AVID TECHNOLOGY, INC.
Avid Technology Park
One Park West
Tewksbury, MA 01876
August 12, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, DC 20549
Re: Avid Technology, Inc.
File No. 0-21174
Quarterly Report on Form 10-Q
Ladies and Gentlemen:
Pursuant to regulations of the Securities and Exchange Commission,
submitted herewith for filing on behalf of Avid Technology, Inc. is the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1999.
This filing is being effected by direct transmission to the Commission's
EDGAR System.
Very truly yours,
/s/ Ethan E. Jacks
Ethan E. Jacks
General Counsel
<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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 August
10, 1999 was 23,720,574.
================================================================================
<PAGE>
AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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 June 30, 1999 and 1998 and the six
months ended June 30, 1999 and 1998 ...................................1
b) Condensed Consolidated Balance Sheets as of
June 30, 1999 (unaudited) and December 31, 1998........................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 1999 and 1998 .......................3
d) Notes to Condensed Consolidated Financial Statements (unaudited).......4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................11
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders..............21
ITEM 5. Other Events.....................................................22
ITEM 6. Exhibits and Reports on Form 8-K.................................23
Signatures..................................................................24
EXHIBIT INDEX...............................................................25
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
1999 1998 1999 1998
(unaudited)(unaudited)(unaudited)(unaudited)
<S> <C> <C> <C> <C>
Net revenues $116,353 $112,852 $227,636 $221,594
Cost of revenues 50,275 44,537 94,696 90,064
--------- --------- --------- ---------
Gross profit 66,078 68,315 132,940 131,530
--------- --------- --------- ---------
Operating expenses:
Research and development 22,644 20,616 46,893 40,928
Marketing and selling 33,525 30,584 66,087 58,278
General and administrative 7,270 6,450 14,011 13,029
Amortization of
acquisition-related
intangible assets 19,787 40,298
--------- --------- --------- ---------
Total operating expenses 83,226 57,650 167,289 112,235
--------- --------- --------- ---------
Operating income (loss) (17,148) 10,665 (34,349) 19,295
Interest and other income, net 1,263 2,713 1,863 5,249
--------- --------- --------- ---------
Income (loss) before income taxes (15,885) 13,378 (32,486) 24,544
Provision for (benefit from)
income taxes (7,849) 4,147 (12,995) 7,608
--------- --------- --------- ---------
Net income (loss) ($8,036) $9,231 ($19,491) $16,936
========= ========= ========= =========
Net income (loss) per common share
- basic ($0.34) $0.40 ($0.81) $0.74
========= ========= ========= =========
Net income (loss) per common share
- diluted ($0.34) $0.37 ($0.81) $0.69
========= ========= ========= =========
Weighted average common shares
outstanding - basic 23,946 23,076 24,167 22,993
========= ========= ========= =========
Weighted average common shares
outstanding - diluted 23,946 24,833 24,167 24,687
========= ========= ========= =========
</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>
June 30, December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $51,352 $62,904
Marketable securities 31,104 48,922
Accounts receivable, net of allowances of
$7,827 and $7,171 at June 30, 1999 and
December 31, 1998, respectively 75,579 89,754
Inventories 11,235 11,093
Deferred tax assets 19,308 17,771
Prepaid expenses 7,021 6,095
Other current assets 4,315 5,108
---------- ----------
Total current assets 199,914 241,647
Property and equipment, net 38,491 35,398
Long-term deferred tax assets 34,292 23,891
Acquisition-related intangible assets 134,640 181,631
Other assets 6,215 4,148
---------- ----------
Total assets $413,552 $486,715
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $28,229 $24,311
Current portion of long-term debt 165 398
Accrued compensation and benefits 15,517 29,031
Accrued expenses 29,546 32,708
Income taxes payable 1,783 13,715
Deferred revenues 19,257 22,519
---------- ----------
Total current liabilities 94,497 122,682
Long-term debt, less current portion 8,647 13,261
Purchase consideration 39,157 60,461
Commitments and contingencies
Stockholders' equity:
Preferred stock
Common stock 265 265
Additional paid-in capital 359,305 349,289
Retained earnings (accumulated deficit) (5,578) 14,338
Treasury stock (76,605) (68,024)
Deferred compensation (2,747) (3,773)
Accumulated other comprehensive loss (3,389) (1,784)
---------- ----------
Total stockholders' equity 271,251 290,311
---------- ----------
Total liabilities and stockholders' equity $413,552 $486,715
========== ==========
</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>
Six Months Ended June 30,
---------------------------
1999 1998
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($19,491) $16,936
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 49,916 10,851
Compensation from stock grants and options 763 3,099
Provision for doubtful accounts 1,222 567
Changes in deferred tax assets (133) 223
(Gain) loss on disposal of equipment 122 (539)
Changes in operating assets and liabilities:
Accounts receivable 8,126 13,296
Inventories 3,340 783
Prepaid expenses and other current assets (457) (2,056)
Accounts payable 4,099 (1,380)
Income taxes payable (13,505) 6,230
Accrued expenses, compensation and benefits (18,821) (7,543)
Deferred revenues (1,269) (5,115)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES: 13,912 35,352
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment and other
assets (16,164) (9,117)
Proceeds from disposal of equipment 1,152 1,218
Purchases of marketable securities (26,764) (100,300)
Proceeds from sales of marketable securities 44,512 83,817
Investment in joint venture (1,500)
Payments on note issued in connection with
acquisition (8,000)
- --------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES: (6,764) (24,382)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (303) (468)
Purchase of common stock for treasury (19,518) (12,837)
Proceeds from issuance of common stock 2,664 8,775
- --------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES: (17,157) (4,530)
- --------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash
equivalents (1,543) (23)
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (11,552) 6,417
Cash and cash equivalents at beginning of period 62,904 108,308
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $51,352 $114,725
- --------------------------------------------------------------------------------
</TABLE>
Non-cash Financing and Investing Activities:
Property and equipment and inventory transferred
to joint venture $500 -
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
(collectively, "Avid" or "the Company"). These financial statements are
unaudited. However, in the opinion of management, the condensed consolidated
financial statements include all adjustments, consisting of only normal,
recurring adjustments, necessary for their fair presentation. Interim results
are not necessarily indicative of results expected for a full year. The
accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions for Form 10-Q and therefore do not include all
information and footnotes necessary for a complete presentation of operations,
the financial position and cash flows of the Company, in conformity with
generally accepted accounting principles. The Company filed audited consolidated
financial statements for the year ended December 31, 1998 on Form 10-K, which
included all information and footnotes necessary for such presentation.
The Company's preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. The most significant estimates reflected in these financial statements
include accounts receivable and sales allowances, inventory valuation, the
recoverability of intangible assets including goodwill, and income tax valuation
allowances. Actual results could differ from those estimates.
2. NET INCOME (LOSS) PER COMMON SHARE
The following table reconciles the numerator and denominator of the basic and
diluted net income (loss) per share computations shown on the Condensed
Consolidated Statements of Operations:
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
1999 1998 1999 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Basic net income (loss) per share
Numerator:
Net income (loss) ($8,036) $9,231 ($19,491) $16,936
Denominator:
Weighted common shares outstanding 23,946 23,076 24,167 22,993
Basic net income (loss) per share ($0.34) $0.40 ($0.81) $0.74
======== ======== ========= ========
Diluted net income (loss) per share
Numerator:
Net income (loss) ($8,036) $9,231 ($19,491) $16,936
Denominator:
Weighted common shares outstanding 23,946 23,076 24,167 22,993
Weighted common stock equivalents - 1,757 - 1,694
-------- -------- --------- --------
23,946 24,833 24,167 24,687
Diluted net income (loss) per share ($0.34) $0.37 ($0.81) $0.69
======== ======== ========= ========
</TABLE>
Options and warrants to purchase 6,985,670 and 6,720,175 weighted shares of
common stock outstanding were excluded from the calculation of diluted net
(loss) per share for the three- and six-month periods ended June 30, 1999,
respectively, because their inclusion would be anti-dilutive. Options to
purchase 77,786 and 73,391 weighted shares of common stock outstanding were
excluded from the calculation of diluted net income per share for the three- and
six-month periods ended June 30, 1998, respectively, because the exercise prices
of those options exceeded the average market price of common stock for the
three- and six-month periods ended June 30, 1998.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------ ------------------
<S> <C> <C>
Raw materials $7,077 $6,193
Work in process 1,362 2,081
Finished goods 2,796 2,819
------------------ ------------------
$11,235 $11,093
================== ==================
</TABLE>
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ -------------
<S> <C> <C>
Computer and video equipment $94,385 $85,365
Office equipment 5,097 4,874
Furniture and fixtures 8,559 7,138
Leasehold improvements 15,678 15,287
------------ -------------
123,719 112,664
Less accumulated depreciation and amortization 85,228 77,266
------------ -------------
$38,491 $35,398
============ =============
</TABLE>
5. 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 29, 1999 to expire on June 28, 2000. Under the
terms of the agreement, the Company must pay an annual commitment fee of 3/8% 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 June 30, 1999.
6. INVESTMENT IN JOINT VENTURE
On January 27, 1999, the Company, with Tektronix, Inc., incorporated a 50% owned
and funded newsroom venture, AvStar Systems LLC ("AvStar"), which began
operations in February 1999 with its corporate office located in Madison,
Wisconsin. The joint venture is dedicated to providing the next generation of
digital news production products. The Company's investment in the joint venture
is being accounted for under the equity method of accounting. The Company's
initial contribution to the joint venture was approximately $2.0 million,
consisting of $1.5 million in cash and $0.5 million of licensed technology,
fixed assets and inventory.
7. LONG-TERM DEBT AND PURCHASE CONSIDERATION
In connection with the acquisition of the business of Softimage Inc.
("Softimage"), Avid issued a $5.0 million subordinated note (the "Note") to
Microsoft Corporation. The principal amount of the Note, including any
adjustments as provided for in the underlying agreement 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.
In conjunction with the acquisition of Softimage, the Company issued stock
options to retained employees. As agreed with the seller, the value of the Note
will be increased by $39.71 for each share underlying forfeited employee stock
options. At the date of acquisition, the Company recorded these options as
Purchase Consideration on the balance sheet at a value of $68.2 million. As
these options become vested, additional paid-in capital is increased or,
alternatively, as the options are forfeited, the Note is increased, with
Purchase Consideration being reduced by a corresponding amount in either case.
Through June 30, 1999, the Note has been increased by approximately $8.9 million
for forfeited Avid stock options. The Company made cash payments of
approximately $8.0 million for principal and $412,000 for interest during the
six months ended June 30, 1999.
In the second quarter of 1999, the Company recorded reductions of $6.9 million
to the goodwill and the deferred tax liability recorded upon the acquisition,
due to the expectation of realizing tax return deductions for a greater portion
of the acquired intangible assets.
8. CONTINGENCIES
On June 7, 1995, the Company filed a patent infringement complaint in the United
States District Court for the District of Massachusetts against Data
Translation, Inc., a Marlboro, Massachusetts-based company. Avid is seeking
judgment against Data Translation that, among other things, Data Translation has
willfully infringed Avid's patent number 5,045,940, entitled "Video/Audio
Transmission System and Method." Avid is also seeking an award of treble damages
together with prejudgment interest and costs, Avid's costs and reasonable
attorneys' fees, and an injunction to prohibit further infringement by Data
Translation. The litigation has been dismissed without prejudice (with leave to
refile) pending a decision by the U.S. Patent and Trademark Office on a reissue
patent application based on the issued patent.
On March 11, 1996, the Company was named as defendant in a patent infringement
suit filed in the United States District Court for the Western District of Texas
by Combined Logic Company, a California partnership located in Beverly Hills,
California. On May 16, 1996, the suit was transferred to the United States
District Court for the Southern District of New York on motion by the Company.
The complaint alleges infringement by Avid of U.S. patent number 4,258,385,
issued in 1981, and seeks injunctive relief, treble damages and costs, and
attorneys' fees. The Company believes that it has meritorious defenses to the
complaint and intends to contest it vigorously. However, an adverse resolution
of this litigation could have a material adverse effect on the Company's
consolidated financial position or results of operations in the period in which
the litigation is resolved. No costs have been accrued for this possible loss
contingency.
The Company also receives inquiries from time to time with regard to additional
possible patent infringement claims. These inquiries are generally referred to
counsel and are in various stages of discussion. If any infringement is
determined to exist, the Company may seek licenses or settlements. In addition,
as a normal incidence of the nature of the Company's business, various claims,
charges, and litigation have been asserted or commenced against the Company
arising from or related to contractual or employee relations, or product
performance. Management does not believe these claims will have a material
adverse effect on the financial position or results of operations of the
Company.
9. CAPITAL STOCK
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, 1998,
the Company had repurchased approximately 2.9 million shares of Avid common
stock at a cost of $90.6 million, which completed the programs announced during
October 1997 and February 1998 and initiated the program announced in October
1998. During the six months ended June 30, 1999, the Company purchased an
additional 1.2 million shares at a cost of $19.5 million. As of June 30, 1999,
the balance of shares authorized for repurchase was approximately 370,000
shares.
10. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss), net of taxes, was approximately ($8.5)
million and $9.2 million for the three-month periods ended June 30, 1999 and
1998, respectively, and ($21.1) million and $17.3 million for the six-month
periods ended June 30, 1999 and 1998, respectively, which consists of net income
(loss), the net changes in foreign currency translation adjustment and the net
unrealized gains and losses on available-for-sale securities. This calculation
is in accordance with the requirements of Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income", and has no
impact on the Company's net income or stockholders' equity.
11. SEGMENT INFORMATION
The Company's organizational structure is based on strategic business units that
offer various products to the principal markets in which the Company's products
are sold. These business units equate to two reportable segments: 1) Video and
Film Editing and Effects and 2) Professional Audio.
The following is a summary of the Company's operations by operating segment for
the three- and six-month periods ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1999 1998 1999 1998
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Video and Film Editing and Effects:
Net revenues $93,856 $96,856 $179,880 $189,360
========= ======== ========= ========
Depreciation $4,767 $4,849 $9,614 $10,024
========= ======== ========= ========
Operating income (loss) ($1,616) $7,876 ($5,370) $13,503
========= ======== ========= ========
Professional Audio:
Net revenues $22,497 $15,996 $47,756 $32,234
========= ======== ========= ========
Depreciation $249 $354 $524 $721
========= ======== ========= ========
Operating income $4,255 $2,789 $11,319 $5,792
========= ======== ========= ========
Segment Totals:
Net revenues $116,353 $112,852 $227,636 $221,594
========= ======== ========= ========
Depreciation $5,016 $5,203 $10,138 $10,745
========= ======== ========= ========
Operating income $2,639 $10,665 $5,949 $19,295
========= ======== ========= ========
</TABLE>
The following table reconciles segment operating income to total consolidated
operating income (loss) for the three- and six-month periods ended June 30, 1999
and 1998 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total operating income for
reportable segments $2,639 $10,665 $5,949 $19,295
Unallocated amortization
of acquisition-related
intangible assets (19,787) - (40,298) -
========= ========= ========= =========
Consolidated operating
income (loss) ($17,148) $10,665 ($34,349) $19,295
========= ========= ========= =========
</TABLE>
The 1999 unallocated amount represents the amortization of acquired intangible
assets, including goodwill, associated with the acquisition of Softimage.
12. SUPPLEMENTAL RECONCILIATION OF NET INCOME (LOSS) TO TAX-EFFECTED INCOME
EXCLUDING AMORTIZATION OF ACQUISITION-RELATED INTANGIBLE ASSETS
The following table presents a calculation of tax-effected income and diluted
per share amounts excluding amortization of acquisition-related intangible
assets. The information is presented in order to enhance the comparability of
the statements of operations for the periods presented.
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Net income (loss) ($8,036) $9,231
Adjustments:
Amortization of acquisition-related intangible assets 19,787
Tax impact of adjustment (9,059)
========= =========
Tax-effected income excluding amortization of
acquisition-related intangible assets $2,692 $9,231
========= =========
Tax-effected income per diluted share excluding
amortization of acquisition-related intangible assets $0.10 $0.37
========= =========
Weighted average common shares outstanding
- diluted - used for calculation 25,781 24,833
========= =========
</TABLE>
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-----------------------
1999 1998
---------- ---------
<S> <C> <C>
Net income (loss) ($19,491) $16,936
Adjustments:
Amortization of acquisition-related intangible assets 40,298
Tax impact of adjustment (15,417)
========== =========
Tax-effected income excluding amortization of
acquisition-related intangible assets $5,390 $16,936
========== =========
Tax-effected income per diluted share excluding
amortization of acquisition-related intangible assets $0.20 $0.69
========== =========
Weighted average common shares outstanding
- diluted - used for calculation 26,407 24,687
========== =========
</TABLE>
The 1999 adjustments represent the amortization of acquired intangible assets,
including goodwill, associated with the acquisition of Softimage. The tax
provisions used in each period in 1999 were based on a tax rate of 31% of the
profit before taxes, excluding the amortization of acquired intangible assets.
13. NEW ACCOUNTING PRONOUNCEMENTS
On July 7, 1999, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133 - an amendment of FASB Statement No. 133." SFAS 137 defers the
implementation of SFAS 133 by one year. SFAS 133, as amended by SFAS 137, is
effective for fiscal quarters beginning after January 1, 2001 for the Company,
and its adoption is not expected to have a material impact on the Company's
financial position or results of operations.
<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 includes forward-looking statements. Actual results
may differ materially from those described herein, depending on such factors as
are described herein, including under "Certain Factors That May Affect Future
Results."
Avid develops and provides digital film, video and audio editing and special
effects software and hardware technologies to create media content for
information and entertainment applications. Integrated with the Company's
digital storage and networking solutions, Avid's products are used worldwide in
video and audio production and post-production facilities; film studios;
network, affiliate, independent and cable television stations and recording
studios; and by advertising agencies; government and educational institutions;
corporate communications departments; and individual home users.
In August 1998, the Company acquired the business of Softimage. The acquisition
was recorded as a purchase and, accordingly, the results of Softimage are
included in the Company's financial statements as of the acquisition date.
RESULTS OF OPERATIONS
Net Revenues
The Company's net revenues have been derived mainly from the sales of
computer-based digital, nonlinear media editing systems and related peripherals,
licensing of related software, and sales of maintenance contracts. Net revenues
increased by $3.5 million (3.1%) to $116.4 million in the quarter ended June 30,
1999 from $112.9 million for the same quarter of last year. Net revenues
increased by $6.0 million (2.7%) to $227.6 million for the six months ended June
30, 1999 from $221.6 million for the six months ended June 30, 1998. The revenue
increase in both periods reflected sales of newer products such as Avid
Symphony, Pro Tools|24 Mix and various products on Windows NT platforms, as well
as incremental Softimage DS and Softimage 3D revenue. These increases in
revenues were offset in part by a decline in revenue from Macintosh-based Media
Composer products, customer service, and broadcast products. Based on a review
of the revenue of its broadcast business, the Company has changed the status of
Tektronix, Inc. from an exclusive to a non-exclusive reseller of these products
in North America.
During the second quarter of 1999, the Company began shipments of Avid Unity
MediaNet 1.0, Media Composer XL 8.0 for the Macintosh and Windows NT, Avid
Xpress 2.1 for Windows NT, and Avid Cinema for Macintosh with USB. During 1999,
Avid also began shipping Pro Tools|24 Mix and Mix Plus for Windows NT,
MediaDrive rS Plus and Media Illusion 5.1. To date, returns of all products have
been immaterial. The Company currently expects revenue for the full year 1999 to
be at or near the 1998 full year amount.
Net revenues derived through indirect channels were greater than 90% of net
revenue for the three months ended June 30, 1999, compared to greater than 75%
of net revenue for the same period in 1998. Indirect channel revenues were
approximately 90% of net revenue for the six months ended June 30, 1999 compared
to greater than 70% for the same period in 1998. The Company is reviewing minor
changes to the channel sales strategy for certain product lines, which may
slightly reduce the percentage of indirect channel revenue for the remainder of
the year.
International sales (sales to customers outside the U.S. and Canada) accounted
for approximately 50% and 49% of the Company's second quarter 1999 and 1998 net
revenues, respectively. International sales increased by 5.6% in the second
quarter of 1999 compared to the same period in 1998. International sales
accounted for approximately 52% and 48% of the Company's net revenues for the
first six months of 1999 and 1998, respectively. International sales increased
by 10.8% in the six months ended June 30, 1999 from the same period in 1998. The
increase in international sales reflected increases in Asia and, to a lesser
extent, in Europe.
Gross Profit
Cost of revenues consists primarily of costs associated with the procurement of
components; the assembly, test, and distribution of finished products;
warehousing; post-sales customer support costs; and provisions for inventory
obsolescence. The resulting gross profit fluctuates based on factors such as the
mix of products sold, the cost and proportion of third-party hardware included
in the systems sold by the Company, the timing of new product introductions, the
offering of product upgrades, price discounts and other sales promotion
programs, the distribution channels through which products are sold, and sales
of aftermarket hardware products. Gross margin decreased to 56.8% in the second
quarter of 1999 compared to 60.5% in the same period of 1998 and decreased to
58.4% for the six months ended June 30, 1999 from 59.4% for the same period in
1998. These decreases were primarily related to product price reductions and
discounting, product mix and unfavorable service margins, all of which were
partially offset by material cost savings. The Company currently expects that
gross margin for the remainder of 1999 could be slightly lower than that of the
second quarter of 1999 due to changing product mix, product promotions, and
other pricing actions.
Research and Development
Research and development expenses increased by $2.0 million (9.8%) in the second
quarter of 1999 compared to the same period in 1998 and increased by $6.0
million (14.6%) for the six months ended June 30, 1999 compared to the same
period in 1998. These increased expenditures were primarily due to incremental
Softimage costs and facilities costs, partially offset by reductions in
non-Softimage personnel costs. Research and development expenses increased to
19.5% of net revenues in the second quarter of 1999 compared to 18.3% in the
same quarter of 1998 and increased to 20.6% for the six months ended June 30,
1999 from 18.5% for the six months ended June 30, 1998. These increases were
primarily due to the increases in research and development expenses noted above.
Marketing and Selling
Marketing and selling expenses increased by approximately $2.9 million (9.6%) in
the second quarter of 1999 compared to the same period in 1998 and increased by
$7.8 million (13.4%) for the six months ended June 30, 1999 compared to the same
period in 1998. These increased expenditures in selling and marketing were
primarily due to incremental Softimage costs and increased spending on various
marketing programs. Marketing and selling expenses increased to 28.8% of net
revenues in the second quarter of 1999 compared to 27.1% in the same quarter of
1998 and increased to 29.0% from 26.3% for the six months ended June 30, 1999
and 1998, respectively. These increases were primarily due to the higher
marketing and selling expenses noted above.
General and Administrative
General and administrative expenses increased by $820,000 (12.7%) in the second
quarter of 1999 compared to the same period in 1998 and increased by $1.0
million (7.5%) for the six months ended June 30, 1999 compared to the same
period in 1998. These increased expenditures in general and administrative
expenses were primarily due to incremental Softimage costs, legal and consulting
fees, partially offset by reductions in non-Softimage personnel costs. General
and administrative expenses increased to 6.2% of net revenues in the second
quarter of 1999 compared to 5.7% in the same quarter of 1998 and increased to
6.2% from 5.9% for the six months ended June 30, 1999 and 1998, respectively.
These increases were primarily due to higher expenses noted above.
Amortization of Acquisition-related Intangible Assets
In connection with the August 1998 acquisition of the business of Softimage, the
Company allocated $88.2 million of the total purchase price of $247.9 million to
intangible assets consisting of completed technologies, work force and trade
name, and $127.8 million to goodwill. Results for the three- and six-month
periods ended June 30, 1999 reflect amortization of $19.8 million and $40.3
million, respectively, associated with these acquisition-related intangible
assets.
In the second quarter of 1999, the Company recorded reductions of $6.9 million
to the goodwill and the deferred tax liability recorded upon the acquisition,
due to the expectation of realizing tax return deductions for a greater portion
of the acquired intangible assets.
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 three months
ended June 30, 1999 decreased $1.5 million as compared to the same period in
1998. For the six months ended June 30, 1999, interest and other income, net
decreased $3.4 million as compared to the same period in 1998. For both periods
the decrease was primarily due to lower cash and investment balances.
Provision for Income Taxes
The Company's effective tax rate was 49.4% for the second quarter of 1999
compared to 31% for the same period in 1998 and the first quarter of 1999. The
change in rate for the current quarter reflects an adjustment to the
deductibility of the intangible assets recorded upon the acquisition of
Softimage, resulting in an expected annual tax rate for 1999 of 40%. The tax
rate for the six-month period ended June 30, 1998 was 31%.
The effective tax rates of 40% for 1999 and 31% for 1998 are different from the
U.S. Federal statutory rate of 35% due primarily to the Company's foreign
subsidiaries, which are taxed in the aggregate at a lower rate, state taxes and
the U.S. Federal Research Tax Credit.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date through both private and public
sales of equity securities as well as through cash flows from operations. As of
June 30, 1999, the Company's principal sources of liquidity included cash, cash
equivalents and marketable securities totaling approximately $82.5 million.
With respect to cash flow, net cash provided by operating activities was $13.9
million for the six months ended June 30, 1999 compared to $35.4 million in
1998. During the six months ended June 30, 1999, net cash provided by operating
activities consisted primarily of the net loss adjusted for depreciation and
amortization and collections in accounts receivable, partially offset by
decreases in accrued expenses and income taxes payable. During the six months
ended June 30, 1998, cash was generated primarily from net income adjusted for
depreciation and amortization as well as from collections of accounts receivable
and increases in income taxes payable, offset by decreases in accrued expenses
and deferred revenue.
The Company purchased $16.2 million of property and equipment and other
long-term assets during the six months ended June 30, 1999, compared to $9.1
million in the same period in 1998. These purchases included hardware and
software for the Company's information systems and equipment to support research
and development activities. The Company also utilized $8.0 million to repay a
portion of the note issued to Microsoft Corporation in connection with the
acquisition of Softimage. Additionally, the Company made a cash investment of
$1.5 million into a joint venture with Tektronix, Inc.
The Company maintains a line of credit agreement with a group of banks that
provides for up to $35.0 million in unsecured revolving credit. The line of
credit agreement, as renewed and amended, expires on June 28, 2000. Under the
terms of the agreement, the Company must pay an annual commitment fee of 3/8% 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 the line as of June 30, 1999. The Company believes existing
cash, cash equivalents and marketable securities, internally generated funds and
available borrowings under its bank credit line will be sufficient to meet the
Company's cash requirements, including capital expenditures, at least through
the 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 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, 1998,
the Company had repurchased approximately 2.9 million shares of Avid common
stock at a cost of $90.6 million, which completed the programs announced during
October 1997 and February 1998 and initiated the program announced in October
1998. During the six months ended June 30, 1999, the Company purchased an
additional 1.2 million shares at a cost of $19.5 million. As of June 30, 1999,
the balance of shares authorized for repurchase was approximately 370,000
shares.
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. Additionally, the note issued to Microsoft
Corporation in connection with the Softimage acquisition is due and payable in
June 2003.
YEAR 2000 READINESS DISCLOSURE
The Company has a worldwide program in place to address its exposure to the Year
2000 issue. This program is designed to minimize the possibility of significant
Year 2000 interruptions. Possible worst case scenarios include the interruption
of significant parts of the Company's business as a result of critical business
systems failures or failures experienced by suppliers, resellers, or customers.
Any such interruption may have a material adverse impact on future results.
Since the possibility of such interruptions cannot be eliminated, the Company
has involved a significant number of cross-functional resources with technical,
business, legal, and financial expertise in order to achieve Year 2000
readiness.
In 1998, the Company established a worldwide program to address its software and
hardware product and customer concerns, its internal business systems, including
technology infrastructure and embedded technology systems, and the compliance of
its suppliers. This program includes the following phases: identification,
assessment, testing, remediation, and contingency planning.
The Company has completed over 95% of the currently planned Year 2000 efforts
relating to its products. A description of the readiness status of the Company's
hardware and software products is available on the Company's web site, which is
updated from time to time. This web site has been and will continue to be the
Company's primary method for communicating information about its products to the
public. Of the products considered for testing, almost all of the current
versions of the Company's currently shipping products, along with certain older
versions of current products, have been classified as "Year 2000 Ready". The
"Year 2000 Ready" category indicates that the Company has determined that the
product, when used in its designated manner, will not terminate abnormally or
give incorrect results with respect to date data before, during or after
December 31, 1999, provided that all products used in conjunction with the
Company's product exchange accurately formatted information with the Company's
product. A few products require software updates to address potential Year 2000
issues, or are still scheduled for assessment or testing. The Company has also
determined that a number of discontinued or older versions of products will not
be tested for Year 2000 issues, and thus makes no representations with regard to
the Year 2000 readiness status of those products. As the Company releases new
products, the Company expects that such products will also be tested for Year
2000 readiness. Because all customer situations or potential Year 2000 product
issues cannot be anticipated, the Company may see a change in demand or an
increase in warranty or service claims as a result of the Year 2000 transition.
Such events, should they occur, could have a material adverse impact on future
results.
With respect to the Company's efforts to address the Year 2000 readiness of its
internal business systems, the identification, assessment, testing and
remediation phases have, for the most part, been completed. The scope of these
efforts were designed to encompass substantially all of the Company's internal
information systems and other infrastructure areas including communication
systems, building security systems and embedded technologies in areas such as
manufacturing and customer support processes. All of the Company's efforts have
been completed with respect to its currently existing enterprise-wide systems
and networks. The remaining efforts involve the remediation of certain desktops
and departmental systems. Due to the size of this project and the number of
ongoing projects unrelated to Year 2000 issues, these remaining activities have
been extended from the second quarter for substantial completion in the third
quarter of 1999. Certain of the Company's business systems were already
scheduled to be replaced in the normal course of business for reasons unrelated
to potential Year 2000 issues. Those systems have been or will be tested for
Year 2000 issues as part of the normal installation and testing process.
The Company has initiated communications with mission critical third party
suppliers and service providers, such as inventory suppliers, equipment
suppliers, financial institutions, landlords, and resellers, to determine the
extent to which the Company's operations are vulnerable to those third parties'
failure to remediate their own Year 2000 issues. Suppliers of software, hardware
or other products that might contain embedded processors were requested to
provide certification regarding the Year 2000 readiness status of their products
and business processes. Suppliers of services were also requested to provide
certification or other appropriate information regarding their Year 2000
readiness status. For service suppliers who interface with the Company via
electronic means, the Company has tested or intends to test mission critical
interfaces where possible or appropriate. In addition, in order to protect
against the acquisition of additional products or services that may not be Year
2000 ready, the Company has implemented a policy that requires sufficient
assurances that such products and services are Year 2000 ready. With respect to
the Company's resellers, the Company has requested from them appropriate
assurances regarding Year 2000 readiness status of their business processes.
The Company's efforts with respect to third party suppliers and service
providers is well underway and is scheduled to be substantially complete during
the third quarter of 1999. The Company has experienced some delays in its
efforts as it waits for certain third party suppliers and service providers to
complete their own programs. The Company intends to continue to monitor those
suppliers as part of the Company's overall program monitoring efforts planned
for the third and fourth quarters of 1999. The Company does not anticipate any
related delays that will significantly impact its Year 2000 readiness as a
whole. However, the Company does face a risk with respect to third party
suppliers who may prove unable to address and remediate their Year 2000 issues.
The Company is developing contingency plans to address the products or services
obtained from those third parties who fail to provide the requested information
or whose responses are inadequate.
The process of developing the Company's contingency plans for Year 2000 risks is
approximately 30% complete. The contingency plans are expected to address all
mission critical areas of the Company, including its infrastructure, internal
business systems and the third party suppliers and service providers referred to
above. In particular, the Company has identified three critical areas as the
focus of the contingency plans: customer support, cash flow and revenue
generation. The Company expects to complete the creation of contingency plans by
the end of the third quarter and to finish testing those plans in the fourth
quarter.
The costs of the Year 2000 readiness program are primarily costs of existing
internal resources and expertise combined with small incremental external
spending for resources such as consultants or updates. The entire cost of the
program is estimated at $3.3 million, of which approximately 85% has been
incurred through July 31, 1999. Although the Company does not, as a general
practice, track internal personnel costs, the Company has included estimates of
such costs in the above program cost estimate. Costs for business system
replacements or upgrades unrelated to Year 2000 issues are not included in this
estimate. No future material product readiness costs are anticipated. However,
milestones and implementation dates and the costs of the Company's Year 2000
readiness program are subject to change based on new circumstances that may
arise or new information becoming available.
Based on the Company's ongoing evaluation of internal information and other
systems, the Company does not anticipate significant business interruptions.
However, satisfactorily addressing a particular Year 2000 issue on a timely
basis is dependent on many factors, some of which are not completely within the
Company's control, such as those involving third parties. Additionally, there
remains the risk that errors or defects related to the Year 2000 issue may
remain undetected. Should business interruptions occur, or should a significant
Year 2000 issue go undetected, there could be a material adverse impact on
future results.
EUROPEAN MONETARY UNION
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their sovereign currencies and the
euro. As of that date, the participating countries agreed to adopt the euro as
their common legal currency. However, the legacy currencies will also remain
legal tender in the participating countries for a transition period between
January 1, 1999 and January 1, 2002. During this transition period, public and
private parties may elect to pay or charge for goods and services using either
the euro or the participating country's legacy currency.
The Company began conducting certain business transactions in the euro on
January 1, 1999, and will change its functional currencies for the effected
countries to the euro by the end of the three-year transition period. The
conversion to the euro has not had and is not expected to have a significant
operational impact or a material financial impact on the results of operations,
financial position, or liquidity of its European businesses.
NEW ACCOUNTING PRONOUNCEMENTS
On July 7, 1999, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133 - an amendment of FASB Statement No. 133." SFAS 137 defers the
implementation of SFAS 133 by one year. SFAS 133, as amended by SFAS 137, is
effective for fiscal quarters beginning after January 1, 2001 for the Company,
and its adoption is not expected to have a material impact on the Company's
financial position or results of operations.
<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 began shipping its Avid Symphony product, which is based on Intel
Architecture ("IA") computers and the Microsoft Windows NT operating system, and
its Softimage DS and Pro Tools|24 products during 1998. The Company began
shipping Media Composer XL 8.0 for the Macintosh and Windows NT and Avid Unity
MediaNet 1.0 in 1999. The Company expects that a significant portion of its
future revenues will be attributable to sales of these newly introduced
products. However, if these products fail to achieve anticipated levels of
market acceptance, the Company's revenues and results of operations could be
adversely affected. In addition, the Company from time to time develops new
products or upgraded existing products to incorporate advances in enabling
technologies. For example, the Company is continuing to develop additional
products that operate using IA - based computers and the Windows NT operating
system. There can be no assurance that customers will not defer purchases of
existing Apple-based and other products in anticipation of the release of such
new products, that the Company will be successful in developing additional new
products or that they will gain market acceptance, if developed. Any deferral by
customers of purchases of existing Apple-based or other products or any failure
by the Company to develop such new products in a timely way or to gain market
acceptance for them could have a material adverse effect on the Company's
business and results of operations.
Certain of the Company's products operate only on specific computer platforms.
The Company currently relies on Apple Computer, Inc., IBM and Intergraph as the
sole manufacturers of such computer platforms. There can be no assurance that
customers will not purchase competitors' products based on other computer
platforms, that the respective manufacturers will continue to develop,
manufacture, and support such computer platforms suitable for the Company's
existing and future markets or that the Company will be able to secure an
adequate supply of computers on the appropriate platforms, the occurrence of any
of which could have a material adverse effect on the Company's business and
results of operations.
The Company has expanded its product line to address the digital media
production needs of the television broadcast news market, online film and video
finishing market and the emerging market for multimedia production tools,
including the corporate and home user market. The Company has limited experience
in serving these markets, and there can be no assurance that the Company will be
able to develop such products successfully, that such products will achieve
widespread customer acceptance, or that the Company will be able to develop
distribution and support channels to serve these markets. A significant portion
of the Company's future growth will depend on customer acceptance in these and
other new markets. Any failure of such products to achieve market acceptance,
additional costs and expenses incurred by the Company to improve market
acceptance of such products and to develop new distribution and support
channels, or the withdrawal from the market of such products or of the Company
from such new markets could have a material adverse effect on the Company's
business and results of operations.
The Company's gross margin fluctuates based on factors such as the mix of
products sold, the cost and the proportion of third-party hardware included in
the systems sold by the Company, the distribution channels through which
products are sold, the timing of new product introductions, the offering of
product and platform upgrades, price discounts and other sales promotion
programs, the volume of sales of aftermarket hardware products, the costs of
swapping or fixing products released to the market with errors or flaws,
provisions for inventory obsolescence, allocations of overhead costs to
manufacturing and of 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
The Company has shifted an increasing proportion of its sales through indirect
channels such as distributors and resellers. The Company believes the overall
shift to indirect channels has resulted in an increase in the number of software
and circuit board "kits" sold through indirect channels in comparison with
turnkey systems consisting of CPUs, monitors, and peripheral devices, including
accompanying software and circuit boards, sold by the Company through its direct
sales force to customers. Resellers and distributors typically purchase software
and "kits" from the Company and other turnkey components from other vendor
sources in order to produce complete systems for resale. Therefore, to the
extent the Company increases its sales through indirect channels, its revenue
per unit sale will be less than it would have been had the same sale been made
directly by the Company. In the event the Company is unable to increase the
volume of sales in order to offset this decrease in revenue per unit sale or is
unable to continue to reduce its costs associated with such sales, profits could
be adversely affected.
The Company's operating expense levels are based, in part, on its expectations
of future revenues. In recent quarters approximately half of the Company's
revenues for the quarter have been recorded in the third month of the quarter.
Further, in many cases, quarterly operating expense levels cannot be reduced
rapidly in the event that quarterly revenue levels fail to meet internal
expectations. Therefore, if quarterly revenue levels fail to meet internal
expectations upon which expense levels are based, the Company's operating
results may be adversely affected and there can be no assurance that the Company
would be able to operate profitably. Reductions of certain operating expenses,
if incurred, in the face of lower than expected revenues could involve material
one-time charges associated with reductions in headcount, trimming product
lines, eliminating facilities and offices, and writing off certain assets.
The Company has significant deferred tax assets. The deferred tax assets reflect
the net tax effects of tax credit and operating loss carryforwards and temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax asset will be realized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income are reduced.
The Company is dependent on a number of suppliers as sole source vendors of
certain key components of its products and systems. Components purchased by the
Company from sole source vendors include; video compression chips manufactured
by C-Cube Microsystems; a small computer systems interface ("SCSI") accelerator
board from ATTO Technology; a 3D digital video effects board from Pinnacle
Systems; application specific integrated circuits ("ASICS") from Chip Express
and LSI Logic; digital signal processing integrated circuits from Motorola; a
fibre channel adapter card from JNI; a fibre channel storage array from Data
General's Clariion division; and a PCI expansion chassis from Magma Inc. The
Company purchases these sole source components pursuant to purchase orders
placed from time to time. The Company also manufactures certain circuit boards
under license from Truevision (a subsidiary of Pinnacle Systems). The Company
generally does not carry significant inventories of these sole source components
and has no guaranteed supply arrangements. No assurance can be given that sole
source suppliers will devote the resources necessary to support the enhancement
or continued availability of such components or that any such supplier will not
encounter technical, operating or financial difficulties that might imperil the
Company's supply of such sole source components. While the Company believes that
alternative sources of supply for sole source components could be developed, or
systems redesigned to permit the use of alternative components, its business and
results of operations could be materially affected if it were to encounter an
untimely or extended interruption in its sources of supply.
The markets for digital media editing and production systems are intensely
competitive and subject to rapid change. The Company encounters competition in
the video and film editing and effects and professional audio markets. Many
current and potential competitors of the Company have substantially greater
financial, technical, distribution, support, and marketing resources than the
Company. Such competitors may use these resources to lower their product costs
and thus be able to lower prices to levels at which the Company could not
operate profitably. Further, such competitors may be able to develop products
comparable or superior to those of the Company or adapt more quickly than the
Company to new technologies or evolving customer requirements. Accordingly,
there can be no assurance that the Company will be able to compete effectively
in its target markets or that future competition will not adversely affect its
business and results of operations.
A significant portion of the Company's business is conducted in currencies other
than the U.S. dollar. Changes in the value of major foreign currencies relative
to the value of the U.S. dollar, therefore, could adversely affect future
revenues and operating results. The Company attempts to reduce the impact of
currency fluctuations on results through the use of forward exchange contracts
that hedge foreign currency-denominated intercompany net receivables or payable
balances. The Company has generally not hedged transactions with external
parties, although it periodically reevaluates its hedging practices.
The Company is involved in various legal proceedings, including patent
litigation; an adverse resolution of any such proceedings could have a material
adverse effect on the Company's business and results of operations. See Note 8
to the Condensed Consolidated Financial Statements.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on June 2, 1999. At the
meeting, Daniel Langlois, William J. Miller, and Lucille S. Salhany were elected
as Class III Directors. The vote with respect to each nominee is set forth
below:
Total Vote For Total Vote Withheld
Each Director From Each Director
Mr. Langlois 23,417,766 243,216
Mr. Miller 23,415,900 245,082
Ms. Salhany 23,418,910 242,072
Additional Directors of the Company whose term of office continues after the
meeting are Charles T. Brumback, Peter C. Gotcher, Robert M. Halperin, Nancy
Hawthorne, Roger J. Heinen, Jr., and William J. Warner.
The stockholders also authorized the amendment of the Company's 1997 Stock
Incentive Plan to increase by 500,000 shares to 2,000,000 shares of common
stock, the number of shares authorized for issuance under this Plan, by a vote
of 17,557,184 shares for, 5,925,145 shares against, 53,738 shares abstaining,
with 124,915 broker non-votes.
The stockholders also authorized amendments to the Company's 1993 Director Stock
Option Plan by (i) increasing to 10,000 the number of shares granted to each new
non-employee director, (ii) increasing to 10,000 the number of options granted
annually to non-employee directors, (iii) reducing the term of options granted
to non-employee directors to six years, (iv) giving discretion to the Board of
Directors to determine at the time of grant the vesting schedule of non-employee
director options granted in (i) and (ii) above, and (v) in lieu of annual
retainers and/or meeting fees, non-employee directors are entitled to receive
immediately exercisable nonstatutory options to purchase shares of Common Stock
at half of the fair market value of the Company's Common Stock on the date of
grant, by a vote of 18,493,761 shares for, 5,064,680 shares against, 102,541
shares abstaining, with no broker non-votes.
In addition, the stockholders ratified the selection of PricewaterhouseCoopers
LLP as the Company's independent auditors by a vote of 23,521,718 shares for,
61,316 shares against, and 77,948 shares abstaining.
<PAGE>
ITEM 5. OTHER EVENTS
Any proposal that a stockholder wishes the Company to consider for inclusion in
the Company's proxy statement and form of proxy card for the Company's 2000
Annual Meeting of Stockholders (the "2000 Meeting") must be submitted to the
Secretary of the Company at its offices, Avid Technology Park, One Park West,
Tewksbury, Massachusetts 01876, no later than December 6, 1999.
In addition, the Company's Bylaws require all stockholder proposals to be timely
submitted in advance to the Company at the above address (other than proposals
submitted for inclusion in the Company's proxy statement and form of proxy card
as described above). To be timely, the notice must be received by the Company no
later than March 24, 2000 or 60 days before the date of the 2000 Meeting,
whichever is later. The Company has not yet set a date for the 2000 Meeting.
However, if the 2000 Meeting is held on June 2, 2000 (the anniversary of the
1999 Annual Meeting of Stockholders), the deadline for delivery of the notice
would be April 3, 2000.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Tenth Amendment dated as of June 29, 1999 to the 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 June 30, 1999, the
Company filed no Current Reports on Form 8-K.
<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: August 12, 1999 By: /s/ William L. Flaherty
-----------------------------
William L. Flaherty
Senior Vice President of
Finance, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
Date: August 12, 1999 By: /s/ Carol L. Reid
-----------------------------
Carol L. Reid
Vice President and Corporate
Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
10.1 Tenth Amendment dated as of June 29, 1999 to the 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
Exhibit 10.1
- --------------------------------------------------------------------------------
TENTH AMENDMENT
TO AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
- --------------------------------------------------------------------------------
Tenth Amendment dated as of June 29, 1999 to Amended and Restated
Revolving Credit Agreement (the "Tenth 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 Tenth 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 toss.1 of the Credit Agreement. Section 1.1 of the
Credit Agreement is hereby amended as follows:
(a) The definition of "Consolidated Tangible Net Worth" is
hereby amended by deleting all the text of such definition following
the words "Financial Accounting Standards Board Statement No. 52" which
appears in such definition and substituting in place thereof the words
"provided, however, for purposes of calculating compliance with ss.8.2
hereof, the amount of the goodwill on the Borrower's balance sheet
relating to the Softimage Acquisition which would otherwise be required
to be deducted from Consolidated Tangible Net Worth shall not be
deducted from Consolidated Tangible Net Worth for purposes of ss.8.2 of
the Credit Agreement"; and
(b) The definition of "Maturity Date" contained on Section 1.1
of the Credit Agreement is hereby amended by deleting the date "June
29, 1999" which appears in such definition and substituting in place
thereof the date "June 28, 2000".
ss.2. Amendment to ss.2 of the Credit Agreement. Section 2.2 of the
Credit Agreement is hereby amended by deleting the words "one quarter of one
percent (1/4%) per annum" which appear in the first sentence of ss.2.2 and
substituting in place thereof the words "three eighths of one percent (.375%)
per annum".
ss.3. Amendment to ss.4 of the Credit Agreement. Section 4.1 of the
Creditagreement is hereby amended by deleting the text of ss.4.1 in its entirety
and substituting in place thereof the words "Intentionally Omitted".
ss.4. Amendment to ss.8 of the Credit Agreement. Section 8 of
the Credit Agreement is hereby amended by deleting ss.8.4 of the Credit
Agreement in its entirety.
ss.5. Conditions to Effectiveness. This Tenth Amendment shall
not become effective until the Agent receives the following:
(a) a counterpart of this Tenth Amendment executed by
the Borrower, the Banks and the Agent; and
(b) payment in cash to the Agent for the respective accounts
of the Banks an amendment fee of $10,000 for each Bank.
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 Tenth 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 Tenth 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 Tenth 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 TENTH AMENDMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
(WITHOUT REFERENCE TO CONFLICT OF LAWS).
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Tenth
Amendment as a document under seal as of the date first above written.
AVID TECHNOLOGY, INC.
By:/s/ William L. Flaherty
---------------------------
Title: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/ Kevin F. Malone
---------------------------
Title: Group Vice President
By:/s/ Bruce W. 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 FOR THE PERIOD ENDED JUNE 30, 1999
AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AS FILED ON FORM 10-Q FOR
THE PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 51,352
<SECURITIES> 31,104
<RECEIVABLES> 75,579
<ALLOWANCES> 7,827
<INVENTORY> 11,235
<CURRENT-ASSETS> 199,914
<PP&E> 123,719
<DEPRECIATION> 85,228
<TOTAL-ASSETS> 413,552
<CURRENT-LIABILITIES> 94,497
<BONDS> 0
0
0
<COMMON> 265
<OTHER-SE> 270,986
<TOTAL-LIABILITY-AND-EQUITY> 413,552
<SALES> 227,636
<TOTAL-REVENUES> 227,636
<CGS> 94,696
<TOTAL-COSTS> 94,696
<OTHER-EXPENSES> 167,289
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (32,486)
<INCOME-TAX> (12,995)
<INCOME-CONTINUING> (19,491)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,491)
<EPS-BASIC> (0.81)
<EPS-DILUTED> (0.81)
</TABLE>
