AVID TECHNOLOGY, INC.
Metropolitan Technology Park
One Park West
Tewksbury, MA 01876
October 19, 1998
OFIS Filer Support
SEC Operations Center
6432 General Green Way
Alexandria, VA 22312-2413
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 Form
8-K/A dated the 19th day of October, 1998.
This filing is being effected by direct transmission to the Commission's
EDGAR System.
Very truly yours,
/s/Frederic G. Hammond
Frederic G. Hammond
General Counsel
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): AUGUST 3, 1998
AVID TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 0-21174 04-2977748
(State or Other Jurisdiction (Commission File (I.R.S. Employer
of Incorporation or Organization) Number) Identification No.)
METROPOLITAN TECHNOLOGY PARK, ONE PARK WEST
TEWKSBURY, MASSACHUSETTS 01876
(Address of Principal Executive Offices) (Zip Code)
978-640-6789
(Registrant's telephone number, including area code)
The undersigned Registrant hereby amends Item 7, the Exhibits and the Exhibit
Index to its Current Report on Form 8-K dated August 18, 1998 (Commission File
No. 000-21174) (the "8-K") as set forth below.
I. Item 7 of the 8-K is hereby amended in its entirety to read as follows.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
(a) FINANCIAL STATEMENTS OF SOFTIMAGE INC.
The following financial statements required by Item 7 with respect
to the Registrant's acquisition of Softimage are filed as part of
this report:
Report of Independent Accountants .............................p. 4
Combined Balance Sheets as of June 30, 1998 and 1997...........p. 5
Combined Statements of Operations for the years
ended June 30, 1998, 1997 and 1996...........................p. 6
Combined Statements of Divisional Equity for the
years ended June 30, 1998, 1997 and 1996.....................p. 7
Combined Statements of Cash Flows for the years
ended June 30, 1998, 1997 and 1996...........................p. 8
Notes to Combined Financial Statements.........................p. 9
(b) PRO FORMA FINANCIAL INFORMATION
The following pro forma financial information required by Item 7
with respect to the Registrant's acquisition of Softimage is filed
as part of this report:
Avid Technology, Inc. Unaudited Pro Forma Combined
Financial Statements ....................................p. 20
Pro Forma Combined Balance Sheet as of June 30, 1998
(unaudited)..............................................p. 21
Pro Forma Combined Statement of Operations for the six
months ended June 30, 1998 (unaudited)...................p. 22
Pro Forma Combined Statement of Operations for the year
ended December 31, 1997 (unaudited)......................p. 23
Notes to Pro Forma Combined Financial Statements (unaudited)..p. 24
(c) EXHIBITS
2.1 Stock and Asset Purchase Agreement dated June 15, 1998 among
Avid, Microsoft and Softimage, which is incorporated herein by
reference to Exhibit 2.1 to the registrant's Quarterly Report on
Form 10-Q under the Securities Exchange Act of 1934, for the
fiscal quarter ended June 30, 1998, as filed with the Commission
on August 12, 1998 (Commission File No. 0-21174). Exhibits not
filed herewith will be provided to the Securities and Exchange
Commission upon request by the Commission.
23.1 Consent of PricewaterhouseCoopers LLP
II. The Exhibit Index and the Exhibits to the 8-K are amended in their
entirety to read as set forth in the Exhibit Index and Exhibits following
the financial statements and pro forma information filed herewith.
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 hereunto duly authorized.
AVID TECHNOLOGY, INC.
Date: OCTOBER 19, 1998 By: /S/ WILLIAM L. FLAHERTY
---------------- ------------------------
William L. Flaherty
Senior Vice President of
Finance, Chief Financial Officer
and Treasurer
(Principal Financial Officer)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of Softimage Inc.:
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of divisional equity and of cash flows
present fairly, in all material respects, the financial position of Softimage
Inc. and its related operations at June 30, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note A to the combined financial statements, on August 3, 1998,
Avid Technology, Inc. acquired from Microsoft Corporation the one outstanding
share of Softimage Inc. common stock and certain assets relating to the business
of Softimage Inc.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
October 9, 1998
SOFTIMAGE INC.
Combined Balance Sheets
(U.S. dollars, in thousands)
June 30,
-------------------------
1998 1997
----------- ------------
ASSETS
Current assets:
Cash $7,116 $4,356
Accounts receivable, net of allowances of $933
and $1,172 in 1998 and 1997, respectively 7,499 9,968
Inventories 307 565
Prepaid expenses 1,024 1,266
Other current assets 528 903
------- -------
Total current assets 16,474 17,058
Property and equipment, net 4,213 8,055
Other assets - 470
-------- -------
Total assets $20,687 $25,583
======== =======
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Accounts payable $ 843 $ 2,811
Accrued expenses 2,159 2,112
Accrued compensation and benefits 1,448 1,322
Accrued taxes 2,523 1,268
Deferred revenue 6,599 4,506
-------- -------
Total current liabilities 13,572 12,019
Commitments and contingencies (Note E)
Divisional equity 7,115 13,564
-------- -------
Total liabilities and divisional equity $20,687 $25,583
======== =======
The accompanying notes are in integral part of the combined financial
statements.
SOFTIMAGE INC.
Combined Statements of Operations
(U.S. dollars, in thousands)
For the Years Ended June 30,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Net revenue $36,860 $37,755 $29,969
Cost of revenue 4,909 5,437 8,290
-------- -------- -------
Gross profit 31,951 32,318 21,679
Operating expenses:
Research and development 17,947 27,261 24,170
Marketing and selling 20,698 20,410 23,606
General and administrative 5,080 4,605 4,359
-------- -------- -------
Total operating expenses 43,725 52,276 52,135
-------- -------- -------
Loss from operations (11,774) (19,958) (30,456)
Other income (expense), net 405 (1,029) (877)
-------- -------- -------
Loss before income taxes (11,369) (20,987) (31,333)
Provision for income taxes 1,839 1,312 853
-------- -------- -------
Net loss $(13,208) $(22,299) $(32,186)
======== ======== =======
The accompanying notes are an integral part of the combined financial
statements.
SOFTIMAGE INC.
Combined Statements of Divisional Equity
(U.S. dollars, in thousands)
For the Years Ended June 30,
--------------------------------
1998 1997 1996
-------- -------- --------
Balance, beginning of year $ 13,564 $ 20,063 $ 20,850
Net loss (13,208) (22,299) (32,186)
Net transfers from Microsoft
Corporation (Note H) 6,118 14,992 30,182
Foreign currency cumulative
translation adjustment 641 808 1,217
-------- -------- -------
Balance, end of year $ 7,115 $13,564 $20,063
======== ======== =======
The accompanying notes are an integral part of the combined financial
statements.
SOFTIMAGE INC.
Combined Statements of Cash Flows
(U.S. dollars, in thousands)
For the Years Ended June 30,
------------------------------------
1998 1997 1996
------- ------- ------
Cash flows from operating activities:
Net loss $(13,208) $(22,299) $(32,186)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 5,044 6,208 5,284
Provision for bad debts 542 729 579
Loss on disposal of property and equipment 421 597 495
Changes in operating assets and liabilities:
Accounts receivable 1,590 (2,615) 3,809
Inventories 247 (2) 788
Prepaid expenses and other assets 1,028 647 (741)
Accounts payable (1,945) (64) (2,852)
Accrued expenses 350 745 2,015
Accrued taxes 1,419 1,569 403
Deferred revenue 2,474 1,003 1,016
-------- -------- --------
Net cash used in operating activities (2,038) (13,482) (21,390)
Cash flows from investing activities:
Purchase of property and equipment (1,380) (2,766) (7,808)
Proceeds from disposals of property and equipment 15 78 -
-------- -------- --------
Net cash used in investing activities (1,365) (2,688) (7,808)
Cash flows from financing activities:
Net transfers from Microsoft Corporation 6,118 14,992 30,182
-------- -------- --------
Net cash provided from financing
activities 6,118 14,992 30,182
Effects of exchange rate changes on cash 45 548 408
-------- -------- --------
Net increase (decrease) in cash 2,760 (630) 1,392
Cash at beginning of year 4,356 4,986 3,594
-------- -------- --------
Cash at end of year $ 7,116 $ 4,356 $ 4,986
======== ======== ========
The accompanying notes are an integral part of the combined financial
statements.
SOFTIMAGE INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION AND NATURE OF BUSINESS
Softimage Inc. and its related operations ("Softimage" or the "Company")
develops software for media-rich applications including video, film, interactive
games and CD-ROM applications. Softimage is also a developer of
three-dimensional animation, video production, two-dimensional cell animation
and compositing software solutions. The Company markets its products on a
worldwide basis, including countries in North America, Europe, Latin America and
the Asia Pacific region. The Company maintains operations in Canada, Japan, the
United States, the United Kingdom, Singapore, France, Germany, Brazil, Argentina
and Italy.
For all periods presented in these combined financial statements, Softimage was
a Canadian, wholly owned subsidiary of Microsoft Corporation ("Microsoft"). On
August 3, 1998, Avid Technology, Inc. ("Avid") acquired from Microsoft the one
outstanding share of Softimage Inc. common stock and certain Microsoft assets
relating to the business of Softimage, as contemplated in the Stock and Asset
Purchase Agreement dated June 15, 1998 among Avid, Microsoft and Softimage Inc.
(the "Acquisition").
These combined financial statements have been prepared using Microsoft's
historical basis in the assets and liabilities and historical results of
operations related to the Softimage product lines. These financial statements
generally reflect the financial position, results of operations and cash flows
of Softimage as if it were a separate entity for all periods presented. The
financial statements include allocations of certain Microsoft expenses,
including legal, tax, employee benefits, insurance services, shared facility
costs and other Microsoft corporate overhead. Management believes that these
allocations are reasonable. However, the financial information included herein
may not necessarily reflect the financial position, results of operations and
cash flows of Softimage in the future, or what they would have been had
Softimage been a separate entity during the periods presented.
For all periods presented, the Company's capital structure consisted of one
share of common stock and certain numbers of non-voting Exchangeable Shares,
which provided rights equivalent to owning common stock of Microsoft and could
be exchanged for Microsoft common shares at the option of the holder at any time
before May 2005. The Exchangeable Shares did not have rights to the liquidation
of assets of Softimage, or rights to dividends, other distributions or tax
allocations of Softimage. Immediately prior to the Acquisition, the Company's
capital structure was reorganized, resulting in the removal of all outstanding
Exchangeable Shares from the Company and their placement into a new company
owned entirely by Microsoft. These combined financial statements have been
presented to give retroactive application to the removal of the Exchangeable
Shares from the Company's capital as of the earliest period presented.
These combined financial statements include the accounts and operations of all
Softimage operating units. Intercompany balances and transactions with other
Softimage operating units have been eliminated. Transactions with Microsoft are
included in the divisional equity account (see Note H). These combined financial
statements and the financial statement footnote data are stated in U.S. dollars.
The Company's fiscal year ends on the Friday closest to June 30 in each year.
Fiscal years 1998, 1997 and 1996 ended on July 3, 1998, June 27, 1997 and June
28, 1996, respectively.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES BY MANAGEMENT
The Company's preparation of combined 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, income
tax valuation allowances and the allocation of corporate expenses from
Microsoft. Actual results may differ from those estimates.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations of
credit risk consist primarily of cash and trade accounts receivable. The Company
places its cash investments with financial institutions with high credit
standing. Softimage provides credit, in the normal course of business, to
various types and sizes of customers located throughout the world. Three
customers in the Asia Pacific region accounted for 24% and 38% of the accounts
receivable balance as of June 30, 1998 and 1997, respectively. The Company
maintains reserves for potential credit losses and such losses have been within
management's expectations.
INVENTORIES
Inventories, principally finished goods, are stated at the lower of cost
(determined on a first-in, first-out basis) or market value.
The Company outsources manufacturing of its products to one vendor. Although
this creates a concentration in sources of production and supply, management
believes that other manufacturers could provide similar manufacturing
capabilities on comparable terms. A change in manufacturer, however, could cause
a delay in manufacturing and a possible loss of sales, which would adversely
affect operating results.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is calculated using the
straight-line method, based upon the following estimated useful lives:
Computer equipment 2 years
Software 3 years
Office equipment 5 years
Furniture and fixtures 5 years
Leasehold improvements Shorter of lease term or 7 years
Expenditures for maintenance and repairs are expensed as incurred. Upon
retirement or other disposition of assets, the cost and related accumulated
depreciation are eliminated from the accounts and the resulting gain or loss is
included in the determination of net income or loss.
DIVISIONAL EQUITY
Divisional equity includes net cash transfers from Microsoft, third party
liabilities paid on behalf of the Company by Microsoft, net amounts due to
Microsoft for services and other charges, and historical loans and advances from
Microsoft as well as current period loss and foreign currency translation
adjustments.
FOREIGN CURRENCY TRANSLATION
The majority of revenues of Softimage are denominated in U.S. dollars. The
functional currency of each Softimage operation is the currency of its country.
Assets and liabilities of operations outside the U.S., including Canada, are
translated into U.S. dollars at the exchange rate in effect at the balance sheet
date. Income and expenses are translated into U.S. dollars using the average
exchange rates during the periods. The resultant translation gains or losses are
reflected as a separate component of divisional equity. Foreign currency
transaction gains and losses are included in the determination of net income or
loss.
REVENUE RECOGNITION
Revenue is recognized upon product shipment, provided that no significant vendor
obligations remain outstanding and the resulting receivable is deemed
collectible by management. Maintenance revenue is recognized ratably over the
term of the maintenance agreement. Included in accounts receivable allowances
are sales allowances provided for expected returns and credits and an allowance
for bad debts.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in the research and development of the Company's products through
the establishment of technological feasibility are expensed as incurred.
Development costs incurred thereafter and until the products are first available
for release have not been material.
For all periods presented, the Company had an agreement with Microsoft whereby
Microsoft provided funding for all research and development efforts in return
for the rights to all intellectual property developed by the Company. Funding
from Microsoft is included in the net transfers from Microsoft in divisional
equity.
INCOME TAXES
Historically, the foreign operations represented by Softimage have generally
been included in the consolidated non-Canadian federal income tax returns filed
by Microsoft. For purposes of these combined financial statements, income tax
expense has been calculated on a separate-return basis. Income taxes paid on
behalf of Softimage are included in divisional equity.
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse. A valuation reserve against deferred tax assets is recorded if,
based upon weighted available evidence, it is more likely than not that some or
all of the deferred tax assets will not be realized.
ALLOCATED COSTS
Microsoft has historically provided certain centralized services to Softimage.
Expenses related to these services have been allocated based on a variety of
methods depending on the nature of the expense. Such allocation methods include
headcount, relative occupancy percentage and management estimates. These amounts
approximate management's estimates of Microsoft's corporate costs to support the
Softimage-related operations. An allocation of corporate selling and marketing
expenses and corporate administrative functions (including data services,
employee benefits, legal, insurance and other corporate overhead) has been
included in the cost of revenue, research and development, selling and
marketing, and general and administrative operating expenses in the combined
statements of operations. Amounts due to Microsoft for these expenses are
included in divisional equity (see Note H).
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1997, Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"), was issued which provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. SOP 97-2
is effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Company will adopt the guidelines of SOP 97-2 as of July
1, 1998, and its adoption is not expected to have a material impact on the
Company's financial results or condition.
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 conditions 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, 1997, however earlier adoption is
encouraged. The Company will adopt the guidelines of SOP 98-1 as of July 1,
1998, and its adoption is not expected to have a material impact on the
Company's financial results or condition.
C. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
JUNE 30,
------------------
1998 1997
------ -------
Computer equipment and software $14,752 $14,242
Office equipment, furniture and fixtures 1,306 2,065
Leasehold improvements 5,905 6,185
-------- -------
21,963 22,492
Accumulated depreciation and amortization (17,750) (14,437)
-------- -------
$ 4,213 $ 8,055
======== =======
D. INCOME TAXES
Provisions for income taxes for the years ended June 30, 1998, 1997 and 1996
were $1,839,000, $1,312,000 and $853,000, respectively. The expense in each
period was due entirely to foreign withholding taxes and foreign income taxes
for which future tax credit utilization or other benefit in Canada is uncertain.
There was no tax benefit recorded for losses generated in Canada during these
periods due to the uncertainty of realizing associated benefits.
The components of income (loss) from domestic (Canada) and foreign operations
before provision for income taxes in fiscal years 1998, 1997 and 1996 were as
follows (in thousands):
1998 1997 1996
------ ------ ------
Domestic $(12,144) $(20,334) $(30,962)
Foreign 370 376 506
--------- --------- ---------
$(11,774) $(19,958) $(30,456)
========= ========= =========
At June 30, 1998, the Company has accumulated capital losses of approximately
$439,000 for Canadian federal purposes and $544,000 for provincial (Quebec)
purposes, which may be carried forward indefinitely to reduce future taxable
capital gains. Additionally as of that date, the Company has non-refundable tax
credits of approximately $5,946,000, which may be carried forward to various
dates between 2006 and 2008 to reduce future federal income taxes payable. The
Company also has unclaimed research and development expenses of approximately
$25,600,000 for Canadian federal purposes and $10,166,000 for provincial
(Quebec) purposes, which may be carried forward indefinitely to reduce future
taxable income. The carryforwards and tax credits are subject to review and
possible adjustment by taxation authorities. Management has recorded a full
valuation allowance against these deferred tax assets due to the uncertainty of
their ultimate realization.
Accrued taxes of $2,523,000 and $1,268,000 at June 30, 1998 and 1997,
respectively, were primarily related to cash receipts for research and
development claims not yet recognized in the statements of operations.
In connection with the Acquisition, Microsoft has indemnified Avid for any taxes
assessed against the Company as a result of the Company's activities or
transactions involving the Company through the date of the Acquisition. As a
result of the Acquisition, Avid will be entitled to utilize the tax credits and
carryforwards of the Company, to the extent not adjusted by taxation authorities
and subject to applicable regulations.
E. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Softimage leases certain equipment and office space under noncancelable leases
which expire at various dates through January 2003. Future minimum lease
payments under noncancelable operating leases at June 30, 1998 were as follows
(in thousands):
1999 $1,462
2000 1,327
2001 1,242
2002 1,089
2003 610
--------
Total minimum lease payments $5,730
========
The Company has subleased a facility to a third party through January 2002. As
of June 30, 1998, total future payments to be received by the Company under this
noncancelable sublease were approximately $250,000.
Total rent expense charged to operations was approximately $1,896,000,
$1,959,000 and $2,261,000 for fiscal years 1998, 1997 and 1996, respectively.
LITIGATION
The Company receives inquiries from time to time with regard to 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 or product
performance. Management does not believe these claims will have a material
adverse effect on the financial position or the results of operations of the
Company.
In connection with the Acquisition, Microsoft has indemnified Avid for any claim
or legal proceeding asserted or related to any fact existing prior to the date
of the Acquisition.
F. EMPLOYEE STOCK OPTION AND SAVINGS PLANS
EMPLOYEE STOCK PURCHASE PLAN
Certain Softimage employees participated in Microsoft's employee stock purchase
plan. Under Microsoft's plan, shares of Microsoft's common stock could be
purchased at six-month intervals at 85% of the lower of the fair market value of
Microsoft's common stock on the first or the last day of each six-month period.
Employees were eligible to purchase shares having a value not exceeding 10% of
their gross compensation during an offering period. No compensation expense
related to this plan has been recognized in the statements of operations.
SAVINGS PLAN
The Company's U.S. employees were eligible to participate in Microsoft's savings
plan, which qualifies under Section 401(k) of the Internal Revenue Code.
Participating employees could defer up to 15% of pretax salary, but no more than
statutory limits. Microsoft contributed fifty cents for each dollar that a
participant contributed, up to a maximum of 3% of a participant's earnings.
The Company's Canadian employees were eligible to participate in the Company's
Canadian stock savings plan. Participating employees could defer up to 12% of
pretax salary; the Company contributed fifty cents for each dollar that a
participant contributed, up to a maximum of 6% of a participant's earnings.
STOCK OPTION PLANS
Microsoft has stock option plans for directors, officers and all employees that
provide for nonqualified and incentive stock option grants. The option exercise
price is the fair market value at the date of grant. Options granted prior to
1995 generally vest over four and one-half years and expire ten years from the
date of grant. Options granted during and after 1995 generally vest over four
and one-half years and expire seven years from the date of grant, while certain
options vest over seven and one-half years and expire after ten years.
Information with respect to options issued to the Softimage employees, directors
and officers under Microsoft's stock option plans is as follows:
WEIGHTED-AVERAGE
SHARES PRICE PER SHARE
-------- ----------------
Options outstanding at June 30, 1995 2,308,846 $11.10
Granted 1,254,848 $22.57
Exercised (94,760) $ 9.64
Canceled (276,698) $15.57
---------
Options outstanding at June 30, 1996 3,192,236 $15.27
Granted 1,251,249 $29.43
Exercised (171,766) $12.19
Canceled (238,196) $19.79
---------
Options outstanding at June 30, 1997 4,033,523 $19.53
Granted 617,736 $63.69
Exercised (741,670) $13.11
Canceled (345,935) $27.36
---------
Options outstanding at June 30, 1998 3,563,654 $27.76
=========
Information with respect to options exercisable which are held by the Company's
employees is as follows:
WEIGHTED-AVERAGE
SHARES PRICE PER SHARE
-------- ----------------
Options exercisable at June 30, 1996 533,873 $8.29
Options exercisable at June 30, 1997 823,336 $11.39
Options exercisable at June 30, 1998 1,231,567 $16.36
The following table summarizes information about stock options outstanding as of
June 30, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ---------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
CONTRACTUAL AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER LIFE (IN EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING YEARS) PRICE EXERCISABLE PRICE
----------------- ----------- ----------- --------- ----------- ---------
$ 5.15 - $20.00 1,088,065 5.75 $11.27 746,353 $10.36
$20.01 - $30.00 1,756,418 4.59 $25.02 466,612 $24.22
$30.01 - $60.00 144,005 5.49 $41.28 18,302 $39.38
$60.01 - $86.38 575,166 6.09 $63.80 300 $62.41
--------- ---------
$5.15 - $86.38 3,563,654 5.22 $27.76 1,231,567 $16.36
========= =========
The Company accounts for stock-based compensation granted to employees and
directors using the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock issued to Employees," and related
interpretations. Accordingly, compensation cost for stock options granted to
employees and directors is measured as the excess, if any, of the fair value of
Microsoft's common stock at the date of the grant over the amount that must be
paid to acquire the stock. No compensation expense related to this plan has been
recognized in the statements of operations. Had compensation cost for
Softimage's portion of Microsoft's stock-based compensation plans been
determined based on the fair value at the grant dates for the awards under the
Microsoft stock option plan consistent with the methodology prescribed under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), the Company's net losses would have been
approximately $20,671,000, $26,532,000 and $33,822,000 for fiscal years 1998,
1997 and 1996, respectively.
The weighted-average Black-Scholes fair value of options granted to Softimage
employees under Microsoft's stock option plans during 1998, 1997 and 1996 was
$25.03, $11.45 and $8.56, respectively. Value was estimated using the expected
option life of five years, no dividends, volatility of 32% for fiscal year 1998
and 30% for fiscal years 1997 and 1996, and risk-free interest rates of 5.7%,
6.5% and 6.0% in fiscal years 1998, 1997 and 1996, respectively.
The effects of applying SFAS 123 for the purposes of pro forma disclosures may
not be indicative of the effects on reported net income or loss for future
years, as the pro forma disclosures include the effects of only those awards
granted after July 1, 1995.
G. MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
In fiscal years 1998, 1997 and 1996, one customer, two customers and one
customer, respectively, accounted for 27%, 36% and 23% of total revenues.
Softimage markets its products worldwide. Revenues are grouped into three main
geographic segments: North America, Asia Pacific and Latin America, and Europe.
Financial data by geographic area for the fiscal years 1998, 1997 and 1996 is as
follows (in thousands):
1998 1997 1996
----- ------ ------
Net revenue:
North America $9,754 $10,288 $8,471
Asia Pacific and Latin America 17,931 18,111 11,280
Europe 9,175 9,356 10,218
------- ------- ------
Total net revenues $36,860 $37,755 $29,969
======= ======= ======
Operating income (loss):
North America $(12,144) $(20,334) $(30,962)
Asia Pacific and Latin America 122 119 173
Europe 248 257 333
------- ------- ------
Total operating loss $(11,774) $(19,958) $(30,456)
======= ======= ======
Identifiable assets:
North America $ 19,724 $ 22,433 $ 23,241
Asia Pacific and Latin America 53 75 62
Europe 910 3,075 5,868
------- ------- ------
Total identifiable assets $ 20,687 $ 25,583 $ 29,171
======= ======= ======
H. RELATIONSHIP WITH MICROSOFT CORPORATION
An allocation of corporate administrative functions, including legal, employee
benefits and other corporate overhead, has been included in the research and
development, selling and marketing, and general and administrative operating
expenses and in the cost of revenue in the accompanying combined statements of
operations and is presented in the following table. These allocations were based
on headcount, relative occupancy percentage or management's estimates.
The amounts allocated to Softimage in fiscal years 1998, 1997 and 1996 are as
follows (in thousands):
1998 1997 1996
---- ---- ----
Cost of revenue $ 258 $ - $ -
Research and development 97 278 400
Selling and marketing 1,143 932 600
General and administrative 489 454 450
Net transfers from Microsoft, presented in divisional equity, include advances
and loans from Microsoft, net cash transfers from Microsoft, third party
liabilities paid on behalf of Softimage by Microsoft, amounts due to Microsoft
for services and other charges, and income taxes paid on behalf of Softimage by
Microsoft. No interest has been charged on these transactions. The
weighted-average balance due to Microsoft was approximately $9,947,000,
$9,859,000 and $3,652,000 for fiscal years 1998, 1997 and 1996, respectively.
The activity in the net transfers from Microsoft account for fiscal years 1998,
1997 and 1996, included in divisional equity, is summarized below (in
thousands):
1998 1997 1996
----- ----- -----
Microsoft services and other charges $1,987 $1,664 $1,450
Foreign income taxes 169 174 215
Loans and advances payable, net 1,089 7,031 15,018
Cash transfers from Microsoft, net 2,873 6,123 13,499
------ ------ ------
Net transfers from Microsoft $6,118 $14,992 $30,182
====== ======= ======
Under various agreements with Microsoft since June 1994, the Company (i) was
reimbursed for its research and development expenses at a rate of cost plus 10%;
(ii) paid a royalty to Microsoft on certain of the Company's sales, based upon
the content of Microsoft's intellectual property incorporated in the related
Softimage products, up to a maximum of 25% of gross revenues, and (iii)
reimbursed Microsoft for its actual personnel and marketing costs that supported
worldwide sales of the Company's products, plus five percent. Only actual costs
of Softimage's selling and marketing and research and development activities,
incurred either by Softimage or Microsoft, have been included in the
accompanying combined statements of operations. All profits and royalties from
transactions with Microsoft, as described above, have been eliminated.
AVID TECHNOLOGY, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On August 3, 1998, Avid Technology, Inc. ("Avid") acquired from Microsoft
Corporation ("Microsoft") the one outstanding share of common stock of Softimage
Inc. ("Softimage") and certain assets relating to the business of Softimage,
upon the closing of the transactions contemplated in the Stock and Asset
Purchase Agreement dated June 15, 1998 among Avid, Microsoft and Softimage (the
"Acquisition"). In connection with the Acquisition, Avid paid $79 million in
cash to Microsoft and issued to Microsoft (i) a subordinated note (the "Note")
in the amount of $5 million, (ii) 2,394,813 shares of Avid's common stock, and
(iii) a ten-year warrant to purchase 1,155,235 shares of Avid's common stock at
an exercise price of $47.65 per share. In addition, Avid agreed to issue to
Softimage employees 40,706 shares of Avid common stock as well as stock options,
with a nominal exercise price, to purchase up to 1,820,817 shares of Avid's
common stock ("Avid Options") to replace unvested Microsoft options that were
forfeited in the transaction. The principal amount of the Note will be increased
by $39.71 for each share underlying forfeited Avid Options. Total consideration
for the acquisition was valued at $247.9 million. The Acquisition was recorded
using the purchase method of accounting.
The accompanying unaudited pro forma combined financial statements are
presented as if Avid and Softimage had been operating as a combined entity. The
unaudited pro forma combined balance sheet as of June 30, 1998 presents the
financial position of Avid assuming the Acquisition had occurred on June 30,
1998. All material adjustments to reflect the Acquisition are set forth in the
column "Pro Forma Adjustments." The unaudited pro forma combined statements of
operations for the six months ended June 30, 1998 and the year ended December
31, 1997 present the results of operations of Avid assuming the Acquisition had
occurred on January 1, 1997 and include all material pro forma adjustments
necessary for this purpose.
The pro forma data is for informational purposes only and may not
necessarily reflect future results of operations and financial position or what
the results of operations or financial position would have been had Avid and
Softimage been operating as a combined entity for the specified periods. The
unaudited pro forma combined financial statements should be read in conjunction
with the historical consolidated financial statements of Avid, including the
notes thereto.
AVID TECHNOLOGY, INC.
PRO FORMA COMBINED BALANCE SHEET
June 30, 1998
(In thousands)
(UNAUDITED)
AVID
TECHNOLOGY SOFTIMAGE PRO FORMA PRO FORMA
INC. INC.(a) ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $114,725 $7,116 $(85,531)(b)(d) $36,310
Marketable securities 95,144 - - 95,144
Accounts receivable, net 65,657 7,499 (865)(d) 72,291
Inventories 9,980 307 (22)(d) 10,265
Deferred tax assets 16,951 - - 16,951
Prepaid expenses 5,576 1,024 (123)(d) 6,477
Other current assets 3,759 528 (54)(d) 4,233
---------- ------- ---------- --------
Total current assets 311,792 16,474 (86,595) 241,671
Property and equipment,net 35,225 4,213 (708)(d) 38,730
Long-term deferred tax
assets 14,820 - 35,945(c) 50,765
Other assets 2,942 - 56,588(c) 59,530
--------- --------- ---------- --------
Total assets $ 364,779 $20,687 $5,230 $390,696
========= ========= ========== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,785 $ 843 $ 384(d) $ 22,012
Current portion of
long-term debt 631 - - 631
Accrued compensation
and benefits 18,312 1,448 (466)(d) 19,294
Accrued expenses 28,186 2,159 4,561(b)(d) 34,906
Income taxes payable 17,472 2,523 (2,523)(d) 17,472
Deferred revenues 21,293 6,599 (5,099)(d) 22,793
--------- --------- ---------- --------
Total current liabilities 106,679 13,572 (3,143) 117,108
Long-term debt,
less current portion 87 - 5,000(b) 5,087
Purchase consideration - - 68,177(b) 68,177
Stockholders' equity:
Common stock 240 - 24(b) 264
Additional paid-in
capital 252,386 - 91,659(b) 344,045
Retained earnings
(accumulated deficit) 36,758 7,115 (156,487)(c)(e) (112,614)
Treasury stock (24,245) - - (24,245)
Deferred compensation (4,939) - - (4,939)
Cumulative translation
adjustment (2,207) - - (2,207)
Net unrealized gains
on marketable securities 20 - - 20
--------- --------- ---------- ---------
Total stockholders'
equity 258,013 7,115 (64,804) 200,324
--------- --------- ---------- ---------
Total liabilities and
stockholders' equity $364,779 $20,687 $5,230 $390,696
========= ========= ========== =========
AVID TECHNOLOGY, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
AVID
TECHNOLOGY SOFTIMAGE PRO FORMA PRO FORMA
INC. INC.(a) ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
Net revenues $221,594 $21,094 $ - $242,688
Cost of revenues 90,064 1,256 981(f) 92,301
-------- ------- -------- --------
Gross profit 131,530 19,838 (981) 150,387
Operating expenses:
Research and development 40,928 9,361 528(f) 50,817
Marketing and selling 58,278 11,569 (197)(f) 69,650
General and administrative 13,029 2,859 (1,312)(f) 14,576
Amortization of acquired
intangible assets - - 13,010(g) 13,010
-------- ------- -------- --------
Total operating expenses 112,235 23,789 12,029 148,053
-------- ------- -------- --------
Operating income 19,295 (3,951) (13,010) 2,334
Interest and other income, net 5,249 200 - 5,449
-------- ------- -------- --------
Income (loss) before income
taxes 24,544 (3,751) (13,010) 7,783
Provision for (benefit from)
taxes 7,608 868 (6,063)(h) 2,413
-------- ------- -------- --------
Net income (loss) $16,936 $(4,619) $(6,947) $5,370
======== ======= ======== ========
Net income (loss) per common
shares - basic $ 0.74 $ 0.21
======== ========
Net income (loss) per common
share - diluted $ 0.69 $ 0.19
======== ========
Weighted average common shares
outstanding - basic 22,993 2,435(i) 25,428
======== ======== ========
Weighted average common shares
outstanding - diluted 24,687 4,256(i) 28,943
======== ======== ========
The accompanying notes are an integral part of the pro forma combined financial
statements.
AVID TECHNOLOGY, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
AVID
TECHNOLOGY SOFTIMAGE PRO FORMA PRO FORMA
INC. INC.(a) ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
Net revenues $471,338 $36,815 $ - $508,153
Cost of revenues 221,553 2,504 1,656(f) 225,713
-------- -------- -------- ---------
Gross profit 249,785 34,311 (1,656) 282,440
Operating expenses:
Research and development 73,470 25,236 (189)(f) 98,517
Marketing and selling 120,394 23,056 (548)(f) 142,902
General and administrative 25,808 4,205 (919)(f) 29,094
Amortization of acquired
intangible assets - - 26,020 (g) 26,020
-------- -------- -------- ---------
Total operating expenses 219,672 52,497 24,364 296,533
-------- -------- -------- ---------
Operating income (loss) 30,113 (18,186) (26,020) (14,093)
Interest and other income
(expense), net 8,125 (312) - 7,813
-------- -------- -------- ---------
Income (loss) before
income taxes 38,238 (18,498) (26,020) (6,280)
Provision for (benefit from)
taxes 11,854 1,507 (15,308)(h) (1,947)
-------- -------- -------- ---------
Net income (loss) $ 26,384 $(20,005) $(10,712) $(4,333)
======== ======== ======== =========
Net income (loss) per common
shares - basic $ 1.14 $ (0.17)
======== ========
Net income (loss) per common
share - diluted $ 1.08 $ (0.17)
======== ========
Weighted average common shares
outstanding - basic 23,065 2,435 (i) 25,500
======== ======= =======
Weighted average common shares
outstanding - diluted 24,325 1,175 (i) 25,500
======== ======= =======
The accompanying notes are an integral part of the pro forma combined financial
statements.
AVID TECHNOLOGY, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
a) To give effect to the acquisition of Softimage Inc. as if it had occurred
on June 30, 1998 for the pro forma balance sheet presentation and on
January 1, 1997 for the pro forma statements of operations presentations.
b) To give effect to the total consideration of $247.9 million paid in the
acquisition 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 Avid common stock issued to Microsoft and
underlying the warrant may not be traded until August 3, 2001, and the
principal amount of the Note will be increased by $39.71 for each share
underlying forfeited Avid Options. The value of Avid Options will be
recorded as Purchase Consideration until the underlying options either
become vested or are forfeited by employees, at which time either
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 the operations of Softimage and the fair market
value of the acquired assets and assumed liabilities have been included in
the financial statements of Avid as of the acquisition date. The purchase
price was allocated to the acquired assets and assumed liabilities as
follows (in thousands):
Current assets, net $ 2,448
Property and equipment 3,505
Completed technologies 44,772
In-process research and development 193,741
Work force 7,644
Tradename 4,172
Deferred tax liability (8,422)
----------
$247,860
==========
The amounts allocated to tangible and intangible assets, including acquired
in-process research and development, were based on results of an
independent appraisal. 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 $193.7 million was charged to operations at the date of the
acquisition, net of the related tax benefit of $44.4 million. The amounts
allocated to completed technologies, work force, and tradename are being
amortized on a straight-line basis over expected useful lives two and
three years, three years, and two years, respectively.
The value 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, and discounting the net cash flows back to their present
values. This evaluation considered the inherent difficulties and
uncertainties in completing the development projects and the risks related
to the viability of and potential changes in future target markets.
In-process research and development projects identified at the acquisition
date include next-generation 3-dimensional modeling, animation and
rendering software; new graphic, film and media management capabilities for
effects-intensive, on-line finishing applications for editing; and new
editing technology architectures to support collaborative work groups. 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; (ii) the rewriting of
software code of the compositing engine to accommodate significant new
features, the rewriting of software code of the titling component, and the
rebuilding of the framework architecture; and (iii) the design of a new
architecture to support simultaneous and synchronized access to projects
and media data. The estimated costs to be incurred to complete the
development of the in-process research and development projects total
approximately $23 million through the first half of 2000.
If these projects are not successfully developed, the sales and profit-
ability of Avid may be adversely affected in future periods. Avid expects
to begin to benefit from the purchased in-process research and development
from the first half of 1999 through the first half of 2000.
No assets related to tax credits and carryforwards of Softimage Inc. were
recorded at the acquisition date due to the uncertainty of their
realization. If any benefit of these 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.
c) To give effect to the allocation of the purchase price, including the
non-recurring charge for in-process research and development and the
related tax benefit that are reflected as a reduction of stockholders'
equity. Other assets recorded in the Acquisition include completed
technologies, work force and tradename.
d) To reduce cash, accounts receivable, inventories, prepaid expenses, other
current assets, fixed assets, and accrued compensation and benefits not
acquired by Avid; and to record additional accounts payable and accrued
expenses acquired by Avid.
e) To eliminate divisional equity of Softimage.
f) To reclassify certain expenses within cost of revenues, research and
development, selling and marketing, and general and administrative expenses
to conform to Avid's historical presentation.
g) To reflect the amortization (on a straight-line basis) of completed
technologies, work force and tradename recorded in connection with the
Acquisition, over expected useful lives of two and three years.
h) To reverse the foreign tax provisions of Softimage, which were calculated
on a separate-return basis; to record the pro forma benefit at 31% of
Softimage losses as combined with Avid; and to record the tax effect at 31%
of other pro forma adjustments.
i) The calculation of pro forma weighted-average number of shares outstanding
includes the weighted-average number of common shares outstanding of Avid
for the respective periods, adjusted to give effect to the issuance of
2,435,519 shares of Avid's common stock in connection with the Acquisition.
For the six months ended June 30, 1998, the calculation includes the effect
of common stock equivalent shares from the assumed exercise of the stock
options issued to Softimage employees. For the year ended December 31,
1997, the calculation eliminates common stock equivalent shares previously
included in Avid's weighted-average shares outstanding amount, as their
inclusion would be antidilutive. The calculations do not include the effect
of common stock equivalent shares from the assumed exercise of the warrant
issued to Microsoft, as their inclusion would be antidilutive for the year
ended December 31, 1997 and for the six months ended June 30, 1998.
j) The non-recurring charge of $193.7 million incurred in connection with the
purchase of in-process research and development and the related tax benefit
of $44.4 million are not included in the presentation of the pro forma
combined statements of operations due to their non-recurring nature.
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
2.1 Stock and Asset Purchase Agreement dated June 15, 1998 among Avid,
Microsoft and Softimage, which is incorporated herein by reference
to Exhibit 2.1 to the registrant's Quarterly Report on Form 10-Q
under the Securities Exchange Act of 1934, for the fiscal quarter
ended June 30, 1998, as filed with the Commission on August 12, 1998
(Commission File No. 0-21174). Exhibits not filed herewith will be
provided to the Securities and Exchange Commission upon request by
the Commission.
23.1 Consent of PricewaterhouseCoopers LLP
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Avid Technology, Inc. on Form S-3 (File Nos. 33-93472, 33-96456
and 333-03128) and Form S-8 (File Nos. 33-64124, 33-64126, 33-64128, 33-64130,
33-82478, 33-88318, 33-98692, 333-08821, 333-08823, 333-08825, 333-30367,
333-42569, 333-42571, 333-56631, 333-60181, 333-60183 and 333-60191) of our
report dated October 9, 1998, on our audits of the combined financial statements
of Softimage Inc. as of June 30, 1998 and 1997, and for each of the three years
in the period ended June 30,1998, which report is included in this current
report on Form 8-K/A.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
October 19, 1998
