit aggregate borrowings of Italian Lire 300,000,000, Irish
Punt 150,000, Australian Dollar 963,400 and German Mark 800,000. No borrowings
were outstanding under these facilities as of December 31, 1998 or 1997.
Subordinated Note
In connection with the acquisition of Softimage (see Note O), Avid issued a $5.0
million subordinated note (the "Note") to Microsoft Corporation. The principal
amount of the Note, including any adjustments relative to Avid stock options
forfeited by Softimage employees, plus all unpaid accrued interest is due on
June 15, 2003. The Note bears interest at 9.5% per annum, payable quarterly.
Through December 31, 1998, the Note has been increased by approximately $5.2
million for forfeited Avid stock options. The Company made cash interest
payments of $77,000 during 1998.
H. INCOME TAXES
Income (loss) before income taxes and the components of the income tax provision
(benefit) for the years ended December 31, 1998, 1997 and 1996 are as follows
(in thousands):
1998 1997 1996
-------- -------- --------
Income (loss) before income taxes:
United States ($27,497) $22,017 ($61,242)
Foreign 23,068 16,221 5,295
-------- -------- --------
Total income (loss) before
income taxes ($4,429) $38,238 ($55,947)
======== ======== ========
Provisions for (benefit from) income taxes:
Current tax expense:
Federal $7,770 $2,353 ($3,235)
Foreign 4,665 4,667 3,189
State 155 75 (16)
-------- -------- --------
Total current tax expense 12,590 7,095 (62)
Deferred tax (benefit) expense:
Federal (13,878) 4,937 (15,820)
Foreign 2,401 (1,237)
State (1,909) 1,059 (2,021)
-------- -------- --------
Total deferred tax (benefit) expense (13,386) 4,759 (17,841)
-------- -------- --------
Total income tax provision (benefit) ($796) $11,854 ($17,903)
======== ======== ========
Net cash payments or (refunds) for income taxes in 1998, 1997 and 1996 were
approximately $6.6 million, ($1.1) million, and $4.9 million, respectively. The
net refund in 1997 was the result of the 1996 loss, which was carried back to
1993, 1994 and 1995 for federal tax purposes.
The cumulative amount of undistributed earnings of subsidiaries which is
intended to be permanently reinvested and for which U.S. income taxes have not
been provided totaled approximately $47.9 million at December 31, 1998.
Deferred tax assets are comprised of the following (in thousands):
December 31,
--------------------
1998 1997
-------- --------
Allowances for accounts receivable $2,118 $1,583
Difference in accounting for:
Revenue 3,487 3,922
Costs and expenses 10,846 9,372
Inventories 1,944 2,738
Intangible assets 7,735 43
Deferred intercompany profit 844 23
Tax credit and net operating loss
carryforwards 15,506 14,820
Other (818) (521)
-------- --------
Net deferred tax assets $41,662 $31,980
======== ========
For U.S. Federal income tax and Canadian income tax purposes at December 31,
1998, the Company has tax credit carryforwards of approximately $11.8 million
and $3.7 million, respectively. A portion of the tax credits expire between 2004
and 2018. Deferred tax assets reflect the net tax effects of the tax credits and
operating loss carryforwards and temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
assets will be realized; accordingly, no valuation allowance has been recorded
for net deferred tax assets. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced.
A reconciliation of the Company's income tax provision (benefit) to the
statutory federal tax rate follows:
1998 1997 1996
------ ------ ------
Statutory rate 35% 35% (35)%
Nondeductible acquisition costs 12
Tax credits (8) (4) (1)
Foreign operations (8) (3) 4
State taxes, net of federal benefit (2) 2 (2)
Foreign sales corporation (2) (1)
Other 4 2 2
---- ---- ----
Effective tax rate before
special charge 31 31 (32)
Rate difference due to charge for
in-process research and development (49)
---- ---- ----
Effective tax rate (18)% 31% (32)%
==== ==== ====
For the year ended December 31, 1998, the effective tax rate before special
charge is based on a profit before tax amount that excludes the $28.4 million
charge for in-process research and development, of which $6.7 million was not
deductible for tax purposes. The Company's actual effective tax rate of 18% for
the year reflects a tax benefit equal to 29% of this one-time charge.
Consolidated results of operations include results of manufacturing operations
in Ireland. Income from the sale of products manufactured or developed in
Ireland is subject to a 10% Irish tax rate through the year 2010. The favorable
Irish tax rate resulted in tax benefits of approximately $1.5 million in 1998
and $900,000 in 1997. The 1996 Irish tax benefit was immaterial to the results
of operations. The 1998 basic and diluted per share tax benefit was $0.06 and
$0.06, respectively.
The Internal Revenue Service is examining the Company's U.S. tax returns for
1993 through 1996. Management believes that any related adjustments that might
be required will not be material to the financial statements.
I. CAPITAL STOCK
Preferred Stock
The Company is authorized to issue up to one million shares of preferred stock,
$.01 par value per share. Each series of preferred stock shall have such rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges, and liquidation preferences,
as shall be determined by the Board of Directors.
In February 1996, the Board of Directors approved a Shareholder Rights Plan. The
rights were distributed in March 1996 as a dividend at the rate of one right for
each share of Common Stock outstanding. No value was assigned to these rights.
The rights may be exercised to purchase shares of a new series of $.01 par
value, junior participating preferred stock or to purchase a number of shares of
the Company's common stock which equals the exercise price of the right, $115
divided by one-half of the then-current market price, upon occurrence of certain
events, including the purchase of 20% or more of the Company's common stock by a
person or group of affiliated or associated persons. The rights expire on
February 28, 2006 and may be redeemed by the Company for $.01 each at any time
prior to the tenth day following a change in control and in certain other
circumstances.
Common Stock
During June and July 1997, the Company granted 347,200 shares of $.01 par value
restricted common stock to certain employees under the 1997 Stock Incentive Plan
approved by the shareholders on June 4, 1997. These shares vest annually in 20%
increments beginning May 1, 1998. Accelerated vesting may occur if certain stock
price performance goals established by the Board of Directors are met. On May 1,
1998, an additional 20% of the restricted stock became vested due to the
attainment of specific stock performance goals. Unvested restricted shares are
subject to forfeiture in the event that an employee ceases to be employed by the
Company. The Company initially recorded, as a separate component of
stockholders' equity, deferred compensation of approximately $9.1 million with
respect to this restricted stock. This deferred compensation represents the
excess of fair value of the restricted shares at the date of the award over the
purchase price and is recorded as compensation expense ratably as the shares
vest. For the year ended December 31, 1998 and 1997, approximately $3.2 million
and $1.1 million, respectively was recorded as compensation expense.
On October 23, 1997, February 5, 1998 and October 21, 1998, the Company
announced that the Board of Directors had authorized the repurchase of up to 1.0
million, 1.5 million and 2.0 million shares, respectively, of the Company's
common stock. Purchases have been and will be made in the open market or in
privately negotiated transactions. The Company has used and plans to continue to
use any repurchased shares for its employee stock plans. As of December 31,
1997, the Company had repurchased a total of 1.0 million shares at a cost of
$28.8 million, which completed the program announced in October 1997. As of
December 31, 1998, the Company had repurchased approximately 1.9 million
additional shares of Avid common stock at a cost of $61.8 million, which
completed the program announced during February 1998 and initiated the program
announced in October 1998. These purchases include the repurchase of 500,000
shares from Intel Corporation ("Intel"). Intel originally purchased
approximately 1.6 million shares of Avid common stock in March 1997.
Warrants
In connection with the acquisition of Softimage Inc. (see Note O), the Company
issued to Microsoft a ten-year warrant to purchase 1,155,235 shares of the
Company's common stock, valued at $26.2 million. The warrants are exercisable
after August 3, 2000, at a price of $47.65 per share, and expire after August 3,
2008.
J. EMPLOYEE BENEFIT PLANS
PROFIT SHARING PLANS
1991 Profit Sharing Plan
The Company has a profit sharing plan under section 401(k) of the Internal
Revenue Code covering substantially all U.S. employees. The 401(k) plan allows
employees to make contributions up to a specified percentage of their
compensation. The Company may, upon resolution by the Board of Directors, make
discretionary contributions to the plan. Effective January 1, 1996, the Company
began contributing 33% of up to the first 6% of an employee's salary contributed
to the plan by the employee. The Company's contributions to this plan totaled
$1.3 million, $988,000, and $946,000 in 1998, 1997 and 1996, respectively.
Effective January 1, 1999, the Company's contribution will be increased from 33%
to 50% of up to the first 6% of an employee's salary contributed to the plan by
the employee.
In addition, the Company has various retirement and post-employment plans
covering certain European employees. Certain of the plans require the Company to
match employee contributions up to a specified percentage as defined by the
plans. The Company made contributions of approximately $1.0 million, $489,000,
and $400,000 in 1998, 1997, and 1996, respectively.
1997 Profit Sharing Plan
In January 1997, the Board of Directors approved the 1997 Profit Sharing Plan
(the "1997 Plan"). The 1997 Plan, effective January 1, 1997, covers
substantially all employees of the Company and its participating subsidiaries,
other than those employees covered by other incentive plans. The plan provides
that the Company contribute a varying percentage of salary (0% to 10%) based on
the Company's achievement of targeted return on invested capital for 1997, as
defined by the plan.
1998 Profit Sharing Plan
In December 1997, the Board of Directors approved the 1998 Profit Sharing Plan
(the "1998 Plan"). The 1998 Plan, effective January 1, 1998 covers substantially
all employees of the Company and its participating subsidiaries, other than
those employees covered by other incentive plans. The plan provides that the
Company contribute a varying percentage of salary (0% to 15%) based on the
Company's achievement of targeted return on invested capital for 1998, as
defined by the plan.
1998 Executive Variable Compensation Plan
In December 1997, the Board of Directors approved the 1998 Executive and Senior
Management Variable Compensation Plan (the "1998 Variable Plan"). The 1998
Variable Plan, effective January 1, 1998, covers executive officers and senior
management. The plan provides that the Company contribute a varying percentage
of salary based on the Company's achievement of targeted return on invested
capital for 1998, as defined by the plan.
1998 Nonqualified Deferred Compensation Plan
In December 1997, the Board of Directors approved the 1998 Nonqualified Deferred
Compensation Plan (the "1998 Deferred Plan"). The 1998 Deferred Plan, effective
January 1, 1998, covers selected senior management and highly compensated
employees, as approved by the Company's Compensation Committee. The plan
provides for a trust to which participants can contribute varying percentages or
amounts of eligible compensation for deferred payment. The timing of the payouts
can be at the election of the employee or upon termination of employment with
the Company. The benefit payable under the 1998 Deferred Plan represents an
unfunded and unsecured contractual obligation of the Company to pay in the
future the value of the deferred compensation, adjusted to reflect the trust's
investment performance. The assets of the trust, as well as the corresponding
obligations, were approximately $2.9 million as of December 31, 1998 and are
recorded in other assets and other long-term liabilities.
STOCK PLANS
1989 Stock Option Plan
The 1989 Stock Option Plan (the "1989 Plan") allows for the issuance of
incentive and non-qualified stock options to purchase the Company's common
stock. Incentive stock options may not be granted at less than the fair market
value of the Company's common stock at the date of grant and are exercisable for
a term not to exceed ten years. For holders of 10% or more of the total combined
voting power of all classes of the Company's stock, options may not be granted
at less than 110% of the fair market value of the common stock at the date of
grant, and the option term may not exceed 5 years. The options generally vest
over a four-year period. In connection with the establishment of the 1993 Stock
Incentive Plan, the 1989 Plan was amended to provide that, subject to certain
exceptions, no further options or awards could be issued thereunder. The 1989
Plan is due to expire on November 9, 1999.
1991 Stock Option Plan
Digidesign had an employee stock option plan whereby an aggregate of 1.5 million
shares of common stock were reserved for issuance. Effective upon the
acquisition by Avid, the stock option agreements were assigned to Avid and Avid
registered the 670,884 shares, equivalent to the number of options outstanding,
taking into effect the exchange ratio of 0.79 shares of Avid common stock for
each share of Digidesign common stock. Under the plan, options may be granted to
employees, directors, consultants, and advisors to the company. Incentive stock
options may be granted at prices not lower than fair market value, as
established by the Board of Directors on the date of grant. Non-qualified stock
options may be granted at not less than 85% of fair market value, as established
by the Board of Directors on the date of grant. The options expire in a maximum
of ten years and may be either incentive stock options or non-qualified stock
options, determined at the discretion of the Board of Directors. Options are
immediately exercisable, subject to a right of repurchase which generally lapses
as to 25% of the subject shares on the first anniversary of the vesting
commencement date, and as to an additional 2.083% for each succeeding full month
of continuous employment. Avid has not granted any additional options under this
plan.
1993 Stock Incentive Plan
Under the 1993 Stock Incentive Plan (the "1993 Plan"), a maximum of 800,000
shares of common stock may be issued upon exercise of incentive stock options or
non-qualified stock options, or in connection with awards of restricted stock
grants, stock appreciation rights or performance shares. The terms of the
incentive stock options granted under this plan are substantially the same as
for those granted under the 1989 Plan. The options generally vest ratably over a
four-year period.
1993 Director Stock Option Plan
The 1993 Director Stock Option Plan (the "Director Plan"), as amended April 12,
1996, provides for the grant of options to purchase up to a maximum of 220,000
shares of common stock of the Company to non-employee directors of the Company,
at an exercise price equal to the fair market value of the stock on the date of
grant. Options generally vest over a twelve month period from the date of grant,
excluding initial grants to directors which vest ratably over a four-year
period, and are exercisable for a term not to exceed ten years.
1994 Stock Option Plan
The 1994 Stock Option Plan, as amended on February 12, 1996, allows for the
issuance of incentive and non-qualified options to purchase up to a maximum of
2.4 million shares of the Company's common stock. The options generally vest
over a four-year period. The terms of the options granted under this plan are
essentially the same as for those granted under the 1989 Plan.
1997 Stock Incentive Plan
The 1997 Stock Incentive Plan covers employees, consultants, and directors of
the Company, and allows for the issuance of incentive and non-qualified stock
options and restricted stock grants to purchase the Company's common stock. An
aggregate of 1.0 million shares of common stock are reserved for issuance under
the plan, including up to 500,000 shares of restricted stock which may be issued
pursuant to the plan. The terms of the options granted under this plan are
substantially the same as for those granted under the 1989 Plan. The options
generally vest ratably over a four-year period. In December 1998, the Board of
Directors approved an amendment to the plan. The amendment, which is subject to
shareholder approval, increases the number of shares authorized to be issued
under the plan by 500,000 shares of common stock.
1997 Stock Option Plan
In December 1997, the Board of Directors approved the 1997 Stock Option Plan.
This plan, which covers employees and consultants, other than executive officers
and directors, allows for the issuance of non-qualified options to purchase up
to 1.0 million shares of the Company's common stock. The terms of the options
granted under this plan are essentially the same as for those granted under the
1989 Plan. The options generally vest over a four-year period.
1998 Avid-Softimage Stock Option Plan
The 1998 Avid-Softimage Stock Option Plan was approved by the Board of Directors
as part of the acquisition of Softimage Inc. (see Note O) to replace the
unvested Microsoft options that were forfeited in the transaction. This plan,
which covers Softimage employees, executive officers and directors, allows for
the issuance of non-qualified options to purchase up to 2.0 million shares of
the Company's common stock. The options may expire up to ten years from the
grant date and generally vest over a four-year period.
1998 Stock Option Plan
In December 1998, the Board of Directors approved the 1998 Stock Option Plan.
This plan, which covers employees and consultants, other than executive officers
and directors, and allows for the issuance of non-qualified options to purchase
up to 1.5 million shares of the Company's common stock. The options may expire
up to ten years from the grant date and generally vest over a four-year period.
Employee Stock Purchase Plan
On July 31, 1996, the 1993 Employee Stock Purchase Plan expired and was replaced
with the 1996 Employee Stock Purchase Plan (the "1996 Purchase Plan"). The 1996
Purchase Plan, as amended on May 19, 1998, authorizes the issuance of a maximum
of 700,000 shares of common stock in semi-annual offerings at a price equal to
the lower of 85% of the closing price on the applicable offering commencement
date or 85% of the closing price on the applicable offering termination date.
As disclosed in Note I, the Company has announced programs to repurchase up to
6.5 million shares of common stock for use in its employee stock purchase and
stock option plans.
Stock-Based Compensation Plans
Information with respect to options granted under all stock option plans is as
follows:
1998 1997 1996
---------------------- ---------------------- ------------------------
Wtd Avg. Wtd Avg. Wtd Avg.
Price Price Price
Shares Per Share Shares Per Share Shares Per Share
---------- --------- ---------- --------- ---------- ----------
Options outstanding at
beginning of year January 1, 3,573,527 $16.09 3,547,356 $16.18 2,986,595 $21.59
Granted, at fair value 3,208,674 $26.19 1,243,950 $14.77 2,273,398 $17.01
Granted, below fair value 1,820,817 $0.01
Exercised (650,420) $13.74 (758,298) $13.23 (260,055) $4.56
Canceled (551,108) $16.52 (459,481) $17.17 (1,452,582) $30.55
--------- --------- ----------
Options outstanding at
December 31, 7,401,490 $16.63 3,573,527 $16.09 3,547,356 $16.18
========= ========= ==========
Options exercisable at
December 31, 1,658,724 $15.94 1,338,726 $16.04 1,237,924 $13.71
========= ========= ==========
Options available for future
grant at December 31, 1,660,022 674,296 866,759
========= ========= ==========
Weighted average fair value
of options granted during
the year $13.29 $7.46 $6.93
========= ========= ==========
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------- --------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------ ----------- ---------------- ---------------- ----------- ----------------
$ 0.0100 to $13.0000 2,546,875 8.69 $3.6732 534,458 $9.2260
$13.1875 to $15.3125 171,549 7.94 $14.2018 91,035 $14.1838
$15.6250 to $16.5000 696,487 7.20 $16.0065 453,061 $16.4606
$16.6875 to $19.6250 424,202 6.84 $19.0415 294,165 $18.9073
$19.7500 to $46.7500 3,562,377 9.29 $25.8392 286,005 $25.1491
--------- -------
$ 0.0100 to $46.7500 7,401,490 8.72 $16.6272 1,658,724 $15.9366
========= ==== ======== ========= ========
The Company has ten stock-based compensation plans, which are described above.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation", which is effective for periods beginning after
December 15, 1995. SFAS No. 123 requires that companies either recognize
compensation expense for grants of stock, stock options, and other equity
instruments based on fair value, or provide pro forma disclosures of net income
and earnings per share in the notes to the financial statements. The Company
adopted SFAS No. 123 in 1996 and elected the disclosure-only alternative
provisions. The Company has chosen to continue to account for stock-based
compensation granted to employees using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to
Employees", and related interpretations. Accordingly, compensation cost for
stock options granted to employees is measured as the excess, if any, of the
fair value of the Company's stock at the date of the grant over the amount that
must be paid to acquire the stock.
During 1998, the Company issued stock options to purchase approximately 1.8
million shares of common stock with a nominal exercise price in connection with
the acquisition of Softimage (see Note O). As a result of this nominal exercise
price, the Company excluded the effects of the options issued from the
calculation of 1998 pro forma net loss from SFAS No. 123 disclosures of
compensation expense. The Softimage purchase price included the excess of the
fair value of the Company's stock on the grant date over the exercise prices.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for the awards under these
plans consistent with the methodology prescribed under SFAS No. 123, the
Company's net income (loss) and earnings per share would have been reduced to
the pro forma amounts indicated below:
1998 1997 1996
--------------------------------- ------------------------------ --------------------------------
Net Earnings Earnings Net Earnings Earnings Net Earnings Earnings
Income per share per share Income per share per share Income per share per share
(Loss) Basic Dilutive (Loss) Basic Dilutive (Loss) Basic Dilutive
---------- --------- ---------- ------- --------- --------- ---------- --------- ---------
As
Reported ($3,633) ($0.15) ($0.15) $26,384 $1.14 $1.08 ($38,044) ($1.80) ($1.80)
======= ====== ====== ======= ===== ===== ======== ====== ======
Pro
Forma ($13,598) ($0.58) ($0.58) $18,855 $0.82 $0.76 ($46,400) ($2.19) ($2.19)
======== ====== ====== ======= ===== ===== ======== ====== ======
The fair value of regular employee options granted during 1998, 1997 and 1996 is
estimated on the date of grant using the Black-Scholes option-pricing model
utilizing the following weighted-average assumptions: (1) risk free interest
rate of 5.15%, 6.47%, and 6.05%, for 1998, 1997 and 1996, respectively, based on
zero-coupon U.S. government issues, (2) expected option life from date of
vesting of 17 months, (3) expected stock volatility of 61.8% for 1998, 61.2% for
1997, and 58.31% for 1996, and (4) expected dividend yield of 0.0%.
The fair value of awards under the Employee Stock Purchase plans during 1998,
1997 and 1996 is estimated on the date of the purchase using the Black-Scholes
option-pricing model utilizing the following weighted average assumptions: (1)
expected option life of 6 months, (2) expected volatility of 61.8% for 1998,
61.2% for 1997, and 58.31% for 1996, and (3) expected dividend yield of 0.0%.
The risk-free interest rate used in determining the fair value of the plans was
determined to be the rate on a zero-coupon six month U.S. Government issue on
the first day of the offering period for each of the six plan periods. These
interest rates ranged from 4.97% to 6.21% in each year. The amount of
compensation expense, net of income taxes, related to the Employee Stock
Purchase plans, included in the pro forma net income (loss) and earnings per
share detailed in the table above, is approximately $1.0 million, $499,000 and
$626,000 for 1998, 1997 and 1996, respectively.
The effects of applying SFAS No. 123 for the purposes of pro forma disclosures
may not be indicative of the effects on reported net income (loss) and net
income (loss) per share for future years, as the pro forma disclosures include
the effects of only those awards granted after January 1, 1995.
On February 12, 1996, the Board of Directors authorized that all options under
the 1994 Stock Option Plan at an exercise price greater than or equal to $28.48
would be eligible to be exchanged for options with an exercise price at the then
fair market value of $16.50 per share and a first vest date of February 21,
1997. This cancellation and reissuance of stock options affected approximately
860,000 options.
K. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases its office space and certain equipment under non-cancelable
operating leases. The future minimum lease commitments under these
non-cancelable leases at December 31, 1998 are as follows (in thousands):
1999 $13,198
2000 11,577
2001 7,758
2002 6,674
2003 5,253
Thereafter 28,463
-------
Total $72,923
=======
The total of future minimum rentals to be received under non-cancelable
subleases related to the above leases is $5.6 million. Such amounts are not
reflected in the schedule of minimum lease payments above.
The Company's two leases for corporate office space in Tewksbury, Massachusetts,
expiring June 2010 contain renewal options to extend the respective terms of
each lease for an additional 60 months.
The Company's lease for the Dublin, Ireland facility has a termination option
clause in April of 2002, which if elected requires the Company to pay certain
penalties of approximately $338,000. The future minimum lease commitments above
include the Company's obligation for its Dublin, Ireland facility through April
2002.
The accompanying consolidated results of operations reflect rent expense on a
straight-line basis over the term of the leases. Total rent expense under
operating leases was approximately $12.4 million, $13.3 million, and $11.4
million for the years ended December 31, 1998, 1997 and 1996, respectively.
Purchase Commitments
As of December 31, 1998, the Company has entered into non-cancelable purchase
commitments for certain components used in its normal operations. The purchase
commitments covered by these agreements aggregate approximately $13.7 million.
The Company currently purchases certain key components used in its products from
sole source suppliers. These components are purchased through purchase orders
placed from time to time. The Company generally does not carry significant
inventories of these sole source components and has no guaranteed supply
arrangements for them. These purchasing arrangements can result in delays in
obtaining products from time to time. While the Company believes that
alternative sources of supply for its sole source components could be developed,
its business and results of operations could be adversely affected if it were to
encounter an extended interruption in its source of supply.
Accounts Sold with Recourse
The Company provides lease financing options to its customers, including
distributors. The Company assigns all of its rights under these lease agreements
to an unrelated third party. Under the terms of these leases, which are
generally three years, the Company remains liable for any unpaid principal
balance upon default by the end-user, but such liability is limited in the
aggregate based on a percentage of initial amounts funded or, in certain cases,
amounts of unpaid balances. At December 31, 1998, 1997 and 1996, the third
party's uncollected balance of lease receivables with recourse was approximately
$86.1 million, $58.0 million and $22.6 million, respectively; at those same
dates, Avid's maximum recourse totaled approximately $22.3 million, $15.4
million and $8.0 million, respectively. The Company records revenue from these
transactions upon the shipment of products to end-users and maintains a reserve
for estimated losses under this recourse lease program. To date, the Company has
not experienced significant losses under this lease program.
Contingencies
On June 7, 1995, the Company filed a patent infringement complaint in the United
States District Court for the District of Massachusetts against Data
Translation, Inc., a Marlboro, Massachusetts-based company. Avid is seeking
judgment against Data Translation that, among other things, Data Translation has
willfully infringed Avid's patent number 5,045,940, entitled "Video/Audio
Transmission System and Method." Avid is also seeking an award of treble damages
together with prejudgment interest and costs, Avid's costs and reasonable
attorneys' fees, and an injunction to prohibit further infringement by Data
Translation. The litigation has been dismissed without prejudice (with leave to
refile) pending a decision by the U.S. Patent and Trademark Office on a reissue
patent application based on the issued patent.
On March 11, 1996, the Company was named as defendant in a patent infringement
suit filed in the United States District Court for the Western District of Texas
by Combined Logic Company, a California partnership located in Beverly Hills,
California. On May 16, 1996, the suit was transferred to the United States
District Court for the Southern District of New York on motion by the Company.
The complaint alleges infringement by Avid of U.S. patent number 4,258,385,
issued in 1981, and seeks injunctive relief, treble damages and costs, and
attorneys' fees. The Company believes that it has meritorious defenses to the
complaint and intends to contest it vigorously. However, an adverse resolution
of this litigation could have a material adverse effect on the Company's
consolidated financial position or results of operations in the period in which
the litigation is resolved. No costs have been accrued for this possible loss
contingency.
The Company also receives inquiries from time to time with regard to additional
possible patent infringement claims. These inquiries are generally referred to
counsel and are in various stages of discussion. If any infringement is
determined to exist, the Company may seek licenses or settlements. In addition,
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 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.
The Company has entered into employment agreements with certain officers of the
Company that provide for severance pay and benefits, including accelerated
vesting of options. Under the terms of the agreements, these officers receive
100% of such severance benefits if they are involuntarily terminated. Such
agreements are effective for two years and are automatically extended for
successive one-year periods after the second anniversary, unless 30 days advance
written notice is given by either party. The Company has also entered into
change in control employment agreements with certain officers of the Company. As
defined in the agreements, a change in control includes, but is not limited to:
a third person or entity becoming the beneficial owner of 30% or more of the
Company's common stock, the shareholders approving any plan or proposal for the
liquidation or dissolution of the Company, or within a twenty-four month period
a majority of the members of the Company's Board of Directors ceasing to
continue as members of the board unless their successors are each approved by at
least two-thirds of the Company's directors. If at any time within two years of
the change in control, the officer's employment is terminated by the Company for
any reason other than cause or by the officer for good reason, as such terms are
defined in the agreement, then the employee is entitled to receive certain
severance payments plus an amount equal to compensation earned under the
management incentive compensation plan during the previous two years as well as
accelerated vesting of options.
L. FINANCIAL INSTRUMENTS
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist of temporary cash investments and trade receivables. The
Company places its excess cash in marketable investment grade securities. There
are no significant concentrations in any one issuer of debt securities. The
Company places its cash, cash equivalents and investments with financial
institutions with high credit standing. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer bases, and their dispersion across different
regions. The Company also maintains reserves for potential credit losses and
such losses have been within management's expectations. (See also Note B).
Forward Exchange Contracts
As of December 31, 1998 and 1997, the Company had approximately $31.9 million
and $22.1 million, respectively, of foreign exchange forward contracts
outstanding, denominated in various European and Asian currencies, the Canadian
dollar and the Australian dollar, as a hedge against its committed exposures.
The following table summarizes the December 31, 1998 currencies and approximate
U.S. dollar amounts involved; the Company is the seller with respect to each
contract with the exception of the Irish pound contract (in thousands):
Local Approximate
Currency U.S. Dollar
Amount Equivalent
------------ ------------
British Pound 800 $1,341
Spanish Peseta 312,000 2,196
Canadian Dollar 2,800 1,804
German Mark 24,170 14,473
Italian Lire 1,100,000 665
Irish Pound 1,100 1,635
French Franc 30,000 5,348
Japanese Yen 504,000 4,401
-------
$31,863
=======
The forward exchange contracts generally have maturities of one month. Net gains
(losses) of approximately ($1.1) million, $3.2 million, and $968,000 resulting
from forward exchange contracts were included in results of operations in 1998,
1997 and 1996, respectively. The fair values of these forward exchange contracts
as of December 31, 1998, 1997, and 1996 were immaterial, as the contracts
generally are placed within a week of year-end.
M. SEGMENT INFORMATION
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131), which is effective for
periods beginning after December 15, 1997. SFAS No. 131 requires that public
business enterprises report certain information about operating segments in
annual and interim financial statements filed with the SEC and issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Operating segments
are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to allocate resources
and in assessing their performance. The Company adopted SFAS No. 131 effective
January 1, 1998.
The Company's organizational structure is based on strategic business units that
offer various products to the principle markets in which the Company's products
are sold. These business units equate to two reportable segments: Video and Film
Editing and Effects and Professional Audio.
The Video and Film Editing and Effects segment produces nonlinear video and film
editing systems to improve the productivity of video and film editors and
broadcasters by enabling them to edit moving pictures and sound in a faster,
easier, more creative, and more cost-effective manner than traditional analog
tape-based systems. The products in this operating segment are designed to
provide capabilities for editing and finishing feature films, television shows,
broadcast news programs, commercials, music videos, and corporate and home
videos. The Professional Audio segment produces digital audio systems for the
professional audio market. This operating segment includes products developed to
provide audio recording, editing, signal processing, and automated mixing.
The accounting policies of each of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based on profit and loss from operations before income taxes,
interest income, interest expenses, and other income, excluding the effects of
nonrecurring charges and amortization of intangible assets associated with
acquisitions. Common costs not directly attributable to a particular segment are
allocated among segments based on management's best estimates, including an
allocation of depreciation expense without a corresponding allocation of the
related assets. The segments are reported net of eliminations resulting from
intersegment sales and transfers. The Company does not present segment assets as
part of the assessment of segment performance, as such, segment asset
information is not disclosed.
The following is a summary of the Company's operations by operating segment for
the years ended December 31, 1998, 1997 and 1996 (in thousands):
For the Year Ended December 31,
---------------------------------
1998 1997 1996
-------- -------- --------
Video and Film Editing and Effects:
Net revenues $412,374 $406,808 $374,381
======== ======== ========
Depreciation $20,290 $21,676 $24,852
======== ======== ========
Operating income (loss) $37,818 $22,061 ($23,880)
======== ======== ========
Professional Audio:
Net revenues $70,003 $64,530 $54,628
======== ======== ========
Depreciation $1,373 $1,601 $1,288
======== ======== ========
Operating income (loss) $11,694 $8,052 ($886)
======== ======== ========
Consolidated:
Net revenues $482,377 $471,338 $429,009
======== ======== ========
Depreciation $21,663 $23,277 $26,140
======== ======== ========
Operating income (loss) $49,512 $30,113 ($24,766)
======== ======== ========
The following table reconciles revenues and operating income (loss) to total
consolidated amounts for the years ended December 31, 1998, 1997 and 1996 (in
thousands):
1998 1997 1996
-------- -------- --------
Operating income (loss)
Total operating income (loss) for
reportable segments $49,512 $30,113 ($24,766)
Unallocated amounts:
Nonrecurring costs ($28,373) ($34,597)
Amortization of acquisition-related
intangible assets ($34,204)
-------- -------- --------
Consolidated operating income (loss) ($13,065) $30,113 ($59,363)
======== ======== ========
The 1998 unallocated amounts represent the charge for in-process research and
development and the amortization of acquired intangible assets, including
goodwill associated with the acquisition of Softimage as described in Note O.
The 1996 unallocated amounts represent approximately $20.1 million of
restructuring and product transition charges and $8.8 million associated with
the Company's decision not to release the Avid Media Spectrum product line as
described in Note N as well as approximately $5.6 million associated with the
write-off of spare parts no longer required to support the business.
The following table summarizes the Company's revenues and long-lived assets,
excluding deferred tax assets, by country (in thousands):
For the Year Ended December 31,
----------------------------------
1998 1997 1996
-------- -------- --------
Revenues
North America (U.S. and Canada) $244,476 $242,106 $210,602
United Kingdom 47,511 45,232 36,151
Other foreign countries 190,390 184,000 182,256
-------- -------- --------
Total revenues $482,377 $471,338 $429,009
======== ======== ========
Long-lived assets
North America (U.S. and Canada) $216,940 $35,589 $45,888
United Kingdom 1,867 2,466 3,158
Other foreign countries 2,370 2,848 4,605
-------- -------- --------
Total long-lived assets $221,177 $40,903 $53,651
======== ======== ========
Foreign revenue is based on the country in which the sales originate.
N. NONRECURRING COSTS
In the first quarter of 1996, the Company recorded a nonrecurring charge of
$20.1 million. Included in this charge was $7.0 million associated with
restructuring, consisting of approximately $5.0 million of costs related to
staff reductions of approximately 70 employees, primarily in the U.S., and
associated write-offs of fixed assets, and $2.0 million related to the decision
to discontinue development of certain products and projects. Included in this
$7.0 million were approximately $5.0 million of cash payments consisting of $3.6
million of salaries and related severance costs and $1.4 million of other staff
reduction and discontinued development costs. The non-cash charges of $2.0
million recorded during 1996 consisted primarily of $1.5 million for the
write-off of fixed assets. Also included in this $20.1 million nonrecurring
charge was $13.1 million related to product transition costs associated with the
transition from NuBus to PCI bus technology in some of the Company's product
lines. As of December 31, 1996, the Company had completed the related
restructuring and product transition actions.
In September 1996, the Company recorded a nonrecurring charge of $8.8 million,
associated primarily with the Company's decision not to release the Avid Media
Spectrum product line. This charge included costs to write-off inventory, fixed
assets, capitalized software and various other costs associated with the
canceled product line. Approximately $7.2 million of the charge related to
non-cash items associated with the write-off of assets. As of December 31, 1997,
the Company had completed the related restructuring.
As described in Note O, in connection with the 1998 acquisition of Softimage,
the Company recorded a charge of approximately $28.4 million for the acquired
in-process research and development. The related tax benefit of $8.2 million is
reflected in the 1998 tax provision (benefit).
O. ACQUISITIONS
On August 3, 1998, the Company acquired from Microsoft Corporation ("Microsoft")
the common stock of Softimage and certain assets relating to the business of
Softimage. In connection with the acquisition, Avid paid $79.0 million in cash
to Microsoft and issued to Microsoft (i) a subordinated note (the "Note") in the
amount of $5 million, due June 2003, (ii) 2,394,813 shares of common stock,
valued at $64.0 million, and (iii) a ten-year warrant to purchase 1,155,235
shares of common stock at an exercise price of $47.65 per share, valued at $26.2
million. In addition, Avid agreed to issue to Softimage employees 40,706 shares
of common stock, valued at $1.5 million, as well as stock options with a nominal
exercise price to purchase up to 1,820,817 shares of common stock, valued at
$68.2 million ("Avid Options"). Avid also incurred fees of $4.0 million in
connection with the transaction. Per terms of the agreements, shares of common
stock issued to Microsoft and shares underlying the warrant may not be traded
until August 3, 2001. Additionally, the principal amount of the Note will be
increased by $39.71 for each share underlying forfeited Avid Options. The value
of the Avid Options has been recorded on the balance sheet as Purchase
Consideration (see Note B).
The acquisition was accounted for under the purchase method of accounting.
Accordingly, the results of operations of Softimage and the fair market value of
the acquired assets and assumed liabilities have been included in the financial
statements of the Company as of the acquisition date. The purchase price was
allocated to the acquired assets and assumed liabilities as follows (in
thousands):
Working capital, net $2,448
Property and equipment 3,958
Completed technologies 76,205
In-process research and development 28,373
Work force 7,790
Trade name 4,252
Deferred tax liability (2,945)
Goodwill 127,779
----------
$247,860
==========
The amounts allocated to identifiable tangible and intangible assets, including
acquired in-process research and development, were based on results of an
independent appraisal. Goodwill represents the amount by which the cost of
acquired net assets exceeded the fair values of those net assets on the date of
purchase. Acquired in-process research and development represented development
projects in areas that had not reached technological feasibility and had no
alternative future use. Accordingly, the amount of $28.4 million was charged to
operations at the date of the acquisition, net of the related tax benefit of
$8.2 million.
The values of completed technologies and in-process research and development
were determined using a risk-adjusted, discounted cash flow approach. The value
of in-process research and development, specifically, was determined by
estimating the costs to develop the in-process projects into commercially viable
products, estimating the resulting net cash flows from such projects,
discounting the net cash flows back to their present values, and adjusting that
result to reflect each project's stage of completion.
In-process research and development projects identified at the acquisition date
included next-generation three-dimensional modeling, animation and rendering
software and new graphic, film and media management capabilities for
effects-intensive, on-line finishing applications for editing. The nature of the
efforts to develop the purchased in-process technology into commercially viable
products principally relate to (i) completion of the animation and real-time
playback architecture, completion and integration of architectural software
components, validation of the resulting architecture, and finalization of the
feature set; and (ii) the rebuilding of the framework architecture, the
rewriting of software code of the compositing engine to accommodate significant
new features, and the rewriting of software code of the titling component. If
these projects are not successfully developed, the sales and profitability of
the Company may be adversely affected in future periods.
The Company recorded deferred tax assets of $6.9 million related to tax credits
and carryforwards of Softimage Inc. An additional $2.6 million of deferred tax
assets were not recorded at the acquisition date due to the uncertainty of their
realization. If any benefit of these unrecorded tax credits and carryforwards is
realized in the future, the non-current assets recorded upon the acquisition
will be reduced at that time by a corresponding amount, before any benefit is
recognized in the statement of operations.
Accumulated amortization associated with identifiable intangible assets was
approximately $16.5 million at December 31, 1998; accumulated amortization
associated with goodwill was approximately $17.7 million at December 31, 1998.
During the year ended December 31, 1998, the Purchase Consideration recorded for
the value of Avid Options was reduced by approximately $7.7 million, resulting
from increases to the Note of approximately $5.2 million for forfeited options
and by increases to additional paid-in capital of approximately $2.5 million for
options which became vested.
The following table presents unaudited pro forma information as if Avid and
Softimage had been combined as of the beginning of the periods presented. The
pro forma data are presented for illustrative purposes only and are not
necessarily indicative of the combined financial position or results of
operations of future periods or the results that actually would have resulted
had Avid and Softimage been a combined company during the specified periods. The
pro forma results include the effects of the purchase price allocation from
amortization of acquisition-related intangible assets and exclude the charge for
the purchased in-process technology and related tax benefit.
Pro Forma Unaudited
(in thousands, except per share amounts)
For the Year Ended December 31,
-------------------------------
1998 1997
-------- --------
Net revenue $505,382 $508,153
======== ========
Net income (loss) ($22,329) ($43,102)
======== ========
Net income (loss) per common
share - basic ($0.89) ($1.69)
======== ========
Net income (loss) per common
share - diluted ($0.89) ($1.69)
======== ========
Weighted average common shares
outstanding - basic 25,071 25,501
======== ========
Weighted average common shares
outstanding - diluted 25,071 25,501
======== ========
P. NET INCOME (LOSS) PER SHARE
The following table reconciles the numerator and denominator of the basic and
diluted earnings per share computations shown on the consolidated statements of
operations:
For the Years Ended December 31,
----------------------------------
(In thousands, except per share data) 1998 1997 1996
-------- -------- --------
Basic EPS
Numerator:
Net income (loss) ($3,633) $26,384 ($38,044)
Denominator:
Weighted common shares outstanding 23,644 23,065 21,163
Basic EPS ($0.15) $1.14 ($1.80)
======== ======== ========
Diluted EPS
Numerator:
Net income (loss) ($3,633) $26,384 ($38,044)
Denominator:
Weighted common shares outstanding 23,644 23,065 21,163
Weighted common stock equivalents 1,260
-------- -------- --------
23,644 24,325 21,163
Diluted EPS ($0.15) $1.08 ($1.80)
======== ======== ========
Options and warrants to purchase 2,534,833 and 1,958,422 weighted shares of
common stock outstanding as of December 31, 1998 and 1996 were excluded from the
year-to-date calculation of diluted net loss per share as the effect of their
inclusion would have been anti-dilutive. Options to purchase 234,554 weighted
shares of common stock outstanding as of December 31, 1997 were excluded from
the year-to-date calculation of diluted net income per share because the
exercise prices of those options exceeded the average market price of common
stock during the periods.
See Note R for supplemental pro forma calculations of net income (unaudited).
Q. QUARTERLY RESULTS (UNAUDITED)
The following information has been derived from unaudited consolidated financial
statements that, in the opinion of management, include all normal recurring
adjustments necessary for a fair presentation of such information.
In thousands, except per share data:
Quarters Ended
-----------------------------------------------------------------------------------------------
1998 1997
--------------------------------------------- ---------------------------------------------
Dec. 31 Sept.30(A) June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
--------------------------------------------- ---------------------------------------------
Net revenues $144,598 $116,185 $112,852 $108,742 $123,735 $116,510 $122,884 $108,209
Cost of revenues 54,256 45,929 44,537 45,527 54,062 51,606 59,700 56,185
-------- -------- -------- ------ ------ ------ ------ ------
Gross profit 90,342 70,256 68,315 63,215 69,673 64,904 63,184 52,024
-------- -------- -------- ------ ------ ------ ------ ------
Operating expenses:
Research & development 25,102 22,757 20,616 20,312 20,160 18,598 18,296 16,416
Marketing & selling 36,035 30,967 30,584 27,694 31,301 30,109 30,687 28,297
General & administrative 8,618 6,902 6,450 6,579 6,977 6,734 6,294 5,803
Nonrecurring costs 28,373
Amortization of acquisition-
related intangible assets 20,503 13,701
--------------------------------------------- ---------------------------------------------
Total operating expenses 90,258 102,700 57,650 54,585 58,438 55,441 55,277 50,516
--------------------------------------------- ---------------------------------------------
Operating income (loss) 84 (32,444) 10,665 8,630 11,235 9,463 7,907 1,508
Other income, net 1,371 2,016 2,713 2,536 2,244 2,596 2,045 1,240
--------------------------------------------- ---------------------------------------------
Income (loss) before income taxes 1,455 (30,428) 13,378 11,166 13,479 12,059 9,952 2,748
Provision for (benefit from)
income taxes 451 (8,855) 4,147 3,461 4,178 3,231 3,483 962
--------------------------------------------- ---------------------------------------------
Net income (loss) $1,004 ($21,573) $9,231 $7,705 $9,301 $8,828 $6,469 $1,786
============================================= =============================================
Net income (loss) per share
- basic $0.04 ($0.89) $0.40 $0.34 $0.39 $0.37 $0.28 $0.08
============================================= =============================================
Net income (loss) per share
- diluted $0.04 ($0.89) $0.37 $0.31 $0.37 $0.34 $0.27 $0.08
============================================= =============================================
Weighted average common shares
outstanding - basic 24,378 24,190 23,076 22,908 23,601 23,912 23,164 21,550
============================================= =============================================
Weighted average common shares
outstanding - diluted 26,703 24,190 24,833 24,587 25,231 25,747 24,075 21,750
============================================= =============================================
High common stock price $27.000 $38.875 $47.750 $41.250 $33.000 $38.000 $28.125 $14.000
Low common stock price $11.063 $18.625 $28.375 $26.000 $23.000 $22.000 $12.375 $9.000
<FN>
(A) The results for the quarter ended September 30, 1998 reflect the restatement
of previously reported results of operations associated with the amount of the
purchase price originally allocated to acquired in-process research and
development at the date of the Company's acquisition of Softimage. The restated
amounts for the quarter reflect a decrease in the charge for in-process research
and development of $165.4 million, an increase in amortization of
acquisition-related intangible assets of $9.4 million, a decrease in benefit
from income taxes of $33.2 million, a decrease in net loss of $122.8 million,
and a decrease in net loss per basic and diluted share of $5.08.
</FN>
The Company's quarterly operating results fluctuate as a result of a number of
factors including, without limitation, the timing of new product introductions,
marketing expenditures, promotional programs, and periodic discounting due to
competitive factors. The Company's operating results may fluctuate in the future
as a result of these and other factors, including the Company's success in
developing and introducing new products, its products and customer mix and the
level of competition which it experiences. The Company operates with a
relatively small backlog. Quarterly sales and operating results therefore
generally depend on the volume and timing of orders received during the quarter.
The Company's expense levels are based in part on its forecasts of future
revenues. If revenues are below expectations, the Company's operating results
may be adversely affected. Accordingly, there can be no assurance that the
Company will be profitable in any particular quarter.
R. SUPPLEMENTAL RECONCILIATION OF NET INCOME (LOSS) TO PRO FORMA NET INCOME
(UNAUDITED)
The following table presents a pro forma calculation of tax-effected income and
diluted per share amounts, excluding nonrecurring costs and amortization of
acquisition-related intangible assets. The information is presented in order to
enhance the comparability of the statements of operations for the years
presented.
(in thousands, except per share data) For the Years Ended December 31,
----------------------------------
1998 1997 1996
-------- -------- --------
Net income (loss) ($3,633) $26,384 ($38,044)
Adjustments:
Nonrecurring costs 28,373 $34,597
Amortization of acquisition-related
intangible assets 34,204
Tax impact of adjustments (18,821) (11,071)
-------- ------- --------
Pro forma net income $40,123 $26,384 ($14,518)
======== ======= ========
Pro forma net income (loss) per common
share -diluted $1.56 $1.08 ($0.69)
======== ======= ========
Weighted average common shares
outstanding - diluted -
used for pro forma calculation 25,704 24,325 21,163
======== ======= ========
The 1998 adjustments include the charge for in-process research and development
of $28.4 million as well as the amortization of $34.2 million related to
acquired intangible assets and goodwill associated with the acquisition of
Softimage. The transaction is further described in Note O.
The 1996 adjustment represents approximately $20.1 million of restructuring and
product transition charges and $8.8 million associated with the Company's
decision not to release the Avid Media Spectrum product line as described in
Note N as well as a non-cash charge recorded in cost of revenues of
approximately $5.6 million associated with the write-off of spare parts no
longer required to support the business.
S. SUPPLEMENTAL CASH FLOW INFORMATION
The following table reflects supplemental cash flow investing activities related
to the Softimage acquisition.
Year Ended
December 31, 1998
-----------------
Fair value of:
Assets acquired and goodwill $257,233
Liabilities assumed (13,374)
Debt, common stock, stock
options and warrant issued (164,859)
---------
Cash paid 79,000
Less: cash acquired (584)
---------
Net cash paid for acquisition $78,416
=========
T. SUBSEQUENT EVENTS (UNAUDITED)
On January 27, 1999, the Company, with Tektronix, Inc., incorporated a 50% owned
and funded newsroom venture, AvStar Systems LLC ("AvStar"), which began
operations in February 1999 with its corporate office located in Madison,
Wisconsin. The joint venture is dedicated to providing the next generation of
digital news production products. The Company's investment in the joint venture
will be accounted for under the equity method of accounting. The Company's
initial contribution to the joint venture was approximately $2.0 million,
consisting of $1.5 million in cash and $0.5 million of licensed technology,
fixed assets and inventory.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption "EXECUTIVE
OFFICERS OF THE COMPANY" in Part I hereof, and the remainder is contained in the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held on
June 2, 1999 (the "1999 Proxy Statement") under the captions "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is contained in the Company's 1999 Proxy Statement
under the captions "Election of Directors - Directors' Compensation" and
"Executive Compensation" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is contained in the Company's 1999 Proxy Statement
under the caption "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is contained in the Company's 1999 Proxy Statement
under the caption "Certain Relationships and Related Transactions" and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements are included in Item 8:
- Report of Independent Accountants
- Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996
- Consolidated Balance Sheets as of December 31, 1998 and 1997
- Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996
- Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
- Notes to Consolidated Financial Statements
(a) 2. FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statement schedule is included in Item
14(d):
Schedule II - Supplemental Valuation and Qualifying Accounts
Schedules other than that listed above have been omitted since the required
information is not present, or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements or the notes thereto.
(a) 3. LISTING OF EXHIBITS
EXHIBIT NO. DESCRIPTION
2.1 Stock and Asset Purchase Agreement among Microsoft Corporation,
Softimage Inc. and Avid Technology, Inc. dated as of June 15, 1998
together with all material exhibits thereto (incorporated by
reference to the Registrant's Quarterly Report a Form 10-Q as filed
with the Commission on August 12, 1998, File No. 0-21174).
3.1 Certificate of Amendment of the Third Amended and Restated
Certificate of Incorporation of the Registrant (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q as filed
with the Commission on May 15, 1995, File No. 0-21174).
3.2 Third Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to the Registrant's
Registration Statement on Form S-8 as filed with the Commission on
June 9, 1993, File No. 33-64126).
3.3 Amended and Restated By-Laws of the Registrant (incorporated by
reference to the Registrant's Registration Statement on Form S-1 as
declared effective by the Commission on March 11, 1993, File No.
33-57796).
3.4 Certificate of Designations establishing Series A Junior
Participating Preferred Stock (the "Certificate of Designations")
(incorporated by reference to the Registrant's Current Report on
Form 8-K as filed with the Commission on March 8, 1996).
3.5 Certificate of Correction to the Certificate of Designations
(incorporated by reference to the Registrant's Current Report on
Form 8-K as filed with the Commission on March 8, 1996).
4.1 Specimen Certificate representing the Registrant's Common Stock
(incorporated by reference to the Registrant's Registration
Statement on Form S-1 as declared effective by the Commission on
March 11, 1993, File No. 33-57796).
4.2 Rights Agreement, dated as of February 29, 1996, between the
Registrant and The First National Bank of Boston, as Rights Agent
(incorporated by reference to the Registrant's Current Report on
Form 8-K as filed with the Commission on March 8, 1996, File No.
0-21174).
4.3 Common Stock Purchase Warrant dated August 3, 1998 by and between
Avid Technology, Inc. and Microsoft Corporation (incorporated by
reference to the Registrant's Quarterly Report a Form 10-Q as filed
with the Commission on November 13, 1998, File No. 0-21174).
10.1 Lease dated September 29, 1995 between Allied Dunbar Insurance PLC
and Avid Technology Limited (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on November 14, 1995, File No. 0-21174).
10.2 Lease dated August 30, 1995 between Syntex (U.S.A.) Inc. and Avid
Technology, Inc. (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q as filed with the Commission on
November 14, 1995, File No. 0-21174).
10.3 Lease between MGI Andover Street, Inc. and Avid Technology, Inc.
dated March 21, 1995 (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q as filed with the Commission on May
15, 1995, File No. 0-21174).
10.4 Amended and Restated lease dated as of June 7, 1996 between MGI One
Park West, Inc. and Avid Technology, Inc. (incorporated by reference
to the Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on August 14, 1996, File No. 0-21174).
10.5 Amended and Restated Revolving Credit Agreement among Avid
Technology, Inc., The First National Bank of Boston, as agent,
NationsBank of Texas, N.A., BayBank and ABN AMRO Bank N.V. dated as
of July 1, 1995 (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q as filed with the Commission on August
9, 1995, File No. 0-21174).
10.6 First Amendment dated September 30, 1995 to Amended and Restated
Revolving Credit Agreement by and among Avid Technology, Inc., The
First National Bank of Boston, as agent, NationsBank of Texas, N.A.,
BayBank and ABN AMRO Bank N.V. (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on November 14, 1995, File No. 0-21174).
10.7 Second Amendment dated as of February 28, 1996 to Amended and
Restated Revolving Credit Agreement among Avid Technology, Inc., The
First National Bank of Boston, as agent, NationsBank of Texas, N.A.,
BayBank and ABN AMRO Bank N.V. dated as of June 30, 1996
(incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q as filed with the Commission on August 14, 1996, File No.
0-21174).
10.8 Third Amendment dated as of May 8, 1996 to Amended and Restated
Revolving Credit Agreement among Avid Technology, Inc., The First
National Bank of Boston, as agent, NationsBank of Texas, N.A.,
BayBank and ABN AMRO Bank N.V. dated as of June 30, 1996
(incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q as filed with the Commission on August 14, 1996, File No.
0-21174).
10.9 Fourth Amendment dated as of June 28, 1996 to Amended and Restated
Revolving Credit Agreement among Avid Technology, Inc., The First
National Bank of Boston, as agent, NationsBank of Texas, N.A.,
BayBank and ABN AMRO Bank N.V. dated as of June 30, 1996
(incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q as filed with the Commission on August 14, 1996, File No.
0-21174).
10.10 Fifth Amendment dated as of July 1, 1996 to Amended and Restated
Revolving Credit Agreement among Avid Technology, Inc., The First
National Bank of Boston, as agent, NationsBank of Texas, N.A.,
BayBank and ABN AMRO Bank N.V. dated as of June 30, 1996
(incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q as filed with the Commission on August 14, 1996, File No.
0-21174).
10.11 Sixth Amendment dated as of June 27, 1997 to Amended and Restated
Revolving Credit Agreement and Assignment (the "Sixth Amendment"),
by and among AVID TECHNOLOGY, INC., a Delaware corporation (the
"Borrower"), BANKBOSTON, N.A. (formerly known as The First National
Bank of Boston) and the other lending institutions listed on
Schedule 1 to the Credit Agreement, amending certain provisions of
the Amended and Restated Revolving Credit Agreement dated as of June
30, 1995 (incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q as filed with the Commission on August 12, 1997,
File No. 0-21174).
10.12 Seventh Amendment dated as of October 1, 1997 to Amended and
Restated Revolving Credit Agreement (the "Seventh Amendment"), by
and among AVID TECHNOLOGY, INC., a Delaware corporation (the
"Borrower"), BANKBOSTON, N.A. (formerly known as The First National
Bank of Boston) and the other lending institutions listed on
Schedule 1 to the Credit Agreement, amending certain provisions of
the Amended and Restated Revolving Credit Agreement dated as of June
30, 1995.
10.13 Eighth Amendment dated as of June 30, 1998 to Amended and Restated
Revolving Credit Agreement and Assignment (the "Eighth Amendment"),
by and among Avid Technology, Inc., BankBoston, N.A (formerly known
as The First National Bank of Boston) and the other lending
institutions listed on Schedule 1 to the Credit Agreement, amending
certain provisions of the Amended and Restated Revolving Credit
Agreement dated as of June 30, 1995 (incorporated by reference to
the Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on August 12, 1998, File No. 0-21174).
10.14 Ninth Amendment dated as of September 30, 1998 to Amended and
Restated Revolving Credit Agreement and Assignment, by and among
Avid Technology, Inc., BankBoston, N.A. (formerly known as The First
National Bank of Boston) and the other lending institutions listed
on schedule 1 to the Credit Agreement, amending certain provisions
of the Amended and Restated Revolving Credit Agreement dated as of
June 30, 1995 (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q as filed with the Commission on
November 13, 1998, File No. 0-21174).
10.15 Form of Distribution Agreement (incorporated by reference to the
Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
10.16 Form of Purchase and License Agreement (incorporated by reference to
the Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
10.17 Form of Software Only License Agreement (incorporated by reference
to the Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
#10.18 1989 Stock Option Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
#10.19 1993 Stock Incentive Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
#10.20 1993 Director Stock Option Plan, as amended (incorporated by
reference to the Registrant's Proxy Statement as filed with the
Commission on April 27, 1995, File No. 0-21174).
#10.21 1993 Executive Compensation Agreement (incorporated by reference to
the Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
#10.22 1993 Employee Stock Purchase Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-8 as filed with the
Commission on June 9, 1993, File No. 33-64130).
#10.23 1994 Stock Option Plan, as amended (incorporated by reference to the
Registrant's Registration Statement on Form S-8 as filed with the
Commission on October 27, 1995, File No. 33-98692).
#10.24 Digidesign, Inc. 1991 Stock Option Plan (incorporated by reference
to Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on May 15, 1995, File No. 0-21174).
#10.25 1995 Executive Variable Compensation Program (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q as filed
with the Commission on May 15, 1995, File No. 0-21174).
#10.26 1998 Executive and Senior Management Variable Compensation Plan.
#10.27 1997 Stock Option Plan.
#10.28 1996 Employee Stock Purchase Plan, as amended.
#10.29 1998 Non-Qualified Deferred Compensation Plan (incorporated by
reference to the Registrant's Registration Statement on Form S-8 as
filed with the Commission on December 18, 1997, File No. 33-42569).
#10.30 1998 Profit Sharing Plan.
#10.31 Employment Agreement between the Company and William J. Miller.
#10.32 Change-in-Control Agreement between the Company and William J.
Miller.
#10.33 Employment Agreement between the Company and William L. Flaherty.
#10.34 Change-in-Control Agreement between the Company and William L.
Flaherty.
#10.35 Employment agreement between the Company and Clifford Jenks
(incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q as filed with the Commission on November 14, 1996, File
No. 0-21174).
*#10.36 1999 Profit Sharing Plan.
*#10.37 1999 Executive and Senior Management Variable Compensation Plan.
10.38 Registration Rights Agreement dated August 3, 1998 by and between
Avid Technology, Inc. and Microsoft Corporation (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q as filed
with the Commission on November 13, 1998, File No. 0-21174).
*10.39 Form of Electronic Software License Agreement.
*#10.40 Form of Employment Agreements between the Company and certain
Executive Officers.
*#10.41 Form of Change-in-Control Agreement between the Company and certain
Executive Officers.
*#10.42 Employment Agreement between the Company and Clifford Jenks.
*#10.43 Change-in-Control Agreement between the Company and Clifford Jenks.
*21 Subsidiaries of the Registrant.
*23.1 Consent of PricewaterhouseCoopers LLP.
- ----------
*documents filed herewith
#Management contract or compensatory plan identified pursuant to Item 14 (a) 3.
(b) REPORTS ON FORM 8-K
For the fiscal quarter ended December 31, 1998, the Company filed a Current
Report on Form 8-K/A on October 19, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AVID TECHNOLOGY, INC.
(Registrant)
By: /s/ William J. Miller By: /s/ William L. Flaherty
----------------------- -----------------------
William J. Miller William L. Flaherty
Chairman of the Board Senior Vice President of
and Chief Executive Officer Finance, Chief Financial
(Principal Executive Officer) Officer and Treasurer
(Principal Financial Officer)
Date: March 30, 1999 Date: March 30, 1999
-------------- --------------
By: /s/ Carol L. Reid
-----------------------
Carol L. Reid
Vice President and
Corporate Controller
(Principal Accounting Officer)
Date: March 30, 1999
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ Charles T. Brumback Director March 21, 1999
------------------------ --------------
Charles T. Brumback
/s/ William E. Foster Director March 29, 1999
------------------------ --------------
William E. Foster
/s/ Peter C. Gotcher Director March 24, 1999
------------------------ --------------
Peter C. Gotcher
/s/ Robert M. Halperin Director March 23, 1999
------------------------ --------------
Robert M. Halperin
/s/ Nancy Hawthorne Director March 21, 1999
------------------------ --------------
Nancy Hawthorne
/s/ Roger J. Heinen, Jr. Director March 25, 1999
------------------------ --------------
Roger J. Heinen, Jr.
/s/ Daniel Langlois Director March 30, 1999
------------------------ --------------
Daniel Langlois
/s/ Lucille S. Salhany Director March 27, 1999
------------------------ --------------
Lucille S. Salhany
/s/ William J. Warner Director March 30, 1999
------------------------ --------------
William J. Warner
AVID TECHNOLOGY, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1998
ITEM 14(d)
FINANCIAL STATEMENT SCHEDULE
AVID TECHNOLOGY, INC.
SCHEDULE II - SUPPLEMENTAL VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1998, 1997 and 1996
Additions
--------------------------
Balance at Charged to Charged to Balance at
beginning of costs and other end of
Description period expenses accounts Deductions period
- ------------------------------- ------------ ---------- ---------- ------------ ----------
Allowance for doubtful accounts
December 31, 1998 $7,097,893 $2,103,801 $(116,756) $(3,216,947)(a) $5,867,991
December 31, 1997 6,959,243 2,032,489 (413,862) (1,479,977)(a) 7,097,893
December 31, 1996 6,011,617 5,599,130 792,927 (5,444,431)(a) 6,959,243
Sales returns and allowances
December 31, 1998 $430,710 $879,670(b) $(6,994)(a) $1,303,386
December 31, 1997 559,600 152,272(b) (281,162)(a) 430,710
December 31, 1996 460,595 283,478(b) (184,473)(a) 559,600
Inventory valuation allowance
December 31, 1998 $8,927,841 $3,668,098 $57,049 $(5,163,997)(a) $7,488,990
December 31, 1997 8,372,460 5,136,384 166,187 (4,747,190)(a) 8,927,841
December 31, 1996 9,780,463 22,925,413 (24,333,416)(a) 8,372,460
<FN>
(a) Amount represents write-offs, net of recoveries.
(b) Sales return provisions are charged directly against revenue.
</FN>
INDEX TO EXHIBITS
Exhibit No. Description Page
2.1 Stock and Asset Purchase Agreement among Microsoft Corporation,
Softimage Inc. and Avid Technology, Inc. dated as of June 15, 1998
together with all material exhibits thereto (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q as filed
with the Commission on August 12, 1998, File No. 0-21174).
3.1 Certificate of Amendment of the Third Amended and Restated
Certificate of Incorporation of the Registrant (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q as filed
with the Commission on May 15, 1995, File No. 0-21174).
3.2 Third Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to the Registrant's
Registration Statement on Form S-8 as filed with the Commission on
June 9, 1993, File No. 33-64126).
3.3 Amended and Restated By-Laws of the Registrant (incorporated by
reference to the Registrant's Registration Statement on Form S-1 as
declared effective by the Commission on March 11, 1993, File No.
33-57796).
3.4 Certificate of Designations establishing Series A Junior
Participating Preferred Stock (the "Certificate of Designations")
(incorporated by reference to the Registrant's Current Report on
Form 8-K as filed with the Commission on March 8, 1996).
3.5 Certificate of Correction to the Certificate of Designations
(incorporated by reference to the Registrant's Current Report on
Form 8-K as filed with the Commission on March 8, 1996).
4.1 Specimen Certificate representing the Registrant's Common Stock
(incorporated by reference to the Registrant's Registration
Statement on Form S-1 as declared effective by the Commission on
March 11, 1993, File No. 33-57796).
4.2 Rights Agreement, dated as of February 29, 1996, between the
Registrant and The First National Bank of Boston, as Rights Agent
(incorporated by reference to the Registrant's Current Report on
Form 8-K as filed with the Commission on March 8, 1996, File No.
0-21174).
4.3 Common Stock Purchase Warrant dated August 3, 1998 by and between
Avid Technology, Inc. and Microsoft Corporation (incorporated by
reference to the Registrant's Quarterly Report a Form 10-Q as filed
with the Commission on November 13, 1998, File No. 0-21174).
10.1 Lease dated September 29, 1995 between Allied Dunbar Insurance PLC
and Avid Technology Limited (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on November 14, 1995, File No. 0-21174).
10.2 Lease dated August 30, 1995 between Syntex (U.S.A.) Inc. and Avid
Technology, Inc. (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q as filed with the Commission on
November 14, 1995, File No. 0-21174).
10.3 Lease between MGI Andover Street, Inc. and Avid Technology, Inc.
dated March 21, 1995 (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q as filed with the Commission on May
15, 1995, File No. 0-21174).
10.4 Amended and Restated lease dated as of June 7, 1996 between MGI One
Park West, Inc. and Avid Technology, Inc. (incorporated by reference
to the Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on August 14, 1996, File No. 0-21174).
10.5 Amended and Restated Revolving Credit Agreement among Avid
Technology, Inc., The First National Bank of Boston, as agent,
NationsBank of Texas, N.A., BayBank and ABN AMRO Bank N.V. dated as
of July 1, 1995 (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q as filed with the Commission on August
9, 1995, File No. 0-21174).
10.6 First Amendment dated September 30, 1995 to Amended and Restated
Revolving Credit Agreement by and among Avid Technology, Inc., The
First National Bank of Boston, as agent, NationsBank of Texas, N.A.,
BayBank and ABN AMRO Bank N.V. (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on November 14, 1995, File No. 0-21174).
10.7 Second Amendment dated as of February 28, 1996 to Amended and
Restated Revolving Credit Agreement among Avid Technology, Inc., The
First National Bank of Boston, as agent, NationsBank of Texas, N.A.,
BayBank and ABN AMRO Bank N.V. dated as of June 30, 1996
(incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q as filed with the Commission on August 14, 1996, File No.
0-21174).
10.8 Third Amendment dated as of May 8, 1996 to Amended and Restated
Revolving Credit Agreement among Avid Technology, Inc., The First
National Bank of Boston, as agent, NationsBank of Texas, N.A.,
BayBank and ABN AMRO Bank N.V. dated as of June 30, 1996
(incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q as filed with the Commission on August 14, 1996, File No.
0-21174).
10.9 Fourth Amendment dated as of June 28, 1996 to Amended and Restated
Revolving Credit Agreement among Avid Technology, Inc., The First
National Bank of Boston, as agent, NationsBank of Texas, N.A.,
BayBank and ABN AMRO Bank N.V. dated as of June 30, 1996
(incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q as filed with the Commission on August 14, 1996, File No.
0-21174).
10.10 Fifth Amendment dated as of July 1, 1996 to Amended and Restated
Revolving Credit Agreement among Avid Technology, Inc., The First
National Bank of Boston, as agent, NationsBank of Texas, N.A.,
BayBank and ABN AMRO Bank N.V. dated as of June 30, 1996
(incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q as filed with the Commission on August 14, 1996, File No.
0-21174).
10.11 Sixth Amendment dated as of June 27, 1997 to Amended and Restated
Revolving Credit Agreement and Assignment (the "Sixth Amendment"),
by and among AVID TECHNOLOGY, INC., a Delaware corporation (the
"Borrower"), BANKBOSTON, N.A. (formerly known as The First National
Bank of Boston) and the other lending institutions listed on
Schedule 1 to the Credit Agreement, amending certain provisions of
the Amended and Restated Revolving Credit Agreement dated as of June
30, 1995 (incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q as filed with the Commission on August 12, 1997,
File No. 0-21174).
10.12 Seventh Amendment dated as of October 1, 1997 to Amended and
Restated Revolving Credit Agreement (the "Seventh Amendment"), by
and among AVID TECHNOLOGY, INC., a Delaware corporation (the
"Borrower"), BANKBOSTON, N.A. (formerly known as The First National
Bank of Boston) and the other lending institutions listed on
Schedule 1 to the Credit Agreement, amending certain provisions of
the Amended and Restated Revolving Credit Agreement dated as of June
30, 1995.
10.13 Eighth Amendment dated as of June 30, 1998 to Amended and Restated
Revolving Credit Agreement and Assignment (the "Eighth Amendment"),
by and among Avid Technology, Inc., BankBoston, N.A (formerly known
as The First National Bank of Boston) and the other lending
institutions listed on Schedule 1 to the Credit Agreement, amending
certain provisions of the Amended and Restated Revolving Credit
Agreement dated as of June 30, 1995 (incorporated by reference to
the Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on August 12, 1998, File No. 0-21174)
10.14 Ninth Amendment dated as of September 30, 1998 to Amended and
Restated Revolving Credit Agreement and Assignment, by and among
Avid Technology, Inc., BankBoston, N.A. (formerly known as The First
National Bank of Boston) and the other lending institutions listed
on schedule 1 to the Credit Agreement, amending certain provisions
of the Amended and Restated Revolving Credit Agreement dated as of
June 30, 1995 (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q as filed with the Commission on
November 13, 1998, File No. 0-21174).
10.15 Form of Distribution Agreement (incorporated by reference to the
Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
10.16 Form of Purchase and License Agreement (incorporated by reference to
the Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
10.17 Form of Software Only License Agreement (incorporated by reference
to the Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
#10.18 1989 Stock Option Plan (incorporated by reference to the
Registrant's Registration Statement on Form S- 1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
#10.19 1993 Stock Incentive Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
#10.20 1993 Director Stock Option Plan, as amended (incorporated by
reference to the Registrant's Proxy Statement as filed with the
Commission on April 27, 1995, File No. 0-21174).
#10.21 1993 Executive Compensation Agreement (incorporated by reference to
the Registrant's Registration Statement on Form S-1 as declared
effective by the Commission on March 11, 1993, File No. 33-57796).
#10.22 1993 Employee Stock Purchase Plan (incorporated by reference to the
Registrant's Registration Statement on Form S-8 as filed with the
Commission on June 9, 1993, File No. 33-64130).
#10.23 1994 Stock Option Plan, as amended (incorporated by reference to the
Registrant's Registration Statement on Form S-8 as filed with the
Commission on October 27, 1995, File No. 33-98692).
#10.24 Digidesign, Inc. 1991 Stock Option Plan (incorporated by reference
to Registrant's Quarterly Report on Form 10-Q as filed with the
Commission on May 15, 1995, File No. 0-21174).
#10.25 1995 Executive Variable Compensation Program (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q as filed
with the Commission on May 15, 1995, File No. 0-21174).
#10.26 1998 Executive and Senior Management Variable Compensation Plan.
#10.27 1997 Stock Option Plan.
#10.28 1996 Employee Stock Purchase Plan, as amended.
#10.29 1998 Non-Qualified Deferred Compensation Plan (incorporated by
reference to the Registrant's Registration Statement on Form S-8 as
filed with the Commission on December 18, 1997, File No. 33-42569).
#10.30 1998 Profit Sharing Plan.
#10.31 Employment Agreement between the Company and William J. Miller.
#10.32 Change-in-Control Agreement between the Company and William J.
Miller.
#10.33 Employment Agreement between the Company and William L. Flaherty.
#10.34 Change-in-Control Agreement between the Company and William L.
Flaherty.
#10.35 Employment agreement between the Company and Clifford Jenks
(incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q as filed with the Commission on November 14, 1996, File
No. 0-21174).
*#10.36 1999 Profit Sharing Plan.
*#10.37 1999 Executive and Senior Management Variable Compensation Plan.
10.38 Registration Rights Agreement dated August 3, 1998 by and between
Avid Technology, Inc. and Microsoft Corporation (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q as filed
with the Commission on November 13, 1998, File No. 0-21174).
*10.39 Form of Electronic Software License Agreement.
*#10.40 Form of Employment Agreements between the Company and certain
Executive Officers.
*#10.41 Form of Change-in-Control Agreement between the Company and certain
Executive Officers.
*#10.42 Employment Agreement between the Company and Clifford Jenks.
*#10.43 Change-in-Control Agreement between the Company and Clifford Jenks.
*21 Subsidiaries of the Registrant.
*23.1 Consent of PricewaterhouseCoopers LLP.
- -----------------
*documents filed herewith
#Management contract or compensatory plan identified
pursuant to Item 14 (a) 3.