UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
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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
inorporation 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: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
---- -----
The number of shares outstanding of the registrant's Common Stock as of October
20, 2004 was 33,958,648.
AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
a) Condensed Consolidated Statements of Operations (unaudited)
for the three and nine months ended September 30, 2004 and 2003 ........1
b) Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2004
and December 31, 2003...................................................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2004 and 2003 ..................3
d) Notes to Condensed Consolidated Financial Statements (unaudited)........4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................13
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk..........26
ITEM 4. Controls and Procedures............................................27
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..................................................28
ITEM 6. Exhibits...........................................................28
SIGNATURES....................................................................30
EXHIBIT INDEX.................................................................31
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
2004 2003 2004 2003
------------- ------------- --------------------------
Net revenues $147,374 $119,090 $414,634 $344,584
Cost of revenues 62,845 52,784 177,943 155,619
Amortization of intangible assets 127 - 127 -
------------- ------------- --------------------------
Gross profit 84,402 66,306 236,564 188,965
------------- ------------- --------------------------
Operating expenses:
Research and development 23,780 20,706 68,996 63,833
Marketing and selling 33,435 27,959 96,945 80,971
General and administrative 7,386 5,670 19,456 16,632
Stock-based compensation * 553 - 553 -
Restructuring and other costs, net - 76 - 1,859
Amortization of intangible assets 988 341 1,976 975
------------- ------------- ------------ ------------
Total operating expenses 66,142 54,752 187,926 164,270
------------- ------------- ------------ ------------
Operating income 18,260 11,554 48,638 24,695
Other income, net 651 592 686 1,330
------------- ------------- ------------ ------------
Income before income taxes 18,911 12,146 49,324 26,025
Provision for (benefit from) income taxes (63) 300 137 900
------------- ------------- ------------ -----------
Net income $18,974 $11,846 $49,187 $25,125
============= ============= ============ ============
Net income per common share - basic $0.58 $0.40 $1.54 $0.88
Net income per common share - diluted $0.54 $0.35 $1.43 $0.78
Weighted average common shares outstanding - basic 32,737 29,865 31,857 28,663
Weighted average common shares outstanding - diluted 35,033 33,380 34,374 32,059
* Stock-based compensation associated with the acquisition of M-Audio (Note 3)
is comprised of $99 of research and development expense, $154 of marketing
and selling expense and $300 of general and administrative expense for the
three and nine months ended September 30, 2004.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands) September 30, December 31,
(unaudited) 2004 2003
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $41,734 $102,649
Marketable securities 78,348 93,660
Accounts receivable, net of allowances of $9,193 and $9,161
at September 30, 2004 and December 31, 2003, respectively 94,438 69,230
Inventories 54,913 38,292
Current deferred tax assets, net 1,047 1,032
Prepaid expenses 7,295 5,117
Other current assets 5,610 7,032
---------------- ----------------
Total current assets 283,385 317,012
Property and equipment, net 26,558 23,223
Intangible assets, net 50,017 1,815
Goodwill 165,356 3,335
Long-term deferred tax assets, net 2,557 -
Other assets 3,804 2,734
---------------- ----------------
Total assets $531,677 $348,119
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $26,214 $15,755
Accrued compensation and benefits 22,400 23,753
Accrued expenses and other current liabilities 36,772 27,452
Income taxes payable 10,396 8,504
Deferred revenues 52,615 44,943
---------------- ----------------
Total current liabilities 148,397 120,407
Long-term debt and other liabilities 1,818 607
---------------- ----------------
Total liabilities 150,215 121,014
---------------- ----------------
Contingencies (Note 6)
Stockholders' equity:
Common stock 339 311
Additional paid-in capital 530,170 419,981
Accumulated deficit (145,288) (194,476)
Deferred compensation (4,947) (30)
Cumulative translation adjustment 1,381 1,306
Net unrealized gains (losses) on debt securities (193) 13
---------------- ----------------
Total stockholders' equity 381,462 227,105
---------------- ----------------
Total liabilities and stockholders' equity $531,677 $348,119
================ ================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands - unaudited)
Nine Months Ended
September 30,
-----------------------------
2004 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $49,187 $25,125
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,931 9,343
Provision for doubtful accounts and recourse obligations 91 418
Compensation expense from stock grants and options 583 169
Equity in income of non-consolidated company (85) (155)
Changes in operating assets and liabilities:
Accounts receivable (14,281) 5,869
Inventories (715) (515)
Prepaid expenses and other current assets 956 84
Accounts payable 3,774 (7,627)
Income taxes payable 1,156 610
Accrued expenses, compensation and benefits 2,236 742
Deferred revenues and deposits 3,301 6,637
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 57,134 40,700
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (9,805) (4,578)
Payments for other long-term assets (485) (360)
Dividend from non-consolidated company - 85
Payments for business acquisitions, net of cash acquired (135,205) (409)
Purchases of marketable securities (29,938) (59,181)
Proceeds from sales of marketable securities 45,585 11,347
- -----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (129,848) (53,096)
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (492) (463)
Proceeds from issuance of common stock under employee stock plans 13,215 44,887
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,723 44,424
- -----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (924) 174
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (60,915) 32,202
Cash and cash equivalents at beginning of period 102,649 62,174
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $41,734 $94,376
- -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
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 consolidated 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, financial position, and cash flows of the Company, in conformity
with generally accepted accounting principles. The accompanying condensed
consolidated balance sheet as of December 31, 2003 was derived from Avid's
audited consolidated financial statements, but does not include all disclosures
required by generally accepted accounting principles. The Company filed audited
consolidated financial statements for the year ended December 31, 2003 in its
2003 Annual Report on Form 10-K, which included all information and footnotes
necessary for such presentation; the financial statements contained in this Form
10-Q should be read in conjunction with the audited consolidated financial
statements in the Form 10-K.
The Company's preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures 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 and income tax asset valuation allowances. Actual results
could differ from those estimates.
2. NET INCOME PER COMMON SHARE
Basic and diluted net income per share were as follows (in thousands, except per
share data):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
2004 2003 2004 2003
------------- ------------- ------------ ------------
Net income $18,974 $11,846 $49,187 $25,125
============= ============= ============ ============
Weighted average common shares outstanding - basic 32,737 29,865 31,857 28,663
Weighted average potential common stock:
Options 2,296 3,515 2,517 3,396
------------- ------------- ------------ ------------
Weighted average common shares outstanding - diluted 35,033 33,380 34,374 32,059
============= ============= ============ ============
Net income per common share - basic $0.58 $0.40 $1.54 $0.88
Net income per common share - diluted $0.54 $0.35 $1.43 $0.78
For the three and nine months ended September 30, 2004 and 2003, certain stock
options and a warrant have been excluded from the diluted net income per share
calculation. Their effect would be anti-dilutive since their exercise prices
were in excess of the Company's average common stock fair value for the related
period.
4
Common stock options and a warrant that were considered anti-dilutive securities
and excluded from the diluted net income per share calculations were as follows,
on a weighted-average basis:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------- ------------ ------------- ------------
Options 242 10 191 102
Warrant 1,155 1,155 1,155 1,155
------------- ------------ ------------- ------------
Total anti-dilutive common stock options and warrant 1,397 1,165 1,346 1,257
============= ============ ============= ============
3. ACQUISITIONS
M-Audio
In August 2004, Avid completed the acquisition of M-Audio, a leading provider of
digital audio and MIDI (Music Industry Digital Interface) solutions for
electronic musicians and audio professionals. Avid paid cash of $79.6 million
net of cash acquired of which $0.5 million will be paid out over a two year
period, and issued stock and options with a fair value of $96.5 million. The
market price of $42.72 used to value the Avid shares was based on the five-day
average closing price of the stock during the period beginning two days before
and ending two days after the date that the terms of the acquisition were agreed
to and announced publicly. The weighted average price of $35.14 used to value
the options was based on the same five-day average, less the weighted average
strike price of the options. Avid also incurred $3.3 million of transaction
costs. The Company has integrated M-Audio into its Professional Audio segment
and will market its line of audio products alongside Digidesign's digital audio
workstations for the professional and home/hobbyist markets. The goodwill of
$122.0 million resulting from the purchase price allocation reflects the value
of the underlying enterprise as well as synergies that Avid expects to realize,
including incremental sales of Digidesign products. The following table
summarizes the estimated fair value of the assets acquired and liabilities
assumed at the date of acquisition (in thousands):
Accounts receivable $7,288
Inventories 13,420
Other current assets 903
Equipment and other long-term assets 1,520
Identifiable intangible assets:
Customer relationships 28,000
Trade name 4,700
Non-compete covenant 1,200
Developed technology 4,500
Goodwill 122,022
----------------
Total assets acquired 183,553
Accounts payable (4,626)
Other current liabilities (5,065)
Deferred compensation related to stock options issued 5,499
----------------
Net assets acquired $179,361
================
As part of the purchase agreement, Avid may be required to make additional
payments to the former shareholders and option holders of M-Audio of up to $45.0
million, contingent upon the operating results of M-Audio through December 31,
2005. These payments, if required, will be made through the issuance of
additional Avid shares. Any additional Avid shares issued to the former
shareholders of M-Audio will be recorded as additional purchase price allocated
to goodwill. Any additional Avid shares issued to former option holders of
M-Audio will be recorded as stock-based compensation.
The identifiable intangible assets are being amortized over their estimated
useful lives of twelve years for customer relationships, six years for the trade
name, four years for the developed technology and two years for the non-compete
covenant. Accumulated amortization of these intangible assets was $0.5 million
at September 30, 2004. Amortization of these intangible assets in the full year
ending December 31, 2004 is expected to be $1.8 million. The $122.0 million of
5
goodwill was assigned to the Company's Audio segment and will not be amortized,
in accordance with the requirements of Statement of Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets". This goodwill is not
deductible for tax purposes.
Avid Nordic AB
In September 2004, the Company acquired Avid Nordic AB, a Sweden-based reseller
of Avid products operating in the Nordic and Benelux regions of Europe, for cash
(net of cash acquired) of Euro 6.1 million ($7.4 million) plus transaction costs
of $0.3 million. The Company previously had no ownership interest in Avid
Nordic. The acquisition allows Avid to serve customers directly in this region.
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed in the transaction (in thousands):
Accounts receivable $3,702
Inventory 2,516
Other current assets 589
Equipment and other long-term assets 671
Identifiable intangible asset 4,700
Goodwill 1,955
-----------
Total assets acquired 14,133
Accounts payable (2,571)
Other current liabilities (2,260)
Long-term deferred tax liability (1,645)
-----------
Net assets acquired $7,657
===========
The identifiable intangible asset represents customer relationships developed in
the region by Avid Nordic AB. This asset will be amortized over a five-year
period. Accumulated amortization of this asset was $0.1 million at September 30,
2004. Amortization for the full year ended December 31, 2004 is expected to be
$0.3 million. The goodwill of $2.0 million resulting from the purchase price
allocation reflects the value of the assembled workforce and existing
infrastructure in the region. This goodwill was assigned to The Video and Film
Editing and Effects ("Video") segment and will not be amortized in accordance
with the requirements of SFAS No. 142. This goodwill is not deductible for tax
purposes.
NXN SOFTWARE AG
In January 2004, Avid acquired Munich, Germany-based NXN Software AG ("NXN"), a
leading provider of asset and production management systems specifically
targeted for the entertainment and computer graphics industries, for cash of
Euro 35 million ($43.7 million)less cash acquired of $0.8 million. The Company
also incurred $1.3 million of transaction costs. The acquisition expands Avid's
offering in digital asset management by enabling the Company's film and video
post-production, broadcast, audio and 3D animation customers to leverage the
workflow capabilities of the NXN Alienbrain(R) product line. NXN is reported
within Video segment. The goodwill resulting from the purchase price allocation
reflects the synergies the Company hopes to realize by integrating the NXN
technology with its other products. The following table summarizes the estimated
fair value of the assets acquired and liabilities assumed at the date of
acquisition (in thousands):
Current assets $2,049
Equipment and other long-term assets 584
Identifiable intangible assets 7,200
Deferred tax assets, net 2,480
Goodwill 38,813
-----------
Total assets acquired 51,126
Current liabilities assumed (6,169)
-----------
Net assets acquired $44,957
===========
The identifiable intangible assets include completed technology valued at $4.3
million, customer relationships valued at $2.1 million, and a trade name valued
at $0.8 million, most of which are being amortized over a six-year period.
6
Amortization expense relating to these intangibles was $0.3 million and $0.9
million for the three- and nine-month periods ended September 30, 2004,
respectively. Amortization of these intangibles for the full year ended December
31, 2004 is expected to be $1.2 million. During the nine-month period ended
September 30, 2004, the $38.8 million of goodwill was reduced by $0.7 million to
$38.1 million due to a reduction in the estimated fair value of deferred revenue
acquired from NXN. This goodwill was assigned to the Video segment and, in
accordance with the requirements of SFAS No. 142, will not be amortized. This
goodwill is not deductible for tax purposes.
Pro Forma Financial Information for Acquisitions (Unaudited)
The results of operations of M-Audio, Avid Nordic and NXN have been included in
the results of operations of the Company since the respective date of each
acquisition. The following unaudited pro forma financial information presents
the results of operations for the three- and nine-month periods ended September
30, 2004 and 2003 as if the acquisitions of both M-Audio and NXN had occurred at
the beginning of 2003. The Company's pro forma results of operations giving
effect to the Avid Nordic AB acquisition as if it had occurred at the beginning
of 2003 is not included as it would not differ materially from the reported
results. The pro forma financial information for the combined entities has been
prepared for comparative purposes only and is not indicative of what actual
results would have been if the acquisitions had taken place at the beginning of
fiscal 2003, or of future results.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------- ------------- ------------
(In thousands, except per share data)
Net revenues $156,329 $133,273 $456,918 $384,739
Net income $18,416 $9,549 $46,828 $18,289
Net income per share:
Basic $0.54 $0.30 $1.40 $0.60
Diluted $0.51 $0.27 $1.30 $0.54
4. INVENTORIES
Inventories consisted of the following (in thousands):
September 30, December 31,
2004 2003
-------------------- --------------------
Raw materials $16,024 $12,086
Work in process 4,694 1,475
Finished goods 34,195 24,731
-------------------- --------------------
$54,913 $38,292
==================== ====================
As of September 30, 2004 and December 31, 2003, the finished goods inventory
included deferred costs of $8.0 million and $14.0 million, respectively,
associated with product shipped to customers for which revenue had not yet been
recognized.
5. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no compensation expense is recorded for options issued to employees
in fixed amounts and with fixed exercise prices at least equal to the fair
market value of the Company's common stock at the date of grant. When the
exercise price of stock options granted to employees is less than the fair
market value of common stock at the date of grant, the Company records that
difference multiplied by the number of shares under option as deferred
compensation, which is then amortized over the vesting period of the options.
Additionally, deferred compensation is recorded for restricted stock granted to
employees based on the fair market value of the Company's stock at date of grant
less the amount paid, if any, for the stock by the employee and is amortized
over the period during which the restrictions lapse. For holders of these
7
options or shares who are terminated, the Company ceases amortization and
reclassifies the associated deferred compensation to additional paid-in capital.
As part of the consideration for the purchase of M-Audio, the Company granted
approximately 345,000 options to employees and issued approximately 34,000
shares of restricted stock. In accordance with Financial Accounting Standards
Board Interpretation No. 44, a portion of the intrinsic value of the unvested
awards was recorded as deferred compensation and is being recognized as
stock-based compensation over the remaining future vesting period or, in the
case of the restricted stock, as the restrictions lapse.
The Company follows the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," for employee awards. All stock-based
awards to non-employees are accounted for at their fair value in accordance with
SFAS No. 123.
The following table illustrates the effect on net income and net income per
share as if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee awards (in thousands, except per share
data).
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- ----------
Net income as reported $18,974 $11,846 $49,187 $25,125
Add: Stock-based employee compensation expense included
in reported net income 557 35 583 64
Deduct: Total stock-based employee compensation expense
determined under the fair value-based method for all
awards, net of related tax effects (4,346) (2,737) (11,657) (9,310)
----------- ----------- ----------- ----------
Pro forma net income $15,185 $9,144 $38,113 $15,879
=========== =========== =========== ==========
Net income per share:
Basic-as reported $0.58 $0.40 $1.54 $0.88
Basic-pro forma $0.46 $0.31 $1.20 $0.55
Diluted-as reported $0.54 $0.35 $1.43 $0.78
Diluted-pro forma $0.44 $0.28 $1.12 $0.50
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model and is amortized over the
stock option's vesting period.
6. CONTINGENCIES
On March 11, 1996, Avid was named as a 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, upon Avid's motion, the suit was transferred to the
United States District Court for the Southern District of New York. The
complaint alleges infringement by Avid of U.S. patent number 4,258,385, and
seeks injunctive relief, treble damages, costs, and attorneys' fees. This patent
expired on May 15, 1999 and therefore, would not be applicable to the products
currently offered by Avid. Accordingly, potential damages, if any, are limited
to the period beginning March 11, 1990 (six years prior to this date of the
complaint) and ending May 15, 1999. In its answer to the complaint, the Company
asserted that it did not infringe the patent and that the patent is invalid.
Avid argued a Motion to Dismiss this claim on November 5, 2004 and is awaiting
the decision of the court. The Company is unable to quantify a range of loss
in this litigation. Combined Logic Company did not specify an alleged damage
amount in its complaint. As only limited discovery has been conducted to date
by either side in the eight years since Combined Logic Company filed its
complaint, the Company believes it does not have sufficient information to
provide any meaningful estimate of the possible range of damages that Combined
Logic Company might seek. The Company believes it has meritorious defenses to
the complaint and intends to contest it vigorously. However, an adverse
resolution of this litigation could have an adverse effect on the Company's
8
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.
In March 1999, Avid and Tektronix, Inc. were sued by Glen Holly Entertainment,
Inc., a Tektronix distributor, claiming that Tektronix's discontinuance of the
Tektronix Lightworks product line was the result of a strategic alliance by
Tektronix and Avid. Glen Holly raised antitrust and common law claims against
Avid and Tektronix, and sought lost future profits, treble damages, attorneys'
fees, and interest. In March 2001, the United States District Court for the
District of California dismissed the anti-trust claims against both parties and
the remaining common law claim against the Company was dismissed by stipulation
and court order on April 6, 2001. Glen Holly subsequently appealed the lower
court's decision. On September 9, 2003, a three-judge panel of the U.S. Court of
Appeals for the Ninth Circuit reversed in part the lower court's dismissal and
sent the antitrust claims back to the lower court for further findings. Avid and
Tektronix filed a Petition for a rehearing by the three-judge panel and a
rehearing by the full Ninth Circuit on September 23, 2003. The Petition was
denied on December 12, 2003. On March 18, 2004, the Company entered into a
settlement agreement with Glen Holly whereby each party issued a general release
of all claims relating to the allegations made in this lawsuit. In consideration
of the settlement, Avid agreed to make a payment to Glen Holly of $1,050,000 and
accordingly, $985,000 was paid in March 2004 and the remaining $65,000 was paid
in April 2004. On March 19, 2004, Avid filed an application for determination of
good faith settlement with the U.S. District Court requesting that it determine
whether Tektronix had a right to contribution or indemnification from Avid
arising from claims asserted in the lawsuit. On June 17, 2004, the U.S. District
Court issued a ruling in which it determined that Tektronix had no such right.
On June 24, 2004, Glen Holly filed a stipulation of dismissal with the Court,
dismissing all claims alleged against the Company in this proceeding. On July
14, 2004, the court issued an order finding that the settlement agreement
between Avid and Glen Holly was entered into in good faith under applicable law.
Avid receives inquiries from time to time with regard to possible patent
infringement claims. 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, intellectual property rights or product performance.
Management does not believe these claims will have a material adverse effect on
the financial position or results of operations of the Company.
From time to time, the Company provides indemnification provisions in agreements
with customers covering potential claims by third parties that Avid products
infringe their intellectual property rights. Pursuant to these indemnification
provisions, the Company agrees to indemnify customers for losses that they
suffer or incur in connection with any valid U.S. patent or copyright
infringement claim brought by a third party with respect to Avid products. These
indemnification provisions generally offer perpetual coverage for infringement
claims based upon the products covered by the agreement. The maximum potential
amount of future payments the Company could be required to make under these
indemnification provisions is theoretically unlimited; however, to date, the
Company has not received any claims under these indemnification provisions. As a
result, the Company believes the estimated fair value of these indemnification
provisions is minimal.
The Company has a standby letter of credit at a bank that is used as a security
deposit in connection with the Company's Daly City, California office space
lease. In the event of default on this lease, the landlord would be eligible to
draw against this letter of credit to a maximum as of September 30, 2004 of $4.3
million, subject to an annual reduction of approximately $0.8 million but not
below $2.0 million. The letter of credit will remain in effect at $2.0 million
throughout the remaining lease period, which extends to September 2009. As of
September 30, 2004, the Company was not in default of this lease.
The Company, through a third party, provides lease financing options to its
customers, including primarily end-users, and occasionally distributors. During
the terms of these leases, which are generally three years, the Company remains
liable for any unpaid principal balance upon default by the end-user, but such
liability is limited in the aggregate based on a percentage of initial amounts
funded or, in certain cases, amounts of unpaid balances. At September 30, 2004
and December 31, 2003, Avid's maximum recourse exposure totaled approximately
$16.6 million and $14.8 million, respectively. The Company records revenue from
these transactions upon the shipment of products, provided that all other
revenue recognition criteria are met. Because the Company has been providing
these financing options to its customers for many years, the Company has a
substantial history of collecting under these arrangements without providing
refunds or concessions to the end user or financing party. To date, the payment
default rate has consistently been between 2% and 4% per year. The Company
maintains a reserve against the entire portfolio balance, approximately $52.0
9
million and $63.5 million at September 30, 2004 and December 31, 2003,
respectively for estimated losses under this recourse lease program based on
these historical default rates. At September 30, 2004 and December 31, 2003, the
Company's accrual for estimated losses was $2.4 million and $3.3 million,
respectively.
Avid provides warranty on hardware sold through its Video segment which
generally mirrors the manufacturers' warranties. The Company charges the related
material, labor and freight expense to cost of revenues in the period incurred.
With respect to the Audio business, Avid provides warranty on externally sourced
and internally developed hardware and records an accrual for the related
liability based on historical trends and actual material and labor costs. The
warranty period for all of the Company's products is generally 90 days to one
year but can extend up to five years depending on the manufacturer's warranty.
The following table sets forth the activity in the product warranty accrual
account (in thousands):
Nine Months Ended September 30,
2004 2003
----------------- ----------------
Accrual balance at beginning of period $1,355 $922
Accruals for product warranties 2,651 1,813
Cost of warranty claims (1,894) (1,511)
----------------- ----------------
Accrual balance at end of period $2,112 $1,224
================= ================
7. COMPREHENSIVE INCOME
Total comprehensive income net of taxes consists of net income, the net changes
in foreign currency translation adjustment and net unrealized gains and losses
on available-for-sale securities. The following is a summary of the Company's
comprehensive income, (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- -------------- -------------
Net income $18,974 $11,846 $49,187 $25,125
Net changes in:
Foreign currency translation adjustment 1,459 436 75 3,675
Unrealized gains (losses) on securities 99 (6) (206) 40
------------- ------------- -------------- -------------
Total comprehensive income $20,532 $12,276 $49,056 $28,840
============= ============= ============== =============
8. 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: Video and Film
Editing and Effects, and Professional Audio. The following is a summary of the
Company's operations by reportable segment (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ----------------------------
2004 2003 2004 2003
--------------- ------------- -------------- -----------
Video and Film Editing and Effects:
Net revenues $95,605 $86,689 $284,015 $243,420
Operating income $11,395 $9,746 $32,706 $17,574
Professional Audio:
Net revenues $51,769 $32,401 $130,619 $101,164
Operating income $8,533 $2,225 $18,588 $9,955
Combined Segments:
Net revenues $147,374 $119,090 $414,634 $344,584
Operating income $19,928 $11,971 $51,294 $27,529
10
The following table reconciles operating income for reportable segments to the
total consolidated amounts for the three- and nine-month periods ended September
30, 2004 and 2003 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- -------------- -------------
Total operating income for reportable segments $19,928 $11,971 $51,294 $27,529
Unallocated amounts:
Restructuring and other costs, net - (76) - (1,859)
Stock-based compensation (553) - (553) -
Amortization of acquisition-related intangible
assets (1,115) (341) (2,103) (975)
------------- ------------- -------------- -------------
Consolidated operating income $18,260 $11,554 $48,638 $24,695
============= ============= ============== =============
9. RESTRUCTURING AND OTHER COSTS, NET
In December 2002, the Company recorded a charge of $3.3 million in connection
with vacating excess space in its Tewksbury, Massachusetts; Daly City,
California; and Montreal, Canada facilities. The portion of the charge related
to Tewksbury ($0.5 million) resulted from a revision of the Company's estimate
of the timing and amount of future sublease income associated with that
facility, for which a charge had previously been included in a 2001
restructuring. The remaining portion of the charge for Daly City and Montreal
was a result of the Company's ceasing to use a portion of each facility in
December 2002, and hiring real estate brokers to assist in finding subtenants.
The Daly City estimate was revised, and an additional charge recorded, in the
fourth quarter of 2003.
In March 2003, the Company implemented a restructuring program under which 48
employees worldwide were terminated, and a leased facility in California was
vacated. In connection with these actions, the Company recorded a charge of $1.2
million for employee terminations and $0.6 million for unutilized space in Santa
Monica that included a write-off of leasehold improvements of $0.4 million. In
September 2004, Avid recorded a charge of $0.2 million to reflect the decrease
in rent to be received from one of the Company's subtenants and reversed a
charge of $0.2 million associated with unutilized space in Tewksbury.
The Company recorded the December 2002 and March 2003 charges in accordance with
the guidance of SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities". SFAS No. 146 requires that a liability be recognized for
an operating lease that is not terminated based on the remaining lease rental
costs, measured at its fair value on a discounted cash flow basis, when the
entity ceases using the rights conveyed by the operating lease. That amount is
reduced by any estimated potential sublease rentals, regardless of whether the
entity intends to enter into a sublease. Future changes in the fair value of the
Company's obligations are recorded through operating expenses.
The following table sets forth the activity in the restructuring and other costs
accrual, which is included in Accrued expenses and other liabilities for the
nine months ended September 30, 2004 (in thousands):
Employee Facilities
Related Related Total
-------------- -------------- --------------
Accrual balance at December 31, 2003 $50 $4,843 $4,893
Revisions of estimated liabilities (50) 50 -
Cash payments - (1,130) (1,130)
-------------- -------------- --------------
Accrual balance at September 30, 2004 $- $3,763 $3,763
============== ============== ==============
The majority of the facilities-related accrual represents estimated losses on
subleases of space vacated as part of the Company's restructuring actions. The
leases, and charges against the amount accrued, extend through 2010 unless the
Company is able to negotiate an earlier termination.
11
10. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain Financial
Instruments with Characteristics of Both Liabilities and Equity", which
establishes standards for how an issuer of financial instruments classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances) if, at
inception, the monetary value of the obligation is based solely or predominantly
on a fixed monetary amount known at inception, variations in something other
than the fair value of the issuer's equity shares or variations inversely
related to changes in the fair value of the issuer's equity shares. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. On November 7, 2003, the FASB deferred the
classification and measurement provisions of SFAS No. 150 as they apply to
certain mandatory redeemable non-controlling interests. This deferral is
expected to remain in effect while these provisions are further evaluated by the
FASB. The Company has not entered into or modified any financial instruments
covered by this statement after May 31, 2003 and the application of this
standard is not expected to have a material impact on the Company's financial
position or results of operations.
On October 13, 2004, the FASB concluded that Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" ("Statement 123R"), which would
require all companies to measure compensation cost for all share-based payments
(including employee stock options) at fair value, would be effective for public
companies (except small business issuer as defined in SEC Regulation S-B) for
interim or annual periods beginning after June 15, 2005. Retroactive application
of the requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("Statement 123"), not Statement
123R, to the beginning of the fiscal year that includes the effective date would
be permitted, but not required. Note 5 - "Accounting for Stock Based
Compensation" sets forth the pro forma effect on net income and earnings per
share assuming Avid had applied the fair value recognition provisions of
Statement 123. The retroactive provisions permitted under this conclusion will
not impact Avid since the first interim period that Statement 123R will be
effective for Avid will be the third quarter of 2005.
12
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We develop, market, sell and support a wide range of software and
hardware for digital media production, management and distribution. Digital
media are video, audio or graphic elements in which the image, sound or picture
is recorded and stored as digital values, as opposed to analog, or tape-based,
signals. Our diverse range of product and service offerings enables customers
to "Make, Manage and Move Media."
Make Media. Our Video and Film Editing and Effects ("Video") segment
offers digital, non-linear video and film editing systems and 3D and special
effects software that enable users to manipulate moving pictures and sound in a
faster, easier, more creative, and more cost-effective manner than using
traditional analog tape-based systems. Non-linear systems allow editors to
access material instantaneously rather than requiring them to work sequentially.
Our Professional Audio ("Audio") segment, Digidesign, offers digital audio
software applications and hardware systems for music, film, television, video,
broadcast, streaming media, and web development. These systems are based upon
proprietary Digidesign/Avid audio hardware, software, and control surfaces, and
allow users to record, edit, mix, process, and master audio in an integrated
manner.
Manage Media. We provide complete network, storage, and database
solutions based on our Avid Unity MediaNetwork technology. This technology
enables users to simultaneously share and manage media assets throughout a
project or organization. The ability to effectively manage digital media assets
is a critical component of success for many broadcast and media companies with
multiple nonlinear editing workstations in a range of geographic locations. As a
result, professionals can collaborate seamlessly on all production elements, and
streamline the process for cost-effectively delivering compelling media
experiences and quickly "re-purposing" or finding new uses or markets for media
assets.
Move Media. We offer products that allow our customers to distribute
media over multiple platforms - including air, cable or satellite, or through
the Internet. In addition, we provide technology for playback directly to air
for broadcast television applications. Many of our products also support the
broadcast of streaming Internet video.
Our products are used worldwide in production and post-production
facilities; film studios; network, affiliate, independent and cable television
stations; recording studios; advertising agencies; government and educational
institutions; corporate communication departments; and game developers and
Internet professionals. Projects produced by our customers using our products
have been honored with Oscar(R), Emmy(R), and Grammy(R) awards, as well as a
host of other international awards. In addition, we have received numerous
awards for technical innovations, including Oscars, Emmys and a Grammy. (Oscar
is a registered trademark and service mark of the Academy of Motion Picture Arts
and Sciences. Emmy is a registered trademark of ATAS/NATAS. Grammy is a
registered trademark of The National Academy of Recording Arts and Sciences,
Inc.)
An important part of our strategy for the past few years has included
expanding and enhancing our product lines and increasing revenues through both
acquisitions and internal development of products. In January 2004, we acquired
Munich, Germany-based NXN Software AG ("NXN"), a leading provider of asset and
production management systems specifically targeted for the entertainment and
computer graphics industries. This acquisition expands Avid's offering in
digital asset management by enabling our film and video post-production,
broadcast, audio and 3D animation customers to leverage the workflow
capabilities of the NXN Alienbrain(R) product line. NXN has been integrated into
our Video segment. In August 2004, we completed the acquisition of Irwindale,
CA-based M-Audio, a leading provider of digital audio and MIDI solutions for
electronic musicians and audio professionals. We have integrated M-Audio into
our Audio segment as a business within our Digidesign audio division, and will
market its line of audio products alongside Digidesign's digital audio
workstations for the professional and home/hobbyist markets. Finally, in
September 2004, we acquired Avid Nordic AB, a Sweden-based reseller of Avid
products operating in the Nordic and Benelux regions of Europe. This acquisition
allows us to directly serve customers in this region.
In April 2004, we introduced two new audio control surfaces as part of
our Digidesign Pro Tools audio product line. D-Control is a high-end, expandable
control surface offering instant access to a large number of mixing parameters
while mixing or recording audio. Together with the Pro Tools|HD system,
D-Control is the basis of the ICON audio production system. Digidesign Command|8
is a semi-professional, small-format control surface which can be used with
13
Digidesign Pro Tools|HD, Pro Tools LE, and Avid Media Composer systems. Both
control surfaces include integrated, high-quality audio monitoring.
In June 2004, we introduced Avid Xpress Studio Complete and Avid Xpress
Studio Essentials, end-to-end content creation suites for DV professionals. Avid
Xpress Studio fully integrates Avid Xpress Pro video editing, Avid Pro Tools LE
audio production, Avid 3D animation, Avid FX compositing and titling, and Avid
DVD authoring software, and offers a choice of Digidesign Mbox or Digidesign 002
and Avid Mojo hardware for tactile audio control and expanded video I/O. Avid
Xpress Studio suites deliver best-of-breed software, hardware, and
interoperability at an affordable price.
Also introduced in June 2004, SOFTIMAGE|XSI(R) version 4.0 is the
latest release of the industry-leading non-linear 3-D production environment.
Version 4.0 delivers advanced toolsets, performance enhancements, and
significant advancements to the core architecture of the software, including new
customization, project management, and workgroup capabilities. To bring
Softimage's professional animation software to a wider audience, the new version
is available in three distinct configurations: XSI Advanced, XSI Essentials, and
the new entry-level, very affordable XSI Foundation.
In 2004, with the introduction of Avid DNxHD technology, we continued
to expand our technology leadership in combining high-quality video and
efficient file sizes. Avid DNxHD encoding delivers 8- and 10-bit
mastering-quality, high-definition (HD) images at bandwidths normally associated
with uncompressed, standard-definition (SD) media. High-efficiency Avid DNxHD
formats enable real-time HD collaboration using today's Avid Unity MediaNetwork
shared storage environments, supporting workflows for HD that postproduction and
broadcast professionals have come to expect for SD. Avid DNxHD technology made
its debut with the September 2004 release of Avid DS Nitris version 7.5,
expanding the capabilities of Avid's high-performance finishing and mastering
system.
In April 2003, we introduced a new family of products based on our
Digital Nonlinear Accelerator (Avid DNA) architecture: a powerful series of
computer hardware products engineered specifically for media processing. When
paired with our industry-leading nonlinear editing software, the Avid DNA family
enables professionals to achieve real-time functionality and superior image and
sound quality when capturing, editing, finishing, and outputting DV, SD, and HD
video formats. The Avid DNA family includes the Media Composer Adrenaline and
Avid NewsCutter Adrenaline FX systems, both of which began shipping in the
second quarter of 2003, and the Avid Xpress Pro and Avid Mojo software/hardware
tandem, which began shipping in the third quarter of 2003. The Avid Media
Composer Adrenaline system leverages the key features of its predecessors and
offers improved quality, speed, and performance in high-pressure, time-sensitive
television and film production environments. The Avid NewsCutter Adrenaline FX
system expands news editing capabilities by offering speed, reliability, and a
range of professional news-focused editing and workflow features in a turnkey
PC-based platform. Avid Xpress Pro software and Avid Mojo hardware deliver
professional video, film, and audio editing capabilities--including automatic
color correction and real-time digital and analog output, and are qualified to
run on a wide range of Windows-based CPUs as well as on the Power Mac G5
platform. The Avid DNA family also includes the Avid DS Nitris system, which
began shipping in the fourth quarter of 2003. The Avid DS Nitris product is a
powerful, high-resolution finishing workstation offering real-time effects and
color correction.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in
conformity with U.S. generally accepted accounting principles and the Company's
discussion and analysis of its financial condition and results of operations
requires the Company's management to make judgments, assumptions, and estimates
that affect the amounts reported in its consolidated financial statements and
accompanying notes. Note 1 of the Notes to Consolidated Financial Statements in
the Company's 2003 Form 10-K describes the significant accounting policies and
methods used in the preparation of the Company's consolidated financial
statements. Management bases its estimates on historical experience and on
various other assumptions that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities. Actual results may differ from
these estimates.
Management believes the Company's critical accounting policies are
those related to revenue recognition and allowances for product returns and
exchanges, allowance for bad debts and reserves for recourse under financing
transactions, inventories and income taxes. Management believes these policies
to be critical because they are both important to the portrayal of the Company's
financial condition and results of operations, and they require management to
make judgments and estimates about matters that are inherently uncertain.
Additional information about these critical accounting policies may by found in
14
the Company's 2003 Form 10-K in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," under the heading "Critical
Accounting Policies and Estimates."
RESULTS OF OPERATIONS
Net Revenues
Our net revenues are derived mainly from the sales of computer-based
digital, nonlinear media editing systems and average selling prices include the
impact of price changes, discounting and mix (higher or lower-end) of products
sold. Average selling prices also include the impact of related peripherals,
licensing of related software, and sales of related software maintenance
contracts. This market has been, and we expect it to continue to be, highly
competitive. A significant portion of these revenues is generated by sales near
the end of each quarter, which can impact our ability to accurately forecast
revenues on a quarterly basis. Increasingly, revenues are also being derived
from sales of "solutions" encompassing multiple products and networking
capabilities that enable users to share and manage media throughout a project or
organization. Such solution sales may include training and installation
services, as well as workflow management assistance, to be provided by us or a
third party. Depending upon the complexity of the arrangement and the level of
our involvement, the revenues resulting from these solution sales may be
deferred for one or more quarters while the services are being performed.
Net revenues increased by $28.3 million (23.8%) to $147.4 million for
the quarter ended September 30, 2004 from $119.1 million for the same quarter in
2003. Revenues in our Video business increased $8.9 million or 10.3%, while
revenues in our Audio business grew by $19.4 million or 59.8%. The growth in the
Video business reflects increased sales volume of our products, specifically the
Avid DNA family of products released in the second through fourth quarters of
2003 as well as increased service revenues. Revenue growth in our Audio segment
primarily reflects increased sales volume of our products including the ProTools
TDM product family and products sold into the Pro Tools LE home/hobbyist market.
The Audio segment revenue increase also includes the impact of the acquisition
of M-Audio in the current quarter. Revenue growth in both segments was also
helped by higher average selling prices in 2004 as compared to 2003. Average
selling prices include the impact of price changes, discounting and mix (higher
or lower-end) of products sold. Average selling prices also include the impact
of related peripherals, licensing of related software, and sales of related
software maintenance contracts. Foreign currency exchange rate changes had a
favorable impact on both segments in 2004 compared to 2003.
Net revenues increased by $70.0 million (20.3%) to $414.6 million for
the nine months ended September 30, 2004 from $344.6 million for the nine months
ended September 30, 2003. Revenues in our Video business increased $40.6 million
or 16.7%, while revenues in our Audio business grew by $29.5 million or 29.1%.
The growth in both segments is due to the factors mentioned above.
Net revenues derived through indirect channels were approximately 69%
and 73% of net revenues for the quarters ended September 30, 2004 and 2003,
respectively. Indirect channel revenues were approximately 72% and 74% of net
revenues for the nine-month periods ended September 30, 2004 and 2003,
respectively. We generally sell directly to our broadcast customers and expect
this will be an area of potential revenue growth in the future.
Sales in the Americas (North and South America) have typically
accounted for approximately 55% of our consolidated net revenues, with sales in
Europe and Asia Pacific represent the remaining 45%. However, the relative
percentages of sales among the regions can vary based on, among other things,
the impact of currency exchange rate fluctuations on revenues, the timing of
revenue recognition of solutions sales, and local economic conditions.
Sales in the Americas accounted for 54% of our third quarter 2004 and
2003 net revenues. For the nine-month periods ended September 30, 2004 and 2003,
sales in the Americas accounted for 55% and 56% of net revenues, respectively.
For the three- and nine-month periods ended September 30, 2004, Americas sales
increased by approximately $15.0 million or 23.2% and $34.5 million or 18.0%,
respectively, compared to the same periods in 2003.
Sales in the Europe and Asia Pacific regions accounted for 46% of our
third quarter 2004 and 2003 net revenues. For the nine-month periods ended
September 30, 2004 and 2003, sales in the Europe and Asia Pacific regions
accounted for 45% and 44% of net revenues, respectively. For the three- and
nine-month periods ended September 30, 2004, Europe and Asia Pacific regions
sales increased by approximately $13.3 million or 24.4% and $35.6 million or
15
23.3%, respectively, compared to the same periods in 2003, with the impact of
currency translation being a favorable factor, particularly in Europe.
Gross Profit
Costs of revenues consists primarily of costs associated with the
procurement of components; post-sales customer support costs related to
maintenance contract revenue and other services; the assembly, testing, and
distribution of finished products; warehousing; and royalties for third-party
software included in our products. The resulting gross margin fluctuates based
on factors such as the mix of products sold, the cost and proportion of
third-party hardware and software included in the systems sold, the offering of
product upgrades, price discounts and other sales promotion programs, the
distribution channels through which products are sold, the timing of new product
introductions, sales of aftermarket hardware products such as disk drives, and
currency exchange rate fluctuations.
Our gross margin increased to 57.4% in the third quarter of 2004 from
55.7% for the same period of 2003. Margins in both segments improved with the
most significant factors being a favorable product mix in the Audio segment and
favorable overhead absorption in the Video segment due to higher revenue volume.
Additionally, there was a positive impact on revenue from currency exchange
rates with no material offsetting impact on costs of revenues as most of our
manufacturing costs are transacted in U.S. dollars.
Our gross margin increased to 57.1% for the nine months ended September
30, 2004 from 54.8% for the same period in 2003. Margins in both the Video and
Audio segments improved, with the most significant factors being due to the
factors mentioned above.
Research and Development
Research and development expenses increased by $3.1 million (14.8%) in
the third quarter of 2004 compared to the same period in 2003 and increased by
$5.2 million (8.1%) for the nine months ended September 30, 2004 compared to the
same period in 2003. The increase in the three-month period ended September 30,
2004 was primarily the result of personnel-related expenses (in part due to the
acquisitions of NXN and M-Audio), partially offset by decreased spending on
computer supplies and hardware for the development of new products. The increase
in the nine-month period ended September 30, 2004 was primarily the result of
personnel related expenses (in part due to the acquisition of NXN and to a
lesser extent M-Audio), partially offset by decreased fees associated with
outsourcing certain engineering activities. Research and development expenses
decreased to 16.1% of net revenues in the third quarter of 2004 compared to
17.4% in the same quarter of 2003 and decreased to 16.6% of net revenues for the
nine months ended September 30, 2004 from 18.5% for the same period in 2003 due
to the increased revenue base.
Marketing and Selling
Marketing and selling expenses increased by $5.5 million (19.6%) in the
third quarter of 2004 compared to the same period in 2003 and increased by $16.0
million (19.7%) for the nine months ended September 30, 2004 compared to the
same period in 2003. The increase in both periods was primarily the result of
personnel-related expenses (in part due to the acquisition of NXN and M-Audio),
trade show and other marketing programs and increased travel expenses. The
increase in the nine-month period ended September 30, 2004 also included higher
net foreign exchange losses (specifically, transaction and re-measurement gains
and losses on net monetary assets denominated in foreign currencies, offset by
hedging gains and losses), which are included in marketing and selling expenses.
Marketing and selling expenses decreased to 22.7% of net revenues in the third
quarter of 2004 compared to 23.5% in the same quarter of 2003 and decreased to
23.4% of net revenues for the nine months ended September 30, 2004 from 23.5%
for the same period in 2003 due to the increased revenue base.
General and Administrative
General and administrative expenses increased by $1.7 million (30.3%)
in the third quarter of 2004 compared to the same period in 2003 and increased
by $2.8 million (17.0%) for the nine months ended September 30, 2004 compared to
the same period in 2003. The increase in both 2004 periods was primarily due to
higher personnel-related costs and to higher audit fees related to compliance
with the Sarbanes-Oxley Act of 2002. General and administrative expenses
increased to 5.0% of net revenues in the third quarter of 2004 compared to 4.8%
in the same quarter of 2003 due to the factors mentioned above and decreased to
16
4.7% from 4.8% of net revenues for the nine-month period ended September 30,
2004 due to the increased revenue base.
Restructuring and Other Costs, Net
In March 2003, we implemented a restructuring program under which 48
employees worldwide were terminated, and a leased facility in California was
vacated. In connection with these actions, during the first three months of 2003
we recorded a charge of $1.2 million for employee terminations and $0.6 million
for unutilized space in Santa Monica that included a write-off of leasehold
improvements of $0.4 million.
Amortization of Acquisition-Related Intangible Assets
In August 2004, we acquired M-Audio, a leading provider of digital
audio and MIDI solutions for electronic musicians and audio professionals, for
cash of $79.7 million and stock and stock options with a fair value of $96.5
million. As part of the purchase accounting allocation, we recorded $38.4
million of identifiable intangible assets, consisting of completed technologies,
customer relationships, a trade name and a non-compete covenant. The unamortized
balance of the identifiable intangible assets relating to this acquisition was
$37.9 million at September 30, 2004.
In September 2004, we acquired Avid Nordic AB for cash, net of cash
acquired, of Euro 6.1 million ($7.4 million). As part of the purchase price
allocation we recorded $4.7 million of identifiable intangible assets consisting
solely of customer relationships. The unamortized balance was $4.6 million at
September 30, 2004.
In January 2004, we acquired NXN Software AG, a leading provider of
asset and production management systems specifically targeted for the
entertainment and computer graphics industries, for cash consideration of
(euro)35 million ($43.7 million). As part of the purchase accounting allocation,
we recorded $7.2 million of identifiable intangible assets, consisting of
completed technologies, customer relationships and a trade name. The unamortized
balance of the identifiable intangible assets relating to this acquisition was
$6.3 million at September 30, 2004.
From 2000 to 2003, we recorded intangible assets as we acquired the
following companies or their assets: Rocket Network, Inc. and Bomb Factory
Digital, Inc. in 2003; iKnowledge, Inc. in 2002; iNews, LLC in 2001; and The
Motion Factory, Inc. in 2000. In connection with these acquisitions, we
allocated $7.6 million to identifiable intangible assets consisting of completed
technologies and work force, and $2.2 million to goodwill. As of January 1,
2002, in connection with the adoption of SFAS 142, we reclassified $1.1 million
of a previously recorded assembled work force intangible to goodwill and, as a
result, ceased amortizing this amount. The unamortized balance of the
identifiable intangible assets relating to these acquisitions was $1.2 million
at September 30, 2004.
Included in the operating results for the quarters ended September 30,
2004 and 2003 is amortization for all of these intangible assets of $1.1 million
and $0.3 million, respectively; the nine-month periods ended September 30, 2004
and 2003 include amortization of $2.1 million and $1.0 million, respectively.
The increased levels of amortization primarily reflect the addition of the
M-Audio assets acquired in August 2004 and the NXN assets acquired in January
2004.
Other Income, Net
Other income, net generally consists of interest income and interest
expense. Other income (expense), net for the third quarter of 2004 increased
$0.1 million to $0.7 million compared to $0.6 million for the third quarter of
2003. The increase was primarily due to higher interest income, partially off by
higher interest expense in the 2004 period. For the nine-month period ended
September 30, 2004, other income, net decreased $0.6 million, from $1.3 million
to $0.7 million, as compared to the same period in 2003. The decrease was
primarily due to a charge in the first quarter of 2004 of $1.1 million related
to reaching a pending settlement of a lawsuit, partially offset by higher
interest income earned on higher average cash, cash equivalents, and marketable
securities balances.
Provision for Income Taxes
We recorded a net tax benefit of approximately $(0.1) million, and a
tax provision of $0.3 million for the quarters ended September 30, 2004 and
2003, respectively. The net tax benefit for the quarter ended September 30, 2004
includes an adjustment for refunds of approximately $0.2 million of taxes
previously paid in Canada. Other than this refund, the tax provision for all
17
periods presented was substantially comprised of taxes payable by our foreign
subsidiaries with only alternative minimum tax provided on anticipated U.S.
taxable profits.
The tax provisions for the nine-month periods ending September 30, 2004
and 2003 were $0.1 million and $0.9 million, respectively. The lower tax
provision in the first nine months of 2004 reflects a first-quarter reversal of
a $1.2 million tax reserve resulting from the expiration of the statute of
limitation on that reserve item and the third-quarter above mentioned refund.
Other than these adjustments, the tax provision for all periods presented was
substantially comprised of taxes payable by our foreign subsidiaries with only
alternative minimum tax provided on anticipated U.S. taxable profits.
The tax provision in each quarter is significantly affected by net
changes in the valuation allowance against our deferred tax assets. Regular
federal income taxes resulting from anticipated U.S. profits have been offset by
the utilization of deductions from acquisition-related temporary differences and
net operating loss carry-forwards; the tax provision benefit of utilizing these
items results from the corresponding net reduction in the valuation allowance.
However, due to the remaining level of deferred tax assets and the level of
related historical taxable income, we have determined that the uncertainty
regarding the realization of these remaining assets is sufficient to warrant the
continued establishment of a valuation allowance against nearly all of our
deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date through both private and public
sales of equity securities, including stock option exercises from our employee
stock plans, as well as through cash flows from operations. As of September 30,
2004, our principal sources of liquidity included cash, cash equivalents and
marketable securities totaling $120.1 million.
With respect to cash flow, net cash provided by operating activities
was $57.1 million for the nine months ended September 30, 2004 compared to $40.7
million for the same period in 2003. During the nine months ended September 30,
2004, net cash provided by operating activities primarily reflects net income
adjusted for depreciation and amortization as well as increases in accounts
receivable, accounts payable and deferred revenue. During the nine months ended
September 30, 2003, net cash provided by operating activities primarily reflects
net income adjusted for depreciation and amortization as well as an increase in
deferred revenue and a decrease in accounts receivable, partially offset by a
decrease in accounts payable.
At September 30, 2004 and December 31, 2003, we held inventory in the
amounts of $54.9 million and $38.3 million, respectively. These balances include
stockroom, spares, and demonstration equipment inventories at various locations,
and inventory at customer sites related to shipments for which we have not yet
recognized revenue. The increase in the current quarter reflects primarily the
acquisitions of M-Audio and Avid Nordic AB. We review all inventory balances
regularly for excess quantities or potential obsolescence and make appropriate
adjustments to write-down the inventories to reflect their estimated realizable
value.
Accounts receivable increased by $25.2 million to $94.4 million at
September 30, 2004 from $69.2 million at December 31, 2003, driven primarily by
the year-over-year increase in net revenues but also to the acquisition of
M-Audio. These balances are net of allowances for sales returns, bad debts and
customer rebates, all of which we estimate and record based on historical
experience. Days sales outstanding in accounts receivable increased from 49 days
at December 31, 2003 to 58 days at September 30, 2004. The increase in days
sales outstanding is primarily attributable to the timing of shipments during
the quarter and an increase in deferred maintenance contract billings for which
revenue is recognized ratably in future quarters.
Net cash flow used in investing activities was $129.8 million for the
nine-month period ending September 30, 2004 compared to $53.1 million for the
same period in 2003. During the nine-month period ended September 30, 2004, we
paid cash of $134.2 million for the purchases of NXN, M-Audio and Avid Nordic
AB, net of cash acquired. Also, a payment of $1.0 million for our 2003
acquisition of Bomb Factory Digital was made in early 2004, after resolution of
acquisition-related contingencies, with the final payments totaling $0.4 million
due through December 2004. We purchased $9.8 million of property and equipment
during the nine months ended September 30, 2004 compared to $4.6 million in the
same period of 2003. Purchases of property and equipment in both 2004 and 2003
were primarily of computer hardware and software to support research and
development activities and our information systems. Our full year capital
spending for 2004 is currently expected to be about $12.0 million, including
purchases of hardware and software to support activities in the research and
development, information systems and manufacturing areas, as well as for
facilities renovations.
18
During the nine months ended September 30, 2004 and 2003, we generated
cash of $13.2 million and $44.9 million, respectively, from the issuance of
common stock related to the exercise of stock options and our employee stock
purchase plan.
In connection with restructuring efforts during 2001 and prior periods,
as well as with the identification in 2003 and 2002 of excess space in various
locations, we also have cash obligations of approximately $15.4 million under
leases for which we have vacated the underlying facilities. We have an
associated restructuring accrual of $3.8 million at September 30, 2004
representing the excess of our lease commitments on space no longer used by us
over expected payments to be received on subleases of such facilities. These
payments will be made over the remaining terms of the leases, which have varying
expiration dates through 2010, unless we are able to negotiate an earlier
termination. All restructuring related payments will be funded through working
capital.
Our cash requirements vary depending upon factors such as our planned
growth, capital expenditures, the possible acquisition of businesses or
technologies complementary to our business and obligations under past
restructuring programs. We believe our existing cash, cash equivalents,
marketable securities and funds generated from operations will be sufficient to
meet our operating cash requirements for at least the next twelve months. In the
event we require additional financing, we believe that we will be able to obtain
such financing; however, there can be no assurance that we would be successful
in doing so, or that we could do so on favorable terms.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 150, "Accounting For Certain Financial Instruments with
Characteristics of Both Liabilities and Equity", which establishes standards for
how an issuer of financial instruments classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances) if, at inception, the monetary
value of the obligation is based solely or predominantly on a fixed monetary
amount known at inception, variations in something other than the fair value of
the issuer's equity shares or variations inversely related to changes in the
fair value of the issuer's equity shares. This Statement is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. On November 7, 2003, the FASB deferred the classification and
measurement provisions of SFAS No. 150 as they apply to certain mandatory
redeemable non-controlling interests. This deferral is expected to remain in
effect while these provisions are further evaluated by the FASB. The Company has
not entered into or modified any financial instruments covered by this statement
after May 31, 2003 and the application of this standard is not expected to have
a material impact on the Company's financial position or results of operations.
On October 13, 2004, the FASB concluded that Statement of Financial
Accounting Standards No. 123R, "Share-Based Payment" ("Statement 123R"), which
would require all companies to measure compensation cost for all share-based
payments (including employee stock options) at fair value, would be effective
for public companies (except small business issuer as defined in SEC Regulation
S-B) for interim or annual periods beginning after June 15, 2005. Retroactive
application of the requirements of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," ("Statement 123"), not
Statement 123R, to the beginning of the fiscal year that includes the effective
date would be permitted, but not required. Note 5 - "Accounting for Stock Based
compensation" sets forth the pro forma effect on net income and earnings per
share assuming Avid had applied the fair value recognition provisions of
Statement 123. The retroactive provisions permitted under this conclusion will
not impact Avid since the first interim period that Statement 123R will be
effective for Avid will be the third quarter of 2005.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Some of the statements in this Form 10-Q relating to our future
performance constitute forward-looking statements. Such forward-looking
statements are based upon management's current expectations and involve known
and unknown risks. Realization of any of these risks may cause actual results to
differ materially from the results described in the forward-looking statements.
Certain of these risks are as follows:
Our performance will depend in part on continued market acceptance of our new
digital nonlinear editing products.
We recently introduced several new digital non-linear products based on
our Digital Nonlinear Accelerator architecture, including our next-generation
Media Composer (Media Composer Adrenaline) and NewsCutter (NewsCutter
Adrenaline) systems, as well as Avid Xpress Pro with Avid Mojo and Avid DS
Nitris hardware. We will need to continue to focus marketing and sales efforts
on educating potential customers and our resellers about the uses and benefits
of these products. The future success of certain of these products, such as Avid
DS Nitris, which enable high-definition production, will also depend on consumer
demand for appliances, such as television sets and monitors, that utilize the
high definition standard. In addition, there are several other risks involved
with offering new products in general, including, without limitation, the
possibility of defects or errors, failure to meet customer expectations, delays
in shipping new products and the introduction of similar products by our
competitors. At the same time, the introduction and transition to new products
could have a negative impact on the market for our existing products, which
could adversely affect our revenues and business.
The broadcast market is large, widely dispersed, and highly competitive, and we
may not be successful in growing our customer base or predicting customer demand
in this market.
We are currently building our presence in the digital broadcast market
and have augmented our NewsCutter product offering with the Avid Unity for News
products, and the server, newsroom, and browser products obtained in the Pluto
and iNews acquisitions. The broadcast market is distinguished from our
traditional video business in that turnkey, fully integrated, complex solutions
(including the configuration of unique workflows), rather than discrete point
products, are frequently required by the customer. Success in this market will
require, among other things, creating compelling solutions and developing a
strong, loyal customer base.
In addition, large, complex broadcast orders often require us to devote
significant sales, engineering, manufacturing, installation, and support
resources to ensure their successful and timely fulfillment. As the broadcast
market converts from analog to digital, our strategy has been to build our
broadcast solutions team in response to customer demand. To the extent that
customer demand for our broadcast solutions exceeds our expectations, we may
encounter difficulties in the short run meeting our customers' needs. Meanwhile,
our competitors may devote greater resources to the broadcast market than we do,
or may be able to leverage their market presence more effectively. If we are
unsuccessful in capturing and maintaining a share of this digital broadcast
market or in predicting and satisfying customer demand, our business and
revenues could be adversely affected.
Our revenues are becoming increasingly dependent on sales of large, complex
solutions.
We expect sales of large, complex solutions to continue to constitute a
material portion of our net revenue, particularly as news stations convert from
analog, or tape-based, processes to digital formats. Our quarterly and annual
revenues could fluctuate significantly if:
o sales to one or more of our customers are delayed or are not completed
within a given quarter;
o the contract terms preclude us from recognizing revenue during that quarter;
o news stations' migrations from analog processes to digital formats slows
down;
o we are unable to complete complex customer installations on schedule;
o our customers reduce their capital investments in our products in response
to slowing economic growth; and
o any of our large customers terminate their relationship with us or
significantly reduce the amount of business they do with us.
20
Our products are complex, and may contain errors or defects resulting from such
complexity.
As we continue to expand our product offerings to include not only point
products but also end-to-end solutions, our products have grown increasingly
complex and, despite extensive testing and quality control, may contain errors
or defects. Such errors or defects could cause us to issue corrective releases
and could result in loss of revenues, delay of revenue recognition, increased
product returns, lack of market acceptance, and damage to our reputation.
The markets for our products are competitive, and we expect competition to
intensify in the future.
The digital video, audio, and 3D markets are highly competitive, with
limited barriers to entry, and are characterized by pressure to reduce prices,
incorporate new features, and accelerate the release of new products. Some of
our current and potential competitors have substantially greater financial,
technical, distribution, support, and marketing resources than we do. Such
competitors may use these resources to lower their product costs, allowing them
to reduce prices to levels at which we could not operate profitably. Delays or
difficulties in product development and introduction may also harm our business.
If we are unable to compete effectively in our target markets, our business and
results of operations could suffer.
In addition to price, our products must also compete favorably with our
competitors' products in terms of reliability, performance, ease of use, range
of features, product enhancements, reputation and training.
New product announcements by our competitors and by us also could have
the effect of reducing customer demand for our existing products. New product
introductions also require us to devote time and resources to training our sales
channels in product features and target customers, with the temporary result
that the sales channels have less time to devote to selling our products.
We have a significant share of the professional audio market, and therefore
growth in this market will depend in part on our ability to successfully
introduce new products or expand into new distribution channels.
Products from our Digidesign division have captured a significant
portion of the professional audio market, due in large part to a series of
successful product introductions. Our future success will depend in part upon
our ability to offer, on a timely and cost-effective basis, new audio products
and enhancements of our existing audio products. This can be a complex and
uncertain process, and we could experience design, manufacturing, marketing, or
other difficulties that delay or prevent the introduction of new or enhanced
products, or the integration of acquired products, which, in turn, could harm
our business.
At M-Audio, revenue has historically been derived from sales through
the same or similar channels as Digidesign. However, M-Audio is currently
expanding its sales channel to include sales through the broader consumer market
channel. While we are not anticipating that a significant portion of our
revenues will come through this channel in the near term, our overall experience
addressing the consumer market channel is limited, and there are some costs
related to pursuing the consumer market channel which are, to a certain extent,
fixed. As a result, we may be unable to adjust our spending in a timely manner
to compensate for any unexpected revenue shortfall from this channel, which
could harm our operating results.
When we acquire other companies or businesses, we become subject to risks that
could hurt our business.
We periodically acquire businesses and form strategic alliances. For
example, and in January 2004, we acquired NXN Software AG, a company that
manufactures asset and production management systems specifically targeted for
the entertainment and computer graphics industries, and in August 2004, we
acquired Midiman, Inc. (d/b/a M-Audio), a leading provider of digital audio and
MIDI solutions for electronic musicians and audio professionals. The risks
associated with such acquisitions, alliances, and investments include, among
others:
o the difficulty of assimilating the operations, policies and personnel of the
target companies;
o the failure to realize anticipated returns on investment, cost savings and
synergies;
o the diversion of management's time and attention;
o the dilution existing stockholders may experience if we decide to issue
shares of our common stock or other rights to purchase our common stock as
consideration in the acquisition in lieu of cash;
o the potential loss of key employees of the target company;
21
o the difficulty in complying with a variety of foreign laws;
o the impairment of relationships with customers or suppliers of the target
company or our customers or suppliers; and
o unidentified issues not
discovered in our due diligence process, including product quality issues
and legal contingencies.
Such acquisitions, alliances, and investments often involve significant
transaction-related costs and could cause short-term disruption to normal
operations. In the future we may also make debt or equity investments. If we are
unable to overcome or counter these risks, it could undermine our business and
lower our operating results.
Our use of independent firms and contractors to perform some of our product
development and manufacturing activities could expose us to risks that could
adversely impact our revenues.
Independent firms and contractors, some of whom are located in other
countries, perform some of our product development and manufacturing activities.
We generally own the software developed by these contractors. The use of
independent firms and contractors, especially those located abroad, could expose
us to risks related to governmental regulation (including tax regulation),
intellectual property ownership and rights, exchange rate fluctuation, political
instability and unrest, natural disasters, and other risks, which could
adversely impact our revenues.
An interruption of our supply of certain products or key components from our
sole source suppliers, or a price increase in such products or components, could
hurt our business.
We are dependent on a number of specific suppliers for certain products
and key components of our products. We purchase these sole source products and
components pursuant to purchase orders placed from time to time. We generally do
not carry significant inventories of these sole source products and components
and have no guaranteed supply arrangements. If any of our sole source vendors
should fail to produce such products or to supply or enhance such components, it
could imperil our supply and our ability to continue selling and servicing
products that use these components. Similarly, if any of our sole source vendors
should encounter technical, operating or financial difficulties, it could
threaten our supply of these products or components. While we believe that
alternative sources for these products and components could be developed, or our
products could be redesigned to permit the use of alternative components, an
interruption of our supply could damage our business and negatively affect our
operating results.
Our gross profit margin varies from product to product depending
primarily on the proportion and cost of third-party hardware included in each
product. From time to time, we add functionality and features to our products.
If we effect such additions through the use of more, or more costly, third-party
hardware, and are not able to increase the price of such products to offset
these increased costs, our gross profit margin on these products could decrease
and our operating results could be adversely affected.
Qualifying and supporting our products on multiple computer platforms is time
consuming and expensive.
Our software engineers devote significant time and effort to qualify and
support our products on various computer platforms, including most notably,
Microsoft and Apple platforms. Computer platform modifications and upgrades
require additional time to be spent to ensure that our products will function
properly. To the extent that the current configuration of the qualified and
supported platforms changes or we need to qualify and support new platforms, we
could be required to expend valuable engineering resources, which could
adversely affect our operating results.
Our operating results are dependent on several unpredictable factors.
The revenue and gross profit from our products depend on many factors,
including:
o mix of products sold;
o cost and proportion of third-party hardware included in such products;
o product distribution channels;
o acceptance of our new product introductions;
o product offers and platform upgrades;
o price discounts and sales promotion programs;
o volume of sales of aftermarket hardware products;
o costs of swapping or fixing products released to the market with defects;
22
o provisions for inventory obsolescence;
o competitive pressure on product prices;
o costs incurred in connection with "solution" sales, which typically have
longer selling and implementation cycles; and
o timing of delivery of "solutions" to customers.
Changes in any of these factors could affect our operating results.
Our operating results could be harmed by currency fluctuations.
We generally derive nearly half of our revenues from customers outside
of the United States. This business is, for the most part, transacted through
international subsidiaries and generally in the currency of the end-user
customers. Therefore, we are exposed to the risks that changes in foreign
currency could adversely impact our revenues, net income (loss), and cash flow.
To hedge against the foreign exchange exposure of certain forecasted
receivables, payables and cash balances of our foreign subsidiaries, we enter
into foreign currency forward-exchange contracts. We record gains, and losses
associated with currency rate exchanges on these contracts in results of
operations, offsetting gains and losses on the related assets and liabilities.
The success of this hedging program depends on forecasts of transaction activity
in the various currencies. To the extent that these forecasts are over- or
understated during the periods of currency volatility, we could experience
currency gains or losses.
Our operating costs are tied to projections of future revenues, which may differ
from actual results.
Our operating expense levels are based, in part, on our expectations of
future revenues. Such future revenues are difficult to predict. A significant
portion of our business occurs near the end of each quarter, which can impact
our ability to precisely forecast revenues on a quarterly basis. Further, we are
generally unable to reduce quarterly operating expense levels 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, our results of operations could be adversely
affected.
Poor global macroeconomic conditions could disproportionately impact our
industry.
In recent years, our customers in the media, broadcast and
content-creation industries delayed or reduced their expenditures in part
because of unsettled economic conditions. The revenue growth and profitability
of our business depends primarily on the overall demand for our products. If
global economic conditions worsen, demand for our products may weaken, and our
business and results of operations could suffer.
Terrorism, acts of war, and other catastrophic events may seriously harm our
business.
Terrorism, acts of war, or other catastrophic events may disrupt our
business and harm our employees, facilities, suppliers, distributors, resellers
or customers, which could significantly impact our revenue and operating
results. The increasing presence of these threats has created many economic and
political uncertainties that could adversely affect our business and stock price
in ways that cannot be predicted. We are predominantly uninsured for losses and
interruptions caused by terrorism, acts of war, and other conflicts and events.
If we fail to maintain strong relationships with our resellers, distributors,
and suppliers, our ability to successfully deploy our products may be harmed.
We sell many of our video products and services, and substantially all
of our audio products and services, indirectly through resellers and
distributors. The loss of one or more key distributors could reduce our
revenues. The resellers and distributors of our video segment products typically
purchase Avid software and Avid-specific hardware from us, and third-party
components from various other vendors, in order to produce complete systems for
resale. Any disruption to our resellers and distributors, or their third-party
suppliers, could reduce our revenues. Increasingly, we are distributing our
products directly, which could put us in competition with our resellers and
distributors and could adversely affect our revenues. In addition, our resellers
could diversify the manufacturers from whom they purchase products to sell to
the final end-users, which could lead to a weakening of our relationships with
our resellers and could adversely affect our revenues.
23
Most of the resellers and distributors of our video products are not
granted rights to return products after purchase, and actual product returns
from such resellers and distributors have been insignificant to date. However,
our revenue from sales of audio products is generally derived from transactions
with distributors and authorized resellers that typically allow limited rights
of return, inventory stock rotation and price protection. Accordingly, reserves
for estimated returns, exchanges and credits for price protection are provided,
as a reduction of revenues, upon shipment of the related products to such
distributors and resellers, based upon our historical experience. To date,
actual returns have not differed materially from management's estimates.
However, if returns of our audio segment products were to exceed estimated
levels, our revenues and operating results could be adversely impacted.
Our future growth could be harmed if we lose the services of our key personnel.
Our success depends upon the services of a number of key employees
including members of our executive team and those in certain technical
positions. The loss of the services of one or more of these key employees could
harm our business. Our success also depends upon our ability to attract highly
skilled new employees. Competition for such employees is intense in the
industries and geographic areas in which we operate. In the past, we have relied
on our ability to grant stock options as one mechanism for recruiting and
retaining highly skilled talent. Recent proposed accounting regulations
requiring the expensing of stock options may impair our future ability to
provide these incentives without incurring significant compensation costs. If we
are unable to compete successfully for our key employees, our business could
suffer.
Our websites could subject us to legal claims that could harm our business.
Some of our websites provide interactive information and services to our
customers. To the extent that materials may be posted on and/or downloaded from
these websites and distributed to others, we may be subject to claims for
defamation, negligence, copyright or trademark infringement, personal injury, or
other theories of liability based on the nature, content, publication or
distribution of such materials. In addition, although we have attempted to limit
our exposure by contract, we may also be subject to claims for indemnification
by end users in the event that the security of our websites is compromised. As
these websites are available on a worldwide basis, they could potentially be
subject to a wide variety of international laws.
Regulations could be enacted that restrict our Internet initiatives.
Federal, state, and international authorities may adopt new laws and
regulations governing the Internet, including laws and regulations covering
issues such as privacy, distribution, and content. For example, the European
Union has issued several directives regarding privacy and data protection,
including the Directive on Data Protection and the Directive on Privacy and
Electronic Communications. The enactment of legislation implementing such
directives by member countries is ongoing. The enactment of this and similar
legislation or regulations could impede the growth of the Internet, harm our
Internet initiatives, require changes in our sales and marketing practices and
place additional financial burdens on our business.
We could incur substantial costs protecting our intellectual property or
defending against a claim of infringement.
Our ability to compete successfully and achieve future revenue growth
depends, in part, on our ability to protect our proprietary technology and
operate without infringing upon the intellectual property rights of others. We
rely upon a combination of patent, copyright, trademark and trade secret laws,
confidentiality procedures, and contractual provisions, as well as required
hardware components and hardware security keys, to protect our proprietary
technology. However, our means of protecting our proprietary rights may not be
adequate. In addition, the laws of certain countries do not protect our
proprietary technology to the same extent as do the laws of the United States.
From time to time unauthorized parties have obtained, copied, and used
information that we consider proprietary. Policing the unauthorized use of our
proprietary technology is costly and time-consuming and we are unable to measure
the extent to which piracy of our software exists. We expect software piracy to
be a persistent problem.
We occasionally receive communications suggesting that our products may
infringe the intellectual property rights of others. It is our practice to
investigate the factual basis of such communications and negotiate licenses
where appropriate. While it may be necessary or desirable in the future to
obtain licenses relating to one or more products or relating to current or
future technologies, we may be unable to do so on commercially reasonable terms.
24
If we are unable to protect our proprietary technology or unable to negotiate
licenses for the use of others' intellectual property, our business could be
impaired.
We are currently involved in various legal proceedings, including
patent litigation. An adverse resolution of any such proceedings could harm our
business and reduce our results of operations. See Note I, "Commitments and
Contingencies" in our audited financial statements filed on Form 10-K.
Our association with industry organizations could subject us to litigation.
We are members of several industry organizations, trade associations
and standards consortia. Membership in these and similar groups could subject us
to litigation as a result of the group's activities. For example, in connection
with our anti-piracy program, designed to enforce copyright protection of our
software, we are a member of the Business Software Alliance (BSA). From time to
time the BSA undertakes litigation against suspected copyright infringers. These
lawsuits could lead to counterclaims alleging improper use of litigation or
violation of other local law. To date, none of these law suits or counterclaims
have had an adverse effect on our results of operations, but should we become
involved in material litigation, our cash flows or financial position could be
adversely effected.
The Sarbanes-Oxley Act of 2002 has caused our operating expenses to increase and
has put additional demands on our management.
The Sarbanes-Oxley Act of 2002 and newly enacted rules and regulations
of the Securities and Exchange Commission and the NASDAQ stock market impose new
duties on us and our executives, directors, attorneys and independent auditors.
In order to comply with the new legislation, we have had to hire additional
personnel and use additional outside legal, accounting and advisory services.
These actions have increased our operating expenses. In addition, the new
legislation has made some corporate actions more challenging, such as proposing
new or amendments to stock option plans, which now require stockholder approval,
or obtaining affordable director and officer liability insurance. The added
demands imposed by the new legislation may also make it more difficult for us to
attract and retain qualified executive officers, key personnel and members of
our board of directors.
If we experience problems with our third-party leasing program, our revenues
could be adversely impacted.
We have an established leasing program with a third party that allows
certain of our customers who choose to do so to finance their purchases. If this
program ended abruptly or unexpectedly, some of our customers might be unable to
purchase our products unless or until they were able to arrange for alternative
financing, and this could adversely impact our revenues.
Our stock price may continue to be volatile.
The market price of our common stock has experienced volatility in the
past and could continue to fluctuate substantially in the future based upon a
number of factors, most of which are beyond our control. These factors include:
o changes in our quarterly operating results;
o shortfalls in revenues or earnings compared to securities analysts'
expectations;
o changes in analysts' recommendations or projections;
o fluctuations in investors' perceptions of us or our competitors;
o shifts in the markets for our products;
o development and marketing of products by our competitors;
o changes in our relationships with suppliers, distributors, resellers, system
integrators, or customers; and
o global macroeconomic conditions.
Further, the stock market has experienced volatility with respect to the price
of equity securities of high technology companies generally, and this volatility
has, at times, appeared to be unrelated to or disproportionate to any of the
factors above.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk
Our primary exposures to market risk are financial, including the
effect of volatility in currencies on asset and liability positions and revenue
and operating expenses of our international subsidiaries that are denominated in
foreign currencies, and the effect of fluctuations in interest rates earned on
our cash equivalents and marketable securities.
Foreign Currency Exchange Risk
We generally derive nearly half of our revenues from customers outside
the United States. This business is, for the most part, transacted through
international subsidiaries and generally in the currency of the end-user
customers. Therefore, we are exposed to the risks that changes in foreign
currency could adversely impact our revenues, net income (loss) and cash flow.
To hedge against the foreign exchange exposure of certain forecasted
receivables, payables and cash balances of our foreign subsidiaries, we enter
into short-term foreign currency forward-exchange contracts. There are two
objectives of our foreign currency forward-exchange contract program: (1) to
offset any foreign exchange currency risk associated with cash receipts expected
to be received from our customers over the next 30 day period and (2) to offset
the impact of foreign currency exchange on the Company's net monetary assets
denominated in currencies other than the U.S. dollar. These forward-exchange
contracts typically mature within 30 days of purchase. We record gains and
losses associated with currency rate changes on these contracts in results of
operations, offsetting gains and losses on the related assets and liabilities.
The success of this hedging program depends on forecasts of transaction activity
in the various currencies. To the extent that these forecasts are over- or
understated during the periods of currency volatility, we could experience
unanticipated currency gains or losses.
For the three- and nine-month periods ended September 30, 2004, net
losses resulting from forward-exchange contracts of $0.8 million and $0.7
million, respectively, were included in results of operations, offset by net
transaction and re-measurement gains on the related asset and liabilities of
$0.6 million for the three-month period ended September 30, 2004 and net losses
on the related asset and liabilities of $0.7 million for the nine-month period
ended September 30, 2004. A hypothetical 10% change in foreign currency rates
would not have a material impact on our results of operations, assuming the
above-mentioned forecast of foreign currency exposure is accurate, because the
impact on the forward contracts as a result of a 10% change would at least
partially offset the impact on the asset and liability positions of our foreign
subsidiaries.
Interest Rate Risk
At September 30, 2004, we held $120.1 million in cash, cash equivalents
and marketable securities, including short-term U.S. and Canadian government and
government agency obligations. Marketable securities are classified as
"available for sale" and are recorded on the balance sheet at market value, with
any unrealized gain or loss recorded in other comprehensive income (loss). A
hypothetical 10% increase or decrease in interest rates would not have a
material impact on the fair market value of these instruments due to their short
maturity.
26
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures. Our management, with the participation of
our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2004. In
designing and evaluating our disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives,
and management necessarily applied its judgment in evaluating the cost-benefit
relationships of possible controls and procedures. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that, as of
September 30, 2004, our disclosure controls and procedures were (1) designed to
ensure that material information relating to us, including our consolidated
subsidiaries, is made known to our Chief Executive Officer and Chief Financial
Officer by others within those entities, particularly during the period in which
this report was being prepared and (2) effective, in that they provide
reasonable assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms.
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended September 30, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 11, 1996, Avid was named as a 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, upon Avid's motion, the suit was transferred to the
United States District Court for the Southern District of New York. The
complaint alleges infringement by Avid of U.S. patent number 4,258,385, and
seeks injunctive relief, treble damages, costs, and attorneys' fees. This patent
expired on May 15, 1999 and therefore, would not be applicable to the products
currently offered by Avid. Accordingly, potential damages, if any, are limited
to the period beginning March 11, 1990 (six years prior to this date of the
complaint) and ending May 15, 1999. In its answer to the complaint, the Company
asserted that it did not infringe the patent and that the patent is invalid.
Avid argued a Motion to Dismiss this claim on November 5, 2004 and is awaiting
the decision of the court. The Company is unable to quantify a range of loss in
this litigation. Combined Logic Company did not specify an alleged damage amount
in its complaint. As only limited discovery has been conducted to date by either
side in the eight years since Combined Logic Company filed its complaint, the
Company believes it does not have sufficient information to provide any
meaningful estimate of the possible range of damages that Combined Logic Company
might seek. The Company believes it has meritorious defenses to the complaint
and intends to contest it vigorously. However, an adverse resolution of this
litigation could have an adverse effect on the Company's consolidated financial
position or results of operations in the period in which the litigation is
resolved. No costs have been accrued for this possible loss contingency.
In March 1999, Avid and Tektronix, Inc. were sued by Glen Holly Entertainment,
Inc., a Tektronix distributor, claiming that Tektronix's discontinuance of the
Tektronix Lightworks product line was the result of a strategic alliance by
Tektronix and Avid. Glen Holly raised antitrust and common law claims against
Avid and Tektronix, and sought lost future profits, treble damages, attorneys'
fees, and interest. In March 2001, the United States District Court for the
District of California dismissed the anti-trust claims against both parties and
the remaining common law claim against the Company was dismissed by stipulation
and court order on April 6, 2001. Glen Holly subsequently appealed the lower
court's decision. On September 9, 2003, a three-judge panel of the U.S. Court of
Appeals for the Ninth Circuit reversed in part the lower court's dismissal and
sent the antitrust claims back to the lower court for further findings. Avid and
Tektronix filed a Petition for a rehearing by the three-judge panel and a
rehearing by the full Ninth Circuit on September 23, 2003. The Petition was
denied on December 12, 2003. On March 18, 2004, the Company entered into a
settlement agreement with Glen Holly whereby each party issued a general release
of all claims relating to the allegations made in this lawsuit. In consideration
of the settlement, Avid agreed to make a payment to Glen Holly of $1,050,000 and
accordingly, $985,000 was paid in March 2004 and the remaining $65,000 was paid
in April 2004. On March 19, 2004, Avid filed an application for determination of
good faith settlement with the U.S. District Court requesting that it determine
whether Tektronix had a right to contribution or indemnification from Avid
arising from claims asserted in the lawsuit. On June 17, 2004, the U.S. District
Court issued a ruling in which it determined that Tektronix had no such right.
On June 24, 2004, Glen Holly filed a stipulation of dismissal with the Court,
dismissing all claims alleged against the Company in this proceeding. On July
14, 2004, the court issued an order finding that the settlement agreement
between Avid and Glen Holly was entered into in good faith under applicable law.
ITEM 6. EXHIBITS
*10.1 Midiman Inc. 2002 Stock Option/Stock Issuance Plan
*#10.2 Form of Incentive Stock Option Agreement
*#10.3 Form of Nonstatutory Stock Option Agreement
*#10.4 Form of Restricted Stock Agreement
#10.5 1997 Stock Incentive Plan (incorporated by reference to the
Registrant's Proxy Statement as filed with the Commission on April 6,
1998, File No. 000-21174)
*31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
28
*31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
- ---------------------
* Documents filed herewith
# Management contract or compensatory plan
29
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: November 9, 2004 By: /s/ Paul J. Milbury
-----------------------
Paul J. Milbury
Chief Financial Officer
(Principal Financial Officer)
Date: November 9, 2004 By: /s/ Carol L. Reid
-------------------------
Carol L. Reid
Vice President and Corporate Controller
(Principal Accounting Officer)
30
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
*10.1 Midiman Inc. 2002 Stock Option/Stock Issuance Plan
*#10.2 Form of Incentive Stock Option Agreement
*#10.3 Form of Nonstatutory Stock Option Agreement
*#10.4 Form of Restricted Stock Agreement
#10.5 1997 Stock Incentive Plan (incorporated by reference to the
Registrant's Proxy Statement as filed with the Commission on April 6,
1998, File No. 000-21174)
*31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
- ---------------------
* Documents filed herewith
# Management contract or compensatory plan
31
Midiman, Inc.
2002 Stock Option/Stock Issuance Plan
Article 1
General Provisions
------------------
1.1. Purpose of the Plan.
This Plan is intended to promote the interests of the
Corporation by providing eligible persons, who are employed by or serving the
Corporation or any Parent or Subsidiary, with the opportunity to acquire a
proprietary interest, or otherwise increase their proprietary interest, in the
Corporation as an incentive for them to continue in such employ or service.
Capitalized terms herein shall have the meanings assigned to
such terms in the attached Appendix.
1.2. Structure of the Plan.
A. The Plan shall be divided into two separate equity
programs:
(i) the Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock, and
(ii) the Stock Issuance Program under which eligible
persons may, at the discretion of the Plan Administrator, be issued shares of
Common Stock directly, either through the immediate purchase of such shares or
as a bonus for services rendered the Corporation (or any Parent or Subsidiary).
B. The provisions of Articles 1 and 4 shall apply to both
equity programs under the Plan and shall govern the interests of all persons
under the Plan.
1.3. Administration of the Plan.
A. The Board shall administer the Plan. However, any or all
administrative functions otherwise exercisable by the Board may be delegated to
the Committee. Members of the Committee shall serve for such period of time as
the Board may determine and may be removed by the Board at any time. The Board
may also at any time terminate the functions of the Committee and reassume all
powers and authority previously delegated to the Committee.
B. The Plan Administrator shall have the authority (subject
to the provisions of the Plan) to establish such rules and procedures as it may
deem appropriate for proper administration of the Plan and to make such
determinations under, and issue such interpretations of, the Plan and any
outstanding options or stock issued under the Plan as it may deem necessary or
advisable. Decisions of the Plan Administrator shall be final and binding on all
parties who have an interest in the Plan or any option grant or stock issued
under the Plan.
C. The Plan Administrator shall have full authority to
determine:
(i) with respect to the grants made under the Option
Grant Program, which eligible persons are to receive such grants, the time or
times when those grants are to be made, the number of shares to be covered by
each such grant, the status of the option as either an Incentive Option or a
Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding, and
(ii) with respect to stock issuances made under the
Stock Issuance Program, which eligible persons are to receive such issuances,
the time or times when those issuances are to be made, the number of shares to
be issued to each Participant, the vesting schedule (if any) applicable to the
issued shares and the consideration to be paid by Participant for such shares.
Each option grant or stock issuance approved by the Plan Administrator shall be
evidenced by the appropriate documentation.
D. To the maximum extent permitted by law, the Corporation
shall indemnify each member of the Board who acts as the Plan Administrator, as
well as any other Employee of the Corporation with duties under the Plan,
against expenses and liabilities (including any amount paid in settlement)
reasonably incurred by the individual in connection with any claims against the
individual by reason of the performance of the individual's duties under the
Plan, unless the losses are due to the individual's gross negligence or lack of
good faith. The Corporation will have the right to select counsel and to control
the prosecution or defense of the suit. In the event that more than one person
who is entitled to indemnification is subject to the same claim, all such
persons shall be represented by a single counsel, unless such counsel advises
the Corporation in writing that he or she cannot represent all such persons
under applicable rules of professional responsibility. The Corporation will not
be required to indemnify any person for any amount incurred through any
settlement unless the Corporation consents in writing to the settlement.
1.4. Eligibility. The persons eligible to participate in the Plan are
as follows:
A. Employees,
B. members of the Board and the members of the board of
directors of any Parent or Subsidiary, and
C. independent contractors who provide services to the
Corporation (or any Parent or Subsidiary).
2
1.5. Stock subject to the Plan.
A. The shares of Common Stock issuable under the Plan shall
be shares of authorized but unissued or reacquired shares of Common Stock.
The maximum number of shares of Common Stock that may be issued and outstanding
or subject to options outstanding under the Plan shall not exceed 2,181,996
shares (Includes the increase of 666,396 shares approved by the Board and the
Stockholders of the Corporation as of March 22,2004.).
B. Shares of Common Stock subject to outstanding options
shall be available for subsequent issuance under the Plan to the extent (i) the
options expire or terminate for any reason prior to their being exercised in
full or (ii) the options are cancelled in accordance with the
cancellation-regrant provisions of Article 2. Unvested Shares issued under the
Plan and subsequently (1) cancelled or (2) repurchased by the Corporation, at a
price per share not greater than the option exercise or direct issue price paid
per share, pursuant to the Corporation's repurchase rights under the Plan shall
be added back to the number of shares of Common Stock reserved for issuance
under the Plan and shall accordingly be available for reissuance through one or
more subsequent option grants or direct stock issuances under the Plan.
C. Should any change be made to the Common Stock by reason
of any stock split, stock dividend, reverse stock split, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the maximum number
and/or class of securities issuable pursuant to the Plan and (ii) the number
and/or class of securities and the exercise price per share in effect under each
outstanding option in order to prevent the dilution or enlargement of benefits
thereunder. The adjustments determined by the Plan Administrator shall be final.
In no event shall any such adjustments be made in connection with the conversion
of one or more outstanding shares of the Corporation's preferred stock or
warrants into shares of Common Stock.
3
Article 2
Option Grant Program
--------------------
2.1. Exercise Price.
A. The Plan Administrator shall fix the exercise price per
share. However, (a) if the option is granted to a 10% Shareholder, the exercise
price per share must not be less than 110% of the Fair Market Value per share of
Common Stock on the date the option is granted, (b) if an Non-Statutory Option
is granted to an Optionee who is not a 10% Shareholder, the exercise price per
share must not be less than 85% of the Fair Market Value per share of Common
Stock on the date the option is granted and (c) if an Incentive Option is
granted to an Optionee who is not a 10% Shareholder, the exercise price per
share shall not be less than 100% of the Fair Market Value per share of Common
Stock on the date the option is granted.
B. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section 4.1 and
the documents evidencing the option, be payable in cash or check made payable to
the Corporation. Should the Common Stock be registered under Section 12 of the
Exchange Act at the time the option is exercised, then the exercise price (and
any applicable withholding taxes) may also be paid as follows:
(i) with shares of Common Stock held for the
requisite period, if any, necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(ii) to the extent the option is exercised for Vested
Shares, through a special sale and remittance procedure pursuant to which
Optionee shall concurrently provide irrevocable instructions to (1) a
Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable income and
employment taxes required to be withheld by the Corporation by reason of such
exercise and (2) the Corporation to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
2.2. Exercise and Term of Options. Each option shall be exercisable
at such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing the option. However, no option shall have a term in excess of ten
years measured from the date that the option is granted.
4
2.3. Effect of Termination of Service.
A. The following provisions shall govern the exercise of any
options granted to Optionee that are outstanding at the time Optionee's Service
ceases:
(i) Should Optionee's Service cease for any reason
other than death, Disability or Misconduct, then each option shall remain
exercisable until the close of business on the earlier of (a) the three month
anniversary of the date Optionee's Service ceased or (b) the termination of the
option.
( ii) Should Optionee's Service cease due to death or
Disability, then each option shall remain exercisable until the close of
business on the earlier of (a) the twelve month anniversary of the date
Optionee's Service ceased or (b) the termination of the option.
(iii) During the limited period of post-Service
exercisability, an option may only be exercised for Vested Shares. Following
Optionee's cessation of Service, no additional option shares shall vest, except
as otherwise specifically provided by the Plan Administrator in its sole
discretion pursuant to an written agreement with Optionee. Upon the expiration
of such limited exercise period or (if earlier) upon the termination of the
option, the options shall terminate and cease to be outstanding for any option
shares for which the options have not been exercised.
(iv) Should Optionee's Service be terminated for
Misconduct or should Optionee otherwise engage in Misconduct, then each
outstanding option granted to Optionee shall terminate immediately with respect
to all option shares.
B. Understanding that there may be adverse tax and
accounting consequences to doing so, the Plan Administrator shall have the
complete discretion, exercisable either at the time an option is granted or at
any time while Optionee remains in Service, to:
(i) extend the period of time for which the option
is to remain exercisable following Optionee's cessation of Service, but in no
event beyond the expiration of the option, and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the number of
Vested Shares for which such option is exercisable at the time of Optionee's
cessation of Service but also with respect to one or more additional
installments in which Optionee would have vested had Optionee continued in
Service.
2.4. Shareholder Rights. The holder of an option shall have no
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become the
holder of record of the purchased shares.
2.5. Unvested Shares. The Plan Administrator shall have the
discretion to grant options that are exercisable for Unvested Shares. Should
5
Optionee's Service cease while the shares issued upon the early exercise of
Optionee's option are still unvested, the Corporation shall have the right to
repurchase any or all of those Unvested Shares at a price per share equal to the
lower of (i) the exercise price paid per share or (ii) the Fair Market Value per
share on the date Optionee's Service ceased. Once the Corporation exercises its
repurchase right, Optionee shall have no further shareholder rights with respect
to those shares. The terms upon which such repurchase right shall be exercisable
(including the period and procedure for exercise and the appropriate vesting
schedule for the purchased shares) shall be established by the Plan
Administrator and set forth in the document evidencing such repurchase right.
Any repurchases must be made in compliance with the relevant provisions of
California law. The Plan Administrator may not impose a vesting schedule upon
any option grant or the shares of Common Stock subject to that option which is
more restrictive than 20% per year vesting, with the initial vesting to occur
not later than one year after the option is granted.
2.6. Limited Transferability of Options. An Incentive Option shall be
exercisable only by Optionee during his or her lifetime and shall not be
assignable or transferable other than by will or by the laws of inheritance
following Optionee's death. A Non-Statutory Option may be assigned in whole or
in part during Optionee's lifetime to one or more of Optionee's family members
(as defined in Rule 701 promulgated by the Securities and Exchange Commission)
or to Optionee's former spouse through a gift or domestic relations order. The
terms applicable to the assigned portion shall be the same as those in effect
for the option immediately prior to such assignment and shall be set forth in
such documents issued to the assignee as the Plan Administrator may deem
appropriate.
2.7. Incentive Options. The terms specified below shall be applicable
to all Incentive Options. Except as modified by the provisions of this Section
2.7, all the provisions of Articles 1, 2 and 4 shall be applicable to Incentive
Options. Options that are specifically designated as Non-Statutory Options are
not subject to the terms of this Section 2.7.
A. Eligibility. Incentive Options may only be granted to
Employees.
B. Dollar Limitation. The aggregate Fair Market Value of
the shares of Common Stock (determined as of the respective date or dates of
grant) for which one or more options granted to any Employee pursuant to the
Plan (or any other option plan of the Corporation or any Parent or Subsidiary)
may for the first time become exercisable as Incentive Options during any one
calendar year shall not exceed $100,000. To the extent that an Optionee's
options exceed that limit, they will be treated as Non-Statutory Options (but
all of the other provisions of the option shall remain applicable), with the
first options that were awarded to Optionee to be treated as Incentive Options.
C. Term of Option Granted to a 10% Shareholder. If any
Employee to whom an Incentive Option is granted is a 10% Shareholder, then the
option term shall not exceed five years measured from the date the option is
granted.
2.8. Change in Control.
6
A. The shares subject to each option outstanding under the
Plan at the time of a Change in Control shall automatically become Vested
Shares, and each such option shall, immediately prior to the effective date of
the Change in Control, become exercisable for all of the shares of Common Stock
at the time subject to that option. However, the shares subject to an
outstanding option shall not become Vested Shares on an accelerated basis if and
to the extent: (i) the option is to be assumed by the successor corporation (or
parent thereof) or otherwise to be continued in full force and effect pursuant
to the terms of the Change in Control transaction or (ii) the option is to be
replaced with a cash incentive program of any successor corporation (or parent
thereof) which preserves the spread existing on the Unvested Shares at the time
of the Change in Control and provides for subsequent payout of that spread no
later than the time Optionee would vest in those Unvested Shares or (iii) the
acceleration of the vesting of such option is subject to other limitations
imposed by the Plan Administrator.
B. All outstanding repurchase rights under the Option Grant
Program shall terminate automatically, and the shares of Common Stock subject to
those terminated rights shall immediately become Vested Shares, immediately
prior to the consummation of a Change in Control, except to the extent: (i)
those repurchase rights are to be assigned to the successor corporation (or
parent thereof) or are otherwise to be continued in full force and effect
pursuant to the terms of the Change in Control transaction, (ii) any property
(including cash payments) issued with respect to Unvested Shares is to be held
in escrow and released no later than as provided by the vesting schedule in
effect for the Unvested Shares pursuant to the Change in Control transaction or
(iii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator.
C. Immediately following the consummation of the Change in
Control, all outstanding options shall terminate, except to the extent assumed
by the successor corporation (or parent thereof) or otherwise continued in full
force and effect pursuant to the terms of the Change in Control transaction.
D. Each option that is assumed or otherwise continued in
effect in connection with a Change in Control shall be appropriately adjusted,
immediately after such Change in Control, to apply to the number and class of
securities which would have been issuable to Optionee in consummation of such
Change in Control, had the option been exercised immediately prior to such
Change in Control. Appropriate adjustments shall also be made to (i) the number
and class of securities available for issuance under the Plan following the
consummation of such Change in Control and (ii) the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same. To the extent the holders of
Common Stock receive cash consideration in whole or part for their Common Stock
in consummation of the Change in Control, the successor corporation may, in
connection with the assumption of the outstanding options under this Plan,
substitute one or more shares of its own common stock with a fair market value
equivalent to the cash consideration paid per share of Common Stock in such
Change in Control transaction.
E. Among its discretionary powers, the Plan Administrator
shall have the ability to structure an option (either at the time the option is
7
granted or at any time while the option remains outstanding) so that some or all
of the shares subject to that option shall automatically become Vested Shares
upon the occurrence of (i) a Change in Control, (ii) another specified event
and/or (iii) the Involuntary Termination of Optionee's Service within a
designated period of time following a specified event. In addition, the Plan
Administrator may provide that one or more of the Corporation's outstanding
repurchase rights with respect to some or all of the shares held by Optionee
shall terminate on an accelerated basis either upon (i) a Change in Control,
(ii) another specified event, and/or (iii) the Involuntary Termination of
Optionee's Service within a designated period of time following a specified
event, and the shares subject to those terminated rights shall become Vested
Shares at that time.
F. The portion of any Incentive Option accelerated in
connection with a Change in Control shall remain exercisable as an Incentive
Option only to the extent the $100,000 limitation set forth in Section 2.7(B)
is not exceeded. To the extent such dollar limitation is exceeded, the
accelerated portion of such option shall be exercisable as a Non-Statutory
Option under the federal tax laws.
2.9. Cancellation and Regrant of Options. The Plan Administrator
shall have the authority to effect, at any time and from time to time, with the
consent of the affected Optionees, the cancellation of any or all outstanding
options under the Plan and to grant in substitution therefor new options
covering the same or different number of shares of Common Stock.
8
Article 3
Stock Issuance Program
----------------------
3.1. Purchase Price.
A. The Plan Administrator shall fix the purchase price per
share. However, (i) if shares are issued under the Stock Issuance Program to a
10% Shareholder, then the purchase price per share shall not be less than 100%
of the Fair Market Value per share of Common Stock on the date of issuance or
(ii) if shares are issued under the Stock Issuance Program to a Participant who
is not a 10% Shareholder, then the purchase price per share shall not be less
than 85% of the Fair Market Value per share of Common Stock on the date of
issuance.
B. Shares of Common Stock may be issued pursuant to the
Stock Issuance Program for any of the following items of consideration which the
Plan Administrator may deem appropriate in each individual instance:
(i) cash or check made payable to the Corporation,
(ii) past services rendered to the Corporation (or
any Parent or Subsidiary), or
(iii) a promissory note to the extent permitted by
Section 4.1.
3.2. Vesting Provisions.
A. Shares of Common Stock issued pursuant to the Stock
Issuance Program may, in the discretion of the Plan Administrator, be Vested
Shares or may vest in one or more installments over Participant's period of
Service or upon attainment of specified performance objectives. Shares of Common
Stock may also be issued pursuant to the Stock Issuance Program pursuant to
awards that entitle the recipients to receive those shares upon the attainment
of designated performance goals or the satisfaction of specified Service
requirements. However, the Plan Administrator may not impose a vesting schedule
upon any shares of Common Stock issued under the Stock Issuance Program which is
more restrictive than 20% per year vesting, with the initial vesting to occur
not later than one year after the shares are issued.
B. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which
Participant may have the right to receive with respect to Participant's Unvested
Shares by reason of any stock dividend, stock split, reverse stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to Participant's Unvested Shares and shall be treated as
if they had been acquired on the same date as the Unvested Shares and (ii) such
9
escrow arrangements as the Plan Administrator shall deem appropriate.
C. Should Participant cease to remain in Service while one
or more Unvested Shares issued pursuant to the Stock Issuance Program are
outstanding or should the performance objectives not be attained with respect to
one or more such Unvested Shares, then the Corporation shall have the right to
repurchase the Unvested Shares at a price per share equal to the lower of (a)
the purchase price paid per share or (b) the Fair Market Value per share on the
date Participant's Service ceased or the performance objectives were not
attained. The terms upon which such repurchase right shall be exercisable shall
be established by the Plan Administrator and set forth in the document
evidencing such repurchase right. Any repurchase must be made in compliance with
the relevant provisions of California law.
D. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more Unvested Shares (or other assets
attributable thereto) which would otherwise occur upon the cessation of
Participant's Service or the non-attainment of the performance objectives
applicable to those shares. Such waiver may be effected at any time and shall
result in the immediate vesting of Participant's interest in the shares of
Common Stock as to which the waiver applies.
E. Outstanding share right awards granted pursuant to the
Stock Issuance Program shall automatically terminate, and no shares of Common
Stock shall actually be issued in satisfaction of those awards, if the
performance goals or Service requirements established for such awards are not
attained or satisfied. The Plan Administrator, however, shall have the
discretionary authority to issue shares of Common Stock under one or more
outstanding share right awards as to which the designated performance goals or
Service requirements have not been attained or satisfied.
3.3. Shareholder Rights. Subject to the terms of the Stock Issuance
Agreement, the Participant shall have full shareholder rights with respect to
any shares of Common Stock issued to Participant pursuant to the Stock Issuance
Program, whether or not Participant's interest in those shares is vested.
Accordingly, Participant shall have the right to vote such shares and to receive
any regular cash dividends paid on such shares. Cash dividends constitute
taxable compensation to Participant and are deductible by the Corporation
(unless Participant has made an election under Section 83(b) of the Code).
3.4. Change in Control.
A. Upon the occurrence of a Change in Control, all
outstanding repurchase rights under the Stock Issuance Program shall terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately become Vested Shares, except to the extent: (i) those
repurchase rights are assigned to the successor corporation (or parent thereof)
or are otherwise continue in full force and effect pursuant to the terms of the
transaction, (ii) the property (including cash payments) issued with respect to
the Unvested Shares is held in escrow and released no later than as provided by
the vesting schedule in effect for the Unvested Shares pursuant to the terms of
10
the Change in Control transaction, or (iii) such accelerated vesting is
precluded by other limitations imposed by the Plan Administrator.
B. The Plan Administrator shall have the discretionary
authority, exercisable either at the time the Unvested Shares are issued or any
time while the Corporation's repurchase rights with respect to those shares
remain outstanding, to provide that those rights shall automatically terminate
in whole or in part on an accelerated basis, and some or all of the shares of
Common Stock subject to those terminated rights shall immediately become Vested
Shares, upon the occurrence of a Change in Control or another specified event or
in the event that Participant's Service is Involuntarily Terminated within a
designated period of time following a specified event.
11
Article 4
Miscellaneous Matters
---------------------
4.1. Financing. The Plan Administrator may permit any Optionee or
Participant to pay the exercise price for shares subject to an option granted
under the Option Grant Program or the purchase price of shares issued under the
Stock Issuance Program by delivering a full-recourse, interest bearing
promissory note secured by the purchased shares and payable in one or more
installments. The Plan Administrator, after considering the potential adverse
tax and accounting consequences, shall set the remaining terms of the note.
However, any promissory note delivered by a consultant must be secured by
collateral in addition to the purchased shares of Common Stock. In no event may
the maximum credit available to Optionee or Participant exceed the sum of (A)
the aggregate option exercise price or purchase price payable for the purchased
shares plus (B) any applicable income and employment tax liability incurred by
Optionee or Participant in connection with the option exercise or share
purchase.
4.2. First Refusal Rights. The Corporation shall have the right of
first refusal with respect to any proposed disposition by Optionee or
Participant (or any successor in interest) of any shares of Common Stock issued
under the Plan. Such right of first refusal shall be exercisable and lapse in
accordance with the terms established by the Plan Administrator and set forth in
the document evidencing such right.
4.3. Tax Withholding. The Corporation's obligation to deliver shares
of Common Stock upon the exercise of any options granted under the Plan or upon
the issuance or vesting of any shares issued under the Plan shall be subject to
the satisfaction of all applicable income and employment tax withholding
requirements.
4.4. Share Escrow/Legends. Unvested Shares may, in the Plan
Administrator's discretion, be held in escrow by the Corporation until the
Unvested Shares vest or may be issued directly to Participant or Optionee with
restrictive legends on the certificates evidencing the fact that Participant or
Optionee does not have a vested right to them.
4.5. Effective Date and Term of Plan.
A. The Plan shall become effective when adopted by the
Board, but no option granted under the Plan may be exercised, and no shares
shall be issued under the Plan, until the Corporation's shareholders approve the
Plan. If such shareholder approval is not obtained within twelve months after
the date of the Board's adoption of the Plan, then all options previously
granted under the Plan shall terminate, and no further options shall be granted
and no shares shall be issued under the Plan. Subject to such limitation, the
Plan Administrator may grant options and issue shares under the Plan at any time
after the effective date of the Plan and before the date fixed herein for
termination of the Plan.
B. The Plan shall terminate upon the earlier of (i) the
expiration of the ten year period measured from the date the Plan is adopted by
the Board or (ii) termination by the Board. All options and unvested stock
12
issuances outstanding at the time of the termination of the Plan shall continue
in effect in accordance with the provisions of the documents evidencing those
options or issuances.
4.6. Amendment or Termination.
A. The Board shall have complete and exclusive power and
authority to amend or terminate the Plan or any awards made hereunder. However,
no such amendment or termination of the Plan shall adversely affect the rights
and obligations with respect to options or unvested stock issuances at the time
outstanding under the Plan unless Optionee or Participant consents to such
amendment or termination. In addition, certain amendments may require approval
of the Corporation's shareholders.
B. Although there may be adverse accounting consequences to
doing so, options may be granted under the Option Grant Program and shares may
be issued under the Stock Issuance Program which are in each instance in excess
of the number of shares of Common Stock then available for issuance under the
Plan, provided any excess shares actually issued under those programs shall be
held in escrow until there is obtained shareholder approval of an amendment
sufficiently increasing the number of shares of Common Stock available for
issuance under the Plan. If such shareholder approval is not obtained within
twelve months after the date the first such excess grants or issuances are made,
then (i) any unexercised options granted on the basis of such excess shares
shall terminate and (ii) the Corporation shall promptly refund to Optionees and
Participants the exercise or purchase price paid for any excess shares issued
under the Plan and held in escrow, together with interest (at the applicable
Short Term Federal Rate) for the period the shares were held in escrow, and such
shares shall thereupon be automatically cancelled.
4.7. Regulatory Approvals. The implementation of the Plan, the
granting of any options under the Plan and the issuance of any shares of Common
Stock (A) upon the exercise of any option or (B) pursuant to the Stock Issuance
Program shall be subject to the Corporation's procurement of all approvals and
permits required by regulatory authorities having jurisdiction over the Plan,
the options granted, and the shares of Common Stock issued, pursuant to it.
4.8. No Employment or Service Rights. Nothing in the Plan shall
confer upon Optionee or Participant any right to continue in Service for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Parent or Subsidiary employing or
retaining such person) or of Optionee or Participant, which rights are hereby
expressly reserved by each, to terminate such person's Service at any time for
any reason, with or without cause, unless the relationship is subject to an
employment agreement.
4.9. No Restraint. Neither the grant of options nor the issuance of
Common Stock under the Plan shall affect the right of the Corporation to
undertake any corporate action.
4.10. Use of Proceeds. Any cash proceeds received by the Corporation
from the sale of shares of Common Stock pursuant to the Plan shall be used for
any corporate purpose.
13
4.11. Financial Reports. The Corporation shall deliver a balance sheet
and an income statement at least annually to each individual holding an
outstanding option granted or shares issued under the Plan, unless such
individual is a key Employee whose duties in connection with the Corporation (or
any Parent or Subsidiary) assure such individual access to equivalent
information.
4.12. Share Reserve. The maximum number of shares of Common Stock that
may be issued over the term of the Plan together with the total number of shares
of Common Stock provided for under any stock bonus or similar plan of the
Corporation shall not exceed 30% of the then outstanding shares (on an as if
converted basis) of the Corporation unless a percentage higher than 30% is
approved by at least two-thirds of the outstanding shares of the Corporation
entitled to vote on such matter.
14
Appendix
--------
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
B. Change in Control shall mean a change in ownership or
control of the Corporation effected through any of the following transactions:
(i) a merger, consolidation or other reorganization
unless securities representing more than 50% of the total combined voting power
of the voting securities of the successor corporation are immediately thereafter
beneficially owned, directly or indirectly and in substantially the same
proportion, by the persons who beneficially owned the Corporation's outstanding
voting securities immediately prior to such transaction;
(ii) a sale, transfer or other disposition of all or
substantially all of the Corporation's assets; or
(iii) the acquisition, directly or indirectly, by any
person or related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common control
with, the Corporation), of beneficial ownership (within the meaning of
Rule 13-d3 of the Exchange Act) of securities possessing more than 50% of the
total combined voting power of the Corporation's outstanding securities from a
person or persons other than the Corporation.
In no event shall any public offering of the
Corporation's securities be deemed to constitute a Change in Control.
C. Code shall mean the Internal Revenue Code of 1986, as
amended.
D. Committee shall mean a committee of two or more Board
members appointed by the Board to exercise one or more administrative functions
under the Plan.
E. Common Stock shall mean the Corporation's common stock.
F. Corporation shall mean Midiman, Inc., a California
corporation, or the successor to all or substantially all of the assets or
voting stock of Midiman, Inc. which has assumed the Plan.
G. Disability shall mean the inability of Optionee or
Participant to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment that is expected to result
in death or has lasted or can be expected to last for a continuous period of
twelve months or more.
A-1
H. Employee shall mean an individual who is in the employ
of the Corporation (or any Parent or Subsidiary), subject to the control and
direction of the employer entity as to both the work to be performed and the
manner and method of performance.
I. Exchange Act shall mean the Securities Exchange Act of
1934, as amended.
J. Exercise Date shall mean the date on which the option
shall have been exercised in accordance with the applicable option
documentation.
K. Fair Market Value per share of Common Stock on any
relevant date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the
Nasdaq Stock Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq Stock
Market and published in The Wall Street Journal. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market Value
shall be the closing selling price on the last preceding date for which such
quotation exists.
(ii) If the Common Stock is at the time listed on any
stock exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the stock exchange
determined by the Plan Administrator to be the primary market for the Common
Stock, as such price is officially quoted in the composite tape of transactions
on such exchange and published in The Wall Street Journal. If there is no
closing selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last preceding date
for which such quotation exists.
(iii) If the Common Stock is at the time neither
listed on any stock exchange or the Nasdaq Stock Market, then the Fair Market
Value shall be determined by the Plan Administrator after taking into account
such factors as the Plan Administrator shall deem appropriate but shall be
determined without regard to any restrictions other than a restriction which,
by its term, will never lapse.
(iv) For purposes of same day sales, the Fair Market
Value shall be deemed to be the amount per share for which the shares of Common
Stock were sold.
L. Incentive Option shall mean an option that satisfies the
requirements of Code Section 422.
M. Involuntary Termination shall mean:
(i) such individual's involuntary dismissal or
discharge by the Corporation (or any Parent or Subsidiary) for reasons other
than Misconduct, or
(ii) such individual's voluntary resignation within
60 days following (a) a change in his or her position with the Corporation (or
any Parent or Subsidiary) which materially reduces his or her duties and
A-2
responsibilities, (b) a reduction in his or her base salary by more than 15%,
unless the base salaries of all similarly situated individuals are reduced by
the Corporation or any Parent or Subsidiary employing the individual, or (c) a
relocation of such individual's place of employment by more than fifty miles,
provided and only if such change, reduction or relocation is effected without
the individual's written consent.
N. Misconduct shall mean (i) the commission of any act of
fraud, embezzlement or dishonesty by Optionee or Participant, (ii)
any unauthorized use or disclosure by such person of confidential information or
trade secrets of the Corporation (or any Parent or Subsidiary), or (iii) any
other intentional misconduct by such person adversely affecting the business or
affairs of the Corporation (or any Parent or Subsidiary) in a material manner;
provided, however, that if the term or concept has been defined in an employment
agreement between the Corporation and Optionee or Participant, then Misconduct
shall have the definition set forth in such employment agreement. The foregoing
definition shall not in any way preclude or restrict the right of the
Corporation (or any Parent or Subsidiary) to discharge or dismiss any Optionee,
Participant or other person in the Service of the Corporation (or any Parent or
Subsidiary) for any other acts or omissions, but such other acts or omissions
shall not be deemed, for purposes of the Plan, to constitute grounds for
termination for Misconduct.
O. Non-Statutory Option shall mean an option that does not
qualify as an Incentive Option.
P. Option Grant Program shall mean the option grant program
in effect under Article 2 of the Plan.
Q. Optionee shall mean any person to whom an option is
granted pursuant to the Plan.
R. Parent shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations ending with the Corporation,
provided each corporation in the unbroken chain (other than the Corporation)
owns, at the time of the determination, stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
S. Participant shall mean any person who is issued shares
of Common Stock under the Stock Issuance Program.
T. Plan shall mean this Midiman, Inc. 2002 Stock
Option/Stock Issuance Plan.
U. Plan Administrator shall mean either the Board or the
Committee acting in its capacity as administrator of the Plan.
V. Service shall mean the performance of services for the
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a member of the board of directors or an independent contractor,
A-3
except to the extent otherwise specifically provided in the documents evidencing
the option grant or stock issuance.
W. Stock Issuance Agreement shall mean the agreement
entered into by the Corporation and Participant at the time of issuance of
shares of Common Stock under the Stock Issuance Program.
X. Stock Issuance Program shall mean the stock issuance
program in effect under Article 3 of the Plan.
Y. Subsidiary shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
Z. 10% Shareholder shall mean the owner of stock (after
taking into account the constructive ownership rules of Section 424(d) of the
Code) possessing more than 10% of the total combined voting power of all classes
of stock of the Corporation (or any Parent or Subsidiary).
AA. Unvested Shares shall mean shares of Common Stock have
not vested in accordance with the vesting schedule applicable to those shares or
any special vesting acceleration provisions and which are subject to the
Corporation's repurchase right.
BB. Vested Shares shall mean shares of Common Stock which
have vested in accordance with the vesting schedule applicable to those shares
or any special vesting acceleration provisions and which are no longer subject
to the Corporation's repurchase right.
A-4
Avid Technology, Inc.
---------------------
Incentive Stock Option Grant
----------------------------
Terms and Conditions
--------------------
1. Grant of Option. Avid Technology, Inc., a Delaware corporation (the
"Company"), has granted to the Optionee identified in the attached Notice of
Stock Option Grant (the "Notice") an option pursuant to the Company's Stock
Plan identified in the Notice (the "Plan") to purchase a total number of shares
as identified in the Notice (the "Shares") of common stock, $0.01 par value per
share, of the Company ("Common Stock") at the price per share and subject to the
terms and conditions set forth herein and in the Notice.
It is intended that the option evidenced hereby shall be an incentive
stock option as defined in Section 422 of the Internal Revenue Code of 1986, as
amended, and any regulations promulgated thereunder (the "Code"). Except as
otherwise indicated by the context, the term "Optionee", as used in this option,
shall be deemed to include any person who acquires the right to exercise this
option validly under its terms. Except where the context otherwise requires, the
term "Company" shall include the parent and all present and future subsidiaries
of the Company as defined in Sections 424(e) and 424(f) of the Code.
2. Vesting Schedule. Except as otherwise provided herein, this option may
be exercised in whole or in part prior to the tenth anniversary of the date of
grant (hereinafter the "Final Exercise Date") commencing on the first vest date
set forth in the Notice (the "Vesting Commencement Date") in an initial
installment of shares as provided therein. The remaining shares shall vest as
provided in the Notice. The right of exercise shall be cumulative so that to the
extent the option is not exercised in any period to the maximum extent
permissible it shall continue to be exercisable, in whole or in part, with
respect to all Shares for which it is vested until the earlier of the Final
Exercise Date or the termination of this option under Section 3 hereof or the
Plan.
3. Exercise of Option.
(a) Form of Exercise. Each election to exercise this option shall be
in a manner as determined by the Company from time to time and shall be
accompanied by payment in full in accordance with Section 4 below. The Optionee
may purchase less than the number of shares covered hereby, provided that no
partial exercise of this option may be for any fractional share or for fewer
than ten whole shares.
(b) Continuous Relationship with the Company Required. Except as
otherwise provided in this Section 3, this option may not be exercised unless
the Optionee, at the time he or she exercises this option, is, and has been at
all times since the grant date as indicated in the Notice (the "Grant Date"), an
employee or officer of, or consultant or advisor to, the Company (an "Eligible
Optionee").
(c) Termination of Relationship with the Company. If the Optionee
ceases to be an Eligible Optionee for any reason, then, except as provided in
paragraphs (d) and (e) below, the right to exercise this option shall terminate
1
three months after such cessation (but in no event after the Final Exercise
Date), provided that this option shall be exercisable only to the extent that
the Optionee was entitled to exercise this option on the date of such
cessation. Notwithstanding the foregoing, if the Optionee, prior to the Final
Exercise Date, violates the non-competition or confidentiality provisions of any
employment contract, confidentiality and nondisclosure agreement or other
similar agreement between the Optionee and the Company, the right to exercise
this option shall terminate immediately upon such violation.
(d) Exercise Period Upon Retirement, Death or Disability. If the
Optionee retires, dies or becomes disabled (within the meaning of Section
22(e)(3) of the Code) prior to the Final Exercise Date while he or she is an
Eligible Optionee and the Company has not terminated such relationship for
"cause" as specified in paragraph (e) below, this option shall be exercisable,
within the period of one year following the date of retirement, death or
disability of the Optionee, by the Optionee (or in the case of death by an
authorized transferee), provided that this option shall be exercisable only to
the extent that this option was exercisable by the Optionee on the date of his
or her retirement, death or disability, and further provided that this option
shall not be exercisable after the Final Exercise Date. For purposes of this
Section 3, "retirement" shall mean the cessation of employment with the Company
for any reason other than "cause" as specified in paragraph (e) below, by an
Optionee who is a least 55 years of age and who has worked full-time for the
company for the five years immediately preceding the date of cessation of
employment.
(e) Discharge for Cause. If the Optionee, prior to the Final
Exercise Date, is discharged by the Company for "cause" (as defined below), the
right to exercise this option shall terminate immediately upon the effective
date of such discharge. "Cause" shall mean willful misconduct by the Optionee or
willful failure by the Optionee to perform his or her responsibilities to the
Company (including, without limitation, breach by the Optionee of any provision
of any employment, consulting, advisory, nondisclosure, non-competition or other
similar agreement between the Optionee and the Company), as determined by the
Company, which determination shall be conclusive. The Optionee shall be
considered to have been discharged for "Cause" if the Company determines, within
30 days after the Optionee's resignation, that discharge for cause was
warranted.
4. Payment of Purchase Price. Payment of the purchase price for shares
purchased upon exercise of this option shall be made by delivery of cash or
check payable to the order of the Company or, with the prior consent of the
Company (which may be withheld in its sole discretion), by (A) delivery of
shares of Common Stock owned by the Optionee for at least six months, valued at
their fair market value, as determined by the Board of Directors of the Company
(the "Board") in good faith; (B) delivery of a promissory note of the Optionee
to the Company on terms determined by the Board; (C) delivery of an irrevocable
undertaking by a credit worthy broker to deliver promptly to the Company
sufficient funds to pay the exercise price or delivery by the Optionee of
irrevocable and unconditional instructions to a credit worthy broker to deliver
promptly to the Company cash or a check sufficient to pay the exercise price;
(D) payment of such other lawful consideration as the Board may determine; or
(E) any combination of the foregoing.
2
5. Tax Matters.
(a) Withholding. No Shares will be issued pursuant to the exercise
of this option unless and until the Optionee pays to the Company, or makes
provision satisfactory to the Company for payment of, any federal, state or
local withholding taxes required by law to be withheld in respect of this
option. In the Board's discretion, and subject to such conditions as the Board
may establish, such tax obligations may be paid in whole or in part in shares of
Common Stock, including shares retained from the option creating the tax
obligation, valued at their fair market value. The Company may, to the extent
permitted by law, deduct any such tax obligations from any payment of any kind
otherwise due to the Optionee.
(b) Disqualifying Disposition. If the Optionee disposes of Shares
acquired upon exercise of this option within two years from the Grant Date or
one year after such Shares were acquired pursuant to exercise of this option,
the Optionee shall notify the Company in writing of such disposition.
6. Nontransferability of Option. This option may not be sold, assigned,
transferred, pledged or otherwise encumbered by the Optionee, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and, during the lifetime of the Optionee, this option shall be
exercisable only by the Optionee.
7. Provisions of the Plan. This option is subject to the provisions of the
Plan, a copy of which is furnished to the Optionee with this option.
8. Miscellaneous.
(a) Governing Law. This option shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to applicable
conflicts of laws.
(b) Severability. The invalidity or unenforceability of any
provision hereof shall not affect the validity or enforceability of any other
provision hereof, and each such other provision shall be severable and
enforceable to the extent permitted by law.
(c) Binding Effect. These terms and conditions shall be binding upon
and inure to the benefit of the Company and the Optionee and their respective
heirs, executors, administrators, legal representatives, successors and assigns.
(d) Entire Agreement. These terms and conditions, the attached
Notice and the Plan constitute the entire agreement between the parties, and
supersedes all prior agreements and understandings, relating to the subject
matter hereof.
(e) Amendment. These terms and conditions may be amended or modified
only by a written instrument executed by both the Company and the Optionee.
3
Avid Technology, Inc.
Notice of Grant of Stock Option
NAME
Employee ID:
-----
Dear ,
-----------
Effective (the "Effective Date"), you have been granted a stock option
to buy shares of common stock of Avid Technology, Inc. (the "Company") at
an exercise price of $ per share.
Shares in each period will become fully vested on the date shown.
- --------------------------------------------------------------------------------
Number of Shares Vest Type Full Vest Expiration
- --------------------- ------------------ ------------------- -------------------
On Vest Date
- --------------------- ------------------ ------------------- -------------------
Monthly
- --------------------------------------------------------------------------------
By your signature and the Company's signature below, you and the Company agree
that this option is granted under and governed by the terms and conditions of
the Company's Stock Option Plan and the attached Terms and Conditions.
AVID TECHNOLOGY, INC.
By Date
-------------------------------- ------------------------
Date
- ---------------------------------- ------------------------
Employee
4
Avid Technology, Inc.
---------------------
Nonstatutory Stock Option Grant
-------------------------------
Terms and Conditions
--------------------
1. Grant of Option. Avid Technology, Inc., a Delaware corporation (the
"Company"), has granted to the Optionee identified in the attached
Notice of Stock Option Grant (the "Notice") an option pursuant to the
Company's Stock Plan identified in the Notice (the "Plan") to purchase a
total number of shares as identified in the Notice (the "Shares") of
common stock, $0.01 par value per share, of the Company ("Common Stock")
at the price per share and subject to the terms and conditions set forth
herein and in the Notice.
It is intended that the option evidenced hereby shall not be an
incentive stock option as defined in Section 422 of the Internal Revenue
Code of 1986, as amended, and any regulations promulgated thereunder
(the "Code"). Except as otherwise indicated by the context, the term
"Optionee", as used in this option, shall be deemed to include any
person who acquires the right to exercise this option validly under its
terms. Except where the context otherwise requires, the term "Company"
shall include the parent and all present and future subsidiaries of the
Company as defined in Sections 424(e) and 424(f) of the Code.
2. Vesting Schedule. Except as otherwise provided herein, this option may
be exercised in whole or in part prior to the tenth anniversary of the
date of grant (hereinafter the "Final Exercise Date") commencing on the
first vest date set forth in the Notice (the "Vesting Commencement
Date") in an initial installment of shares as provided therein. The
remaining shares shall vest as provided in the Notice. The right of
exercise shall be cumulative so that to the extent the option is not
exercised in any period to the maximum extent permissible it shall
continue to be exercisable, in whole or in part, with respect to all
Shares for which it is vested until the earlier of the Final Exercise
Date or the termination of this option under Section 3 hereof or the
Plan.
3. Exercise of Option.
(a) Form of Exercise. Each election to exercise this option shall be
in a manner as determined by the Company from time to time and shall be
accompanied by payment in full in accordance with Section 4 below. The Optionee
may purchase less than the number of shares covered hereby, provided that no
partial exercise of this option may be for any fractional share or for fewer
than ten whole shares.
(b) Continuous Relationship with the Company Required. Except as
otherwise provided in this Section 3, this option may not be exercised unless
the Optionee, at the time he or she exercises this option, is, and has been at
all times since the grant date as indicated in the Notice (the "Grant Date"), an
employee, officer or director of, or consultant or advisor to, the Company (an
"Eligible Optionee").
(c) Termination of Relationship with the Company. If the Optionee
ceases to be an Eligible Optionee for any reason, then, except as provided in
1
paragraphs(d) and (e) below, the right to exercise this option shall terminate
three months after such cessation (but in no event after the Final Exercise
Date), provided that this option shall be exercisable only to the extent that
the Optionee was entitled to exercise this option on the date of such cessation.
Notwithstanding the foregoing, if the Optionee, prior to the Final Exercise
Date, violates the non-competition or confidentiality provisions of any
employment contract, confidentiality and nondisclosure agreement or other
agreement between the Optionee and the Company, the right to exercise this
option shall terminate immediately upon such violation.
(d) Exercise Period Upon Death, Disability or Retirement. If the
Optionee retires, dies or becomes disabled (within the meaning of Section
22(e)(3) of the Code) prior to the Final Exercise Date while he or she is an
Eligible Optionee and the Company has not terminated such relationship for
"cause" as specified in paragraph (e) below, this option shall be exercisable,
within the period of one year following the date of retirement, death or
disability of the Optionee, by the Optionee (or in the case of death by an
authorized transferee), provided that this option shall be exercisable only to
the extent that this option was exercisable by the Optionee on the date of his
or her retirement, death or disability, and further provided that this option
shall not be exercisable after the Final Exercise Date. For purposes of this
Section 3, "retirement" shall mean the cessation of employment with the Company
for any reason other than "cause" as specified in paragraph (e) below, by an
Optionee who is a least 55 years of age and who has worked full-time for the
company for the five years immediately preceding the date of cessation of
employment.
(e) Discharge for Cause. If the Optionee, prior to the Final Exercise
Date, is discharged by the Company for "cause" (as defined below), the right to
exercise this option shall terminate immediately upon the effective date of such
discharge. "Cause" shall mean willful misconduct by the Optionee or willful
failure by the Optionee to perform his or her responsibilities to the Company
(including, without limitation, breach by the Optionee of any provision of any
employment, consulting, advisory, nondisclosure, non-competition or other
similar agreement between the Optionee and the Company), as determined by the
Company, which determination shall be conclusive. The Optionee shall be
considered to have been discharged for "Cause" if the Company determines, within
30 days after the Optionee's resignation, that discharge for cause was
warranted.
4. Payment of Purchase Price. Payment of the purchase price for shares
purchased upon exercise of this option shall be made by delivery of cash or
check payable to the order of the Company or, with the prior consent of the
Company (which may be withheld in its sole discretion), by (A) delivery of
shares of Common Stock owned by the Optionee for at least six months, valued at
their fair market value, as determined by the Board of Directors of the Company
(the "Board") in good faith; (B) delivery of a promissory note of the Optionee
to the Company on terms determined by the Board; (C) delivery of an irrevocable
undertaking by a credit worthy broker to deliver promptly to the Company
sufficient funds to pay the exercise price or delivery by the Optionee of
irrevocable and unconditional instructions to a credit worthy broker to deliver
promptly to the Company cash or a check sufficient to pay the exercise price;
(D) payment of such other lawful consideration as the Board may determine; or
(E) any combination of the foregoing.
2
5. Tax Matters. No Shares will be issued pursuant to the exercise of this
option unless and until the Optionee pays to the Company, or makes provision
satisfactory to the Company for payment of, any federal, state or local
withholding taxes required by law to be withheld in respect of this option. In
the Board's discretion, and subject to such conditions as the Board may
establish, such tax obligations may be paid in whole or in part in shares of
Common Stock, including shares retained from the option creating the tax
obligation, valued at their fair market value. The Company may, to the extent
permitted by law, deduct any such tax obligations from any payment of any kind
otherwise due to the Optionee.
6. Nontransferability of Option. This option may not be sold, assigned,
transferred, pledged or otherwise encumbered by the Optionee, either voluntarily
or by operation of law, except by will or the laws of descent and distribution,
and, during the lifetime of the Optionee, this option shall be exercisable only
by the Optionee.
7. Provisions of the Plan. This option is subject to the provisions of the
Plan, a copy of which is furnished to the Optionee with this option.
8. Miscellaneous.
(a) Governing Law. This option shall be governed by and
construed in accordance with the laws of the State of Delaware without regard to
applicable conflicts of laws.
(b) Severability. The invalidity or unenforceability of any
provision hereof shall not affect the validity or enforceability of any other
provision hereof, and each such other provision shall be severable and
enforceable to the extent permitted by law.
(c) Binding Effect. These terms and conditions shall be
binding upon and inure to the benefit of the Company and the Optionee and their
respective heirs, executors, administrators, legal representatives, successors
and assigns.
(d) Entire Agreement. These terms and conditions, the
attached Notice and the Plan constitute the entire agreement between the
parties, and supersedes all prior agreements and understandings, relating to the
subject matter hereof.
(e) Amendment. These terms and conditions may be amended or
modified only by a written instrument executed by both the Company and the
Optionee.
3
Avid Technology, Inc.
Notice of Grant of Stock Option
NAME
Employee ID:
-------------
Dear
--------------,
Effective (the "Effective Date"), you have been granted a stock
option to buy shares of common stock of Avid Technology, Inc. (the
"Company") at an exercise price of $ per share.
Shares in each period will become fully vested on the date shown.
- --------------------------------------------------------------------------------
Number of Shares Vest Type Full Vest Expiration
- ------------------- ----------------- ------------------- ----------------------
On Vest Date
- ------------------- ----------------- ------------------- ----------------------
Monthly
- --------------------------------------------------------------------------------
By your signature and the Company's signature below, you and the Company agree
that this option is granted under and governed by the terms and conditions of
the Company's Stock Option Plan and the attached Terms and Conditions.
AVID TECHNOLOGY, INC.
By Date
------------------------------- ------------------------
Date
- ----------------------------------- ------------------------
Employee
(f)
4
Avid Technology, Inc.
Notice of Grant of Restricted Stock Under 1997 Stock Incentive Plan, as amended
NAME
Employee ID:
-----------
Dear ,
---------------
Effective (the "Effective Date"), you have been granted the
right to buy shares of Avid Technology, Inc. (the "Company") Restricted
Stock at $ per share (the "Shares"). The total price of the Shares is
$ . The Shares are subject to the terms and conditions of the Company's
1997 Stock Incentive Plan, as amended and the Terms and Conditions of the
Restricted Stock Award, each of which is attached hereto, and which, together
with this Notice of Grant of Restricted Stock, forms the complete agreement
between you and the Company relative to the Shares.
The Shares will vest as set forth in the following schedule, and will become
fully vested on the last date shown.
Vested Shares Vesting Date
------------- ------------
Upon termination of your employment, the Company has an option to repurchase the
Shares which are not then vested at a price of $ per Share, pursuant to the
Terms and Conditions of the Restricted Stock Award.
By your signature and the Company's signature below, you and the Company agree
that the Shares are granted under and governed by the terms and conditions of
the Company's 1997 Stock Incentive Plan, as amended and the Terms and Conditions
of the Restricted Stock Award.
AVID TECHNOLOGY, INC.
By Date
------------------------------- -------------------------
Name:
Title:
Address: One Park West
Tewksbury, MA 01876
- --------------------------------- Date ------------------------
Employee
Address:
Avid Technology, Inc.
Terms and Conditions of Restricted Stock Award
Granted Under 1997 Stock Incentive Plan, as amended
1. Purchase of Shares.
------------------
Avid Technology, Inc., a Delaware corporation (the "Company") has issued
and sold to the Participant, and the Participant has purchased from the Company,
subject to the terms and conditions set forth herein and in the
Company's 1997 Stock Incentive Plan, as amended (the "Plan"), the number of
shares identified in the attached Notice (the "Shares") of common stock, $.01
par value, of the Company ("Common Stock"), at a purchase price per share
identified in the attached Notice. The aggregate purchase price for the Shares
shall be paid by the Participant by check payable to the order of the Company or
such other method as may be acceptable to the Company. The Company shall record
on its books the issuance to the Participant of that number of Shares purchased
by the Participant. The Participant agrees that the Shares shall be subject to
the Purchase Option set forth in Section 2 herein and the restrictions on
transfer set forth in Section 4 herein.
2. Purchase Option.
---------------
(a) The Shares shall vest and become "Vested Shares" on the
dates set forth in the attached Notice (each of such vesting dates being
referred to as a "Vesting Anniversary Date"). Except as provided in subsection
2(b) below, in the event that the Participant ceases to be employed by the
Company (as an employee or officer of, or an advisor or consultant to, the
Company) for any reason or no reason, with or without cause, prior to the final
Vesting Anniversary Date following the date hereof, vesting shall cease and the
Company shall have the right and option (the "Purchase Option") to purchase from
the Participant, for a sum specified in the attached Notice (the "Option
Price"), some or all of the Shares that are not then Vested Shares.
(b) In the event that the Participant's employment with the
Company is terminated by reason of death or disability (as defined in Section
22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"), the
Participant's Shares shall continue to vest for a period of one year.
(c) For purposes of these Terms and Conditions of the
Restricted Stock Award, employment with the Company shall include employment
with a parent or subsidiary of the Company.
3. Exercise of Purchase Option and Closing.
(a) The Company may exercise the Purchase Option by
delivering or mailing to the Participant (or his estate), within 90 days after
the termination of the employment of the Participant with the Company, a written
notice of exercise of the Purchase Option. Such notice shall specify the number
of Shares to be purchased. If and to the extent the Purchase Option is not so
1
exercised by the giving of such a notice within such 90-day period, the Purchase
Option shall automatically expire and terminate effective upon the expiration of
such 90-day period.
(b) Within 10 days after delivery to the Participant of the
Company's notice of the exercise of the Purchase Option pursuant to subsection
(a) above, the Company shall cause to be transferred to the Company on its books
that number of Shares which the Company has elected to purchase in accordance
with the terms herein. In the event a certificate or certificates representing
the Shares have been issued to the Participant, the Participant (or his estate)
shall tender to the Company at its principal offices the certificate or
certificates representing the Shares which the Company has elected to purchase
in accordance with the terms herein, duly endorsed in blank or with duly
endorsed stock powers attached thereto, all in form suitable for the transfer of
such Shares to the Company. Upon such transfer, the Company shall deliver or
mail to the Participant a check in the amount of the aggregate Option Price for
such Shares (provided that any delay in making such payment shall not invalidate
the Company's exercise of the Purchase Option with respect to such Shares).
(c) After the time at which any Shares are transferred to
the Company pursuant to subsection 3(b) above, the Company shall not pay any
dividend to the Participant on account of such Shares or permit the Participant
to exercise any of the privileges or rights of a stockholder with respect to
such Shares, but shall, in so far as permitted by law, treat the Company as the
owner of such Shares.
(d) The Option Price may be payable, at the option of the
Company, in cancellation of all or a portion of any outstanding indebtedness of
the Participant to the Company or in cash (by check) or both.
(e) The Company shall not purchase any fraction of a Share
upon exercise of the Purchase Option, and any fraction of a Share resulting from
a computation made pursuant to Section 2 herein shall be rounded to the nearest
whole Share (with any one-half Share being rounded upward).
(f) The Company may assign its Purchase Option to one or
more persons or entities.
4. Restrictions on Transfer.
------------------------
The Participant shall not sell, assign, transfer, pledge, hypothecate
or otherwise dispose of, by operation of law or otherwise any unvested Shares,
or any interest therein, except by will or the laws of descent and distribution,
provided that such Shares shall remain subject to these Terms and Conditions of
the Restricted Stock Award (including without limitation the restrictions on
transfer set forth in this Section 4, and the Purchase Option) and such
permitted transferee shall, as a condition to such transfer, deliver to the
Company a written instrument confirming that such transferee shall be bound by
all of the terms and conditions herein.
2
5. Effect of Prohibited Transfer.
-----------------------------
The Company shall not be required (a) to transfer on its books any of
the Shares which shall have been sold or transferred in violation of any of the
provisions set forth herein, or (b) to treat as owner of such Shares or to pay
dividends to any transferee to whom any such Shares shall have been so sold or
transferred.
6. Restrictive Legend.
------------------
All certificates representing Shares shall have affixed thereto a
legend in substantially the following form, in addition to any other legends
that may be required under federal or state securities laws:
"The shares of stock represented by this certificate are
subject to restrictions on transfer and an option to purchase
set forth in certain Terms and Conditions of Restricted Stock
Award, and a copy of such Terms and Conditions of Restricted
Stock Award is available for inspection without charge at the
office of the Secretary of the corporation."
7. Provisions of the Plan.
----------------------
These Terms and Conditions of Restricted Stock Award are subject to the
provisions of the Plan, a copy of which is furnished herewith to the
Participant.
8. Withholding Taxes; Section 83(b) Election.
-----------------------------------------
(a) The Participant acknowledges and agrees that the Company
has the right to withhold from payments of any kind otherwise due to the
Participant, or to require the Participant to pay to the Company any federal,
state or local taxes of any kind required by law to be withheld by the Company
with respect to the purchase of the Shares by the Participant or the lapse of
the Purchase Option. At the option of the Board of Directors of the Company, the
Participant may satisfy such tax obligation in whole or in part by surrendering
to the Company shares of Common Stock, including Shares which are Vested Shares,
having a value, based on the last reported sale price of the Common Stock on the
NASDAQ National Market on the day prior to surrender, equal to the amount of
such obligation.
(b) The Participant acknowledges that the Participant has
been informed of the availability of making an election in accordance with
Section 83(b) of the Code; that such election must be filed with the Internal
Revenue Service within 30 days of the transfer of shares to the Participant; and
that the Participant is solely responsible for making such election.
3
9. Miscellaneous.
-------------
(a) Severability. The invalidity or unenforceability of any
provision hereof shall not affect the validity or enforceability of any other
provision hereof, and each such other provision shall be severable and
enforceable to the extent permitted by law.
(b) Binding Effect. These terms and conditions shall be
binding upon and inure to the benefit of the Company and the Participant and
their respective heirs, executors, administrators, legal representatives,
successors and assigns, subject to the restrictions on transfer set forth in
Section 4 herein.
(c) Notice. All notices required or permitted hereunder
shall be in writing and deemed effectively given upon personal delivery or five
days after deposit in the United States Post Office, by registered or certified
mail, postage prepaid, addressed to the other party hereto at the address shown
beneath his or its respective signature to the attached Notice, or at such other
address or addresses as either party shall designate to the other in accordance
with this Section 9(c).
(d) Entire Agreement. These terms and conditions, the
attached Notice and the Plan constitute the entire agreement between the
parties, and supersedes all prior agreements and understandings, relating to the
subject matter herein.
(e) Amendment. These terms and conditions may be amended or
modified only by a written instrument executed by both the Company and the
Participant.
(f) Governing Law. These terms and conditions shall be
construed, interpreted and enforced in accordance with the internal laws of the
State of Delaware without regard to any applicable conflicts of laws.
4
CERTIFICATION
I, David A. Krall, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Avid Technology,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 9, 2004 /s/ David A. Krall
-------------------------------------
David A. Krall
President and Chief Executive Officer
(principal executive officer)
CERTIFICATION
I, Paul J. Milbury, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Avid Technology,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 9, 2004 /s/ Paul J. Milbury
-----------------------------------------
Paul J. Milbury
Chief Financial Officer
(principal financial officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Avid Technologies, Inc.
(the "Company") for the period ended September 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, David A. Krall, President and Chief Executive Officer of the
Company, and Paul J. Milbury, Chief Financial Officier of the Company, each
hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: November 9, 2004 /s/ David A. Krall
--------------------------
David A. Krall
President and Chief Executive Officer
Dated: November 9, 2004 /s/ Paul J. Milbury
--------------------------
Paul J. Milbury
Chief Financial Officer
