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
QUARTERLY REPORT ON FORM 10-Q/A
Ladies and Gentlemen:
Pursuant to regulations of the Securities and Exchange Commission,
submitted herewith for filing on behalf of Avid Technology, Inc. is the
Company's Quarterly Report on Form 10-Q/A for the fiscal quarter ended September
30, 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
<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
Commission File Number 0-21174
AVID TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2977748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AVID TECHNOLOGY PARK
ONE PARK WEST
TEWKSBURY, MA 01876
(Address of principal executive offices)
Registrant's telephone number, including area code: (978) 640-6789
Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports).
Yes X No
----
Indicate by check mark whether the registrant has been subject to such
filing requirements for the past 90 days.
Yes X No
----
The number of shares outstanding of the registrant's Common Stock as of November
9, 1998 was 24,499,653.
- --------------------------------------------------------------------------------
<PAGE>
AVID TECHNOLOGY, INC.
FORM 10-Q/A
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
a) Condensed Consolidated Statements of Operations (unaudited)
for the three months ended September 30, 1998 and 1997, and
the nine months ended September 30, 1998 and 1997 ..................1
b) Condensed Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997...................................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1998 and 1997 ..............3
d) Notes to Condensed Consolidated Financial Statements (unaudited)....4
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................15
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K..............................29
Signatures...............................................................30
EXHIBIT INDEX............................................................31
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1998 1997 1998 1997
(unaudited) (unaudited) (unaudited) (unaudited)
(restated) (restated)
----------------------- -----------------------
<S> <C> <C> <C> <C>
Net revenues $116,185 $116,510 $337,779 $347,602
Cost of revenues 45,929 51,606 135,993 167,491
-------- -------- -------- --------
Gross profit 70,256 64,904 201,786 180,111
-------- -------- -------- --------
Operating expenses:
Research and development 22,757 18,598 63,685 53,310
Marketing and selling 30,967 30,109 89,245 89,094
General and administrative 6,902 6,734 19,931 18,830
Nonrecurring costs 28,373 28,373
Amortization of
acquisition-related
intangible assets 13,701 13,701
-------- -------- -------- --------
Total operating expenses 102,700 55,441 214,935 161,234
Operating income (loss) (32,444) 9,463 (13,149) 18,877
Interest and other income, net 2,016 2,596 7,265 5,882
-------- -------- -------- --------
Income (loss) before income taxes (30,428) 12,059 (5,884) 24,759
Provision for (benefit from)
income taxes (8,855) 3,231 (1,247) 7,675
-------- -------- -------- --------
Net income (loss) ($21,573) $8,828 ($4,637) $17,084
======== ======== ======== ========
Net income (loss) per common
share - basic ($0.89) $0.37 ($0.20) $0.75
======== ======== ======== ========
Net income (loss) per common
share - diluted ($0.89) $0.34 ($0.20) $0.72
======== ======== ======== ========
Weighted average common shares
outstanding - basic 24,190 23,912 23,396 22,875
======== ======== ======== ========
Weighted average common shares
outstanding - diluted 24,190 25,747 23,396 23,857
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
(restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $60,643 $108,308
Marketable securities 37,699 78,654
Accounts receivable, net of allowances
of $7,923 and $7,529 in 1998 and 1997,
respectively 73,760 79,773
Inventories 12,059 9,842
Deferred tax assets 16,975 17,160
Prepaid expenses 6,823 4,645
Other current assets 5,412 2,700
-------- --------
Total current assets 213,371 301,082
Property and equipment, net 37,301 38,917
Long-term deferred tax assets 20,092 14,820
Acquisition-related intangible assets 202,121
Other assets 2,878 1,986
-------- --------
Total assets $475,763 $356,805
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $17,586 $22,166
Current portion of long-term debt 562 783
Accrued compensation and benefits 23,293 23,737
Accrued expenses 33,187 30,249
Income taxes payable 12,859 11,210
Deferred revenues 21,623 26,463
-------- --------
Total current liabilities 109,110 114,608
Long-term debt, less current portion 7,622 403
Purchase consideration 64,883
Commitments and contingencies
Stockholders' equity:
Preferred stock
Common stock 265 242
Additional paid-in capital 344,582 252,307
Retained earnings 14,334 27,286
Treasury stock (59,543) (27,548)
Deferred compensation (4,308) (8,034)
Cumulative translation adjustment (1,254) (2,472)
Net unrealized gains on marketable securities 72 13
-------- --------
Total stockholders' equity 294,148 241,794
-------- --------
Total liabilities and stockholders' equity $475,763 $356,805
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
(unaudited) (unaudited)
(restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($4,637) $17,084
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 29,936 19,893
Compensation from stock grants and options 3,531
Provision for doubtful accounts 1,407 1,464
Changes in deferred tax assets 224 (151)
Tax benefit of stock option exercises 2,394
(Gain) loss on disposal of equipment (605) 218
Changes in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable 13,174 90
Inventories (1,921) 11,813
Prepaid expenses and other current assets (3,493) (108)
Accounts payable (5,837) (1,259)
Income taxes payable 1,619 6,824
Accrued expenses, compensation and benefits (5,945) 18,962
Deferred revenues (6,491) 759
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 41,117 77,983
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment and other assets (12,462) (12,033)
Acquisition of business, net of cash acquired
(Notes 3 and 4) (78,416)
Capitalized software development costs (20) (107)
Proceeds from disposal of equipment 1,306 1,554
Purchases of marketable securities (128,759) (102,193)
Proceeds from sales of marketable securities 169,774 51,341
- --------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (48,577) (61,438)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (521) (1,593)
Purchase of common stock for treasury (51,144)
Proceeds from issuance of common stock 10,859 25,821
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (40,806) 24,228
- --------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash
equivalents 601 (864)
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (47,665) 39,909
Cash and cash equivalents at beginning of period 108,308 75,795
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $60,643 $115,704
================================================================================
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1D. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL INFORMATION
The accompanying condensed consolidated financial statements include the
accounts of Avid Technology, Inc. and its wholly owned subsidiaries ("Avid" or
"the Company"). The interim financial statements are unaudited. However, in the
opinion of management, the condensed consolidated financial statements include
all adjustments, consisting of only normal, recurring adjustments, necessary for
their fair presentation. Interim results are not necessarily indicative of
results expected for a full year. The accompanying unaudited condensed financial
statements have been prepared in accordance with the instructions for Form 10-Q
and therefore do not include all information and footnotes necessary for a
complete presentation of operations, the financial position, and cash flows of
the Company, in conformity with generally accepted accounting principles. The
Company filed audited consolidated financial statements for the year ended
December 31, 1997 on Form 10-K which included all information and footnotes
necessary for such presentation.
The Company's preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. The most significant estimates 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.
Restatement
On August 3, 1998, the Company acquired from Microsoft Corporation ("Microsoft")
the common stock of Softimage Inc. ("Softimage") and certain assets relating to
the business of Softimage (see Note 3). The Company believes that the amount
recorded as an in-process research and development (IPR&D) charge at the date of
its acquisition of Softimage was measured in a manner consistent with widely
recognized appraisal practices that were being utilized at the time of the
acquisition. Subsequent to the acquisition, in a letter dated September 9, 1998
to the American Institute of Certified Public Accountants, the Chief Accountant
of the Securities and Exchange Commission (SEC) expressed new views of the SEC
staff that took issue with certain appraisal practices employed in the
determination of the fair value of the IPR&D that were the basis for the
Company's measurement of its IPR&D. Accordingly, the Company has voluntarily
decided to adjust the amount originally allocated to acquired IPR&D in a manner
to reflect the SEC staff's new views and has restated its third quarter 1998
condensed consolidated financial statements. As a result, the third quarter
pre-tax charge for acquired IPR&D was decreased from the $193.7 million amount
previously recorded to an amount of $28.4 million, a decrease of $165.3 million.
Correspondingly, the value of completed technologies was increased from $44.8
million to $76.2 million, resulting in goodwill of $127.8 million, in addition
to other minor changes.
Amortization of acquired intangible assets (including goodwill) was increased
from $4.4 million, as previously reported for the quarter to $13.7 million. As a
result of this change and the decrease in the IPR&D charge, the third quarter
1998 net loss decreased from $144.3 million to $21.6 million, and basic and
diluted net loss per share decreased to a net loss per share of $0.89.
The following table summarizes the changes to the purchase price allocation
among the acquired assets and assumed liabilities as a result of the Company's
restatement (in thousands):
As
Previously As
Reported Restated
---------- ----------
Working capital $2,448 $2,448
Property and equipment 3,505 3,958
Completed technologies 44,772 76,205
In-process research and
development 193,741 28,373
Work force 7,644 7,790
Trade name 4,172 4,252
Deferred tax liability (8,422) (2,945)
Goodwill 127,779
---------- ----------
Total Purchase Price $247,860 $247,860
========== ==========
The following table summarizes the changes in the Company's condensed
consolidated results of operations for the three- and nine-month periods ended
September 30, 1998 and changes in its condensed consolidated balance sheet as of
September 30, 1998 as a result of the Company's restatement of the purchase
price allocation (in thousands):
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
-------------------- --------------------
As As
Previously As Previously As
Reported Restated Reported Restated
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Nonrecurring costs $193,741 $28,373 $193,741 $28,373
Amortization of acquisition-
related intangible assets 4,350 13,701 4,350 13,701
Total operating expenses 258,717 102,700 370,952 214,935
Operating income (loss) (188,461) (32,444) (169,166) (13,149)
Income (loss) before income taxes (186,445) (30,428) (161,900) (5,884)
Provision for (benefit from)
income taxes (42,105) (8,855) (34,497) (1,247)
Net income (loss) (144,340) (21,573) (127,403) (4,637)
Net income (loss) per common share
- basic (5.97) (0.89) (5.45) (0.20)
Net income (loss) per common share
- diluted (5.97) (0.89) (5.45) (0.20)
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1998
------------------------
As
Previously As
Reported Restated
---------- --------
<S> <C> <C>
Property and equipment, net $36,848 $37,301
Deferred tax assets, long-term 50,764 20,092
Acquisition-related
intangible assets 52,034 202,121
Total assets 355,895 475,763
Income taxes payable 15,758 12,859
Total current liabilities 112,009 109,110
Retained earnings (108,433) 14,334
Total stockholders' equity 171,381 294,148
</TABLE>
2. NET INCOME (LOSS) PER COMMON SHARE
The following table reconciles the numerator and denominator of the basic and
diluted earnings per share computations shown on the Condensed Consolidated
Statements of Operations:
<TABLE>
<CAPTION>
(in thousands, except per share data) For the
Three Months Ended
September 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Basic EPS
Numerator:
Net income (loss) ($21,573) $8,828
Denominator:
Weighted common shares outstanding 24,190 23,912
Basic EPS ($0.89) $0.37
======== ========
Diluted EPS
Numerator:
Net income (loss) ($21,573) $8,828
Denominator:
Weighted common shares outstanding 24,190 23,912
Weighted common stock equivalents 1,835
-------- --------
24,190 25,747
Diluted EPS ($0.89) $0.34
======== ========
</TABLE>
Options and warrants to purchase 3,013,826 weighted shares of common stock
outstanding were excluded from the calculation of diluted earnings per share for
the three months ended September 30, 1998 because their inclusion would be
anti-dilutive. Options to purchase 57,855 weighted shares of common stock
outstanding were excluded from the calculation of diluted earnings per share for
the three month period ended September 30, 1997 because the exercise prices of
those options exceeded the average market price of common stock for the
three-month period ended September 30, 1997.
<TABLE>
<CAPTION>
(in thousands, except per share data) For the
Nine Months Ended
September 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Basic EPS
Numerator:
Net income (loss) ($4,637) $17,084
Denominator:
Weighted common shares outstanding 23,396 22,875
Basic EPS ($0.20) $0.75
======== ========
Diluted EPS
Numerator:
Net income (loss) ($4,637) $17,084
Denominator:
Weighted common shares outstanding 23,396 22,875
Weighted common stock equivalents - 982
-------- --------
23,396 23,857
Diluted EPS ($0.20) $0.72
======== ========
</TABLE>
Options and warrants to purchase 2,188,964 weighted shares of common stock
outstanding were excluded from the calculation of diluted earnings per share for
the nine months ended September 30, 1998 because their inclusion would be
anti-dilutive. Options to purchase 302,195 weighted shares of common stock
outstanding were excluded from the calculation of diluted earnings per share for
the nine month period ended September 30, 1997 because the exercise prices of
those options exceeded the average market price of common stock for the
nine-month period ended September 30, 1997.
3. ACQUISITION OF SOFTIMAGE
On August 3, 1998, the Company acquired from 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. As the
underlying options either become vested or are forfeited by employees,
additional paid-in capital or the Note, respectively, will be increased and
Purchase Consideration will be reduced.
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
include 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. 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 $6.6 million at September 30, 1998; accumulated amortization
associated with goodwill was approximately $7.1 million at September 30, 1998.
During the quarter ended September 30, 1998, the Purchase Consideration recorded
for the value of Avid Options was reduced by approximately $3.3 million,
resulting from increases to the Note of approximately $2.5 million for forfeited
options and by increases to additional paid-in capital of approximately $0.8
million for options that 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.
<TABLE>
<CAPTION>
Pro Forma Unaudited
(in thousands, except per share amounts)
For the
Nine Months Ended
September 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Net revenue $360,784 $377,060
======== ========
Net income (loss) ($23,328) ($34,963)
======== ========
Net income (loss) per common share
- basic ($0.92) ($1.38)
======== ========
Net income (loss) per common share
- diluted ($0.92) ($1.38)
======== ========
Weighted average common shares
outstanding - basic 25,305 25,310
======== ========
Weighted average common shares
outstanding - diluted 25,305 25,310
======== ========
</TABLE>
4. SUPPLEMENTAL CASH FLOW INFORMATION
The following table reflects supplemental cash flow investing activities related
to the Softimage acquisition.
Nine Months Ended
September 30, 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
========
5. INVENTORIES
Inventories consist of the following (in thousands):
September 30, December 31,
1998 1997
------------- ------------
Raw materials $7,488 $5,488
Work in process 1,913 674
Finished goods 2,658 3,680
-------- --------
$12,059 $9,842
======== ========
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Computer and video equipment $84,463 $75,042
Office equipment 4,916 4,652
Furniture and fixtures 7,030 6,820
Leasehold improvements 14,686 13,105
-------- --------
111,095 99,619
Less accumulated depreciation and
amortization 73,794 60,702
-------- --------
$37,301 $38,917
======== ========
</TABLE>
7. LINE OF CREDIT
The Company has an unsecured line of credit 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 as of 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 during the nine-month period ended September
30, 1998.
8. LONG-TERM DEBT
In connection with the acquisition of Softimage (see Note 3), 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 September 30, 1998, the Note has been increased by approximately $2.5
million for forfeited Avid stock options.
9. CONTINGENCIES
On June 7, 1995, the Company filed a patent infringement complaint in the United
States District Court for the District of Massachusetts against Data
Translation, Inc., a Marlboro, Massachusetts-based company. Avid is seeking
judgment against Data Translation that, among other things, Data Translation has
willfully infringed Avid's patent number 5,045,940, entitled "Video/Audio
Transmission System and Method." Avid is also seeking an award of treble damages
together with prejudgment interest and costs, Avid's costs and reasonable
attorneys' fees and an injunction to prohibit further infringement by Data
Translation. The litigation has been dismissed without prejudice (with leave to
refile) pending a decision by the U.S. Patent and Trademark Office on a reissue
patent application based on the issued patent.
On March 11, 1996, the Company was named as defendant in a patent infringement
suit filed in the United States District Court for the Western District of Texas
by Combined Logic Company, a California partnership located in Beverly Hills,
California. On May 16, 1996, the suit was transferred to the United States
District Court for the Southern District of New York on motion by the Company.
The complaint alleges infringement by Avid of U.S. patent number 4,258,385,
issued in 1981, and seeks injunctive relief, treble damages and costs, and
attorneys' fees. The Company believes that it has meritorious defenses to the
complaint and intends to contest it vigorously. However, an adverse resolution
of this litigation could have a material adverse effect on the Company's
consolidated financial position or results of operations in the period in which
the litigation is resolved. No costs have been accrued for this possible loss
contingency.
The Company also receives inquiries from time to time with regard to additional
possible patent infringement claims. These inquiries are generally referred to
counsel and are in various stages of discussion. If any infringement is
determined to exist, the Company may seek licenses or settlements. In addition,
from time to time as a normal incidence of the nature of the Company's business,
various claims, charges, and litigation have been asserted or commenced against
the Company arising from or related to contractual or employee relations,
intellectual property rights or product performance. Management does not believe
these claims will have a material adverse effect on the financial position or
results of operations of the Company.
10. CAPITAL 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.
On October 23, 1997, February 5, 1998 and October 21, 1998 the Company announced
that the Board of Directors 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 will 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 September
30, 1998, the Company had repurchased a total of 1.5 million shares of Avid
common stock at a cost of $51.1 million, which completed the program announced
during February 1998. These purchases under the program announced in February
1998, include the repurchase of 500,000 shares from Intel Corporation ("Intel").
Intel originally purchased 1,552,632 shares of Avid common stock in March 1997.
Subsequent to September 30, 1998 through November 9, 1998, the Company
repurchased approximately 176,000 additional shares of Avid common stock, under
the program announced in October 1998, at a cost of $4.1 million.
11. 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 all fiscal quarters of all
fiscal years beginning after June 15, 1999 (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.
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 from
operations. Comprehensive income is a more inclusive reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the calculation of net income. The adoption of SFAS 130 had
no impact on the Company's net income or stockholder's equity. Total
comprehensive income (loss), net of taxes, was ($20.9) million and $9.5 million
for the three-month period ended September 30, 1998 and 1997, respectively and
($3.8) million and $17.9 million for the nine-month period ended September 30,
1998 and 1997, respectively, which consists of net income, the net changes in
foreign currency translation adjustment and the net unrealized gains and losses
on available-for-sale securities.
In March 1998, Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), was issued which
provides guidance on applying generally accepted accounting principles in
addressing whether and under what condition the costs of internal-use software
should be capitalized. SOP 98-1 is effective for transactions entered into in
fiscal years beginning after December 15, 1998, however earlier adoption is
encouraged. The Company adopted the guidelines of SOP 98-1 as of January 1,
1998, and the impact of such adoption was not material to results of operations
or cash flows for the three- and nine-month periods ended September 30, 1998.
12. 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.
<TABLE>
<CAPTION>
(in thousands, except per share data) For the
Three Months Ended
September 30,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Net income (loss) ($21,573) $8,828
Adjustments:
Nonrecurring costs 28,373
Amortization of acquisition-related
intangible assets 13,701
Tax impact of adjustments (12,465)
-------- --------
Pro forma net income $8,036 $8,828
======== ========
Pro forma net income (loss) per common share
- diluted $0.30 $0.34
======== ========
Weighted average common shares outstanding -
diluted - used for pro forma calculation 26,476 25,747
======== ========
</TABLE>
<TABLE>
<CAPTION>
(in thousands, except per share data) For the
Nine Months Ended
September 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Net income (loss) ($4,637) $17,084
Adjustments:
Nonrecurring costs 28,373
Amortization of acquisition-related 13,701
intangible assets
Tax impact of adjustments (12,465)
-------- --------
Pro forma net income $24,972 $17,084
======== ========
Pro forma net income (loss) per common
share - diluted $0.99 $0.72
======== ========
Weighted average common shares outstanding -
diluted - used for pro forma calculation 25,308 23,857
======== ========
</TABLE>
The 1998 adjustments for the three and nine months include the charge for
in-process research and development of $28.4 million as well as the amortization
of $13.7 million related to acquired intangible assets and goodwill associated
with the acquisition of Softimage. The acquisition is further described in Note
3.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The text of this document may include forward-looking statements. Actual results
may differ materially from those described herein, depending on such factors as
are described herein, including under "Certain Factors That May Affect Future
Results."
Avid 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
film studios; video production and post-production facilities; network,
independent and cable television stations; recording studios; advertising
agencies; government and educational institutions; corporate communications
departments; and by consumers.
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 three-dimensional ("3D") animation,
video production, two-dimensional ("2D") cel animation (a cel used in cel
animation consists of layers of two-dimensional artwork which are changed on a
frame by frame basis creating an illusion of motion) 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.
The Company believes that the amount recorded as an in-process research and
development (IPR&D) charge at the date of its acquisition of Softimage was
measured in a manner consistent with widely recognized appraisal practices that
were being utilized at the time of the acquisition. Subsequent to the
acquisition, in a letter dated September 9, 1998 to the American Institute of
Certified Public Accountants, the Chief Accountant of the Securities and
Exchange Commission (SEC) expressed new views of the SEC staff that took issue
with certain appraisal practices employed in the determination of the fair value
of the IPR&D that was the basis for the Company's measurement of its IPR&D.
Accordingly, the Company has voluntarily decided to adjust the amount originally
allocated to acquired IPR&D in a manner to reflect the SEC staff's new views and
to restate its third quarter 1998 condensed consolidated financial statements.
As a result, the third quarter pre-tax charge for acquired IPR&D was decreased
from the $193.7 million amount previously recorded to an amount of $28.4
million, a decrease of $165.3 million. Correspondingly, the value of completed
technologies was increased from $44.8 million to $76.2 million, resulting in
goodwill of $127.8 million, in addition to other minor changes. Amortization of
acquired intangible assets (including goodwill) was increased from $4.4 million,
as previously reported for the quarter, to $13.7 million. As a result of this
change and the decrease in the IPR&D charge, the third quarter 1998 net loss
decreased from $144.3 million to $21.6 million, and basic and diluted net loss
per share decreased to a net loss per share of $0.89. Excluding this one-time
charge and amortization, pro forma net income was $8.0 million, or $0.30 per
diluted share, and $25.0 million, or $0.99 per diluted share, for the three and
nine months ended September 30, 1998, respectively.
RESULTS OF OPERATIONS
Net Revenues
The Company's net revenues have been derived mainly from the sales of
computer-based digital, nonlinear media editing systems and related peripherals,
licensing of related software, and sales of software maintenance contracts. Net
revenues decreased by $325,000 (0.3%) to $116.2 million in the quarter ended
September 30, 1998 from $116.5 million in the same quarter of last year. Net
revenues for the nine months ended September 30, 1998 of $337.8 million
decreased by $9.8 million (2.8%) from $347.6 million for the nine months ended
September 30, 1997. Revenues for the three months ended September 30, 1998
compared to the same period in 1997 reflected decreased sales of Media Composer
and storage products. These decreases in revenues were largely offset by
incremental Softimage business and increased sales of digital audio products.
The decrease in net revenues for the nine months ended September 30, 1998
compared to the same period in 1997 reflected decreased sales of system
upgrades, Media Composer products, Avid Cinema, and Broadcast products. These
decreased revenues were offset in part by increased sales of MCXpress and Avid
Xpress products, customer service, and incremental Softimage business. During
the third quarter of 1998, the Company began shipments of Pro Tools/24 MIX
products, version 1.6 of MCXpress, and Avid Marquee. Additionally, late in the
third quarter 1998, the Company began shipping the NewsCutter DV product. To
date, 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 three
months ended September 30, 1998, compared to greater than 60% in the same period
of last year.
International sales (sales to customers outside the U.S. and Canada) accounted
for approximately 48% and 46% of the Company's third quarter 1998 and 1997 net
revenues, respectively. International sales increased by 5.6% in the third
quarter of 1998 compared to the same period in 1997. International sales
accounted for approximately 48% of the Company's net revenues for the first nine
months of 1998 and 1997, respectively. International sales decreased by 2.2% in
the nine-month period ended September 30, 1998 from the same period in 1997.
International revenues reflected sluggishness in the Asia Pacific region offset
by increases in Europe. Additionally, revenue for the nine months was impacted
adversely by the strengthening of the U.S. dollar against various currencies.
Gross Profit
Cost of revenues consists primarily of costs associated with the acquisition 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 60.5% in the
third quarter of 1998 compared to 55.7% in the third quarter of 1997 and
increased to 59.7% for the nine-month period ended September 30, 1998 from 51.8%
for the same period in 1997. The increase during 1998 was primarily due to lower
material costs, continued improvements in manufacturing efficiencies, and
improved service margins. The Company currently expects that gross margins for
the remainder of 1998 will approximate the results of the three most recent
quarters.
Research and Development
Research and development expenses increased by $4.2 million (22.4%) in the third
quarter of 1998 compared to the same period in 1997 and increased $10.4 million
(19.5%) for the nine-month period ended September 30, 1998 compared to the same
period of 1997. These increased expenditures were primarily due to two months of
incremental Softimage costs as well as additions to the Company's engineering
staffs for the continued development of new and existing products. Research and
development expenses were 19.6% as a percentage of net revenues in the third
quarter of 1998 compared to 16.0% in the same quarter of 1997 and were 18.9%
compared to 15.3% for the nine-month periods ended September 30, 1998 and 1997,
respectively. These increases were primarily due to the increases in research
and development expenses noted above combined with lower revenues.
Marketing and Selling
Marketing and selling expenses increased by $858,000 (2.8%) in the third quarter
of 1998 compared to the same period in 1997 and increased by $151,000 (0.2%) for
the nine-month period ended September 30, 1998 compared to the same period in
1997. These increased expenditures in selling and marketing were primarily due
to two 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. Marketing and selling expenses were 26.7% as a
percentage of net revenues in the third quarter of 1998 compared to 25.8% in the
same quarter of 1997 and were 26.4% compared to 25.6% for the nine-month periods
ended September 30, 1998 and 1997, respectively. These increases largely reflect
the higher selling and marketing expenditures noted above combined with lower
revenues.
General and Administrative
General and administrative expenses for the third quarter of 1998 increased by
$168,000 (2.5%) from the third quarter of 1997 and increased $1.1 million (5.8%)
for the nine-month period ended September 30, 1998, compared to the nine-month
period ended September 30, 1997. The increase in general and administrative
expenses for the three-month period ended September 30, 1998 compared to 1997
was primarily due to two months of incremental Softimage costs. The increase in
general and administrative expenses for the nine-month period ended September
30, 1998 compared to 1997 was primarily due to two months of incremental
Softimage costs. General and administrative expenses were 5.9% as a percentage
of net revenues in the third quarter of 1998 compared to 5.8% in the third
quarter of 1997 and 5.9% for the nine-month period ended September 30, 1998
compared to 5.4% for the same period in 1997 primarily due to the incremental
Softimage costs as well as lower revenues.
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 the third quarter of 1998. Results for
the three- and nine-month periods ended September 30, 1998 also reflect
amortization of $13.7 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 3 to the Condensed
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
assigned a value of $25.7 million to this in-process research and
development. The estimated costs to complete this project as of the
acquisition date were $5.1 million. 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 Graphic, 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 assigned a
value of $2.7 million to this in-process research and development. The
estimated costs to complete this project as of the acquisition date were
$3.8 million. 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 forecasted 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 to reach 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.
Interest and Other Income, Net
Interest and other income, net consists primarily of interest income, other
income and interest expense. Interest and other income, net for the third
quarter in 1998 decreased $580,000 as compared to the same period in 1997. For
the nine-month period ended September 30, 1998 as compared to the same period in
1997, interest and other income, net increased $1.4 million. The decrease in
interest and other income for the three-month period ended September 30, 1998
compared to 1997 was primarily due to a decrease in investment balances. The
increase in interest and other income for the nine-month period ended September
30, 1998 compared to 1997 was primarily due to higher investment balances.
Provision for (Benefit from) Income Taxes
The Company's effective tax rate was 29% and 21% for the three and nine months
ended September 30, 1998 compared to 27% for the three months ended September
30, 1997 and 31% for the nine months ended September 30, 1997. The tax rate for
the three and nine months ended September 30, 1998 includes a benefit of $8.2
million related to the pre-tax charge of $28.4 for the in-process technology
associated with the Company's acquisition of Softimage. 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
the three and nine months ended September 30, 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
effective tax rate of 27% for the three months ended September 30, 1997 reduced
the year to date effective tax rate from 35% to 31% in the third quarter of
1997. This reduction was primarily due to the tax law change which extended the
U.S. Federal Research Tax Credit for the full year as well as the relative
levels of profit within 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
September 30, 1998, the Company's principal sources of liquidity included cash,
cash equivalents and marketable securities totaling approximately $98.3 million.
The Company's operating activities generated cash of $41.1 million in the nine
months ended September 30, 1998 compared to $78.0 million in the nine months
ended September 30, 1997. Cash was generated during the nine months ended
September 30, 1998 primarily from net income after adjustment for the charge for
in-process research and development in connection with the acquisition of
Softimage and for depreciation and amortization, as well as from collections of
accounts receivable offset by decreases in accounts payable, accrued expenses
and deferred revenue. In the nine months ended September 30, 1997, cash was
generated primarily from net income adjusted for depreciation as well as from
increases in accrued expenses and income taxes payable and reductions in
inventory.
The Company purchased $12.5 million of property and equipment and other assets
during the nine months ended September 30, 1998, compared to $12.0 million in
the same period in 1997. These purchases included primarily hardware and
software for the Company's information systems and equipment to support research
and development activities. The Company also utilized $78.4 million, net of cash
acquired, in the acquisition of Softimage.
The Company has an unsecured line of credit 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 September 30, 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 and investments in product development, at least
through the next twelve months. In the event the Company requires additional
financing, the Company believes that it would be able to obtain such financing;
however, there can be no assurance that it would be successful in doing so, or
that it could do so on terms favorable to the Company.
On October 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 will 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
approximately $28.8 million, which completed the program announced in October
1997. As of September 30, 1998, the Company had repurchased a total of 1.5
million shares at a cost of approximately $51.1 million, which completed the
program announced in February 1998. These purchases under the program announced
in February 1998 include the repurchase of 500,000 shares of Avid common stock
from Intel Corporation. Intel originally purchased 1,552,632 shares of Avid
common stock in March 1997. As of November 9, 1998, the Company had repurchased
approximately 176,000 shares of Avid common stock at a cost of approximately
$4.1 million under the program announced during October 1998.
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 the acquisition date, the estimated costs to
be incurred to complete the development of in-process research and development
projects totaled approximately $8.9 million through the second half of the year
1999. Additionally, the note issued to Microsoft Corporation in connection with
the acquisition is due and payable in June 2003.
YEAR 2000 READINESS DISCLOSURE
The Company, like many other companies, is taking steps to confirm and address
its readiness for any problems that may arise due to the "Year 2000 Issue." In
broad terms, the "Year 2000 Issue" refers to the possibility that a given
computer system, software product or other equipment utilizing microprocessors
may not correctly process dates beyond December 31, 1999 because such systems
are coded to accept only two digit entries in the date code field, and therefore
might read a date using "00" as the year 1900 rather than the year 2000. As a
result, a given system may fail to work at all or may give erroneous information
or miscalculations potentially causing a disruption in operations, including,
among other things, interruptions in manufacturing operations, a temporary
inability to process transactions, send invoices, or engage in similar normal
business transactions.
The Company has commenced a phased program to identify, assess, test, remediate,
and develop contingency plans for all mission-critical applications and products
potentially affected by the Year 2000 Issue ("the Y2K Program"), to be
substantially completed by June 30, 1999. The Company has also established a
Year 2000 Program Management Office to manage the Y2K Program. All Company
groups are represented and involved in the Y2K Program efforts. The Company has
also engaged a third-party consultant to assist with the Company's Y2K Program.
The goal of the Y2K Program is to determine that the particular product or asset
is "Year 2000 Ready"; that is, when used in its designated manner of use, prior
to, during or after the calendar year 2000, the product or asset will operate
correctly, including leap year and date sensitive calculations.
The Y2K Program has identified three potential areas of impact for review: (1)
the software and systems used in the Company's internal business processes; (2)
the Company's software and hardware products offered to customers; and (3) third
party vendors, manufacturers and suppliers.
The Company, utilizing a third-party consultant, is conducting its inventory and
assessment of internal applications and computer hardware. Some software
applications have been determined to be Year 2000 ready, and work is already
underway to address other applications which have not yet been determined to be
Year 2000 Ready based on their importance to the business and the estimated time
required to make them Year 2000 Ready. Currently, the Company is on target for
completing its inventory and assessment phase by December 31, 1998. All internal
software and hardware testing and any necessary remediation is expected to be
completed no later than June 30, 1999.
With regard to products sold by the Company, the Company's Year 2000 Program
efforts include assessment and testing of designated products currently or
recently sold by the Company for Year 2000 issues. Generally, for any such
products identified as being subject to the Year 2000 Issue, the Company plans
to take an appropriate action suited to the particular product, such as
preparing updates, recommending migration paths, providing patches, ceasing to
sell the product, or a combination of actions.
While the Company's goal is to ensure that the designated products currently or
recently sold are Year 2000 Ready, the actual performance of such Company
products will also require that systems used by the end user in conjunction with
the Company products be Year 2000 Ready and accurately exchange information with
such Company products.
The Company has initiated communication with significant suppliers 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 hardware,
software or other products that might contain embedded processors were requested
to provide certification regarding the Year 2000 Readiness status of their
products. The Company will continue to seek certification from non-responsive
suppliers and will continue to evaluate the importance of other existing vendors
and suppliers. In addition, in order to protect against the acquisition of
additional products that may not be Year 2000 Ready, the Company plans to
implement a policy that would require sufficient assurances that products sold
or licensed to the Company are Year 2000 Ready, prior to purchase of such
products.
Year 2000 Readiness activities are expected for the most part to be performed as
a part of the Company's normal sustaining activity. The Company is not currently
able to estimate the total cost of its Year 2000 identification, assessment,
remediation and testing efforts. The Company believes based on available
information that Year 2000 Readiness will be achieved in a timely manner.
However, satisfactorily addressing the Year 2000 Issue on a timely basis is
dependent on many factors, some of which are not completely within the Company's
control, including the continued availability of skilled resources, critical
suppliers and subcontractors meeting their commitments to be Year 2000 Ready,
and timely action by customers to address their own Year 2000 issues. If the
Company fails to adhere to its timeline for achieving Year 2000 Readiness for
these or any other unforeseen reasons, the costs could become material to the
Company's results of operations as the millennium approaches.
As with other companies generally, the Company's internal business operations
could be subject to the risks generally associated with the Year 2000 Issue.
Moreover, because the Company is in the business of selling computer software
and hardware products, the Company is also subject to the potential effect of
the Year 2000 Issue on the Company's products, thus making the Company's related
Year 2000 risk potentially greater than that of companies in other industries.
Despite the Company's evaluation and testing of its internal business operations
or products, there remains the risk that errors or defects related to the Year
2000 Issue may remain undetected.
Should the Company's internal systems, its software and/or hardware products
delivered to customers or the internal systems of one or more of its significant
vendors, manufacturers or suppliers fail to achieve Year 2000 readiness (or any
combination of those events), the Company's business and its results of
operations could be adversely affected in a variety of ways, including the delay
or loss of revenue, a diversion in development resources, delay or cancellation
of the product development, or increased service or warranty costs. There can be
no assurance that there will not be interruptions in the Company's operations,
other limitations of systems functionality, product failures, or significant
costs incurred to avoid such interruptions, limitations or failures.
The Company has not yet fully developed a contingency plan to address situations
that may result if the Company is unable to achieve Year 2000 Readiness of its
critical operations. Development of such contingency plans is in progress and is
expected to be completed by June 30, 1999. The Company is also subject to the
same unpredictable external forces that generally affect industry and commerce.
There can be no assurance that the Company will be able to develop a contingency
plan that will adequately address all Year 2000 issues that may arise.
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 all fiscal quarters of all
fiscal years beginning after June 15, 1999 (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.
<PAGE>
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") -based computers and the Microsoft Windows NT
operating system, and its ProTools/24 MIX product. The Company expects that a
portion of its revenues for the fourth quarter 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 would be adversely affected. In addition, the Company has from time
to time developed 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.
Many of the Company's products operate primarily only on Apple computers. The
Company relies on Apple Computer, Inc. as the sole manufacturer of such
computers. There can be no assurance that customers will not purchase
competitors' products based on non-Apple computers, that Apple will continue to
develop, manufacture, and support products suitable for the Company's existing
and future markets or that the Company will be able to secure an adequate supply
of Apple computers, the occurrence of any of which could have a material adverse
effect on the Company's business and results of operations.
In August 1998, the Company consummated its acquisition of Softimage from
Microsoft. Softimage is a leading developer of 3D animation, video production,
2D cel animation and compositing software solutions and technologies. The
Company's business and results of operations could be materially adversely
affected in the event that the Company fails successfully to integrate the
business and operations of Softimage.
The Company's gross margin has fluctuated, and may continue to 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 the first nine months
of 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 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 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 is also dependent on a number of other suppliers as sole source
vendors of certain other 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 AMI, Atmel, and LSI Logic; digital signal processing integrated circuits
from Motorola; a fibre channel adapter card from Adaptec; 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, Inc. 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, digital news production, 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 Note 9
to Condensed Consolidated Financial Statements.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
4 Common Stock Purchase Warrant dated August 3, 1998 by and between
Avid Technology, Inc. and Microsoft Corporation.
10.1 Registration Rights Agreement dated August 3, 1998 by and between
Avid Technology, Inc. and Microsoft Corporation.
10.2 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.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K. For the fiscal quarter ended September 30, 1998, the
Company filed current reports on Form 8-K on July 7, 1998 and August 12,
1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Avid Technology, Inc.
Date: March 30, 1999 By: /s/ William L. Flaherty
-----------------------
William L. Flaherty,
Senior Vice President of Finance,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
4 Common Stock Purchase Warrant dated August 3, 1998 by and between
Avid Technology, Inc. and Microsoft Corporation.
10.1 Registration Rights Agreement dated August 3, 1998 by and between
Avid Technology, Inc. and Microsoft Corporation.
10.2 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.
27 Financial Data Schedule
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON
ITS EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON TRANS-
FER SET FORTH IN SECTION 4 OF THIS WARRANT
Warrant No. 1 Number of Shares: 1,155,235
(subject to adjustment)
Date of Issuance: August 3, 1998
AVID TECHNOLOGY, INC.
COMMON STOCK PURCHASE WARRANT
(Void after August 3, 2008)
Avid Technology, Inc., a Delaware corporation (the "COMPANY"), for value
received, hereby certifies that Microsoft Corporation or, subject to Section 9,
its registered assigns (the "REGISTERED HOLDER"), is entitled, subject to the
terms set forth below, to purchase from the Company, at any time or from time to
time on or after August 3, 2000 and on or before August 3, 2008 at not later
than 5:00 p.m. (Boston, Massachusetts time), 1,155,235 shares of common stock,
$.01 par value per share (the "COMMON STOCK"), of the Company, at a purchase
price of $47.65 per share. The shares of Common Stock purchasable upon exercise
of this Warrant, and the purchase price per share, each as adjusted from time to
time pursuant to the provisions of this Warrant, are hereinafter referred to as
the "WARRANT SHARES" and the "PURCHASE PRICE," respectively.
1. EXERCISE
(1) This Warrant may be exercised by the Registered Holder, in whole or in part,
by surrendering this Warrant, with the purchase form appended hereto as EXHIBIT
I duly executed by such Registered Holder or by such Registered Holder's duly
authorized attorney, at the principal office of the Company, or at such other
office or agency as the Company may designate, accompanied by payment in full,
in lawful money of the United States, of the Purchase Price payable in respect
of the number of Warrant Shares purchased upon such exercise. The Purchase Price
shall be paid in the form of (i) cash, (ii) a check of the Registered Holder to
the Company, (iii) an electronic wire transfer of immediately available funds in
accordance with written instructions of the Company or, (iv) if approved by the
Company, any combination of the foregoing forms of payment.
(2) Each exercise of this Warrant shall be deemed to have been effected
immediately prior to the close of business on the day on which this Warrant
shall have been surrendered to the Company as provided in subsection 1(a) above.
At such time, the person or persons in whose name or names any certificates for
Warrant Shares shall be issuable upon such exercise as provided in subsection
1(c) below shall be deemed to have become the holder or holders of record of the
Warrant Shares represented by such certificates.
(3) As soon as practicable after the exercise of this Warrant in full or in
part, and in any event within 10 days thereafter, the Company, at its expense,
will cause to be issued in the name of, and delivered to, the Registered Holder,
or as such Holder (upon compliance with Section 9 and payment by such Holder of
any applicable transfer taxes) may direct:
(1) a certificate or certificates for the number of full Warrant Shares to which
such Registered Holder shall be entitled upon such exercise plus, in lieu of
any fractional share to which such Registered Holder would otherwise be
entitled, cash in an amount determined pursuant to Section 3 hereof; and
(2) in case such exercise is in part only, a new warrant or warrants (dated the
date hereof) of like tenor, calling in the aggregate on the face or faces
thereof for the number of Warrant Shares equal (without giving effect to any
adjustment therein) to the number of such shares called for on the face of this
Warrant minus the number of such shares purchased by the Registered Holder upon
such exercise.
2. ADJUSTMENTS
(1) If outstanding shares of the Company's Common Stock shall be subdivided into
a greater number of shares or a dividend in Common Stock shall be paid in
respect of Common Stock, the Purchase Price in effect immediately prior to such
subdivision or at the record date of such dividend shall simultaneously with the
effectiveness of such subdivision or immediately after the record date of such
dividend be proportionately reduced. If outstanding shares of Common Stock shall
be combined into a smaller number of shares, the Purchase Price in effect
immediately prior to such combination shall, simultaneously with the
effectiveness of such combination, be proportionately increased. When any
adjustment is required to be made in the Purchase Price, the number of Warrant
Shares purchasable upon the exercise of this Warrant shall be changed to the
quotient of (i) (A) the number of shares issuable upon the exercise of this
Warrant immediately prior to such adjustment multiplied by (B) the Purchase
Price in effect immediately prior to such adjustment, divided by (ii) the
Purchase Price in effect immediately after such adjustment.
(2) If there shall occur any capital reorganization or reclassification of the
Company's Common Stock (other than a change in par value or a subdivision or
combination as provided for in subsection 2(a) above), or any consolidation or
merger of the Company with or into another corporation, or a transfer of all or
substantially all of the assets of the Company, then, as part of any such
reorganization, reclassification, consolidation, merger or sale, as the case may
be, lawful provision shall be made so that the Registered Holder of this Warrant
shall have the right thereafter to receive upon the exercise hereof the kind and
amount of shares of stock or other securities or property which such Registered
Holder would have been entitled to receive if, immediately prior to any such
reorganization, reclassification, consolidation, merger or sale, as the case may
be, such Registered Holder had held the number of shares of Common Stock which
were then purchasable upon the exercise of this Warrant. In any such case,
appropriate adjustment (as reasonably determined in good faith by the Board of
Directors of the Company) shall be made in the application of the provisions set
forth herein with respect to the rights and interests thereafter of the
Registered Holder of this Warrant, such that the provisions set forth in this
Section 2 (including provisions with respect to adjustment of the Purchase
Price) shall thereafter be applicable, as nearly as is reasonably practicable,
in relation to any shares of stock or other securities or property thereafter
deliverable upon the exercise of this Warrant.
(3) When any adjustment is required to be made in the Purchase Price, the
Company shall promptly mail to the Registered Holder a certificate setting forth
the Purchase Price after such adjustment and setting forth a brief statement of
the facts requiring such adjustment. Such certificate shall also set forth the
kind and amount of stock or other securities or property into which this Warrant
shall be exercisable following the occurrence of any of the events specified in
subsection 2(a) or (b) above.
3. FRACTIONAL SHARES. The Company shall not be required upon the exercise of
this Warrant to issue any fractional shares, but shall make an adjustment
therefor in cash on the basis of the Fair Market Value per share of Common
Stock. For this purpose, The Fair Market Value per share of Common Stock shall
be determined as follows:
(1) If the Common Stock is listed on a national securities exchange, the Nasdaq
National Market or another nationally recognized exchange or trading system as
of the Exercise Date, the Fair Market Value per share of Common Stock shall be
deemed to be the last reported sale price per share of Common Stock thereon on
the Exercise Date; or, if no such price is reported on such date, such price on
the next preceding business day (provided that if no such price is reported on
the next preceding business day, the Fair Market Value per share of Common Stock
shall be determined pursuant to clause (ii)).
(2) If the Common Stock is not listed on a national securities exchange, the
Nasdaq National Market or another nationally recognized exchange or trading
system as of the Exercise Date, the Fair Market Value per share of Common Stock
shall be deemed to be the amount most recently determined by the Board of
Directors to represent the fair market value per share of the Common Stock
(including without limitation a determination for purposes of granting Common
Stock options or issuing Common Stock under an employee benefit plan of the
Company); and, upon request of the Registered Holder, the Board of Directors (or
a representative thereof) shall promptly notify the Registered Holder of the
Fair Market Value per share of Common Stock. Notwithstanding the foregoing, if
the Board of Directors has not made such a determination within the three-month
period prior to the effective date of exercise, as determined in pursuant to
Section 1(b) above (the "EXERCISE DATE"), then (A) the Fair Market Value per
share of Common Stock shall be the amount next determined by the Board of
Directors to represent the fair market value per share of the Common Stock
(including without limitation a determination for purposes of granting Common
Stock options or issuing Common Stock under an employee benefit plan of the
Company), (B) the Board of Directors shall make such a determination within 15
days of a request by the Registered Holder that it do so, and (C) the exercise
of this Warrant pursuant to this subsection 1(b) shall be delayed until such
determination is made.
4. SECURITIES LAW TRADING RESTRICTIONS
(1) This Warrant and the Warrant Shares shall not be sold or transferred unless
(i) the Company provides consent in accordance with Section 9, and (ii) either
(A) the Warrant or the Warrant Shares first shall have been registered under the
Securities Act of 1933, as amended (the "Act"), or (B) the Company first shall
have been furnished with an opinion of legal counsel, reasonably satisfactory to
the Company, to the effect that such sale or transfer is exempt from the
registration requirements of the Act.
(2) Each certificate representing Warrant Shares shall bear a legend
substantially in the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT
BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED
UNLESS AND UNTIL SUCH SECURITIES ARE REGISTERED UNDER SUCH ACT OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY IS
OBTAINED TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED.
The foregoing legend shall be removed from the certificates representing any
Warrant Shares, at the request of the holder thereof, at such time as they
become eligible for resale pursuant to Rule 144(k) under the Act, or any
successor provision thereto.
5. NO IMPAIRMENT. The Company will not, by amendment of its charter or through
reorganization, consolidation, merger, dissolution, sale of assets or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the holder of this
Warrant against impairment.
6. NOTICES OF RECORD DATE, ETC.
In case:
(1) the Company shall take a record of the holders of its Common Stock (or other
stock or securities at the time deliverable upon the exercise of this Warrant)
for the purpose of entitling or enabling them to receive any dividend or other
distribution, or to receive any right to subscribe for or purchase any shares of
stock of any class or any other securities, or to receive any other right; or
(2) of any capital reorganization of the Company, any reclassification of the
capital stock of the Company, any consolidation or merger of the Company with or
into another corporation (other than a consolidation or merger in which the
Company is the surviving entity), or any transfer of all or substantially all of
the assets of the Company; or
(3) of the voluntary or involuntary dissolution, liquidation or winding-up of
the Company, then, and in each such case, the Company will mail or cause to be
mailed to the Registered Holder of this Warrant a notice specifying, as the case
may be, (i) the date on which a record is to be taken for the purpose of such
dividend, distribution or right, and stating the amount and character of such
dividend, distribution or right, or (ii) the effective date on which such
reorganization, reclassification, consolidation, merger, transfer, dissolution,
liquidation or winding-up is to take place, and the time, if any is to be fixed,
as of which the holders of record of Common Stock (or such other stock or
securities at the time deliverable upon the exercise of this Warrant) shall be
entitled to exchange their shares of Common Stock (or such other stock or
securities) for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, transfer, dissolution,
liquidation or winding-up. Such notice shall be mailed at least ten (10) days
prior to the record date or effective date for the event specified in such
notice.
7. RESERVATION OF STOCK. The Company will at all times reserve and keep
available, solely for issuance and delivery upon the exercise of this Warrant,
such number of Warrant Shares and other stock, securities and property, as from
time to time shall be issuable upon the exercise of this Warrant.
8. REPLACEMENT OF WARRANTS. Upon receipt of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of this Warrant and
(in the case of loss, theft or destruction) upon delivery of an indemnity
agreement (with surety if reasonably required) in an amount reasonably
satisfactory to the Company, or (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will issue, in lieu thereof, a new
Warrant of like tenor.
9. TRANSFER RESTRICTIONS
(1) Neither this Warrant nor any rights hereunder are transferable, in whole or
in part, without the written consent of the Company which the Company may
withhold in its sole discretion. To effect any such permitted transfer, the
Registered Holder must surrender this Warrant with a properly executed
assignment (in the form attached hereto as EXHIBIT II) at the principal office
of the Company. Such assignment shall not be effective unless and until
countersigned by the Company.
(2) Upon the surrender by the Registered Holder of this Warrant and an
assignment executed by the Registered Holder and countersigned by the Company to
the Company at the principal office of the Company, the Company will, subject to
the provisions of Section 4 hereof, issue and deliver to or upon the order of
such Holder a new Warrant of like tenor, in such name as the Registered Holder
(upon payment by such Registered Holder of any applicable transfer taxes) shall
direct, calling on the face thereof for the number of shares of Common Stock
called for on the face of the Warrant so surrendered. (3) Until any permitted
transfer of this Warrant is effected as provided above, the Company may treat
the Registered Holder of this Warrant as the absolute owner hereof for all
purposes.
10. MAILING OF NOTICES, ETC. All notices and other communications from the
Company to the Registered Holder of this Warrant shall be mailed by first-class
certified or registered mail, postage prepaid, to the address furnished to the
Company in writing by the last Registered Holder of this Warrant who shall have
furnished an address to the Company in writing. All notices and other
communications from the Registered Holder of this Warrant or in connection
herewith to the Company shall be mailed by first-class certified or registered
mail, postage prepaid, to the Company at its principal office set forth below.
If the Company should at any time change the location of its principal office to
a place other than as set forth below, it shall give prompt written notice to
the Registered Holder of this Warrant and thereafter all references in this
Warrant to the location of its principal office at the particular time shall be
as so specified in such notice.
11. NO RIGHTS AS STOCKHOLDER. Until the exercise of this Warrant, the Registered
Holder of this Warrant shall not have or exercise any rights by virtue hereof as
a stockholder of the Company.
12. CHANGE OR WAIVER. No term of this Warrant may be changed or waived other
than by an instrument in writing signed by the party against which enforcement
of the change or waiver is sought.
13. HEADINGS. The headings in this Warrant are for purposes of reference only
and shall not limit or otherwise affect the meaning of any provision of this
Warrant.
14. GOVERNING LAW. This Warrant shall be governed by and construed in accordance
with the laws of the State of Delaware applicable to contracts entered into and
performed entirely within Delaware.
AVID TECHNOLOGY, INC.
By: /S/WILLIAM L. FLAHERTY
--------------------------
Senior Vice President of Finance, Chief
Financial Officer, and Treasurer
ATTEST:
/S/PETER T. JOHNSON
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<PAGE>
EXHIBIT I
PURCHASE FORM
To:_________________ Dated:______________
The undersigned, pursuant to the provisions set forth in the attached
Warrant (No. ___), hereby irrevocably elects to purchase _____ shares of the
Common Stock covered by such Warrant. The undersigned herewith makes payment of
$____________, representing the full purchase price for such shares at the price
per share provided for in such Warrant. Such payment is in the form of (indicate
the applicable amount for each form of payment):
$___________ Cash
$___________ Check of the Registered Holder to the Company
$___________ Wire transfer of immediately available funds to the
Company
$___________ TOTAL PURCHASE PRICE
Signature:
Address:
<PAGE>
EXHIBIT II
ASSIGNMENT FORM
FOR VALUE RECEIVED, ________________________________________
hereby sells, assigns and transfers all of the rights of the undersigned under
the attached Warrant (No. ____) with respect to the number of shares of Common
Stock covered thereby set forth below, unto:
Name of Assignee Address No. of Shares
REGISTERED HOLDER
Signature: Dated:
Witness: Dated:
On behalf and in the name of the Company, the undersigned consents to the
assignment of the attached Warrant by the Registered Holder to the assignee set
forth above.
COMPANY
By:
Name:
Title:
REGISTRATION RIGHTS AGREEMENT
This Agreement, dated as of August 3, 1998 is entered into by and between
Avid Technology, Inc., a Delaware corporation (the "COMPANY"), and Microsoft
Corporation, a Washington corporation (the "PURCHASER").
RECITALS
Whereas, the Company and the Purchaser have entered into a Stock and Asset
Purchase Agreement dated as of June 15, 1998 (the "PURCHASE AGREEMENT");
Whereas, the Purchaser has agreed that no shares of capital stock of the
Company received in connection with the Purchase Agreement (and the warrant
issued thereunder) shall be transferred by the Purchaser until after the third
anniversary of the Closing Date (as defined in the Purchase Agreement); and
Whereas, the Company and the Purchaser desire to provide for certain
arrangements with respect to the registration of shares of capital stock of the
Company under the Securities Act of 1933;
Now, Therefore, in consideration of the mutual promises and covenants
contained in this Agreement, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS.
As used in this Agreement, the following terms shall have the following
respective meanings:
"COMMISSION" means the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"COMMON STOCK" means the common stock, $.01 par value per share,
of the Company.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, or any successor federal statute, and the rules and regulations of the
Commission issued under such Act, as they each may, from time to time, be in
effect.
"OTHER HOLDERS" shall have the meaning set forth in Section 2(c).
"PROSPECTUS" means the prospectus included in any Registration
Statement, as amended or supplemented by an amendment or prospectus supplement,
including post-effective amendments, and all material incorporated by reference
or deemed to be incorporated by reference in such Prospectus.
"REGISTRATION STATEMENT" means a registration statement filed by the
Company with the Commission for a public offering and sale of securities of the
Company (other than a registration statement on Form S-8 or Form S-4, or their
successors, or any other form for a similar limited purpose, any registration
statement covering only securities proposed to be issued in exchange for
securities or assets of another corporation or any registration statement
covering only securities offered by another stockholder or stockholders of the
Company).
"REGISTRATION EXPENSES" means the expenses described in Section 5.
"REGISTRABLE SHARES" means the Shares and any other shares of Common
Stock issued in respect of the Shares (because of stock splits, stock dividends,
reclassifications, recapitalizations or other similar events); PROVIDED,
HOWEVER, that shares of Common Stock which are Registrable Shares shall cease to
be Registrable Shares upon (i) becoming eligible for sale under Rule 144(k)
under the Securities Act, (ii) any sale pursuant to a Registration Statement or
Rule 144 under the Securities Act or (iii) any sale in any manner to a person or
entity which, by virtue of Section 12 of this Agreement, is not entitled to the
rights provided by this Agreement.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and
the rules and regulations thereunder, as they may be from time to time in
effect.
"SHARES" means the shares of Common Stock acquired by the Purchaser
under the Purchase Agreement, including shares of Common Stock issued upon
exercise of the Warrant (as defined in the Purchase Agreement).
"STOCKHOLDER" means the Purchaser and any person or entity to whom
the rights granted under this Agreement are transferred by the Purchaser
pursuant to Section 12 hereof.
2. REQUIRED REGISTRATIONS
(1) At any time after August 3, 2001, the Stockholder may request, in writing,
that the Company effect the registration under the Securities Act of Registrable
Shares owned by the Stockholder.
(2) Upon receipt of any request for registration pursuant to this Section 2
received after August 3, 2001, the Company shall use its reasonable best efforts
to effect the registration, on Form S-3 under the Securities Act (or, if such
form is not available, such other form as shall be appropriate for such sale),
of all Registrable Shares which the Company has been requested to so register.
(3) If the Stockholder intends to distribute the Registrable Shares covered by
its request by means of an underwriting, it shall so advise the Company as a
part of its request made pursuant to Section 2(a). If other holders of
securities of the Company who are entitled by contract with the Company to have
securities included in such a registration (the "OTHER HOLDERS") request that
their securities be included in such registration and underwriting, the Company
may include the securities of such Other Holders in such registration and
underwriting on the terms set forth herein. The Company shall (together with the
Stockholder and all Other Holders proposing to distribute their securities
through such underwriting) enter into an underwriting agreement in customary
form (including, without limitation, customary indemnification and contribution
provisions) with the managing underwriter. Notwithstanding any other provision
of this Section 2(c), if the managing underwriter advises the Company that the
inclusion of all shares requested to be registered would adversely affect the
offering, the securities of the Company held by Other Holders shall first be
excluded from such registration and underwriting to the extent deemed advisable
by the managing underwriter and, if all such shares have been excluded and
further limitation of the number of shares is required, Registrable Shares shall
then be excluded from such underwriting and registration to the extent deemed
advisable by the managing underwriter. If the Stockholder or any Other Holder
who has requested inclusion in such registration as provided above disapproves
of the terms of the underwriting, such person may elect to withdraw therefrom by
written notice to the Company, and the securities so withdrawn shall also be
withdrawn from registration. If the managing underwriter has not limited the
number of Registrable Shares or other securities to be underwritten, the Company
may include securities for its own account in such registration if the managing
underwriter so agrees and if the number of Registrable Shares and other
securities which would otherwise have been included in such registration and
underwriting will not thereby be limited.
(4) The Stockholder shall have the right to select the managing underwriter(s)
for any underwritten offering requested pursuant to Section 2(a), subject to the
approval of the Company, which approval will not be unreasonably withheld.
(5) The Company shall not be required to effect more than four registrations
pursuant to Section 2. In addition, the Company shall not be required to effect
any registration within six months after the effective date of any other
Registration Statement. For purposes of this Section 2(e), a Registration
Statement shall not be counted until such time as such Registration Statement
has been declared effective by the Commission (unless the Stockholder withdraws
its request for such registration and elects not to pay the Registration
Expenses therefor pursuant to Section 5).
(6) If at the time of any request to register Registrable Shares by the
Stockholder pursuant to this Section 2, the Company is engaged or has plans to
engage in a registered public offering or is engaged or plans to engage in any
other activity which, in the good faith determination of the Company's Board of
Directors, would be adversely affected by the requested registration, then the
Company may at its option direct that such request be delayed for a period not
in excess of 90 days from the date of such request, such right to delay a
request to be exercised by the Company not more than once, or for an aggregate
delay of more than 90 days, in any 12-month period.
3. INCIDENTAL REGISTRATION
(1) Whenever the Company proposes to file a Registration Statement (other than a
Registration Statement filed pursuant to Section 2) at any time and from time to
time, it will, prior to such filing, give written notice to the Stockholder of
its intention to do so. Upon the written request of the Stockholder given within
20 days after the Company provides such notice (which request shall state the
intended method of disposition of such Registrable Shares), the Company shall
use reasonable efforts to cause all Registrable Shares which the Company has
been requested by the Stockholder to register to be registered under the
Securities Act to the extent necessary to permit their sale or other disposition
in accordance with the intended methods of distribution specified in the request
of the Stockholder; provided that the Company shall have the right to postpone
or withdraw any registration effected pursuant to this Section 3 without
obligation to the Stockholder.
(2) If the registration for which the Company gives notice pursuant to Section
3(a) is a registered public offering involving an underwriting, the Company
shall so advise the Stockholder as a part of the written notice given pursuant
to Section 3(a). In such event, the right of the Stockholder to include its
Registrable Shares in such registration pursuant to Section 3 shall be
conditioned upon such Stockholder's participation in such underwriting on the
terms set forth herein. If the Stockholder proposes to distribute Registrable
Shares through such underwriting, it shall (together with the Company and any
Other Holders distributing their securities through such underwriting) enter
into an underwriting agreement in customary form with the underwriter or
underwriters selected for the underwriting by the Company. Notwithstanding any
other provision of this Section 3, if the managing underwriter determines that
the inclusion of all shares requested to be registered would adversely affect
the offering, the Company may limit the number of Registrable Shares to be
included in the registration and underwriting. The Company shall so advise the
Stockholder and the number of shares that are entitled to be included in the
registration and underwriting shall be allocated in the following manner. The
securities of the Company held by stockholders other than Other Holders shall
first be excluded from such registration and underwriting to the extent deemed
advisable by the managing underwriter and, if all such shares have been excluded
and further limitation of the number of shares is required, the number of shares
that may be included in such registration and underwriting shall then be
allocated among the Stockholder and Other Holders requesting registration in
proportion, as nearly as practicable, to the respective number of shares of
Common Stock (on an as-converted basis) which they held at the time the Company
gave the notice specified in Section 3(a). If the Stockholder or any such Other
Holder would thus be entitled to include more securities than such holder
requested to be registered, the excess shall be allocated among the Stockholder
and such Other Holders pro rata in the manner described in the preceding
sentence. If the Stockholder or any Other Holder disapproves of the terms of any
such underwriting, such person may elect to withdraw therefrom by written notice
to the Company, and any Registrable Shares or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
4. REGISTRATION PROCEDURES
(1) If and whenever the Company is required by the provisions of Section 2 or
Section 3 of this Agreement to use its best efforts to effect the registration
of any Registrable Shares under the Securities Act, the Company shall:
(1) file with the Commission a Registration Statement with respect to such
Registrable Shares and use its reasonable best efforts to cause that
Registration Statement to become and remain effective for 180 days from the
effective date or such lesser period until all such Registrable Shares are sold;
(1) as expeditiously as possible furnish to the Stockholder such reasonable
numbers of copies of the Prospectus, including any preliminary Prospectus, in
conformity with the requirements of the Securities Act, and such other documents
as the Stockholder may reasonably request in order to facilitate the public sale
or other disposition of the Registrable Shares;
(2) as expeditiously as possible use its reasonable best efforts to register
or qualify the Registrable Shares covered by the Registration Statement under
the securities or Blue Sky laws of such states as the Stockholder shall
reasonably request, and do any and all other acts and things that may be
necessary or desirable to enable the Stockholder to consummate the public sale
or other disposition in such states of the Registrable Shares included in the
Registration Statement; PROVIDED, HOWEVER, that the Company shall not be
required in connection with this paragraph (iii) to qualify as a foreign
corporation or execute a general consent to service of process in any
jurisdiction;
(3) as expeditiously as possible, cause all such Registrable Shares to be
listed on each securities exchange or automated quotation system on which
similar securities issued by the Company are then listed;
(4) promptly provide a transfer agent and registrar for all such Registrable
Shares not later than the effective date of such registration statement;
(5) promptly make available for inspection by the Stockholder, any managing
underwriter participating in any disposition pursuant to such Registration
Statement, and any attorney or accountant or other agent retained by any such
underwriter or selected by the Stockholder, all financial and other records,
pertinent corporate documents and properties of the Company and cause the
Company's officers, directors, employees and independent accountants to supply
all information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such Registration Statement;
(6) as expeditiously as possible, notify the Stockholder, promptly after the
Company shall receive notice thereof, of the time when such Registration
Statement has become effective or a supplement to any Prospectus forming a part
of such Registration Statement has been filed; and
(7) as expeditiously as possible following the effectiveness of such
Registration Statement, notify the Stockholder of any request by the Commission
for the amending or supplementing of such Registration Statement or Prospectus.
(2) If the Company has delivered a Prospectus to the Stockholder and after
having done so the Prospectus is amended to comply with the requirements of the
Securities Act, the Company shall promptly notify the Stockholder and, if
requested, the Stockholder shall immediately cease making offers of Registrable
Shares and return all Prospectuses to the Company. The Company shall promptly
provide the Stockholder with revised Prospectuses and, following receipt of the
revised Prospectuses, the Stockholder shall be free to resume making offers of
the Registrable Shares.
(3) In the event that, in the judgment of the Company based on advice of
counsel, it is advisable to suspend use of a Prospectus included in a
Registration Statement due to pending material developments or other events that
have not yet been publicly disclosed or due to the need to file with the
Commission financial statements required to comply with the Securities Act, the
Company shall notify the Stockholder to such effect, and, upon receipt of such
notice, the Stockholder shall immediately discontinue any sales of Registrable
Shares pursuant to such Registration Statement until the Stockholder has
received copies of a supplemented or amended Prospectus or until the Stockholder
is advised in writing by the Company that the then current Prospectus may be
used and has received copies of any additional or supplemental filings that are
incorporated or deemed incorporated by reference in such Prospectus.
Notwithstanding anything to the contrary herein, the Company shall not exercise
its rights under this Section 4(c) to suspend sales of Registrable Shares for a
period in excess of 90 days in any 365-day period.
5. ALLOCATION OF EXPENSES. The Company will pay all Registration Expenses for
all registrations under this Agreement; PROVIDED, HOWEVER, that if a
registration under Section 2 is withdrawn at the request of the Stockholder
(other than as a result of information concerning the business or financial
condition of the Company which is made known to the Stockholder after the date
on which such registration was requested) and if the Stockholder elects not to
have such registration counted as a registration requested under Section 2, the
Stockholder shall pay the Registration Expenses of such registration. For
purposes of this Section, the term "REGISTRATION EXPENSES" shall mean all
expenses incurred by the Company in complying with this Agreement, including,
without limitation, all registration and filing fees, exchange listing fees,
printing expenses, fees and expenses of counsel for the Company, state Blue Sky
fees and expenses, and the expense of any special audits incident to or required
by any such registration, but excluding underwriting discounts and selling
commissions and any fees and expenses of counsel to the Stockholder.
6. INDEMNIFICATION AND CONTRIBUTION
(1) In the event of any registration of any of the Registrable Shares under the
Securities Act pursuant to this Agreement, the Company will indemnify and hold
harmless the Stockholder, each underwriter of Registrable Shares, and each other
person, if any, who controls the Stockholder or such underwriter within the
meaning of the Securities Act or the Exchange Act against any losses, claims,
damages or liabilities, joint or several, to which the Stockholder or such
underwriter or controlling person may become subject under the Securities Act,
the Exchange Act, state securities or Blue Sky laws or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any Registration Statement under which such
Registrable Shares were registered under the Securities Act, any preliminary
prospectus or final prospectus contained in the Registration Statement, or any
amendment or supplement to such Registration Statement, or arise out of or are
based upon the omission or alleged omission to state a material fact required to
be stated therein or necessary to make the statements therein not misleading;
and the Company will reimburse the Stockholder and such underwriter or
controlling person for any legal or any other expenses reasonably incurred by
the Stockholder or such underwriter or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action;
PROVIDED, HOWEVER, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any untrue statement or omission made (i) in such Registration Statement,
preliminary prospectus or prospectus, or any such amendment or supplement, in
reliance upon and in conformity with information furnished to the Company, in
writing, by or on behalf of the Stockholder or such underwriter or controlling
person specifically for use in the preparation thereof, or (ii) in any
prospectus or preliminary prospectus, or any supplement thereto, other than the
most current version thereof, if the Stockholder has breached its obligations
under Section 4(b).
(2) In the event of any registration of any of the Registrable Shares under the
Securities Act pursuant to this Agreement, the Stockholder will indemnify and
hold harmless the Company, each of its directors and officers and each
underwriter (if any) and each person, if any, who controls the Company or any
such underwriter within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages or liabilities, joint or several, to which
the Company, such directors and officers, underwriter or controlling person may
become subject under the Securities Act, Exchange Act, state securities or Blue
Sky laws or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement under which such Registrable Shares were registered under
the Securities Act, any preliminary prospectus or final prospectus contained in
the Registration Statement, or any amendment or supplement to the Registration
Statement, or arise out of or are based upon any omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, if the statement or omission was made in
reliance upon and in conformity with information relating to the Stockholder
furnished in writing to the Company by or on behalf of the Stockholder
specifically for use in connection with the preparation of such Registration
Statement, prospectus, amendment or supplement; PROVIDED, HOWEVER, that the
obligations of the Stockholder hereunder shall be limited to an amount equal to
the net proceeds to the Stockholder from the Registrable Shares sold in
connection with such registration.
(3) Each party entitled to indemnification under this Section (the "INDEMNIFIED
PARTY") shall give notice to the party required to provide indemnification (the
"INDEMNIFYING PARTY") promptly after such Indemnified Party has actual knowledge
of any claim as to which indemnity may be sought, and shall permit the
Indemnifying Party to assume the defense of any such claim or any litigation
resulting therefrom; PROVIDED, that counsel for the Indemnifying Party, who
shall conduct the defense of such claim or litigation, shall be approved by the
Indemnified Party (whose approval shall not be unreasonably withheld); and,
PROVIDED, FURTHER, that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Section except to the extent that the Indemnifying Party is adversely
affected by such failure. The Indemnified Party may participate in such defense
at such party's expense; PROVIDED, HOWEVER, that the Indemnifying Party shall
pay such expense if representation of such Indemnified Party by the counsel
retained by the Indemnifying Party would be inappropriate due to actual or
potential differing interests between the Indemnified Party and any other party
represented by such counsel in such proceeding; PROVIDED FURTHER that in no
event shall the Indemnifying Party be required to pay the expenses of more than
one law firm per jurisdiction as counsel for the Indemnified Party. The
Indemnifying Party also shall be responsible for the expenses of such defense if
the Indemnifying Party does not elect to assume such defense. No Indemnifying
Party, in the defense of any such claim or litigation shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability in respect of such claim or litigation, and no Indemnified Party
shall consent to entry of any judgment or settle such claim or litigation
without the prior written consent of the Indemnifying Party, which consent shall
not be unreasonably withheld.
(4) In order to provide for just and equitable contribution in circumstances in
which the indemnification provided for in this Section 6 is due in accordance
with its terms but for any reason is held to be unavailable to an Indemnified
Party in respect to any losses, claims, damages and liabilities referred to
herein, then the Indemnifying Party shall, in lieu of indemnifying such
Indemnified Party, contribute to the amount paid or payable by such Indemnified
Party as a result of such losses, claims, damages or liabilities to which such
party may be subject in such proportion as is appropriate to reflect the
relative fault of the Company on the one hand and the Stockholder on the other
in connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative fault of the Company and the Stockholder shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of material fact related to information supplied by the Company
or the Stockholder and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Stockholder agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to above. Notwithstanding the provisions
of this Section 6(d), in no case shall the Stockholder be liable or responsible
for any amount in excess of the net proceeds received by the Stockholder from
the offering of Registrable Shares; PROVIDED, HOWEVER, that no person guilty of
fraudulent misrepresentation (within the meaning of Section 10(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party under this Section, notify the party from whom
contribution may be sought, but the omission so to notify the party from whom
contribution may be sought shall not relieve such party from any other
obligation it or they may have thereunder or otherwise under this Section. No
party shall be liable for contribution with respect to any action, suit,
proceeding or claim settled without its prior written consent, which consent
shall not be unreasonably withheld.
7. OTHER MATTERS WITH RESPECT TO UNDERWRITTEN OFFERINGS. In the event that
Registrable Shares are sold pursuant to a Registration Statement in an
underwritten offering pursuant to Section 2, the Company agrees to (a) enter
into an underwriting agreement containing customary representations and
warranties with respect to the business and operations of the Company and
customary covenants and agreements to be performed by the Company, including
without limitation customary provisions with respect to indemnification by the
Company of the underwriters of such offering; (b) use reasonable efforts to
cause its independent public accounting firm to issue customary "cold comfort
letters" to the underwriters with respect to the Registration Statement; and (c)
if requested by the Stockholder, consider in good faith making its senior
executives available to assist the underwriters with respect to so-called "road
shows" in connection with marketing efforts for and the distribution and sale of
the Registrable Shares.
8. INFORMATION BY HOLDER. Each holder of Registrable Shares included in any
registration shall furnish to the Company such information regarding such holder
and the distribution proposed by such holder as the Company may reasonably
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Agreement.
9. CONFIDENTIALITY OF NOTICES. Upon receiving any written notice from the
Company regarding the Company's plans to file a Registration Statement, the
Stockholder shall treat such notice confidentially and shall not disclose such
information to any person other than as necessary to exercise its rights under
this Agreement.
10. RULE 144 REQUIREMENTS. During the term of this Agreement, the Company
shall:
(1) use its best efforts to file with the Commission in a timely manner all
reports and other documents required of the Company under the Securities Act and
the Exchange Act; and
(2) furnish to the Stockholder upon request (i) a written statement by the
Company as to its compliance with the reporting requirements of the Securities
Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly
report of the Company, and (iii) such other reports and documents of the Company
as such holder may reasonably request to avail itself of any similar rule or
regulation of the Commission allowing it to sell any such securities without
registration.
11. TERMINATION. All of the Company's obligations to register Registrable Shares
under Sections 2 and 3 of this Agreement shall terminate six years after the
date hereof.
12. TRANSFERS OF RIGHTS. This Agreement, and the rights and obligations of
the Purchaser hereunder, may not be assigned by the Purchaser without the
express written consent of the Company.
13. GENERAL
(1) SEVERABILITY. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(2) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts applicable to
contracts entered into and performed entirely within Massachusetts.
(3) NOTICES. All notices, requests, consents and other communications under this
Agreement shall be in writing and shall be deemed delivered (i) two business
days after being sent by registered or certified mail, return receipt requested,
postage prepaid or (ii) one business day after being sent via a reputable
nationwide overnight courier service guaranteeing next business day delivery, in
each case to the intended recipient as set forth below:
If to the Company, at Avid Technology, Inc., Metropolitan Technology Park,
One Park West, Tewksbury, MA 01876, Attention: President, or at such other
address or addresses as may have been furnished in writing by the Company to the
Purchaser, with a copy to Mark G. Borden, Esq., Hale and Dorr, 60 State Street,
Boston, MA 02190; and
If to the Purchaser, at Microsoft Corporation, One Microsoft Way, Redmond,
WA 98052-6399, Attention: President, or at such other address or addresses as
may have been furnished in writing by the Purchaser to the Company, with a copy
to Gary J. Kocher, Esq., Preston Gates & Ellis LLP, 5000 Columbia Seafirst
Center, 701 Fifth Avenue, Seattle, Washington 98104-7011.
Any party may give any notice, request, consent or other communication
under this Agreement using any other means (including, without limitation,
personal delivery, messenger service, telecopy, first class mail or electronic
mail), but no such notice, request, consent or other communication shall be
deemed to have been duly given unless and until it is actually received by the
party for whom it is intended. Any party may change the address to which
notices, requests, consents or other communications hereunder are to be
delivered by giving the other parties notice in the manner set forth in this
Section.
(4) COMPLETE AGREEMENT. This Agreement constitutes the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements and understandings relating to such subject
matter.
(5) AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended or
terminated and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and the holders of at
least a majority of the Registrable Shares; PROVIDED, that this Agreement may be
amended with the consent of the holders of less than all Registrable Shares only
in a manner which affects all such holders in the same fashion. Any such
amendment, termination or waiver effected in accordance with this Section 13(e)
shall be binding on all parties hereto, even if they do not execute such
consent. No waivers of or exceptions to any term, condition or provision of this
Agreement, in any one or more instances, shall be deemed to be, or construed as,
a further or continuing waiver of any such term, condition or provision.
(6) PRONOUNS. Whenever the context may require, any pronouns used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns and pronouns shall include the plural, and vice
versa.
(7) COUNTERPARTS; FACSIMILE SIGNATURES. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, and all
of which together shall constitute one and the same document. This Agreement may
be executed by facsimile signatures.
(8) SECTION HEADINGS. The section headings
are for the convenience of the parties and in no way alter, modify, amend, limit
or restrict the contractual obligations of the parties.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
Executed as of the date first written above.
AVID TECHNOLOGY, INC.
By: /S/WILLIAM L. FLAHERTY
-------------------------
Name: WILLIAM L. FLAHERTY
Title: SENIOR VICE PRESIDENT OF FINANCE,
CFO, AND TREASURER
MICROSOFT CORPORATION
By: /S/ROBERT A. ESHELMAN
-------------------------
Name: ROBERT A. ESHELMAN
Title: ASSISTANT SECRETARY
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NINTH AMENDMENT
TO AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
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Ninth Amendment dated as of September 30, 1998 to Amended and Restated
Revolving Credit Agreement (the "Ninth 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 (as hereinafter
defined) (the "Banks") and BANKBOSTON, N.A., as agent for the Banks (in such
capacity, the "Agent"), amending certain provisions of the Amended and Restated
Revolving Credit Agreement dated as of June 30, 1995 (as amended and in effect
from time to time, the "Credit Agreement") by and among the Borrower, the Banks
and the Agent. Terms not otherwise defined herein which are defined in the
Credit Agreement shall have the same respective meanings herein as therein.
WHEREAS, the Borrower, the Banks and the Agent have agreed to modify
certain terms and conditions of the Credit Agreement as specifically set forth
in this Ninth Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
SS.1. AMENDMENT TO SS.1 OF THE CREDIT AGREEMENT. Section 1.1 of the
Credit Agreement is hereby amended as follows:
(a) the definition of "Consolidated Operating Cash Flow" is hereby amended
by inserting immediately after the words "PLUS (ii) depreciation and
amortization for such period" the words "PLUS (iii) any pre-tax non cash
writedowns taken in the fiscal quarter ended September 30, 1998 of
acquired-in-process research and development relating to the Softimage
Acquisition, up to an aggregate amount of not more than $193,741,000"
(b) the definition of "Consolidated Tangible Net Worth" is hereby amended
by (i) deleting the period which appears at the end of the text of such
definition and substituting in place thereof a semicolon; and (ii) inserting
immediately after the end of the text of such definition the words "PROVIDED,
HOWEVER, for purposes of calculating compliance with ss.8.2 and ss.8.4 hereof,
any after-tax non cash writedowns taken in the fiscal quarter ended September
30, 1998 of acquired-in-process research and development relating to the
Softimage Acquisition, up to an aggregate amount of not more than $149,374,000,
which would otherwise be required to be deducted from Consolidated Tangible Net
Worth shall not be deducted for purposes of ss.8.2 and ss.8.4 of this Credit
Agreement."
SS.2. AMENDMENT TO SS.6 OF THE CREDIT AGREEMENT. Section 6.12 of the
Credit Agreement is hereby amended by deleting the text of ss.6.12 in its
entirety and restating it as follows:
6.12. USE OF PROCEEDS. The Borrower will use the proceeds of the
Loans solely for working capital and general corporate purposes, and will
not use any proceeds of the Loans to purchase or otherwise acquire any of
the Borrower's capital stock.
SS.3. AMENDMENT TO SS.7 OF THE CREDIT AGREEMENT. Section 7.4 of the
Credit Agreement is hereby amended by deleting the text of ss.7.4 in its
entirety and restating it as follows:
7.4. DISTRIBUTIONS. The Borrower will not make any Distributions;
PROVIDED, HOWEVER, so long as no Event of Default has occurred and is
continuing or would exist as a result thereof, the Borrower shall be
permitted to make Distributions for the repurchase by the Borrower of its
capital stock.
SS.4. AMENDMENT TO SS.8 OF THE CREDIT AGREEMENT. Section 8.4 of the Credit
Agreement is hereby amended by inserting immediately after the words "PLUS one
hundred percent (100%) of the net proceeds of any new equity issued by the
Borrower or any of its Subsidiaries" the words "LESS (d) the aggregate purchase
price of all capital stock of the Borrower repurchased by the Borrower through
the date of determination"
SS.5. CONDITIONS TO EFFECTIVENESS. This Ninth Amendment shall not
become effective until the Agent receives a counterpart of this Ninth
Amendment executed by the Borrower, the Majority Banks and the Agent.
SS.6. REPRESENTATIONS AND WARRANTIES. The Borrower hereby repeats, on and
as of the date hereof, each of the representations and warranties made by it in
ss.5 of the Credit Agreement, PROVIDED, that all references therein to the
Credit Agreement shall refer to such Credit Agreement as amended hereby. In
addition, the Borrower hereby represents and warrants that the execution and
delivery by the Borrower of this Ninth Amendment and the performance by the
Borrower of all of its agreements and obligations under the Credit Agreement as
amended hereby are within the corporate authority of the Borrower and have been
duly authorized by all necessary corporate action on the part of the Borrower.
SS.7. RATIFICATION, ETC. Except as expressly amended hereby, the Credit
Agreement and all documents, instruments and agreements related thereto are
hereby ratified and confirmed in all respects and shall continue in full force
and effect. The Credit Agreement and this Ninth Amendment shall be read and
construed as a single agreement. All references in the Credit Agreement or any
related agreement or instrument to the Credit Agreement shall hereafter refer to
the Credit Agreement as amended hereby.
SS.8. NO WAIVER. Nothing contained herein shall constitute a waiver
of, impair or otherwise affect any Obligations, any other obligation of the
Borrower or any rights of the Agent or the Banks consequent thereon.
SS.9. COUNTERPARTS. This Ninth Amendment may be executed in one or
more counterparts, each of which shall be deemed an original but which
together shall constitute one and the same instrument.
SS.10. GOVERNING LAW. THIS NINTH AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
(WITHOUT REFERENCE TO CONFLICT OF LAWS).
IN WITNESS WHEREOF, the parties hereto have executed this Ninth Amendment
as a document under seal as of the date first above written.
AVID TECHNOLOGY, INC.
By: /s/ William L. Flaherty
------------------------
Title: Senior Vice President of Finance,
Chief Financial Officer, and
Treasurer
BANKBOSTON, N.A.,
individually and as Agent
By: /s/ John B. Desmond
-----------------------
Title: Vice President
ABN AMRO BANK N.V.
By: /s/ Bruce Swords
-----------------------
Title: Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEETS ON THE FORM 10-Q/A FOR THE PERIOD ENDED SEPTEMBER
30, 1998 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AS FILED ON FORM
10-Q/A FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 60,643
<SECURITIES> 37,699
<RECEIVABLES> 81,683
<ALLOWANCES> 7,923
<INVENTORY> 12,059
<CURRENT-ASSETS> 213,371
<PP&E> 111,095
<DEPRECIATION> 73,794
<TOTAL-ASSETS> 475,763
<CURRENT-LIABILITIES> 109,110
<BONDS> 0
0
0
<COMMON> 265
<OTHER-SE> 293,883
<TOTAL-LIABILITY-AND-EQUITY> 475,763
<SALES> 337,779
<TOTAL-REVENUES> 337,779
<CGS> 135,993
<TOTAL-COSTS> 135,993
<OTHER-EXPENSES> 214,935
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,884)
<INCOME-TAX> (1,247)
<INCOME-CONTINUING> (4,637)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,637)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
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