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 MARCH 31, 2006
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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
incorporation or organization) Identification No.)
AVID TECHNOLOGY PARK
ONE PARK WEST
TEWKSBURY, MA 01876
(Address of principal executive offices)
Registrant's telephone number, including area code: (978) 640-6789
Indicate by check mark whether the registrant: (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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer X Accelerated Filer ____ Non-accelerated Filer ____
---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ____ No X
---
The number of shares outstanding of the registrant's Common Stock as of
April 24, 2006 was 42,239,625.
AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
a) Condensed Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 2006 and 2005................1
b) Condensed Consolidated Balance Sheets (unaudited)
as of March 31, 2006 and December 31, 2005........................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2006 and 2005................3
d) Notes to Condensed Consolidated Financial Statements (unaudited)..4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................18
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk............30
ITEM 4. Controls and Procedures..............................................31
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings....................................................32
ITEM 1A. Risk Factors.........................................................32
ITEM 6. Exhibits.............................................................40
SIGNATURES....................................................................41
EXHIBIT INDEX.................................................................42
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
March 31,
----------------------------
2006 2005
------------- -------------
Net revenues:
Product $194,022 $147,378
Services 24,048 18,623
------------- -------------
Total net revenues 218,070 166,001
------------- -------------
Cost of revenues:
Product 91,361 60,897
Services 13,315 10,070
Amortization of intangible assets 5,080 281
------------- -------------
Total cost of revenues 109,756 71,248
------------- -------------
Gross profit 108,314 94,753
------------- -------------
Operating expenses:
Research and development 35,496 24,679
Marketing and selling 49,912 37,842
General and administrative 15,137 10,302
Restructuring costs 1,066 -
In-process research and development 310 -
Amortization of intangible assets 3,665 1,592
------------- -------------
Total operating expenses 105,586 74,415
------------- -------------
Operating income 2,728 20,338
Interest income 2,068 808
Interest expense (98) (94)
Other income (expense), net - 123
------------- -------------
Income before income taxes 4,698 21,175
Provision for income taxes 1,353 1,429
------------- -------------
Net income $3,345 $19,746
============= =============
Net income per common share - basic $0.08 $0.56
Net income per common share - diluted $0.08 $0.53
Weighted-average common shares
outstanding - basic 42,137 34,987
Weighted-average common shares
outstanding - diluted 43,200 37,263
The accompanying notes are an integral part of the condensed consolidated
financial statements
1
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, December 31,
2006 2005
---------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $147,838 $133,954
Marketable securities 90,841 104,476
Accounts receivable, net of allowances
of $21,920 and $22,233 at March 31, 2006
and December 31, 2005, respectively 131,700 140,669
Inventories 100,717 96,845
Current deferred tax assets, net 532 528
Prepaid expenses 10,427 8,548
Other current assets 15,160 16,657
---------------- ---------------
Total current assets 497,215 501,677
Property and equipment, net 38,036 38,563
Intangible assets, net 113,691 118,676
Goodwill 404,424 396,902
Other assets 6,055 6,228
---------------- ---------------
Total assets $1,059,421 $1,062,046
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $36,097 $43,227
Accrued compensation and benefits 25,654 27,841
Accrued expenses and other current liabilities 50,726 55,443
Income taxes payable 14,168 13,027
Deferred revenues 64,593 66,034
---------------- ---------------
Total current liabilities 191,238 205,572
Long-term liabilities 16,773 16,877
---------------- ---------------
Total liabilities 208,011 222,449
---------------- ---------------
Contingencies (Note 8)
Stockholders' equity:
Common stock 423 421
Additional paid-in capital 934,093 928,703
Accumulated deficit (85,450) (88,795)
Deferred compensation - (1,830)
Accumulated other comprehensive income 2,344 1,098
---------------- ---------------
Total stockholders' equity 851,410 839,597
---------------- ---------------
Total liabilities and stockholders' equity $1,059,421 $1,062,046
================ ===============
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)
Three Months Ended March 31,
2006 2005
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,345 $19,746
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14,000 5,267
Provision for doubtful accounts (972) 400
In-process research and development 310 -
Loss (gain) on disposal of fixed assets 121 (55)
Compensation expense from stock grants and options 4,506 842
Equity in income of non-consolidated company - (60)
Changes in deferred tax assets and liabilities, excluding effects of acquisitions (666) -
Changes in operating assets and liabilities, excluding effects of acquisitions:
Accounts receivable 10,961 (80)
Inventories (2,628) (1,403)
Prepaid expenses and other current assets 90 2,334
Accounts payable (10,396) (755)
Income taxes payable 1,260 537
Accrued expenses, compensation and benefits, and other liabilities (7,643) (13,692)
Deferred revenues (1,977) 7,233
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,311 20,314
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,448) (4,151)
Payments for other long-term assets (50) (280)
Payments for business acquisitions, including transaction costs,
net of cash acquired (9,226) -
Purchases of marketable securities (8,462) (27,132)
Proceeds from sales of marketable securities 21,912 19,411
- --------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (274) (12,152)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (22) (24)
Proceeds from issuance of common stock under employee stock plans 2,715 5,649
- --------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,693 5,625
- --------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 1,154 (618)
- --------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 13,884 13,169
Cash and cash equivalents at beginning of period 133,954 79,058
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $147,838 $92,227
- --------------------------------------------------------------------------------------------------------------------------
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 statement. 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, 2005 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, 2005 in its 2005 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. Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year presentation.
The Company's preparation of financial statements in conformity with 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,
purchase accounting, stock-based compensation, inventory valuation and income
tax asset valuation allowances. Actual results could differ from those
estimates.
On January 12, 2006, we completed the acquisition of Medea Corporation
("Medea"), a California-based provider of low cost storage solutions for
real-time media applications. The results of operations of Medea have been
included in the Company's results of operations since the acquisition date (see
Note 3).
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 March 31,
2006 2005
----------- -----------
Net income $3,345 $19,746
=========== ===========
Weighted-average common shares outstanding - basic 42,137 34,987
Weighted-average potential common stock:
Options 1,036 2,012
Restricted stock units 3 -
Warrant 24 264
----------- -----------
Weighted-average common shares outstanding - diluted 43,200 37,263
=========== ===========
Net income per common share - basic $0.08 $0.56
Net income per common share - diluted $0.08 $0.53
4
Common stock equivalents that were considered anti-dilutive securities and
excluded from the diluted net income per share calculations, were as follows, on
a weighted-average basis (in thousands):
Three Months Ended
March 31,
----------------------
2006 2005
---------- ----------
Options 2,136 350
Restricted stock 15 -
---------- ----------
Total anti-dilutive common stock equivalents 2,151 350
========== ==========
3. ACQUISITIONS
Medea
On January 12, 2006, Avid acquired all the outstanding shares of Medea
Corporation, a California-based provider of low cost storage solutions for
real-time media applications, for cash of $8.9 million plus transaction costs of
$0.2 million. The Company performed a preliminary allocation of the total
purchase price of $9.1 million to the net tangible and intangible assets of
Medea based on their fair values as of the consummation of the acquisition. The
purchase price was allocated as follows: ($2.1) million to net liabilities
assumed, $3.8 million to amortizable identifiable intangible assets, $0.3
million to in-process R&D and the remaining $7.1 million to goodwill. An
additional $1.4 million was recorded as goodwill for deferred tax liabilities
related to non-deductible intangible asset amortization. The total goodwill of
$8.5 million, which reflects the value of the assembled workforce and the
synergies the Company expects to realize by offering Medea's RAID (Redundant
Array of Independent Disks) storage solutions to its Professional Film, Video
and Broadcast ("Professional Video") segment customers, is reported within the
Professional Video segment and is not deductible for tax purposes. The results
of operations of Medea have been included in the results of operations of the
Company since the acquisition date.
The Company used the income approach to determine the value of the intangible
assets. The income approach presumes that the value of an asset can be estimated
by the net economic benefit, usually the cash flows discounted to present value,
to be received over the life of the asset. The income approach typically uses a
projection of revenues and expenses specifically attributed to the intangible
asset to calculate a potential income stream which is then discounted using a
rate of return that accounts for both the time value of money and risk factors.
The weighted-average discount rate (or rate of return) used to determine the
value of Medea's intangible assets was 19% and the effective tax rate used was
35%.
The amortizable identifiable intangible assets include developed technology of
$2.7 million, customer relationships of $0.7 million, order backlog of $0.3
million and non-compete agreements of $0.1 million. The customer relationships,
order backlog and non-compete agreements are being amortized on a straight-line
basis over their estimated useful lives of six years, one-half year and two
years, respectively. Developed technology is being amortized over the greater of
the amount calculated using the ratio of current quarter revenue to the total of
current quarter and anticipated future revenues, or the straight-line method,
over the estimated useful life of two and one-half years. The weighted-average
amortization period for the amortizable identifiable intangible assets is
approximately three years. Amortization expense for these intangibles totaled
$0.5 million for the three months ended March 31, 2006 and accumulated
amortization was $0.5 million at March 31, 2006. The allocation of $0.3 million
to in-process research and development ("R&D") was expensed during the three
months ended March 31, 2006.
Pinnacle
In August 2005, Avid completed the acquisition of California-based Pinnacle
Systems, Inc. ("Pinnacle"), a supplier of digital video products to customers
ranging from individuals to broadcasters. Under the terms of the agreement,
Pinnacle common shareholders received 0.0869 of a share of Avid common stock
plus $1.00 in cash for each share of Pinnacle common stock outstanding at the
closing of the transaction. Avid paid $72.1 million in cash plus common stock
consideration of approximately $362.9 million in exchange for all of the
outstanding shares of Pinnacle. Avid also incurred $6.5 million of transaction
costs.
5
The Company has integrated Pinnacle's broadcast and professional offerings,
including the Deko(R) on-air graphics system and the MediaStream(TM) playout
server, into its Professional Video segment and has formed a new Consumer Video
segment that offers Pinnacle's consumer products, including Pinnacle Studio(TM)
and other products.
During 2005, the Company allocated the total purchase price of $441.4 million as
follows: $91.8 million to net assets acquired, $123.1 million to identifiable
intangible assets (including $32.3 million of in-process R&D), and the remaining
$226.5 million to goodwill. During the first quarter of 2006, the Company
continued its analysis of the fair values of certain assets and liabilities, in
particular accruals for employee terminations, facilities closures and contract
terminations; inventories; and certain other accruals. Accordingly, the Company
recorded adjustments to these assets and liabilities resulting in a $1.1 million
increase in the value of the net assets acquired and a corresponding decrease in
goodwill.
The identifiable intangible assets, with the exception of the in-process R&D,
which was expensed at the time of acquisition, are being amortized over their
estimated useful lives of six and one-half years for customer relationships,
seven years for the trade names and two to three years for the developed
technology. The weighted-average amortization period for these intangible assets
in total is approximately five years. These intangible assets are being
amortized using the straight-line method, with the exception of developed
technology. Developed technology is being amortized on a product-by-product
basis over the greater of the amount calculated using the ratio of current
quarter revenues to the total of current quarter and anticipated future revenues
over the estimated useful lives of two to three years, or the straight-line
method over each product's remaining respective useful life. Amortization
expense for these intangibles totaled $6.3 million for the three months ended
March 31, 2006 and accumulated amortization was $18.9 million at March 31, 2006.
The goodwill of $225.4 million resulting from the purchase price allocation
reflects the value of the underlying enterprise, as well as planned synergies
that Avid expects to realize, including incremental sales of legacy Avid
Professional Video products. Of the total $225.4 million of goodwill, $89.5
million has been assigned to the Company's Professional Video segment and $135.9
million has been assigned to the Consumer Video segment. This goodwill is not
deductible for tax purposes and will not be amortized for financial reporting
purposes, in accordance with the requirements of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets".
Wizoo
In August 2005, Avid acquired all the outstanding shares of Wizoo Sound Design
GmbH ("Wizoo"), a Germany-based provider of virtual instruments for music
producers and sound designers, for cash of euro 4 million ($4.9 million) plus
transaction costs of $0.2 million. The purchase price was allocated as follows:
($0.6 million) to net liabilities assumed, $1.2 million to identifiable
intangible assets, $0.1 million to in-process R&D, and the remaining $4.4
million to goodwill. The identifiable intangible assets, which include developed
technology of $0.6 million and license agreements of $0.6 million, are being
amortized on a straight-line basis over their estimated useful lives of two to
four years and three to four years, respectively. Amortization expense for these
intangibles totaled $0.1 million for the three months ended March 31, 2006 and
accumulated amortization was $0.3 million at March 31, 2006. The goodwill of
$4.4 million, which reflects the value of the assembled workforce and the
synergies the Company hopes to realize by integrating the Wizoo technology with
its other products, is reported within the Company's Audio segment and is not
deductible for tax purposes.
As part of the purchase agreement, Avid may be required to make additional
payments to the former shareholders of Wizoo of up to euro 1.0 million ($1.2
million), contingent upon Wizoo achieving certain engineering milestones through
January 2008. These payments, if required, will be recorded as additional
purchase consideration, allocated to goodwill. As of March 31, 2006, one
engineering milestone has been met and less than $0.1 million has been recorded
as additional purchase price.
M-Audio
In August 2004, Avid completed the acquisition of Midiman, Inc. d/b/a M-Audio
("M-Audio"), a leading provider of digital audio and MIDI (Musical Instrument
Digital Interface) solutions for musicians and audio professionals. Avid paid
cash of $79.6 million, net of cash acquired, and issued stock and options with a
fair value of $96.5 million. Avid also incurred $3.3 million of transaction
costs. The total purchase price was allocated as follows: $13.5 million to net
assets acquired, $5.5 million to deferred compensation, $38.4 million to
identifiable intangible assets and the remaining $122.0 million to goodwill.
During the quarter ended December 31, 2005, the goodwill was reduced by $1.2
million to $120.8 million due to the resolution of tax contingencies.
6
The identifiable intangible assets include customer relationships valued at
$28.0 million, completed technology valued at $4.5 million, a trade name valued
at $4.7 million and a non-compete covenant valued at $1.2 million, which are
being amortized over their estimated useful lives of twelve years, four years,
six years and two years, respectively. The twelve year life for customer
relationships, although longer than that used for similar intangible assets for
other acquisitions by Avid, is considered reasonable due to the similarities in
their business to Avid's Digidesign division, which has enjoyed long-term
relationships with its customers. Amortization expense totaled $1.2 million and
$1.2 million for the three-month periods ended March 31, 2006 and 2005,
respectively, and accumulated amortization of these intangible assets was $7.8
million at March 31, 2006
Avid Nordic AB
In September 2004, the Company acquired Avid Nordic AB, a Sweden-based exclusive
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 purchase price was allocated as follows:
$1.0 million to net assets acquired, $4.7 million to an identifiable intangible
asset, and the remaining $2.0 million to goodwill. During the quarter ended
December 31, 2004, the goodwill was increased by $0.4 million to $2.4 million
due to a reduction in the estimated fair value of inventory and other current
assets acquired from Avid Nordic AB. During the quarter ended September 30,
2005, the Company paid approximately euro 1.1 million ($1.4 million) of
additional purchase consideration and recorded a corresponding increase to
goodwill.
The identifiable intangible asset represents customer relationships developed in
the region by Avid Nordic AB. This asset will be amortized over its estimated
useful life of five years. Amortization expense totaled $0.2 million and $0.2
million for the three -month periods ended March 31, 2006 and 2005,
respectively, and accumulated amortization of this asset was $1.5 million at
March 31, 2006.
NXN Software GmbH
In January 2004, Avid acquired Munich, Germany-based NXN Software GmbH ("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 total
purchase price was allocated as follows: ($1.0 million) to net liabilities
assumed, $7.2 million to identifiable intangible assets and the remaining $38.8
million to goodwill. During the year ended December 31, 2004, the goodwill was
reduced by $0.7 million to $38.1 million due to finalizing the estimated fair
value of deferred revenue acquired from NXN.
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, which are being amortized over their estimated useful lives of
four to six years, three to six years, and six years, respectively. Amortization
expense relating to these intangibles was $0.3 million and $0.3 million for the
three-month periods ended March 31, 2006 and 2005, respectively, and accumulated
amortization of these assets was $2.2 million at March 31, 2006.
Pro Forma Financial Information for Acquisitions (Unaudited)
The results of operations of Medea, Pinnacle, Wizoo, 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-month period ended
March 31, 2005 as if the acquisition of Pinnacle had occurred at the beginning
of 2005. The Company's pro forma results of operations giving effect to the
Medea and Wizoo acquisitions as if each had occurred at the beginning of 2005 is
not included as it would not differ materially from 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 2005,
or of future results.
7
Three Months Ended
March 31, 2005
---------------------
(In thousands, except per share data)
Net revenues $231,205
Net loss ($21,058)
Net loss per share:
Basic ($0.51)
Diluted ($0.51)
Included in the pro forma net income reported above for the three-month period
ended March 31, 2005 is a charge of $32.3 million for in-process research and
development related to the Pinnacle acquisition.
4. ACCOUNTS RECEIVABLE
Accounts receivable, net consist of the following (in thousands):
March 31, December 31,
2006 2005
------------- -------------
Accounts receivable $153,620 $162,902
Less:
Allowance for doubtful accounts (3,724) (4,847)
Allowance for sales returns and rebates (18,196) (17,386)
------------- -------------
$131,700 $140,669
============= =============
The allowance for doubtful accounts represents a reserve for estimated bad debt
losses resulting from the inability of customers to make required payments for
products or services. When evaluating the adequacy of this allowance, the
Company analyzes accounts receivable balances, historical bad debt experience,
customer concentrations, customer credit-worthiness and current economic trends.
The allowance for sales returns and rebates, which includes allowances for
estimated returns, exchanges and credits for price protection, are provided as a
reduction of revenues in the same period that related revenues are recorded,
based upon the Company's historical experience. To date, actual returns and
other allowances have not differed materially from management's estimates.
The accounts receivable and deferred revenue balances as of March 31, 2006 and
December 31, 2005 are net of approximately $17 million and $14 million,
respectively, which represent amounts for large solution sales that have been
invoiced but for which revenue had not been earned and payment was not due.
5. INVENTORIES
Inventories consist of the following (in thousands):
March 31, December 31,
2006 2005
-------------- --------------
Raw materials $34,815 $26,878
Work in process 10,509 13,040
Finished goods 55,393 56,927
-------------- --------------
$100,717 $96,845
============== ==============
As of March 31, 2006 and December 31, 2005, the finished goods inventory
included inventory at customer locations of $8.8 million and $8.9 million,
respectively, associated with product shipped to customers for which revenue had
not yet been recognized.
8
6. LONG-TERM LIABILITIES
Long-term liabilities consist of the following (in thousands):
March 31, December 31,
2006 2005
-------------- --------------
Long-term deferred tax liability $10,186 $9,372
Long-term deferred rent 3,436 3,644
Long-term accrued restructuring 3,151 3,861
-------------- --------------
$16,773 $16,877
============== ==============
7. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has several stock-based compensation plans under which employees,
officers, directors and consultants may be granted stock awards or options to
purchase the Company's common stock, generally at the market price on the date
of grant. Certain plans allow for options to be granted at below market price
under certain circumstances, although this is typically not the Company's
practice. The options become exercisable over various periods, typically four
years for employees and one year for non-employee directors, and have a maximum
term of ten years. As of March 31, 2006, 2,655,162 shares of common stock remain
available for future grant as stock options under the Company's stock-based
compensation plans, including 2,313,671 shares that may alternatively be issued
as grants of restricted stock.
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"), which is a
revision of SFAS No. 123, "Accounting for Stock Based Compensation". SFAS 123(R)
requires employee stock-based compensation awards to be accounted for under the
fair value method and eliminates the ability to account for these instruments
under the intrinsic value method as prescribed by Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. The Company adopted SFAS 123(R) on January 1, 2006 using the
modified prospective application method as permitted under SFAS 123(R). Under
this method, the Company is required to record compensation cost, based on the
fair value estimated in accordance with SFAS 123(R), for stock-based awards
granted after the date of adoption over the requisite service periods for the
individual awards, which generally equals the vesting period. The Company is
also required to record compensation cost for the unvested portion of previously
granted stock-based awards outstanding at the date of adoption over the
requisite service periods for the individual awards based on the fair value
estimated in accordance with the original provisions of SFAS No. 123.
Prior to the adoption of SFAS 123(R), the Company accounted for stock-based
compensation under the recognition and measurement principles of APB Opinion No.
25 and related interpretations. Accordingly, no compensation expense was
recorded for options issued to employees and directors in fixed amounts and with
fixed exercise prices at least equal to the market price of the Company's common
stock at the date of grant. When the exercise price of stock options granted to
employees was less than the market price of the Company's common stock at the
date of grant, the Company recorded the difference multiplied by the number of
shares under option as deferred compensation, which was amortized over the
vesting period of the options. Additionally, deferred compensation was recorded
for restricted stock granted to employees based on the market price of the
Company's common stock at the date of grant and was amortized over the period in
which the restrictions lapsed. In connection with the adoption of SFAS 123(R) on
January 1, 2006, the Company reversed the remaining deferred compensation of
$1.8 million, with the offset to additional paid-in capital.
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 all stock-based employee awards for the three-month period ended
March 31, 2005 (in thousands, except per share data):
9
Three Months Ended
March 31, 2005
-------------------
Net income as reported $19,746
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 842
Deduct: Total stock-based employee
compensation expense determined under
the fair value based method for all
awards, net of related tax effects (4,820)
-------------------
Pro forma net income $15,768
===================
Net income per share:
Basic-as reported $0.56
Basic-pro forma $0.45
Diluted-as reported $0.53
Diluted-pro forma $0.43
Beginning with the three-month period ended March 31, 2006, with the adoption of
SFAS 123(R), the Company recorded stock-based compensation expense for the fair
value of stock options. Stock-based compensation expense of $4.5 million,
resulting from the adoption of SFAS 123(R), the acquisition of M-Audio, and the
issuance of restricted stock and restricted stock units, was included in the
following captions in our condensed consolidated statement of operations for the
three months ended March 31, 2006 (in thousands):
Three Months Ended
March 31, 2006
-------------------
Cost of product revenues $139
Cost of services revenues 219
Research and development expense 1,335
Marketing and selling expense 1,303
General and administrative expense 1,510
-------------------
$4,506
===================
As permitted under SFAS No. 123 and SFAS 123(R), the Company uses the
Black-Scholes option pricing model to estimate the fair value of stock option
grants. The Black-Scholes model relies on a number of key assumptions to
calculate estimated fair values. The following table sets forth the
weighted-average of the key assumptions and fair value results for stock options
granted during the three-month periods ended March 31, 2006 and 2005:
Three Months Ended
March 31,
---------------------
2006 2005
---------- ----------
Expected dividend yield 0.0% 0.0%
Risk-free interest rate 4.59% 3.88%
Expected volatility 34.9% 51.0%
Expected life (in years) 4.22 4.10
Weighted-average fair value of options granted $16.77 $28.62
The dividend yield of zero is based on the fact that the Company has never paid
cash dividends and has no present intention to pay cash dividends. Since
adoption of SFAS 123(R) on January 1, 2006, the expected stock-price volatility
assumption used by the Company has been based on recent (six month trailing)
implied volatility calculations. These calculations are performed on exchange
traded options of the Company's stock. The Company believes that using a
10
forward-looking market driven volatility assumption will result in the best
estimate of expected volatility. Prior to adoption of SFAS 123(R), the expected
volatility was based on historical volatilities of the underlying stock. The
risk-free interest rate is the U.S. Treasury security rate with a term equal to
the expected life of the option. The expected life is based on company-specific
historical experience. With regard to the estimate of the expected life, the
Company considers the exercise behavior of past grants and models the pattern of
aggregate exercises. Based on the Company's historical turnover rates, an
annualized estimated forfeiture rate of 6.5% has been used in calculating the
estimated cost for the three-month period ended March 31, 2006. Additional
expense will be recorded if the actual forfeiture rate is lower than estimated,
and a recovery of prior expense will be recorded if the actual forfeiture is
higher than estimated. Prior to the adoption of SFAS 123(R), forfeitures were
not estimated at the time of award and adjustments were reflected in pro forma
net income disclosures as forfeitures occurred.
Information with respect to options granted under all stock option plans is as
follows:
Three Months Ended March 31, 2006
---------------------------------------------------------
Weighted- Weighted- Aggregate
Average Average Intrinsic
Shares Exercise Remaining Value
Price Contractual (in thousands)
Term
------------ ---------- ------------ --------------
Options outstanding at December 31, 2005 4,220,174 $36.65
Granted 67,400 $47.86
Exercised (142,083) $16.51
Forfeited (78,832) $39.28
Canceled (7,449) $59.51
------------
Options outstanding at March 31, 2006 4,059,210 $37.45 7.50 $43,791
============
Options vested and expected to vest at
March 31, 2006 3,900,478 $37.11 7.44 $43.257
============
Options exercisable at March 31, 2006 2,245,672 $33.94 6.66 $33,744
============
The aggregate intrinsic value of stock options exercised during the three months
ended March 31, 2006 was approximately $3.9 million. Cash received from the
exercise of stock options for the three months ended March 31, 2006 was $2.3
million. The Company did not realize any actual tax benefit from the tax
deductions for stock option exercises for the three months ended March 31, 2006,
due to the full valuation allowance on the Company's U.S. deferred tax assets.
The following table summarizes the status of the Company's non-vested restricted
stock units as of December 31, 2005, and changes during the three months ended
March 31, 2006:
Non-Vested Restricted Stock Units
--------------------------------------------------------------
Weighted- Weighted-Average Aggregate
Average Remaining Intrinsic
Shares Grant-Date Recognition Period Value
Fair Value (in thousands)
----------- ---------- ------------------- -------------
Non-vested at December 31, 2005 - -
Granted 207,757 $47.01
Vested - -
Forfeited (67) 47.01
-----------
Non-vested at March 31, 2006 207,690 $47.01 3.94 $9,024
===========
11
The following table summarizes the status of the Company's non-vested restricted
stock as of December 31, 2005, and changes during the three months ended March
31, 2006:
Non-Vested Restricted Stock
--------------------------------------------------------------
Weighted- Weighted-Average Aggregate
Average Remaining Intrinsic
Shares Grant-Date Recognition Period Value
Fair Value (in thousands)
----------- ---------- ------------------- -------------
Non-vested at December 31, 2005 15,000 $56.72
Granted 8,618 47.01
Vested - -
Forfeited - -
-----------
Non-vested at March 31, 2006 23,618 $53.18 3.10 $1,026
===========
As of March 31, 2006, there was $36.7 million of total unrecognized compensation
cost, before forfeitures, related to non-vested stock-based compensation awards
granted under the Company's stock-based compensation plans. This cost will be
recognized over the next four years. We expect this amount to be amortized as
follows: $13.0 million during the remainder of 2006, $12.1 million in 2007, and
$11.6 million thereafter. The weighted-average recognition period of the total
unrecognized compensation cost is 1.48 years.
The Company's 1996 Employee Stock Purchase Plan, as amended through May 25,
2003, authorizes the issuance of a maximum of 1,700,000 shares of common stock
in quarterly offerings to employees at a price equal to 95% of the closing price
on the applicable offering termination date. As of March 31, 2006, 319,931
shares remain available for issuance under this plan. Based on the plan design,
the Company's 1996 Employee Stock Purchase Plan is considered noncompensatory
under SFAS 123(R). Accordingly, the Company is not required to assign fair value
to shares issued from this plan.
8. CONTINGENCIES
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 from time to time 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.
In April 2005, Avid was notified by the Korean Federal Trade Commission ("KFTC")
that a former reseller, Neat Information Telecommunication, Inc. ("Neat"), had
filed a petition against a subsidiary, Avid Technology Worldwide, Inc., alleging
unfair trade practices. On August 11, 2005, the KFTC issued a decision in favor
of Avid regarding the complaint filed by Neat. However, Neat filed a second
petition with the KFTC on October 17, 2005 alleging the same unfair trade
practices as those set forth in the former KFTC petition. On January 13, 2006,
Avid filed its response to the second KFTC petition denying Neat's allegations.
On February 16, 2006, the KFTC reaffirmed its earlier decision in favor of Avid
and concluded its review of the case. In addition, on October 14, 2005, Neat
filed a civil lawsuit in Seoul Central District Court against Avid Technology
Worldwide, Inc. alleging unfair trade practices. In the civil action, Neat is
seeking approximately $1.7 million in damages, plus interest and attorneys fees.
The Company has filed answers to the complaint denying Neat's allegations. Avid
believes that Neat's claims are without merit and intends to vigorously defend
the claim in these actions. Avid cannot predict the outcome of these actions at
this time and, accordingly, no costs have been accrued for any possible loss
contingency.
From time to time, the Company provides indemnification provisions in agreements
with customers covering potential claims by third parties of intellectual
property infringement. These agreements generally provide that the Company will
indemnify customers for losses incurred in connection with an infringement claim
brought by a third party with respect to the Company's 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 incurred material costs related to these indemnification
provisions. As a result, the Company believes the estimated fair value of these
indemnification provisions is minimal.
12
As permitted under Delaware law, Avid has agreed to indemnify its officers and
directors for certain events that occur while the officer or director is serving
in such capacity. The term of the indemnification period is for each respective
officer's or director's lifetime. The maximum potential amount of future
payments the Company could be required to make under these indemnification
agreements is unlimited; however, Avid has mitigated the exposure through the
purchase of directors and officers insurance, which is intended to limit the
risk and, in most cases, enable the Company to recover all or a portion of any
future amounts paid. As a result of this insurance policy coverage and Avid's
related payment experience to date, the Company believes the estimated fair
value of these indemnification agreements 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 March 31, 2006, of $3.5
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
March 31, 2006, the Company was not in default of this lease.
The Company, through a third party, provides lease financing options to its
customers, including end-users and, on a limited basis, resellers. 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 March 31, 2006 and
December 31, 2005, Avid's maximum recourse exposure totaled approximately $13.5
million and $13.0 million, respectively. The Company records revenue from these
transactions upon the shipment of products, provided that all other revenue
recognition criteria, including collectibility being reasonably assured, 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 significant 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 of the original funded amount. This
low default rate results from the diligence of the third party leasing company
in screening applicants and in collecting amounts due, and because Avid actively
monitors its exposures under the financing program and participates in the
approval process for any lessees outside of agreed-upon credit-worthiness
metrics. The Company maintains a reserve for estimated losses under this
recourse lease program based on these historical default rates compared to the
funded amount outstanding at period end. At both March 31, 2006 and December 31,
2005, the Company's accrual for estimated losses was $1.8 million.
Avid provides warranties on externally sourced and internally developed
hardware. For internally developed hardware and in cases where the warranty
granted to customers for externally sourced hardware is greater than that
provided by the manufacturer, the Company 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
or local law.
The following table sets forth the activity in the product warranty accrual
account (in thousands):
Three Months Ended March 31,
2006 2005
-------------- -------------
Accrual balance at beginning of period $6,190 $2,261
Accruals for product warranties 1,165 1,074
Cost of warranty claims (1,084) (948)
-------------- -------------
Accrual balance at end of period $6,271 $2,387
============== =============
The $3.9 million product warranty accrual increase from 2005 to 2006 is
primarily the result of $3.3 million of acquired Pinnacle warranty accruals.
13
9. 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
March 31,
-----------------------
2006 2005
----------- -----------
Net income $3,345 $19,746
Net changes in:
Foreign currency translation adjustmen 1,330 (1,263)
Unrealized gains (losses) on securities (84) 62
----------- -----------
Total comprehensive income $4,591 $18,545
=========== ===========
10. SEGMENT INFORMATION
The Company's organizational structure is based on strategic business units,
each of which offers various products to the principal markets in which the
Company's products are sold. These business units equate to three reportable
segments: Professional Film, Video and Broadcast; Audio; and Consumer Video. The
following is a summary of the Company's operations by reportable segment (in
thousands):
Three Months Ended
March 31,
--------------------------
2006 2005
------------- -----------
Professional Film, Video and Broadcast:
Net revenues $116,200 $104,485
Operating income (loss) 10,111 15,115
Audio:
Net revenues $72,747 $61,516
Operating income (loss) 9,592 7,867
Consumer Video:
Net revenues $29,123 -
Operating income (loss) (2,419) -
Combined Segments:
Net revenues $218,070 $166,001
Operating income (loss) 17,284 22,982
Certain expenses are not included in the operating results of the reportable
segments because management does not consider them in evaluating operating
results of the segments. The following table reconciles operating income (loss)
for reportable segments to the total consolidated amounts for the three-month
periods ended March 31, 2006 and 2005 (in thousands):
Three Months Ended
March 31,
-----------------------
2006 2005
---------- -----------
Total operating income for reportable segments $17,284 $22,982
Unallocated amounts:
Restructuring costs (1,066) -
Stock-based compensation (4,435) (771)
In-process research and development (310) -
Amortization of acquisition-related intangible assets (8,745) (1,873)
---------- -----------
Consolidated operating income $2,728 $20,338
========== ===========
14
11. RESTRUCTURING COSTS AND ACCRUALS
In March 2006, the Company implemented a restructuring program within the
Consumer Video segment under which 23 employees worldwide, primarily in the
marketing and selling and research and development functions, were notified that
their employment would be terminated. The program was the result of an
examination of the business by management to identify areas in which changes in
the organizational structure were needed to better support the way business is
now being conducted. In connection with this action, the Company recorded a
charge of $1.1 million. Payments to the employees are expected to be completed
during 2006.
In December 2005, the Company implemented a restructuring program under which
the employment of 20 employees worldwide was terminated and a portion of a
leased facility in Montreal, Canada was vacated. In connection with these
actions, the Company recorded charges of $0.8 million for employee terminations
and $0.5 million for continuing rent obligations on excess space vacated, net of
potential sublease income.
Also during 2005, the Company recorded a charge of $1.8 million in connection
with a revised estimate of the lease obligation associated with a facility that
was vacated as part of a restructuring plan in 1999. The revision was necessary
due to one of the subtenants in the facility giving notice of their intention to
discontinue their sublease. The lease extends through September 2010.
The Company recorded these 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 estimated 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
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. These restructuring charges and accruals
require significant estimates and assumptions, including sub-lease income
assumptions. These estimates and assumptions are monitored on at least a
quarterly basis for changes in circumstances and any corresponding adjustments
to the accrual are recorded in the Company's statement of operations in the
period when such changes are known.
In connection with the August 2005 Pinnacle acquisition, the Company recorded
accruals of $14.4 million in 2005, the components of which are disclosed in the
table below, related to severance agreements and lease or other contract
terminations in accordance with EITF 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination". Such amounts recorded in
connection with the Pinnacle acquisition are reflected in the purchase price
allocation for the acquisition and any adjustments to the accruals are recorded
as adjustments to goodwill (see Note 3) and are not recorded in the Company's
statement of operations.
The following table sets forth the activity in the restructuring and other costs
accruals for the three months ended March 31, 2006 (in thousands):
2006 and Prior Pinnacle Acquisition
Restructurings Restructuring
Liabilities
--------------------- ---------------------
Employee Facilities Employee Facilities
Related Related Related Related Total
--------------------- --------------------- ----------
Accrual balance at December 31, 2005 $129 $4,467 $2,976 $2,785 $10,357
Restructuring charge 1,134 - - - 1,134
Revisions of estimated liabilities (68) - (523) (394) (985)
Cash payments for employee-related charges (61) - (577) - (638)
Cash payments for facilities, net of sublease income - (387) - (607) (994)
Foreign exchange 16 15 45 26 102
--------------------- --------------------- ----------
Accrual balance at March 31, 2006 $1,150 $4,095 $1,921 $1,810 $8,976
===================== ===================== ==========
The facilities-related accruals at March 31, 2006 represent estimated losses on
subleases of space vacated as part of the Company's restructuring actions. The
leases, and payments against the amount accrued, extend through 2011 unless the
Company is able to negotiate earlier terminations.
15
The employee-related accruals at March 31, 2006 represent cash payments to be
made in 2006 to former employees and are the result of restructuring actions
taken in 2006 and 2005.
The $9.0 million total restructuring and other costs accruals at March 31, 2006,
consists of $5.8 million recorded in accrued expenses and other current
liabilities and $3.2 million recorded in long-term liabilities. The $10.4
million total restructuring and other costs accruals at December 31, 2005,
consists of $6.5 million recorded in accrued expenses and other current
liabilities and $3.9 million recorded in long-term liabilities.
12. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2006, the Financial Standards Accounting Board, or FASB, issued SFAS
No. 156, "Accounting for Servicing of Financial Assets", an amendment to FASB
Statement No. 140. SFAS No. 156 requires recognition of a servicing asset or
servicing liability whenever an entity enters into certain service agreements
which result in an obligation to service a financial asset, and requires that
servicing assets and servicing liabilities be recognized at fair value, if
practicable. SFAS No. 156 will be effective for fiscal years beginning after
September 15, 2006, or January 1, 2007 for Avid. Adoption of SFAS No. 156 is not
expected to have a material impact on the Company's financial position or
results of operations.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments", an amendment to FASB Statements No. 133 and 140.
SFAS No. 155 permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation. SFAS No. 155 will be effective for fiscal years beginning after
September 15, 2006, or January 1, 2007 for Avid. As of March 31, 2006, the
Company did not have any hybrid financial instruments subject to the fair value
election of SFAS No. 155.
In February 2006, the FASB issued FSP No. FAS 123(R)-4, "Classification of
Options and Similar Instruments Issued as Employee Compensation That Allow for
Cash Settlement upon the Occurrence of a Contingent Event", which addresses the
classification of options and similar instruments issued as employee
compensation that allow for cash settlement upon occurrence of a contingent
event. The guidance in this FSP shall be applied upon initial adoption of SFAS
123(R) or the first reporting period beginning after the date of adoption,
whichever is later. Adoption of this standard is not expected to have a material
impact on the Company's financial position or results of operations.
In November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3,
"Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards." The Company is considering whether to adopt the alternative
transition method provided in the FASB Staff Position ("FSP") for calculating
the tax effects of stock-based compensation pursuant to SFAS 123(R). The
alternative transition method includes simplified methods to establish the
beginning balance of the additional paid-in capital pool ("APIC Pool") related
to the excess tax benefits available to absorb tax deficiencies recognized
subsequent to the adoption of SFAS 123(R). The Company is currently evaluating
which transition method it will use for calculating its APIC Pool. An entity may
take up to one year from the later of its initial adoption of SFAS 123(R) or the
effective date of this FSP to evaluate its available transition alternatives and
make its one-time election. Until and unless the Company elects the transition
method described in the FSP, the transition method provided in SFAS 123(R) is
being followed. The Company expects to complete its evaluation by December 31,
2006.
In June 2005, the FASB issued FSP No. FAS 143-1, "Accounting for Electronic
Equipment Waste Obligations", or FSP 143-1, which provides guidance on the
accounting for obligations associated with the European Union, or EU, Directive
on Waste Electrical and Electronic Equipment, or the WEEE Directive. FSP 143-1
provides guidance on how to account for the effects of the WEEE Directive with
respect to historical waste associated with products in the market on or before
August 13, 2005. FSP 143-1 is required to be applied to the later of the first
reporting period ending after June 8, 2005 or the date of the adoption of the
WEEE Directive into law by the applicable EU member country. The Company is in
the process of registering with the member countries, as appropriate, and is
still awaiting guidance from these countries with respect to the compliance
costs and obligations for historical waste. Avid will continue to work with each
country to obtain guidance and will accrue for compliance costs when they are
probable and reasonably estimable. The accruals for these compliance costs may
have a material impact on the Company's financial position or results of
operations when guidance is issued by each member country.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", a replacement of APB Opinion No. 20, "Accounting Changes" and
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements".
SFAS No. 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. Previously, most voluntary changes in accounting
principles required recognition in a cumulative effect adjustment within net
income of the period of the change. SFAS No. 154 requires retrospective
16
application to prior periods' financial statements, unless it is impracticable
to determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 was effective for Avid for accounting changes made on or
after January 1, 2006; however, this standard does not change the transition
provisions of any existing accounting pronouncements. The Company's financial
position or results of operations will only be impacted if it implements changes
in accounting principle that are addressed by the standard or corrects
accounting errors in future periods.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs", an amendment
of Accounting Research Bulletin No. 43, which is the result of the FASB's
efforts to converge U.S. accounting standards for inventories with International
Accounting Standards. SFAS No. 151 requires idle facility expenses, freight,
handling costs and wasted material (spoilage) costs to be recognized as
current-period charges. It also requires that the allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. Avid adopted SFAS No. 151 on January 1, 2006. Adoption of
SFAS No. 151 did not have a material impact on the Company's financial position
or results of operations.
13. SUBSEQUENT EVENT
On April 13, 2006, the Company acquired all the outstanding shares of Sundance
Digital, Inc., a Texas-based developer of automation and device control software
for broadcast video servers, tape transports, graphics systems and other
broadcast station equipment, for cash consideration of approximately $12.5
million.
17
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
We develop, market, sell and support a wide range of software and
hardware products for digital media production, management and distribution.
Digital media are video, audio or graphic elements in which an image or sound is
recorded and stored in 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 products help every class of user create and use video
and audio assets, from the home user to the feature film professional. Our
Professional Film, Video and Broadcast, or Professional Video, segment offers
innovative video and film editing systems, as well as 3D and special-effects
software. These products enable professionals, and aspiring professionals, in
the post-production and broadcast markets to manipulate moving pictures and
sound in fast, easy, creative and cost-effective ways. Our Audio segment offers
consumer and professional digital audio software applications and hardware
systems for music, film, television, video, broadcast, streaming media and web
development. These systems are based upon proprietary audio hardware, software
and control surfaces, and allow users to record, edit, mix, process and master
audio in an integrated manner. Our Consumer Video segment offers products for
home video editing and TV viewing. Our home video editing products allow users
to create, edit and share video content more easily and effectively, while our
TV viewing products allow consumers to view, record and time shift television
programming on their computers.
Manage Media. The ability to manage digital media assets effectively is
a critical component of success for all content creators. Our technology
enables users to simultaneously share and manage media assets throughout a
project or organization. As a result, professionals can collaborate in real
time on all production elements and streamline the process for cost-effective
management and delivery of media. In addition, our tools allow customers to
easily repurpose digital assets to take advantage of a variety of market
opportunities. For consumer applications, we also offer products that allow
users to manage their media projects, such as home movies or recorded music.
Move Media. Our products allow our customers to distribute media over
multiple platforms - including air, cable or satellite, or on 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. For professionals as well as consumers, our
laptop-based editing systems, storage products and DVD authoring tools enable
easy portability of media.
Our products are used worldwide in production and post-production
facilities; film studios; network, affiliate, independent and cable television
stations; recording studios; performance venues; advertising agencies;
government and educational institutions; corporate communication departments;
and by game developers and Internet professionals, as well as by amateurs,
aspiring professionals and home hobbyists. Projects produced by customers using
our products have been honored with Oscar(R), Emmy(R) and Grammy(R) awards, in
addition to a host of other international awards. We have also received numerous
awards for technical innovations, including two Oscars, 12 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.
Recently, we have focused on expanding and enhancing our product lines
and increasing revenues through both acquisitions and the internal development
of products. As part of this strategy, we made the following acquisitions in
2005 and 2006.
o On April 13, 2006, we acquired Sundance Digital, Inc., a Texas-based
developer of automation and device control software for broadcast
video servers, tape transports, graphics systems and other broadcast
station equipment.
o On January 12, 2006, we acquired Medea Corporation, a
California-based provider of low cost storage solutions for real-time
media applications. The acquisition of Medea will allow us to provide
high performance, low cost RAID (Redundant Array of Independent
Disks) storage solutions to our Professional Video customers.
18
o In August 2005, we acquired California-based Pinnacle Systems, Inc.,
a supplier of digital video products to customers ranging from
hobbyists to broadcasters. The acquisition of Pinnacle has allowed us
to expand our offerings within our Professional Video segment through
the integration of Pinnacle's broadcast and professional offerings,
including the Deko(R) on-air graphics system and the MediaStream(TM)
playout server, into that segment. We also created a new Consumer
Video segment which offers Pinnacle's consumer products, including
Pinnacle Studio(TM) and other products.
o In August 2005, we also acquired Wizoo Sound Design GmbH, a
Germany-based provider of virtual instruments for music producers and
sound designers. Wizoo's products have been and will continue to be
sold through our Audio segment. Wizoo technology is also being
integrated into other Avid Audio product offerings to expand features
and functionality.
Total net revenues for the first quarter of 2006 were $218.1 million, an
increase of $52.1 million, or 31.4%, compared to the first quarter last year.
Approximately 90% of this increase represents net revenues from Pinnacle, which
was acquired in the third quarter of 2005. Net income for the first quarter of
2006 was $3.3 million, a decrease of $16.4 million, or 83.1%, from the same
period last year. However, $4.0 million of this decrease was the direct result
of the adoption of Statement of Financial Standards, or SFAS, No. 123 (revised
2004), "Share-Based Payment", or SFAS 123(R), on January 1, 2006, which requires
the recognition of fair value expense for all stock-based compensation awards.
Net income for the first quarter of 2006 also included $8.7 million of
amortization expense and $1.1 million of restructuring costs, compared to $1.9
million of amortization expense and no restructuring expense for the same period
last year. Our operating activities continue to generate positive cash flow with
cash of $10.3 million provided by operating activities in the first quarter of
2006.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in
conformity with U.S. generally accepted accounting principles and our discussion
and analysis of our financial condition and results of operations requires us to
make judgments, assumptions, and estimates that affect the amounts reported in
our consolidated financial statements and accompanying notes. Note B of the
Notes to Consolidated Financial Statements in our 2005 Annual Report on Form
10-K describes the significant accounting policies and methods used in the
preparation of our consolidated financial statements. We base our estimates on
historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
judgments about the carrying values of assets and liabilities. Actual results
may differ from these estimates.
We believe that our 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, business combinations, goodwill and intangible assets, stock-based
compensation and income tax assets. We believe these policies are critical
because they are important to the portrayal of our financial condition and
results of operations, and they require us to make judgments and estimates about
matters that are inherently uncertain. Additional information about our critical
accounting policies, except stock-based compensation, may by found in our 2005
Annual Report on 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." The critical accounting policy for
stock-based compensation, which follows, is being added as of this report as a
result of the adoption of SFAS 123(R) on January 1, 2006.
Stock-Based Compensation
During the first quarter of 2006, we adopted the provisions of and
accounted for stock-based compensation in accordance with SFAS No. 123 (revised
2004), "Share-Based Payment", which is a revision of SFAS No. 123, "Accounting
for Stock Based Compensation". SFAS 123(R) requires employee stock-based
compensation awards to be accounted for under the fair value method and
eliminates the ability to account for these instruments under the intrinsic
value method as prescribed by Accounting Principles Board, or APB, Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations. We
adopted SFAS 123(R) on January 1, 2006 using the modified prospective
application method as permitted under SFAS 123(R). Under this method, we are
required to record compensation cost, based on the fair value estimated in
accordance with SFAS 123(R), for stock-based awards granted after the date of
adoption over the requisite service periods for the individual awards, which
generally equals the vesting period. We are also required to record compensation
cost for the unvested portion of previously granted stock-based awards
outstanding at the date of adoption over the requisite service periods for the
individual awards based on the fair value estimated in accordance with the
original provisions of SFAS No. 123.
19
Prior to the adoption of SFAS 123(R), we accounted for stock-based
compensation under the recognition and measurement principles of APB Opinion No.
25 and related interpretations. Accordingly, no compensation expense was
recorded for options issued to employees and non-employee directors in fixed
amounts and with fixed exercise prices at least equal to the market price of our
common stock at the date of grant. When the exercise price of stock options
granted to employees was less than the market price of our common stock at the
date of grant, we recorded the difference multiplied by the number of shares
under option as deferred compensation, which was amortized over the vesting
period of the options. Additionally, deferred compensation was recorded for
restricted stock granted to employees based on the market price of our common
stock at the date of grant and was amortized over the period in which the
restrictions lapsed. We reversed deferred compensation associated with unvested
restricted stock upon the cancellation of shares for terminated employees.
In anticipation of the adoption of SFAS 123(R), on October 26, 2005, our
Board of Directors approved a partial acceleration of the vesting of all
outstanding options to purchase our common stock that were granted on February
17, 2005. Vesting was accelerated for options to purchase 371,587 shares of our
common stock, par value $0.01 per share, with an exercise price of $65.81 per
share, including options to purchase 157,624 shares of our common stock held by
our executive officers. The decision to accelerate vesting of these options was
made to avoid recognizing compensation cost related to these out-of-the money
options in our future statements of operations upon the adoption of SFAS 123(R).
It is estimated that the maximum future compensation expense that would have
been recorded in our statements of operations had the vesting of these options
not been accelerated is approximately $4.4 million.
As permitted under SFAS No. 123 and SFAS 123(R), we use the
Black-Scholes option pricing model to estimate the fair value of stock option
grants. The Black-Scholes model relies on a number of key assumptions to
calculate estimated fair values. Our assumed dividend yield of zero is based on
the fact that we have never paid cash dividends and have no present intention to
pay cash dividends. Since adoption of SFAS 123(R) on January 1, 2006, the
expected stock-price volatility assumption used by us has been based on recent
(six month trailing) implied volatility calculations. These calculations are
performed on exchange traded options of our stock. We believe that using a
forward-looking market driven volatility assumption will result in the best
estimate of expected volatility. Prior to adoption of SFAS 123(R), the expected
volatility was based on historical volatilities of the underlying stock. The
assumed risk-free interest rate is the U.S. Treasury security rate with a term
equal to the expected life of the option. The assumed expected life is based on
company-specific historical experience. With regard to the estimate of the
expected life, we consider the exercise behavior of past grants and models the
pattern of aggregate exercises. Based on our historical turnover rates, an
annualized estimated forfeiture rate of 6.5% has been used in calculating the
estimated cost for the three-month period ending March 31, 2006. Additional
expense will be recorded if the actual forfeiture rate is lower than estimated,
and a recovery of prior expense will be recorded if the actual forfeiture is
higher than estimated. Prior to the adoption of SFAS 123(R), forfeitures were
not estimated at the time of award and adjustments were reflected in pro forma
net income disclosures as forfeitures occurred.
If factors change and we employ different assumptions for estimating
stock-based compensation expense in future periods, or if we decide to use a
different valuation model, the stock-based compensation expense we recognize in
future periods may differ significantly from what we have recorded in the
current period and could materially affect our operating income, net income and
earnings per share. It may also result in a lack of comparability with other
companies that use different models, methods and assumptions. The Black-Scholes
option-pricing model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable.
These characteristics are not present in our option grants. Existing valuation
models, including the Black-Scholes model, may not provide reliable measures of
the fair values of our stock-based compensation. Consequently, there is a risk
that our estimates of the fair values of our stock-based compensation awards on
the grant dates may bear little resemblance to the actual values realized upon
the exercise, expiration, early termination or forfeiture of those stock-based
payments in the future. Certain stock-based payments, such as employee stock
options, may expire with little or no intrinsic value compared to the fair
values originally estimated on the grant date and reported in our financial
statements. Alternatively, the value realized from these instruments may be
significantly higher than the fair values originally estimated on the grant date
and reported in our financial statements. Currently, there is no market-based
mechanism or other practical application to verify the reliability and accuracy
of the estimates stemming from these valuation models, nor is there a means to
compare and adjust the estimates to actual values. The guidance in SFAS 123(R)
is relatively new from an application perspective and the application of these
principles may be subject to further interpretation and refinement over time.
See Note 7 of the Condensed Consolidated Financial Statements in Item 1 for
further information regarding our adoption of SFAS 123(R).
20
During the first quarter of 2006, we granted restricted stock units,
rather than stock options, as part of our annual stock-based compensation plan.
We also granted restricted stock and stock options to new hires and for other
purposes. In the future, as determined by our continued analysis, we may grant
either stock awards, options, or other equity based instruments allowed by our
stock based compensation plans, or a combination thereof, as part of our overall
compensation strategy.
RESULTS OF OPERATIONS
Net Revenues
We develop, market, sell and support a wide range of software and
hardware for digital media production, management and distribution. Our net
revenues are derived mainly from the sales of computer-based digital, nonlinear
media editing systems and related peripherals, licensing of software and sales
of related software maintenance contracts. We are organized into strategic
business units that reflect the principal markets in which our products are
sold: Professional Video, Audio and Consumer Video. Discrete financial
information is available for each business unit and the operating results of
these business units are evaluated regularly to make decisions regarding the
allocation of resources and to assess performance. As such, these business units
represent our reportable segments under Statement of Financial Standards, or
SFAS, No. 131, "Disclosures about Segments of an Enterprise and Related
Information".
Our Professional Video segment produces tools for digital non-linear
editing and finishing, data storage, digital asset management and on-air
graphics to improve the productivity of video and film editors and broadcasters
by enabling them to manipulate moving pictures and sound in a faster, easier,
more creative and more cost-effective manner than by use of traditional analog
tape-based systems. The products in this operating segment are designed to
provide capabilities for editing and finishing feature films, television shows,
broadcast news programs, commercials, music videos and corporate and consumer
videos. Our Audio segment produces digital audio systems for the audio market.
This operating segment includes products developed to provide audio recording,
editing, signal processing and mixing. This segment also includes our M-Audio
product family acquired in August 2004. Our Consumer Video segment develops and
markets products that are aimed primarily at the consumer market, which allow
users to create, edit, view and distribute rich media content including video,
photographs and audio. This segment is comprised of specific product lines
acquired as part of our acquisition of Pinnacle.
The following is a summary of our net revenues by segment for the
three-month periods ended March 31, 2006 and 2005:
Three Months Ended March 31,
-----------------------------------------------------------------------
(dollars in thousands)
% of % of
2006 Consolidated 2005 Consolidated %Change
Net Net Net Net in
Revenues revenues Revenues revenues Change Revenues
----------- ------------ ----------- ------------ ---------- ----------
Professional Video
Product Revenues: $92,741 42.5% $86,140 51.9% $6,601 7.7%
Service Revenues: 23,459 10.8% 18,345 11.0% 5,114 27.9%
----------- ------------ ----------- ------------ ----------
Total 116,200 53.3% 104,485 62.9% 11,715 11.2%
----------- ------------ ----------- ------------ ----------
Audio
Product Revenues: 72,158 33.1% 61,238 36.9% 10,920 17.8%
Service Revenues: 589 0.3% 278 0.2% 311 111.9%
----------- ------------ ----------- ------------ ----------
Total 72,747 33.4% 61,516 37.1% 11,231 18.3%
----------- ------------ ----------- ------------ ----------
Consumer Video
Product Revenues: 29,123 13.3% - - 29,123 100.0%
----------- ------------ ----------- ------------ ----------
Total 29,123 13.3% - - 29,123 100.0%
----------- ------------ ----------- ------------ ----------
Total Net Revenues: $218,070 100.0% $166,001 100.0% $52,069 31.4%
=========== ============ =========== ============ ==========
Our acquisition of Pinnacle accounted for $15.4 million of Professional
Video product revenues during the three-month period ended March 31, 2006. This
was partially offset by decreased revenues for editing and finishing products,
21
which were primarily the result of lower average selling prices in the current
quarter compared to strong results in the first quarter of 2005. Average selling
prices reflect the impact of price changes and discounting, changes in the mix
of products sold (high- or low-end), and the impact of changes in foreign
currency exchange rates. We expect sales to broadcast customers will be an area
of continued revenue growth in the future.
Service revenues consist primarily of maintenance contracts,
installation services and training. Professional video services revenues
resulting from the Pinnacle acquisition were $3.2 million for the three-month
period ended March 31, 2006. The remaining increase in Professional Video
service revenues was primarily due to increases in maintenance contracts sold on
our products. Professional services, such as installation services provided in
connection with large broadcast news deals, also increased.
The increase in revenues for our Audio segment was the result of
increased revenues from Digidesign's Control Surfaces and Live Sound Mixing
Consoles product lines, as well as increased sales of M-Audio products.
The Consumer Video segment was formed in the third quarter of 2005 with
our acquisition of Pinnacle; therefore, there is no comparable data for the
first quarter of 2005. All of the revenues for the three-month period ended
March 31, 2006 represent revenue from the Pinnacle consumer business acquired in
August 2005. Net revenues for the Consumer Video segment for the third and
fourth quarters of 2005 were $18.5 million and $40.6 million, respectively. The
decline in revenues from the fourth quarter of 2005 to the first quarter of 2006
is partially due to seasonality of our Consumer Video products, whose revenues
typically peak in the fourth quarter of the year, as well as the residual impact
of quality issues surrounding the introduction of Pinnacle Studio version 10.
Net revenues derived through indirect channels were 73% and 66% for the
three-month periods ended March 31, 2006 and 2005, respectively. This increase
in indirect selling was due primarily to the acquisition of Pinnacle, whose
consumer products are sold almost exclusively through indirect channels.
For the three-month period ended March 31, 2006, international sales
accounted for 57% of our net revenues compared to 56% for the same period in
2005. International sales increased by $30.7 million or 32.9% for the three
months ended March 31, 2006 compared to the corresponding 2005 period. This
increase in international sales occurred in Europe, Asia and Canada.
Gross Profit
Cost of revenues consists primarily of costs associated with the
procurement of components; the assembly, testing, and distribution of finished
products; warehousing; post-sales customer support costs related to maintenance
contract revenue and other services; and royalties for third-party software and
hardware 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.
The following is a summary of our cost of revenues and gross margin
percentages for the three-month periods ended March 31, 2006 and 2005:
Three Months Ended March 31,
---------------------------------------------------------------------------
(dollars in thousands)
% of Net
% of Net Gross
Related Gross Related Gross Margin
2006 Revenues Margin % 2005 Revenues Margin % % Change
--------- ---------- ---------- --------- ---------- ---------- -----------
Product Cost of Revenues $91,361 47.1% 52.9% $60,897 41.3% 58.7% (5.8%)
Services Cost of Revenues 13,315 55.4% 44.6% 10,070 54.1% 45.9% (1.3%)
Amortization of Technology 5,080 2.6% - 281 0.2% - -
--------- ---------
Total $109,756 50.3% 49.7% $71,248 42.9% 57.1% (7.4%)
========= =========
The decrease in the product gross margin percentage for the three-month
period ended March 31, 2006, as compared to the same period in 2005, primarily
reflects changes in product mix largely due to the acquisition of Pinnacle, as
22
well as an unfavorable impact of foreign currency exchange rates on revenues
which are typically denominated in the currency of the customer while a
significant percentage of the costs are denominated in U.S. dollars, reduced
product pricing due to competitive pressures, and an increased number of sales
promotions, which were partially offset by increased volumes.
The service gross margin decrease for the three-month period ended March
31, 2006, as compared to the same period in 2005, primarily reflects the impact
of the Pinnacle acquisition which has lower services gross margins, partially
offset by increased services revenue. Amortization of technology included in
costs of sales primarily represents the amortization of developed technology
assets resulting from the August 2005 Pinnacle acquisition.
Costs and Expenses
Beginning with the three-month period ended March 31, 2006, with the
adoption of SFAS 123(R), the Company recorded stock-based compensation expense
for the fair value of stock options. Stock-based compensation expense of $4.5
million for the three months ended March 31, 2006, resulting from the adoption
of SFAS 123(R), the acquisition of M-Audio, and the issuance of restricted stock
and restricted stock units, and stock-based compensation expense of $0.9 million
for the three months ended March 31, 2005, resulting from the acquisition of
M-Audio and the issuance of restricted stock, was included in the following
captions in our condensed consolidated statement of operations (in thousands):
Three Months Ended
March 31,
--------------------
2006 2005
--------- --------
Cost of product revenues $ 139 $ -
Cost of services revenues 219 -
Research and development expense 1,335 83
Marketing and selling expense 1,303 235
General and administrative expense 1,510 524
--------- --------
$ 4,506 $ 842
========= ========
As of March 31, 2006, there was $36.7 million of total unrecognized
compensation cost, before forfeitures, related to non-vested stock-based
compensation awards granted under the Company's stock-based compensation plans.
This cost will be recognized over the next four years. We expect this amount to
be amortized as follows: $13.0 million during the remainder of 2006, $12.1
million in 2007, and $11.6 million thereafter. See Note 7 of the Condensed
Consolidated Financial Statements in Item 1 for further information regarding
our stock-based compensation assumptions and expenses, including pro forma
disclosures for the three-month period ended March 31, 2005.
Research and Development
Three Months Ended March 31,
-----------------------------------------------
(dollars in thousands)
2006 2005
Expenses Expenses Change % Change
----------- ------------ ----------- -----------
Research and Development: $35,496 $24,679 $10,817 43.8%
Percentage of Net Revenues: 16.3% 14.9% 1.4%
Research and development expenses include costs associated with the
development of new products and enhancement of existing products, and consist
primarily of employee salaries and benefits, facilities costs, depreciation,
consulting and temporary help, and prototype and development expenses. For the
three-month period ended March 31, 2006, the increase in research and
development expenditures was primarily due to an increase in personnel-related
costs and facilities costs, particularly related to the acquisition of Pinnacle
in August 2005. We also incurred increased stock-based compensation expense of
$1.3 million as a result of the adoption of SFAS 123(R) on January 1, 2006. The
increase in research and development expense as a percentage of revenues relates
to the increase in stock-based compensation in 2006 as well as to the other
spending increases noted above.
23
Marketing and Selling
Three Months Ended March 31,
-----------------------------------------------
(dollars in thousands)
2006 2005
Expenses Expenses Change % Change
----------- ------------ ----------- -----------
Marketing and Selling $49,912 $37,842 $12,070 31.9%
Percentage of Net Revenues: 22.9% 22.8% 0.1%
Marketing and selling expenses consist primarily of employee salaries
and benefits for sales, marketing and pre-sales customer support personnel,
commissions, travel expenses, advertising and promotional expenses, and
facilities costs. For the three-month period ended March 31, 2006, the increase
in marketing and selling expenses, as compared to the same period last year, was
primarily due to higher spending for advertising, trade shows and other
marketing programs, as well as higher personnel-related costs, including
salaries and related taxes, benefits, and commissions, in large part due to the
acquisition of Pinnacle in August 2005. We also spent more on consulting and
other outside services during the three-month period ended March 31, 2006 as
compared to the corresponding period in 2005. We also incurred increased
stock-based compensation expense of $1.1 million as a result of the adoption of
SFAS 123(R) on January 1, 2006.
General and Administrative
Three Months Ended March 31,
-----------------------------------------------
(dollars in thousands)
2006 2005
Expenses Expenses Change % Change
----------- ----------- ------------ -----------
General and Administrative $15,137 $10,302 $4,835 46.9%
Percentage of Net Revenues: 6.9% 6.2% 0.7%
General and administrative expenses consist primarily of employee
salaries and benefits for administrative, executive, finance and legal
personnel, audit and legal fees, insurance and facilities costs. For the
three-month period ended March 31, 2006, the increase in general and
administrative expenditures was primarily due to higher personnel-related costs,
as well as higher facilities-related costs and depreciation, all primarily
resulting from our acquisition of Pinnacle in August 2005. We also incurred
increased stock-based compensation expense of $1.0 million as a result of the
adoption of SFAS 123(R) on January 1, 2006.
Restructuring and Other Costs
In March 2006, we implemented a restructuring program within our
Consumer Video segment under which 23 employees worldwide, primarily in the
marketing and selling and research and development functions, were notified that
their employment would be terminated. The program was the result of an
examination of the business by management to identify areas in which changes in
the organizational structure were needed to better support the way business is
now being conducted. In connection with this action, we recorded a charge of
$1.1 million. The estimated annual cost savings expected to result from this
restructuring action totals approximately $2.9 million.
In-process Research and Development
During the three months ended March 31, 2006, we recorded an in-process
research and development, or R&D, charge of $0.3 million related to the
acquisition of Medea. This in-process R&D represents product development efforts
that were underway at Medea at the time of acquisition, for which technological
feasibility had not yet been established. Technological feasibility is
established when either of the following criteria is met: 1) detail program
design has been completed, documented, and traced to product specifications and
its high-risk development issues have been resolved; or 2) a working model of
the product has been finished and determined to be complete and consistent with
the product design. Upon the acquisition, Medea did not have a completed product
design or working model for the in-process technology and we believe that there
24
is no future alternative use for such technology beyond the stated purpose of
the specific R&D project; therefore the in-process R&D of $0.3 million was
expensed during the three months ended March 31, 2006.
The key assumptions used in the valuation consisted of the expected
completion dates for the in-process projects, estimated costs to complete the
projects, revenue and expense projections assuming future release, and a
risk-adjusted discount rate. The discount rate considers risks such as delays to
bring the products to market and competitive pressures. The valuation of Medea
in-process R&D used a discount rate of 20%.
Amortization of Acquisition-Related Intangible Assets
Three Months Ended March 31,
-------------------------------------
(dollars in thousands)
2006 2005 Change
------------ ----------- ------------
Amortization of Intangible Assets: $8,745 $1,873 $6,872
Percentage of Net Revenues: 4.0% 1.1% 2.9%
Included in amortization of intangible assets for the three-month
periods ended March 31, 2006 and 2005, is $5.1 million and $0.3 million,
respectively, for amortization of developed technology which is recorded within
cost of revenues. Acquisition-related intangible assets result from acquisitions
accounted for under the purchase method of accounting and include
customer-related intangibles, developed technology, trade names and other
identifiable intangible assets with finite lives. These intangible assets are
amortized using the straight-line method, with the exception of developed
technology for Pinnacle. Pinnacle developed technology is being amortized on a
product-by-product basis over the greater of the amount calculated using the
ratio of current quarter revenues to the total of current quarter and
anticipated future revenues over the estimated useful lives of two to three
years, or the straight-line method over each product's remaining respective
useful lives. The increase in amortization expense for the three-month period
ended March 31, 2006 reflects acquisitions that occurred during 2005 and in the
first quarter of 2006 as discussed below.
For our Medea acquisition, we performed an allocation of the $9.1
million purchase price to the acquired net tangible and intangible assets based
on their fair values as of the consummation of the acquisition. As part of the
purchase accounting allocation, we recorded $3.8 million of amortizable
identifiable intangible assets, consisting of completed technology, customer
relationships, non-compete covenants and order backlog.
For our Pinnacle acquisition, we performed an allocation of the total
Pinnacle purchase price of $441.4 million to the acquired net tangible and
intangible assets based on their fair values as of the consummation of the
acquisition. The determination of these fair values included management's
consideration of a valuation of Pinnacle's intangible assets prepared by an
independent valuation specialist. As part of the purchase accounting allocation,
we recorded $90.8 million of amortizable identifiable intangible assets,
consisting of completed technologies, customer relationships and trade names.
Other Income (Expense), Net
Three Months Ended March 31,
-------------------------------------
(dollars in thousands)
2006 2005 Change
----------- ------------ -----------
Other Income (Expense), Net: $1,970 $837 $1,133
Percentage of Net Revenues: 0.9% 0.5% 0.4%
Other income (expense), net, generally consists of interest income,
interest expense and equity in income of a non-consolidated company.
The increase in other income and expense, net for the three-month period
ended March 31, 2006 was primarily due to increased interest income earned on
higher average cash and marketable securities balances.
25
Provision for Income Taxes, Net
Three Months Ended March 31,
-----------------------------------
(dollars in thousands)
2006 2005 Change
----------- ------------ -----------
Provision for income taxes, net $1,353 $1,429 ($76)
As a percentage of net revenues 0.6% 0.9% (0.3%)
Our effective tax rate was 29% and 7% for the three-month periods
ended March 31, 2006 and 2005, respectively. The tax provisions for the
three-month periods ended March 31, 2006 and 2005 were substantially comprised
of taxes payable by our foreign subsidiaries and generally non-cash tax
provisions for Federal and state tax on anticipated U.S taxable profits. The
increase in the effective tax rate for the three months ended March 31,2006, as
compared to the same period of 2005, results from: (1) an increased foreign
effective tax rate, (2) an increase in the Federal and state provisions caused
by the absence of net operating loss carry-forwards available to offset current
year profits as a result of the utilization of such carry-forwards, and the
related valuation allowance recognized, in prior years' tax provisions, and
(3) the impact of lower profit before tax caused by increased acquisition
related amortization and the implementation of SFAS 123(R) requiring the
expensing of stock based compensation as we generally recognize no significant
U.S. tax benefit from these expenses due to the full valuation allowance on our
U.S deferred tax assets. Except for a minimal amount of state tax payments, the
Federal and state tax provisions are non-cash provisions due to the tax impact
of net operating loss carry-forwards available from APIC related stock option
deductions and acquisition related net operating loss carry-forwards.
The tax rate in each year is affected by net changes in the valuation
allowance against our deferred tax assets. We regularly review our deferred tax
assets for recoverability taking into consideration such factors as historical
losses after deductions for stock compensation, projected future taxable income
and the expected timing of the reversals of existing temporary differences. SFAS
No. 109, "Accounting for Income Taxes," requires us to record a valuation
allowance when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Based on the level of deferred tax
assets as of March 31, 2006, the level of historical U.S. losses after
deductions for stock compensation, and the level of outstanding stock options
which we anticipate will generate significant U.S. tax deductions in the future,
we have determined that the uncertainty regarding the realization of these
assets is sufficient to warrant the continued establishment of a full valuation
allowance against the U.S. net deferred tax assets.
Our assessment of the valuation allowance on the U.S. deferred tax
assets could change in the future based upon our levels of pre-tax income and
other tax-related adjustments. Removal of the valuation allowance in whole or in
part would result in a non-cash reduction in income tax expense during the
period of removal. In addition, because a portion of the valuation allowance was
established to reserve certain deferred tax assets resulting from the exercise
of employee stock options, in accordance with SFAS No. 109 and SFAS 123(R),
removal of the valuation allowance related to these assets would occur upon
utilization of these deferred tax assets to reduce taxes payable and would
result in a credit to additional paid in capital within stockholders equity
rather than the provision for income taxes. To the extent no valuation allowance
is established for our deferred tax assets in future periods, future financial
statements would reflect an increase in income tax expense which would be on a
non-cash basis until such time as our deferred tax assets are all used to reduce
current taxes payable.
Excluding the impact of the valuation allowance, our effective tax rate
would have been 31% and 30% for the three-month periods ended March 31, 2006 and
2005, respectively. These rates differ from the Federal statutory rate of 35%
primarily due to income in foreign jurisdictions which have lower tax rates.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations in recent years through cash flows from
operations as well as from stock option exercises from our employee stock plans.
As of March 31, 2006, our principal sources of liquidity included cash, cash
equivalents and marketable securities totaling $238.7 million.
With respect to cash flow, net cash provided by operating activities was
$10.3 million for the three months ended March 31, 2006 compared to $20.3
million for the same period in 2005. During the three months ended March 31,
2006, net cash provided by operating activities primarily reflects net income
adjusted for depreciation and amortization and stock-award compensation, as well
26
as a decrease in accounts receivable and an increase in income taxes payable,
partially offset by decreases in accounts payable, accrued expenses, and
deferred revenues, and an increase in inventory. During the three months ended
March 31, 2005, net cash provided by operating activities primarily reflects net
income adjusted for depreciation and amortization as well as an increase in
deferred revenue, partially offset by a decrease in accrued expenses and
accounts payable and an increase in inventory.
Accounts receivable decreased by $9.0 million to $131.7 million at March
31, 2006 from $140.7 million at December 31, 2005. 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. The decrease from December
31, 2005 was primarily attributable to an 11% decrease in revenue for the three
months ended March 31, 2006, as compared to the three months ended December 31,
2005. Days sales outstanding in accounts receivable increased from 52 days at
December 31, 2005 to 54 days at March 31, 2006. The increase in days sales
outstanding was primarily attributable to the relative proportion of solution
sales in each period, which were higher in the December 2005 quarter than the
March 2006 quarter. These sales are typically paid prior to recognition and
therefore lower our days sales outstanding in the period when revenue is
recognized.
At March 31, 2006 and December 31, 2005, we held inventory in the
amounts of $100.7 million and $96.8 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 from December 31, 2005 was
primarily attributable to increased Professional Video inventory including an
increase in demo inventory related to the NAB (National Association of
Broadcasters) trade show, and inventory resulting from the Medea acquisition. We
review all inventory balances regularly for excess quantities or potential
obsolescence and make appropriate adjustments as needed to write-down the
inventories to reflect their estimated realizable value. We source inventory
products and components pursuant to purchase orders placed from time to time.
Net cash flow used in investing activities was $0.3 million for the
three months ended March 31, 2006 compared to $12.2 million for the same period
in 2005. The decrease in net cash flow used in investing activities for the
three months ended March 31, 2006 was primarily the result of the timing of
purchases and sales of marketable securities in the quarter. Sales of marketable
securities resulted in $21.9 million in proceeds, which significantly exceeded
purchases of $8.5 million. Also in the quarter ended March 31, 2006, we paid
$8.9 million in cash plus transaction costs of $0.2 million for Medea.
We purchased $4.4 million of property and equipment during the three
months ended March 31, 2006 compared to $4.2 million in the same period of 2005.
Purchases of property and equipment in both quarters consisted primarily of
computer hardware and software to support research and development activities
and our information systems.
During the three months ended March 31, 2006 and 2005, we generated cash
of $2.7 million and $5.6 million, respectively, from financing activities,
primarily 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 2005 and prior periods,
as well as with the identification in 2003 and 2002 of excess space in various
locations, as of March 31, 2006, we have future cash obligations of
approximately $13.7 million under leases for which we have vacated the
underlying facilities. We have an associated restructuring accrual of $4.1
million at March 31, 2006 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. This restructuring accrual requires significant estimates and
assumptions, including sub-lease income assumptions. These estimates and
assumptions are monitored on a quarterly basis for changes in circumstances and
any corresponding adjustments to the accrual are recorded in the period when
such changes are known. The lease payments will be made over the remaining terms
of the leases, which have varying expiration dates through 2011, unless we are
able to negotiate an earlier termination. In connection with the Pinnacle
acquisition in 2005, we recorded restructuring accruals totaling $14.4 million
related to severance ($10.0 million) and lease or other contract terminations
($4.4 million). As of March 31, 2006, we have future cash obligations of
approximately $2.7 million under leases for which we have vacated the underlying
facilities, and restructuring accruals of $1.9 million and $1.8 million related
to Pinnacle acquisition-related severance and lease obligations, respectively.
The severance payments will be made during 2006 and the lease payments will be
made over the remaining terms of the leases, which have varying expiration dates
through 2010. All payments related to restructuring actions are expected to be
funded through working capital. See Note 11 of the Condensed Consolidated
Financial Statements in Item 1 for the activity in the restructuring and other
costs accrual for the three months ended March 31, 2006.
27
Our cash requirements vary depending upon factors such as our planned
growth, capital expenditures, the possible acquisitions of businesses or
technologies complementary to our business, and obligations under past
restructuring programs. We believe that 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 that 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 March 2006, the Financial Standards Accounting Board, or FASB, issued
SFAS No. 156, "Accounting for Servicing of Financial Assets", an amendment to
FASB Statement No. 140. SFAS No. 156 requires recognition of a servicing asset
or servicing liability whenever an entity enters into certain service agreements
which result in an obligation to service a financial asset, and requires that
servicing assets and servicing liabilities be recognized at fair value, if
practicable. SFAS No. 156 will be effective for fiscal years beginning after
September 15, 2006, or January 1, 2007 for Avid. Adoption of SFAS No. 156 is not
expected to have a material impact on our financial position or results of
operations.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments", an amendment to FASB Statements No. 133 and 140.
SFAS No. 155 permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation. SFAS No. 155 will be effective for fiscal years beginning after
September 15, 2006, or January 1, 2007 for Avid. As of March 31, 2006, we did
not have any hybrid financial instruments subject to the fair value election of
SFAS No. 155.
In February 2006, the FASB issued FSP No. FAS 123(R)-4, "Classification
of Options and Similar Instruments Issued as Employee Compensation That Allow
for Cash Settlement upon the Occurrence of a Contingent Event", which addresses
the classification of options and similar instruments issued as employee
compensation that allow for cash settlement upon occurrence of a contingent
event. The guidance in this FSP shall be applied upon initial adoption of SFAS
123(R) or the first reporting period beginning after the date of adoption,
whichever is later. Adoption of this standard is not expected to have a material
impact on our financial position or results of operations.
In November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3,
"Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards." We are considering whether to adopt the alternative transition
method provided in the FASB Staff Position, or FSP, for calculating the tax
effects of stock-based compensation pursuant to SFAS 123(R). The alternative
transition method includes simplified methods to establish the beginning balance
of the additional paid-in capital pool, or APIC Pool, related to the excess tax
benefits available to absorb tax deficiencies recognized subsequent to the
adoption of SFAS 123(R). We are currently evaluating which transition method
it will use for calculating its APIC Pool. An entity may take up to one year
from the later of its initial adoption of SFAS 123(R) or the effective date
of this FSP to evaluate its available transition alternatives and make its
one-time election. Until and unless we elect the transition method described in
the FSP, the transition method provided in SFAS 123(R) is being followed. We
expect to complete our evaluation by December 31, 2006.
In June 2005, the FASB issued Staff Position No. FAS 143-1, "Accounting
for Electronic Equipment Waste Obligations", or FSP 143-1, which provides
guidance on the accounting for obligations associated with the European Union,
or EU, Directive on Waste Electrical and Electronic Equipment, or the WEEE
Directive. FSP 143-1 provides guidance on how to account for the effects of the
WEEE Directive with respect to historical waste associated with products in the
market on or before August 13, 2005. FSP 143-1 is required to be applied to the
later of the first reporting period ending after June 8, 2005 or the date of the
adoption of the WEEE Directive into law by the applicable EU member country. We
are in the process of registering with the member countries, as appropriate, and
are still awaiting guidance from these countries with respect to the compliance
costs and obligations for historical waste. We will continue to work with each
country to obtain guidance and will accrue for compliance costs when they are
probable and reasonably estimable. The accruals for these compliance costs may
have a material impact on our financial position or results of operations when
guidance is issued by each member country.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", a replacement of APB Opinion No. 20, "Accounting Changes" and
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements".
SFAS No. 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. Previously, most voluntary changes in accounting
principles required recognition in a cumulative effect adjustment within net
income of the period of the change. SFAS No. 154 requires retrospective
application to prior period financial statements, unless it is impracticable to
28
determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 was effective for us for accounting changes made on or
after January 1, 2006; however, this standard does not change the transition
provisions of any existing accounting pronouncements. Our financial position or
results of operations will only be impacted if we implement changes in
accounting principle that are addressed by the standard or correct accounting
errors in future periods.
In November 2004, FASB issued SFAS, No. 151, "Inventory Costs", an
amendment of Accounting Research Bulletin No. 43, which is the result of the
FASB's efforts to converge U.S. accounting standards for inventories with
International Accounting Standards. SFAS No. 151 requires idle facility
expenses, freight, handling costs and wasted material (spoilage) costs to be
recognized as current-period charges. It also requires that the allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. We adopted SFAS No. 151 on January 1,
2006. Adoption of SFAS No. 151 did not have a material impact on our financial
position or results of operations.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign Currency Exchange Risk
We have significant international operations and, therefore, our
revenues, earnings, cash flows and financial position are exposed to foreign
currency risk from foreign currency denominated receivables, payables, sales
transactions, as well as net investments in foreign operations.
We derive more than 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 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 our 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
and contract rates versus financial statement rates. To the extent that these
forecasts are overstated or understated during the periods of currency
volatility, we could experience unanticipated currency gains or losses.
At March 31, 2006, we had $56.8 million of forward-exchange contracts
outstanding, denominated in the euro, British pound, Swedish krona, Norwegian
krone, Canadian dollar, Japanese Yen, Singapore dollar and Korean won, as a
hedge against forecasted foreign currency-denominated receivables, payables and
cash balances. For the three months ended March 31, 2006, net losses of $0.9
million resulting from forward-exchange contracts were included in results of
operations, offset by net transaction and remeasurement gains on the related
assets and liabilities of $0.7 million. During the three-month period ended
March 31, 2006, we hedged our net investment in our Canadian subsidiary with a
$23.0 million forward contract. At March 31, 2006, the fair value of this
forward contact was $0.6 million. The currency effect of the net investment
hedge is deemed effective and is, therefore, reflected as a component of foreign
currency translation in accumulated other comprehensive income. Interest effects
of this hedge are reported in interest income.
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 March 31, 2006, we held $238.7 million in cash, cash equivalents and
marketable securities, including short-term corporate obligations, asset-backed
securities, commercial paper and U.S. 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.
30
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure 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 of March 31, 2006. The term "disclosure controls and
procedures", as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
means controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company's management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of March 31, 2006, our chief executive officer and
chief financial officer concluded that, as of such date, the Company's
disclosure controls and procedures were effective at the reasonable assurance
level.
Changes in Internal Control over Financial Reporting
Management considers the acquisition of Pinnacle Systems, Inc. on August
9, 2005 to be material to the results of operations, financial position and cash
flows of the Company from the date of acquisition through March 31, 2006 and
considers the internal controls and procedures of Pinnacle to have a material
effect on our internal control over financial reporting. The Company has
executed an extension of our Sarbanes-Oxley Act Section 404 compliance program
to include Pinnacle's operations in fiscal 2006.
31
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 2005, we were notified by the Korean Federal Trade Commission
("KFTC") that a former reseller, Neat Information Telecommunication, Inc.
("Neat"), had filed a petition against our subsidiary, Avid Technology
Worldwide, Inc., alleging unfair trade practices. On August 11, 2005, the KFTC
issued a decision in favor of Avid regarding the complaint filed by Neat.
However, Neat filed a second petition with the KFTC on October 17, 2005 alleging
the same unfair trade practices as those set forth in the former KFTC petition.
On January 13, 2006, we filed our response to the second KFTC petition denying
Neat's allegations. On February 16, 2006, the KFTC reaffirmed its earlier
decision in favor of Avid and concluded its review of the case. In addition, on
October 14, 2005, Neat filed a civil lawsuit in Seoul Central District Court
against Avid Technology Worldwide, Inc. alleging unfair trade practices. In the
civil action, Neat is seeking approximately $1.7 million in damages, plus
interest and attorneys' fees. We have filed answers to the complaint denying
Neat's allegations. We believe that Neat's claims are without merit and we
intend to defend ourselves vigorously in these actions. Because we cannot
predict the outcome of these actions at this time, no costs have been accrued
for any possible loss contingency.
We receive inquiries from time to time with regard to possible patent
infringement claims. If any infringement is determined to exist, we may seek
licenses or settlements. In addition, as a normal incidence of the nature of our
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. We do not
believe these claims will have a material adverse effect on our financial
position or results of operations.
ITEM 1A. RISK FACTORS
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:
We may not be able to realize the expected benefits of our acquisition of
Pinnacle Systems
As a result of our recent acquisition of Pinnacle, we face challenges in
several areas that could have an adverse effect on our business. For example,
some of the assumptions that we have relied upon, such as the achievement of
operating synergies and revenue growth, may not be realized. In addition, if our
integration of Pinnacle is not successful, our results of operations could be
harmed, employee morale could decline, key employees could leave and customers
could cancel existing orders or choose not to place new ones. With the
completion of the integration, the combined company must operate as a unified
organization utilizing common information and communication systems, operating
procedures, financial controls and human resources practices. We may encounter
difficulties, unforeseen costs and delays involved in integrating the Pinnacle
business, including:
o failure to successfully manage relationships with customers and with
important third parties;
o failure of customers to continue using the products and services of the
combined company;
o failure to properly integrate the professional film, video and broadcast
businesses of Avid and Pinnacle;
o challenges encountered in managing larger, more geographically dispersed
operations;
o difficulties in successfully integrating the management teams and
employees of Avid and Pinnacle;
o diversion of the attention of management from other ongoing business
concerns;
o potential incompatibility of technologies and systems;
o potential impairment charges to write-down the carrying amount of
goodwill and other intangible assets; and
o potential incompatibility of business cultures.
We also face challenges inherent in efficiently managing an increased
number of employees over large geographic distances, including the need to
develop appropriate systems, policies, benefits and compliance programs. The
inability to manage the organization of the combined company effectively could
have a material adverse effect on our business.
32
Our performance will depend in part on continued customer acceptance of our
products.
We regularly introduce new products, as well as upgrades and
enhancements to existing products. We will need to continue to focus marketing
and sales efforts on educating potential customers, as well as our resellers and
distributors, about the uses and benefits of these products. The future success
of certain of our video products, such as Avid DS Nitris, which enable
high-definition production, will also depend on demand for high definition
content and appliances, such as television sets and monitors that utilize the
high definition standard. Other risks involved with offering new products in
general include, 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. For example, we experienced
initial quality issues with the introduction of Pinnacle Studio version 10.
There can be no assurance that the improvements we've implemented will
adequately address these issues or that customers will accept the improvements.
In addition, we occasionally introduce products in new markets, where we have
little experience and may not overcome any barriers to entry. The introduction
and transition to new products could also have a negative impact on the market
for our existing products, which could adversely affect our revenues and
business.
The digital broadcast business is large, geographically dispersed and highly
competitive, and we may not be successful in growing our customer base or
predicting customer demand in this business.
We are continuing to enhance our status in the digital broadcast
business and have augmented our NewsCutter product offering with the Avid Unity
for News products and other server, newsroom and browser products. In this
business, in addition to or in lieu of discrete point products, customers often
seek complex solutions involving highly integrated components (including the
configuration of unique workflows) from a single or multiple vendors. Success in
this business will require, among other things, creating and implementing
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
business 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 term meeting our customers' needs.
Meanwhile, our competitors may devote greater resources to the broadcast
business than we do, or may be able to leverage their presence more effectively.
If we are unsuccessful in expanding within the digital broadcast business or in
predicting and satisfying customer demand, our business and revenues could be
adversely affected.
We have a significant presence in the audio business, and therefore, the growth
of our audio business will depend in part on our ability to successfully
introduce new products.
Our Digidesign division has a significant presence in the audio
business, 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.
We will face challenges associated with sales of video and audio products to the
consumer market.
As a result of our recent acquisition of Pinnacle, we expect a material
portion of our future revenue to come from sales to consumers of home video
editing and viewing products. In addition, M-Audio is expanding its sales
channel to include sales of its audio products through the consumer channel. The
market for these consumer video and audio products is highly competitive and we
expect to face price-based competition from competitors selling similar
products. Although we acquired experienced personnel through our acquisitions of
M-Audio and Pinnacle, Avid's prior experience in the consumer market is limited.
If we are not successful marketing to this base of customers, our operating
results could suffer. Furthermore, sales of consumer electronics and software
typically increase in the second half of the year, reaching their peak during
the year-end holiday season. As a result, to the extent we increase sales of our
video and audio products through consumer channels, we expect to experience
greater seasonality in our revenues.
Another challenge that is particularly acute with respect to the sale of
consumer software is software piracy. The unauthorized use of our proprietary
technology is costly and efforts to restrict such unauthorized use are
time-consuming. We are unable to accurately measure the extent to which piracy
of our software exists, but we expect it to be a persistent problem.
33
A portion of our revenue is 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 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 revenues relating to one
or more significant contracts during a particular quarter;
o news stations' migrations to networked digital infrastructure 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; or
o any of our large customers terminates its relationship with us or
significantly reduces the amount of business it does with us.
We compete with many other enterprises and we expect competition to intensify in
the future.
The business segments in which we operate 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. In addition
to competing based on 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. Delays or
difficulties in product development and introduction may also harm our business.
If we are unable to compete for our target customers effectively, our business
and results of operations could suffer.
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 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 may have less time to devote to selling our products. In
addition, our introduction of new products and expansion of existing product
offerings can put us into competition with companies with whom we formerly
collaborated. In the event such companies discontinue their alliances with us,
we could experience a negative impact on our business.
Potential future acquisitions could be difficult to integrate, divert the
attention of key personnel, disrupt our business, dilute stockholder value and
impair our financial results.
As part of our business strategy, we periodically acquire companies,
technologies and products that we believe can improve our ability to compete in
our core markets or allow us to enter new markets. For example, in August 2005,
we acquired Pinnacle and in August 2004, we acquired M-Audio. The risks
associated with such acquisitions 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 potential dilution to existing stockholders, if we issue common
stock or other equity rights in the acquisition;
o the potential loss of key employees of the target company;
o the difficulty in complying with a variety of foreign laws and
regulations, if so required;
o the impairment of relationships with customers or suppliers;
o the risks associated with contingent payments and earn-outs;
o the possibility of incurring debt and amortization expenses, as well as
impairment charges, related to goodwill and other intangible assets; and
o unidentified issues not discovered in due diligence, which may include
product quality issues and legal contingencies.
Such acquisitions often involve significant transaction-related costs
and could cause disruption to normal operations. In the future, we may also make
debt or equity investments. If so, we may fail to realize anticipated returns on
such investments. If we are unable to overcome or mitigate these risks, they
could adversely affect our business and lower revenues.
34
Our products are complex and may contain errors or defects resulting from such
complexity.
As we continue to enhance and expand our product offerings, 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.
Poor global economic conditions could adversely affect demand for our products
and the financial condition of our suppliers, distributors and resellers.
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, as could the financial health of our
suppliers, distributors and resellers, which could adversely affect our revenues
and business.
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 activities. We generally own
the software developed by these contractors. We also rely on subcontractors for
most of our manufacturing activities. Our strategy to rely on independent firms
and contractors involves a number of significant risks, including loss of
control over the manufacturing process, potential absence of adequate
manufacturing capacity, potential delays in lead times and reduced control over
delivery schedules, manufacturing yields, quality and cost. Furthermore, the use
of independent firms and contractors, especially those located abroad, could
expose us to risks related to governmental regulation, foreign taxation,
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 these products or components, our supply and our ability
to continue selling and servicing products that use these components could be
imperiled. Similarly, if any of our sole source vendors should encounter
technical, operating or financial difficulties, our supply of these products or
components would be threatened. 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 and software
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 or software and are not able to increase the price
of our products to offset the increased costs, our gross profit margin on these
products could decrease and our operating results could be adversely affected.
We rely on third party software for some of our products and if we are unable to
use or integrate such software, our product and service development may be
delayed.
We rely on certain software that we license from third parties,
including software that is bundled with our products and sold to end users and
software that is integrated with internally developed software and used in our
products to perform key functions. These third-party software licenses may not
continue to be available on commercially reasonable terms and the software may
not be appropriately supported, maintained or enhanced by the licensors. The
loss of licenses to, or inability to support, maintain and enhance, any such
software, could result in increased costs, or in delays or reductions in product
shipments until equivalent software could be developed, identified, licensed and
integrated, which could adversely affect our business.
35
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 Microsoft and
Apple platforms. Computer platform modifications and upgrades require additional
time to be spent to ensure that our products function properly. To the extent
that the current configuration of 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 revenues and gross profit 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 and software 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;
o provisions for inventory obsolescence;
o competitive pressure on product prices;
o costs incurred in connection with our broadcast and some of our audio
solution sales, which typically have longer selling and implementation
cycles;
o timing of delivery of solutions to customers; and
o foreign currency exchange impact on our revenues.
Changes in any of these factors could adversely affect our operating results.
Our international operations expose us to significant exchange rate fluctuations
and regulatory, intellectual property and other risks which could harm our
operating results.
We generally derive approximately 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. The success of our hedging
program depends on forecasts of transaction activity in the various currencies.
To the extent that these forecasts are over- or under-stated during periods of
currency volatility, we could experience currency gains or losses.
Other risks inherent in our international operations include changes in
regulatory practices, environmental laws, tax laws, trade restrictions and
tariffs, longer collection cycles for accounts receivable and greater
difficulties in protecting our intellectual property.
New environmental regulations could negatively impact our future operating
results.
The European Union, or EU, has finalized the Waste Electrical and
Electronic Equipment, or WEEE, Directive, which makes producers, importers
and/or distributors of specified electronic products, including some of our
products, responsible for the collection, recycling, treatment and disposal of
covered products. The WEEE Directive became effective in August 2005, although
to date not all EU countries have adopted rules implementing the WEEE Directive.
The EU has also passed the Restriction of Hazardous Substances, or RoHS,
Directive, which places restrictions on lead and certain other substances
contained in specified electronic products, including some of our products, sold
in the EU after June 2006. While the cost of compliance with these directives
cannot be determined before the member states issue their final implementation
guidance, the potential costs could be significant and could adversely affect
our future operating results. Furthermore, failure to comply with the directives
could result in substantial penalties and fines.
36
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, especially as a
result of our recent acquisition of Pinnacle. A significant portion of our
business occurs near the end of each quarter, which can impact our ability to
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.
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 catastrophic events.
If we fail to maintain strong relationships with our resellers, distributors and
suppliers, our ability to successfully deploy and sell our products may be
harmed.
We sell many of our Professional Video products and services and
substantially all of our Audio and Consumer Video products and services,
indirectly through resellers and distributors. In our Audio and Consumer Video
segments, a few distributors account for a significant portion of the revenue in
that segment. The loss of one or more key distributors could reduce our
revenues. The resellers and distributors of our Professional 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 broadcast 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 end-users, which could lead to a weakening of our
relationships with our resellers and could adversely affect our revenues.
Most of the resellers and distributors of our Professional 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. Our revenue from sales of Audio and Consumer Video products is generally
derived, however, 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 recorded 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 or Consumer Video
segment products were to exceed estimated levels, our revenues and operating
results could be adversely impacted.
With respect to our Consumer Video segment, we have expanded our
distribution network to include several consumer channels, including large
distributors of products to computer software and hardware retailers, which in
turn sell products to end users. We also sell our Consumer Video products
directly to certain retailers. Our Consumer Video product distribution network
exposes us to the following risks, some of which are out of our control:
o we are obligated to provide price protection to our retailers and
distributors and, while the agreements limit the conditions under which
products can be returned to us, we may be faced with product returns or
price protection obligations;
o retailers or distributors may not continue to stock and sell our
consumer products; and
o retailers and distributors often carry competing products.
Changes in accounting rules could adversely affect our future operating results.
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. These principles
are subject to interpretation by various governing bodies, including the
Financial Accounting Standards Board and the Securities and Exchange Commission,
which promulgate and interpret appropriate accounting regulations. Changes from
current accounting regulations may have a significant effect on our reported
financial results. Furthermore, changes in the rules regarding accounting for
37
stock-based compensation, which took effect on January 1, 2006, have resulted in
higher operating expenses and lower earnings per share compared to prior
periods.
Our future growth could be harmed if we lose the services of certain employees.
Our success depends upon the services of a talented and dedicated
workforce, including members of our executive team and employees in technical
positions. The loss of the services of one or more key employees could harm our
business. Our success also depends upon our ability to attract and retain 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. However, changes in the accounting rules that
will require us to expense stock options will impair our ability to provide
these incentives without incurring compensation costs. If we are unable to
compete successfully for talented employees, our business could suffer.
If we fail to manage our growth effectively, our business could be harmed.
Our success depends on our ability to manage the growth of our
operations effectively. As a result of our acquisitions and increasing demand
for our products and services, the scope of our operations has grown both
domestically and internationally. Our management team will face challenges
inherent in efficiently managing an increased number of employees over larger
geographic distances. These challenges include implementing effective
operational systems, procedures and controls, as well as training new personnel.
Inability to successfully respond to these challenges could have a material
adverse effect on the growth of our business.
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 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.
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 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 such unauthorized use, including piracy, of our software exists. We
expect software piracy to continue 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.
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 also may be liable to some of our customers for damages that they may
incur in connection with intellectual property claims. Although we attempt to
limit our exposure to liability arising from infringement of third-party
intellectual property rights in our agreements with customers, we may not always
be successful. If we are required to pay damages to our customers, or indemnify
our customers for damages they incur, our business could be harmed. Moreover,
even if a particular claim falls outside of our indemnity or warranty
obligations to our customers, our customers may be entitled to additional
contractual remedies against us.
38
Regulations could be enacted that restrict our Internet initiatives.
Federal, state and international authorities may adopt new laws or
regulations governing the Internet, including laws or regulations covering
issues such as privacy, distribution and content. For example, the EU 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 EU
member countries is ongoing. The enactment of this and similar legislation or
regulations could curb our Internet sales and other initiatives, require changes
in our sales and marketing practices and place additional financial burdens on
our business.
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 activities of such groups. 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,
or 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 a violation of other local laws. To date, none of
these lawsuits or counterclaims have adversely affected our results of
operations, but, should we become involved in material litigation, our cash
flows or financial position could be adversely affected.
Compliance with rules and regulations concerning corporate governance has caused
our operating expenses to increase and has put additional demands on our
management.
The Sarbanes-Oxley Act of 2002 and various rules and regulations
promulgated by the SEC and the National Association of Securities Dealers in
recent years have increased the scope, complexity and cost of our corporate
governance, reporting and disclosure practices. These laws, rules and
regulations also divert attention from business operations, increase the cost of
obtaining director and officer liability insurance and may 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 to finance their purchases of our products. 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, which 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, many of which are beyond our control. These factors include:
o changes in our quarterly operating results;
o shortfalls in our 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;
o announcements of major acquisitions;
o a shift in financial markets; and
o global macroeconomic conditions.
Furthermore, the market prices of equity securities of high technology
companies have generally demonstrated volatility in recent years and this
volatility has, at times, appeared to be unrelated to or disproportionate to any
of the factors above.
39
ITEM 6. EXHIBITS
*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
40
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: May 10, 2006 By: /s/ Paul J. Milbury
--------------------------
Paul J. Milbury
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: May 10, 2006 By: /s/ Joel E. Legon
--------------------------
Joel E. Legon
Vice President and Corporate Controller
(Principal Accounting Officer)
41
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
*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
42
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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c) 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
d) 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: May 10, 2006 /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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f) 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) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c) 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
d) 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: May 10, 2006 /s/ Paul J. Milbury
---------------------
Paul J. Milbury
Vice President and 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 Technology, Inc.
(the "Company") for the period ended March 31, 2006 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, Vice President and Chief Financial Officer 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: May 10, 2006 /s/ David A. Krall
-----------------------------
David A. Krall
President and Chief Executive Officer
Dated: May 10, 2006 /s/ Paul J. Milbury
-----------------------------
Paul J. Milbury
Vice President and Chief Financial Officer