Avid Technology, Inc.
AVID TECHNOLOGY INC (Form: 10-Q, Received: 08/08/2007 16:37:05)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________

 

FORM 10-Q

(Mark One)

 

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended June 30, 2007


o


TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________   to   __________

 

Commission File Number:    0-21174

 

__________________

 

Avid Technology, Inc .

( Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware

(State or Other Jurisdiction of
Incorporation or Organization)

 

04-2977748

(I.R.S. Employer
 Identification No.)

 

 

Avid Technology Park, One Park West

Tewksbury, Massachusetts 01876

(Address of Principal Executive Offices, Including Zip Code)

 

(978) 640-6789

(Registrant’s Telephone Number, Including Area Code)

__________________

 

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   o

 

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   o   

Non-accelerated Filer   o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes   o         No   x

 

The number of shares outstanding of the registrant’s Common Stock as of July 31, 2007 was 40,710,000.

 

 

 

 


AVID TECHNOLOGY, INC.

 

FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007

 

TABLE OF CONTENTS

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

Condensed Consolidated Financial Statements :

 

 

Condensed Consolidated Statements of Operations (unaudited) for
the three and six months ended June 30, 2007 and 2006


1

 

Condensed Consolidated Balance Sheets (unaudited) as of
June 30, 2007 and December 31, 2006


2

 

Condensed Consolidated Statements of Cash Flows (unaudited) for
the six months ended June 30, 2007 and 2006


3

 

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 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

ITEM 4.

Submission of Matters to a Vote of Security Holders

33

ITEM 6.

Exhibits

33

 

 

 

SIGNATURES

34

 

 

 

EXHIBIT INDEX

35

 

 

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Section 27A of the Securities Act of 1933, as amended. For this purpose, any statements contained herein regarding our strategy, future plans or operations, financial position, future revenues, projected costs, prospects and objectives of management, other than statements of historical facts, may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations expressed or implied in forward-looking statements. There are a number of factors that could cause actual events or results to differ materially from those indicated or implied by such forward-looking statements, many of which are beyond our control, including the factors discussed in Part I - Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, and as referenced in Part II - Item 1A of this report. In addition, the forward-looking statements contained herein represent our estimates only as of the date of this filing and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements or otherwise.

 

 


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
June 30,

 

 

 

Six Months Ended
June 30,

 

 

 

2007

 

 

 

2006

 

 

 

2007

 

 

 

2006

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

192,370

 

 

 

$

197,960

 

 

 

$

384,813

 

 

 

$

392,323

 

Services

 

 

32,956

 

 

 

 

24,266

 

 

 

 

59,411

 

 

 

 

47,973

 

Total net revenues

 

 

225,326

 

 

 

 

222,226

 

 

 

 

444,224

 

 

 

 

440,296

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

92,991

 

 

 

 

93,819

 

 

 

 

185,703

 

 

 

 

185,180

 

Services

 

 

17,454

 

 

 

 

13,812

 

 

 

 

33,433

 

 

 

 

27,127

 

Amortization of intangible assets

 

 

4,761

 

 

 

 

5,016

 

 

 

 

9,233

 

 

 

 

10,096

 

Total cost of revenues

 

 

115,206

 

 

 

 

112,647

 

 

 

 

228,369

 

 

 

 

222,403

 

Gross profit

 

 

110,120

 

 

 

 

109,579

 

 

 

 

215,855

 

 

 

 

217,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

38,444

 

 

 

 

35,617

 

 

 

 

76,186

 

 

 

 

71,113

 

Marketing and selling

 

 

56,505

 

 

 

 

52,583

 

 

 

 

108,199

 

 

 

 

102,495

 

General and administrative

 

 

17,698

 

 

 

 

15,853

 

 

 

 

35,550

 

 

 

 

30,990

 

Amortization of intangible assets

 

 

3,431

 

 

 

 

3,977

 

 

 

 

6,863

 

 

 

 

7,642

 

Restructuring costs, net

 

 

1,517

 

 

 

 

 

 

 

 

1,775

 

 

 

 

1,066

 

In-process research and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

310

 

Total operating expenses

 

 

117,595

 

 

 

 

108,030

 

 

 

 

228,573

 

 

 

 

213,616

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

(7,475

)

 

 

 

1,549

 

 

 

 

(12,718

)

 

 

 

4,277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

2,037

 

 

 

 

2,144

 

 

 

 

4,026

 

 

 

 

4,213

 

Interest expense

 

 

(98

)

 

 

 

(89

)

 

 

 

(222

)

 

 

 

(187

)

Other income (expense), net

 

 

84

 

 

 

 

(174

)

 

 

 

114

 

 

 

 

(174

)

Income (loss) before income taxes

 

 

(5,452

)

 

 

 

3,430

 

 

 

 

(8,800

)

 

 

 

8,129

 

Provision for (benefit from) income taxes, net

 

 

547

 

 

 

 

731

 

 

 

 

(2,821

)

 

 

 

2,084

 

Net income (loss)

 

$

(5,999

)

 

 

$

2,699

 

 

 

$

(5,979

)

 

 

$

6,045

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share – basic

 

$

(0.15

)

 

 

$

0.06

 

 

 

$

(0.15

)

 

 

$

0.14

 

Net income (loss) per common share – diluted

 

$

(0.15

)

 

 

$

0.06

 

 

 

$

(0.15

)

 

 

$

0.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding – basic

 

 

40,940

 

 

 

 

42,273

 

 

 

 

41,046

 

 

 

 

42,205

 

Weighted-average common shares outstanding – diluted

 

 

40,940

 

 

 

 

43,057

 

 

 

 

41,046

 

 

 

 

43,126

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

1

 


AVID TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, unaudited)

 

 

 

June 30,
2007

 

 

 

December 31,
2006

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

114,928

 

 

 

$

96,279

 

Marketable securities

 

 

45,120

 

 

 

 

75,828

 

Accounts receivable, net of allowances of $19,333 and $23,087 at

 

 

 

 

 

 

 

 

 

June 30, 2007 and December 31, 2006, respectively

 

 

138,450

 

 

 

 

138,578

 

Inventories

 

 

140,290

 

 

 

 

144,238

 

Deferred tax assets, net

 

 

1,283

 

 

 

 

1,254

 

Prepaid expenses

 

 

10,079

 

 

 

 

8,648

 

Other current assets

 

 

24,410

 

 

 

 

19,114

 

Total current assets

 

 

474,560

 

 

 

 

483,939

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

45,004

 

 

 

 

40,483

 

Intangible assets, net

 

 

85,952

 

 

 

 

102,048

 

Goodwill

 

 

360,550

 

 

 

 

360,143

 

Other assets

 

 

10,713

 

 

 

 

10,421

 

Total assets

 

$

976,779

 

 

 

$

997,034

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

32,090

 

 

 

$

34,108

 

Accrued compensation and benefits

 

 

25,108

 

 

 

 

22,246

 

Accrued expenses and other current liabilities

 

 

47,373

 

 

 

 

52,801

 

Income taxes payable

 

 

9,776

 

 

 

 

13,284

 

Deferred revenues

 

 

79,235

 

 

 

 

73,743

 

Total current liabilities

 

 

193,582

 

 

 

 

196,182

 

 

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

18,190

 

 

 

 

20,471

 

Total liabilities

 

 

211,772

 

 

 

 

216,653

 

 

 

 

 

 

 

 

 

 

 

Contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

 

Common stock

 

 

423

 

 

 

 

423

 

Additional paid-in capital

 

 

960,345

 

 

 

 

952,763

 

Accumulated deficit

 

 

(146,298

)

 

 

 

(134,708

)

Treasury stock at cost, net of reissuances

 

 

(57,578

)

 

 

 

(43,768

)

Accumulated other comprehensive income

 

 

8,115

 

 

 

 

5,671

 

Total stockholders’ equity

 

 

765,007

 

 

 

 

780,381

 

Total liabilities and stockholders’ equity

 

$

976,779

 

 

 

$

997,034

 

 

 

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)

 

 

 

Six Months Ended
June 30,

 

 

 

2007

 

 

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(5,979

)

 

 

$

6,045

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

27,167

 

 

 

 

28,348

 

Provision for (recoveries of) doubtful accounts

 

 

405

 

 

 

 

(1,107

)

In-process research and development

 

 

 

 

 

 

310

 

Loss on disposal of fixed assets

 

 

15

 

 

 

 

133

 

Compensation expense from stock grants and options

 

 

8,103

 

 

 

 

8,860

 

Equity in loss of non-consolidated company

 

 

 

 

 

 

203

 

Changes in deferred tax assets and liabilities, excluding initial effects of acquisitions

 

 

(2,208

)

 

 

 

(974

)

Changes in operating assets and liabilities, excluding initial effects of acquisitions:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,479

 

 

 

 

3,269

 

Inventories

 

 

4,186

 

 

 

 

(22,746

)

Prepaid expenses and other current assets

 

 

(6,642

)

 

 

 

3,663

 

Accounts payable

 

 

(2,095

)

 

 

 

4,840

 

Income taxes payable

 

 

(3,243

)

 

 

 

1,790

 

Accrued expenses, compensation and benefits and other liabilities

 

 

(3,846

)

 

 

 

(8,318

)

Deferred revenues

 

 

5,288

 

 

 

 

(778

)

Net cash provided by operating activities

 

 

22,630

 

 

 

 

23,538

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(14,709

)

 

 

 

(9,062

)

Payments for other long-term assets

 

 

(438

)

 

 

 

(569

)

Payments for business acquisitions, including transaction costs, net of cash acquired

 

 

(529

)

 

 

 

(20,490

)

Purchases of marketable securities

 

 

(2,142

)

 

 

 

(52,938

)

Proceeds from sales of marketable securities

 

 

35,003

 

 

 

 

52,078

 

Net cash provided by (used in) investing activities

 

 

17,185

 

 

 

 

(30,981

)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

Payments on capital lease obligations

 

 

(51

)

 

 

 

(37

)

Purchases of common stock for treasury

 

 

(23,687

)

 

 

 

 

Proceeds from issuance of common stock under employee stock plans

 

 

4,245

 

 

 

 

4,177

 

Net cash provided by (used in) financing activities

 

 

(19,493

)

 

 

 

4,140

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(1,673

)

 

 

 

1,203

 

Net increase (decrease) in cash and cash equivalents

 

 

18,649

 

 

 

 

(2,100

)

Cash and cash equivalents at beginning of period

 

 

96,279

 

 

 

 

123,073

 

Cash and cash equivalents at end of period

 

$

114,928

 

 

 

$

120,973

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3

 


AVID TECHNOLOGY, INC.

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, 2006 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, 2006 in its 2006 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.

 

As disclosed in the Company’s 2006 Annual Report on Form 10-K, during 2006 the Company concluded that it was appropriate to classify its investments in variable-rate demand-note securities as marketable securities. Previously, such investments were classified as cash and cash equivalents. Accordingly, the Company has made corresponding adjustments to the accompanying statement of cash flows to reflect the gross purchases and sales of these securities as investing activities. As a result, cash used in investing activities increased by $20.8 million for the six-month period ended June 30, 2006. This change in classification does not affect previously reported cash flows from operations or from financing activities.

 

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 the Company’s estimates.

 

4

 


2.

NET INCOME PER COMMON SHARE

 

Basic and diluted net income per common share are as follows (in thousands, except per share data):

 

 

 

Three Months Ended
June 30,

 

 

 

Six Months Ended
June 30,

 

 

 

2007

 

 

 

2006

 

 

 

2007

 

 

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(5,999

)

 

 

$

2,699

 

 

 

$

(5,979

)

 

 

$

6,045

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding - basic

 

 

40,940

 

 

 

 

42,273

 

 

 

 

41,046

 

 

 

 

42,205

 

Weighted-average potential common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options

 

 

 

 

 

 

784

 

 

 

 

 

 

 

 

921

 

Weighted-average common shares outstanding - diluted

 

 

40,940

 

 

 

 

43,057

 

 

 

 

41,046

 

 

 

 

43,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share – basic

 

$

(0.15

)

 

 

$

0.06

 

 

 

$

(0.15

)

 

 

$

0.14

 

Net income (loss) per common share – diluted

 

$

(0.15

)

 

 

$

0.06

 

 

 

$

(0.15

)

 

 

$

0.14

 

 

Common stock equivalents, on a weighted-average basis, that are considered anti-dilutive securities and excluded from the diluted net income per share calculations are as follows (in thousands):

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

2007

 

2006

 

2007

 

2006

Options

3,469

 

2,590

 

3,381

 

2,529

Warrant

1,155

 

1,155

 

1,155

 

1,155

Non-vested restricted stock and restricted stock units

678

 

230

 

624

 

151

Total anti-dilutive common stock equivalents

5,302

 

3,975

 

5,160

 

3,835

 

3.

ACQUISITIONS

 

Sibelius

 

In July 2006 the Company acquired all the outstanding shares of Sibelius Software Limited (“Sibelius”) for cash, net of cash acquired, of $20.3 million plus transaction costs of $0.7 million and $0.5 million for the fair value of stock options assumed. In the third quarter of 2006, the Company performed a preliminary allocation of the purchase price to the net tangible assets and intangible assets of Sibelius based on their fair values as of the consummation of the acquisition. The purchase price was allocated as follows: $1.0 million to net tangible assets acquired, $9.2 million to amortizable identifiable intangible assets, $0.5 million to in-process research and development (“R&D”) and the remaining $10.8 million to goodwill. An additional $3.2 million was recorded as goodwill for deferred tax liabilities related to non-deductible intangible asset amortization. During the fourth quarter of 2006, the Company received a cash refund of $0.3 million related to the settlement of a purchase price adjustment clause in the acquisition agreement that was recorded as a decrease to goodwill. Also during the fourth quarter of 2006 and the first three months of 2007, the Company continued its analysis of the fair values of certain assets and liabilities, primarily deferred tax assets and tax reserves, and recorded an increase in the value of net assets acquired of $0.3 million with a corresponding decrease to goodwill.

 

The amortizable identifiable intangible assets include developed technology valued at $6.6 million, customer relationships valued at $1.8 million and a trade name valued at $0.8 million. Amortization expense for these intangibles totaled $0.5 million and $1.0 million, respectively, for the three- and six-month periods ended June 30, 2007, and accumulated amortization was $1.9 million at June 30, 2007. The allocation of $0.5 million to in-process

 

5

 


R&D was expensed at the time of acquisition and represents technology that had not yet reached technological feasibility and had no alternative future use.

 

Sundance

 

In April 2006 the Company acquired all the outstanding shares of Sundance Digital, Inc. (“Sundance”) for cash, net of cash acquired, of $11.2 million plus transaction costs of $0.2 million. In the second quarter of 2006, the Company performed a preliminary allocation of the purchase price to the net tangible and intangible assets of Sundance based on their fair values as of the consummation of the acquisition. The purchase price was allocated as follows: ($4.0) million to net liabilities assumed, $5.6 million to amortizable identifiable intangible assets and the remaining $9.8 million to goodwill. During the remainder of 2006 and the first three months of 2007, the Company continued its analysis of the fair values of certain assets and liabilities primarily related to accounts receivable reserves. Accordingly, the Company recorded adjustments to these assets and liabilities resulting in a net increase of $0.5 million in the value of the net liabilities assumed and a corresponding increase to goodwill.

 

The amortizable identifiable intangible assets include developed technology valued at $3.9 million, customer relationships valued at $1.0 million, non-competition agreements valued at $0.4 million and trademarks and a trade name valued at $0.3 million. Amortization expense for these intangibles totaled $0.5 million and $0.4 million, respectively, for the three-month periods ended June 30, 2007 and 2006, and $1.0 million and $0.4 million, respectively, for the six-month periods ended June 30, 2007 and 2006. Accumulated amortization was $2.2 million at June 30, 2007.

 

Medea

 

In January 2006 the Company acquired all the outstanding shares of Medea Corporation (“Medea”) for cash of $8.9 million plus transaction costs of $0.2 million. In the first quarter of 2006, the Company performed a preliminary allocation of the purchase price 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. During the remainder of 2006, the Company continued its analysis of the fair values of certain assets and liabilities primarily related to accruals for employee terminations and a facility closure. Accordingly, the Company recorded adjustments to these assets and liabilities resulting in a $1.1 million increase in net liabilities assumed and a corresponding increase to goodwill.

 

The amortizable identifiable intangible assets include developed technology valued at $2.7 million, customer relationships valued at $0.7 million, order backlog valued at $0.3 million and non-competition agreements valued at $0.1 million. Amortization expense for these intangibles totaled $0.4 million and $0.5 million, respectively, for the three-month periods ended June 30, 2007 and 2006, and $0.7 million and $1.0 million, respectively, for the six-month periods ended June 30, 2007 and 2006. Accumulated amortization for the customer relationships, non-competition agreements and developed technology was $1.9 million at June 30, 2007. The order backlog, which had an estimated useful life of six months, was fully amortized during the first two quarters of 2006. The allocation of $0.3 million to in-process R&D was expensed at the time of acquisition.

 

Pinnacle

 

In August 2005 the Company completed the acquisition of Pinnacle Systems, Inc. (“Pinnacle”) for $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. During 2005 the Company allocated the total purchase price of $441.4 million as follows: $91.8 million to net assets acquired, $90.8 million to amortizable identifiable intangible assets, $32.3 million to in-process R&D and the remaining $226.5 million to goodwill. As of December 31, 2005, $135.9 million of goodwill was assigned to the Company’s Consumer Video segment and $90.6 was assigned to the Professional Video segment.

 

During 2006 the Company continued its analysis of the fair values of certain assets and liabilities, in particular accruals for employee terminations, facilities closures, contract terminations, inventory reserves, deferred tax assets and tax reserves, and certain other accruals. Accordingly, the Company recorded adjustments to these assets and

 

6

 


liabilities resulting in a $12.7 million increase in the value of the net assets acquired and a corresponding decrease to goodwill.

 

In December 2006 the Company’s annual goodwill impairment testing determined that the carrying value of the goodwill assigned to the Consumer Video segment exceeded its implied fair value by $53.0 million. The Company recorded this amount as an impairment loss and a reduction to goodwill.

 

During the first three months of 2007, the Company recorded a further $0.3 million reduction in the deferred tax liabilities assumed and a corresponding decrease in goodwill. At June 30, 2007, the total goodwill was $160.5 million with $78.0 assigned to the Consumer Video segment and $82.5 million assigned to the Professional Video segment.

 

The amortizable identifiable intangible assets include developed technology valued at $41.2 million, customer relationships valued at $34.4 million and trade names valued at $15.2 million. Amortization expense for these intangibles totaled $5.1 million and $6.3 million, respectively, for the three-month periods ended June 30, 2007 and 2006, and $10.0 million and $12.6 million, respectively, for the six-month periods ended June 30, 2007 and 2006. Accumulated amortization was $47.1 million at June 30, 2007.

 

Wizoo

 

In August 2005 the Company acquired all the outstanding shares of Wizoo Sound Design GmbH (“Wizoo”) for a total purchase price of $5.1 million allocated as follows: ($0.6 million) to net liabilities assumed, $1.2 million to amortizable identifiable intangible assets, $0.1 million to in-process R&D and the remaining $4.4 million to goodwill. As part of the purchase agreement, Avid was contingently obligated to make additional payments to the former shareholders of Wizoo of up to €1.0 million, dependent upon Wizoo achieving certain engineering milestones through January 2008. During 2006 three engineering milestones were met and €0.6 million ($0.8 million) was recorded as additional purchase price. During the first quarter of 2007, the final milestone was met and an additional €0.4 million ($0.5 million) was recorded as additional purchase price. Also, during 2006, goodwill was reduced by $0.5 million primarily as a result of an increase in the value of net assets acquired due to the utilization of Wizoo deferred tax assets, resulting in a goodwill balance of $5.2 million at June 30, 2007.

 

Amortizable Identifiable Intangible Assets

 

As a result of the above acquisitions, as well as the acquisitions of M-Audio, Avid Nordic AB and NXN Software in prior years, amortizable identifiable intangible assets consisted of the following (in thousands):

 

 

 

June 30, 2007

 

 

 

December 31, 2006

 

 


Gross

 

 

 

Accumulated
Amortization

 

 

 


Net

 

 

 


Gross

 

 

 

Accumulated
Amortization

 

 

 


Net

Completed technologies
   and patents

 

$

66,298

 

 

 

$

(46,612)

 

 

 

$

19,686

 

 

 

$

66,298

 

 

 

$

(36,984)

 

 

 

$

29,314

Customer relationships

 

 

71,701

 

 

 

 

(20,534)

 

 

 

 

51,167

 

 

 

 

71,701

 

 

 

 

(15,864)

 

 

 

 

55,837

Trade names

 

 

21,316

 

 

 

 

(6,689)

 

 

 

 

14,627

 

 

 

 

21,316

 

 

 

 

(5,093)

 

 

 

 

16,223

Non-compete covenants

 

 

1,704

 

 

 

 

(1,511)

 

 

 

 

193

 

 

 

 

1,704

 

 

 

 

(1,384)

 

 

 

 

320

License agreements

 

 

560

 

 

 

 

(281)

 

 

 

 

279

 

 

 

 

560

 

 

 

 

(206)

 

 

 

 

354

 

 

$

161,579

 

 

 

$

(75,627)

 

 

 

$

85,952

 

 

 

$

161,579

 

 

 

$

(59,531)

 

 

 

$

102,048

 

Amortization expense related to all intangible assets in the aggregate was $8.2 million and $9.0 million, respectively, for the three-month periods ended June 30, 2007 and 2006, and $16.1 million and $17.7 million, respectively, for the six-month periods ended June 30, 2007 and 2006. The Company expects amortization of these intangible assets to be approximately $14 million for the remainder of 2007, $22 million in 2008, $15 million in 2009, $12 million in 2010, $10 million in 2011, $5 million in 2012 and $8 million thereafter.

 

7

 


Pro Forma Financial Information for Acquisitions (Unaudited)

 

The results of operations of Sibelius, Sundance and Medea have been included in the results of operations of the Company since the respective date of each acquisition. The following unaudited pro forma financial information presents the results of operations for the three- and six-month periods ended June 30, 2006 as if the acquisitions of Sibelius and Sundance had occurred at the beginning of 2006. Pro forma results of operations giving effect to the Medea acquisition are not included as they 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 2006 or of future results.

 

(in thousands except per share data)

 

Three Months Ended
June 30, 2006

 

Six Months Ended
June 30, 2006

 

Net revenues

 

 

$225,291

 

 

$448,613

 

 

 

 

 

 

 

 

 

Net income

 

 

$1,634

 

 

$3,159

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

Basic

 

 

$0.04

 

 

$0.07

 

Diluted

 

 

$0.04

 

 

$0.07

 

 

4.

INCOME TAXES

 

In June 2006 the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. ("FIN") 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 , which clarified the accounting for uncertainty in income taxes recognized in an enterprise’s financial statement in accordance with SFAS No. 109, Accounting for Income Taxes . FIN 48 requires that a tax position must be more likely than not to be sustained before being recognized in the financial statements. The interpretation also requires the Company to accrue interest and penalties as applicable on its unrecognized tax positions.

 

FIN 48 is effective for fiscal years beginning after December 15, 2006, or January 1, 2007 for Avid. As a result of the adoption of FIN 48, the Company recognized no adjustment in the liability for unrecognized income tax benefits. At January 1, 2007, Avid had $6.9 million of unrecognized tax benefits, of which $4.7 million would affect the Company’s effective tax rate if recognized. In March 2007 a Canadian research and development tax credit audit for the years ended December 31, 2004 and 2005 was completed. As a result, Avid recognized $3.0 million of previously unrecognized tax benefits. This amount was included in the tax benefits for the six months ended June 30, 2007. At June 30, 2007, the Company’s unrecognized tax benefits totaled $4.1 million, of which $1.9 million would affect the Company’s effective tax rate if recognized. The remaining balance of $2.2 million, if recognized, would reduce goodwill. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.

 

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2007 and January 1, 2007, respectively, Avid had approximately $0.5 million and $0.7 million of accrued interest related to uncertain tax positions.

 

The tax years 2000 through 2006 remain open to examination by the taxing authorities in the jurisdictions in which the Company operates.

 

8

 


5.

ACCOUNTS RECEIVABLE

 

Accounts receivable, net of allowances, consist of the following (in thousands):

 

 

 

June 30,
2007

 

 

 

December 31,
2006

 

Accounts receivable

 

$

157,783

 

 

 

$

161,665

 

Less:

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

 

(2,377

)

 

 

 

(2,583

)

Allowance for sales returns and rebates

 

 

(16,956

)

 

 

 

(20,504

)

 

 

$

138,450

 

 

 

$

138,578

 

 

The accounts receivable balances as of June 30, 2007 and December 31, 2006, both exclude approximately $40 million for large solution sales and certain distributor sales that have been invoiced but for which revenues have not been recognized and payments are not due.

 

6.

INVENTORIES

 

Inventories, net of related reserves, consist of the following (in thousands):

 

 

 

June 30,
2007

 

 

 

December 31,
2006

Raw materials

 

$

42,950

 

 

 

$

41,937

Work in process

 

 

8,821

 

 

 

 

9,140

Finished goods

 

 

88,519

 

 

 

 

93,161

 

 

$

140,290

 

 

 

$

144,238

 

As of June 30, 2007 and December 31, 2006, the finished goods inventory includes inventory at customer locations of $26.5 million and $23.3 million, respectively, associated with products shipped to customers for which revenues have not yet been recognized.

 

7.

LONG-TERM LIABILITIES

 

Long-term liabilities consist of the following (in thousands):

 

 

 

June 30,
2007

 

 

 

December 31,
2006

Long-term deferred tax liabilities

 

$

9,193

 

 

 

$

11,116

Long-term deferred revenue

 

 

3,666

 

 

 

 

3,851

Long-term deferred rent

 

 

3,236

 

 

 

 

3,396

Long-term accrued restructuring

 

 

2,095

 

 

 

 

2,108

 

 

$

18,190

 

 

 

$

20,471

 

8.

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. Some plans allow for options to be granted at below-market prices 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 June 30, 2007, 1,585,549 shares of common stock remain available to cover future stock option

 

9

 


grants under the Company’s stock-based compensation plans, including 1,432,147 shares that may alternatively be issued as awards of restricted stock, restricted stock units or other forms of stock-based compensation.

 

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004) (“SFAS No. 123(R)”), Share-Based Payment , the Company records stock-based compensation expense for the fair value of stock options. Stock-based compensation expense resulting from the adoption of SFAS No. 123(R), the acquisition of M-Audio and the issuance of restricted stock and restricted stock units was included in the following captions in the Company’s condensed consolidated statements of operations for the three- and six-month periods ended June 30, 2007 and 2006 (in thousands):

 

 

Three Months Ended
June 30,

             

Six Months Ended
June 30,

 

2007

 

2006

 

2007

 

2006

Products cost of revenues

$   182

 

$   131

 

$   323

 

$   270

Services cost of revenues

251

 

208

 

448

 

427

Research and development expense

1,354

 

1,272

 

2,397

 

2,607

Marketing and selling expense

1,201

 

1,230

 

2,136

 

2,533

General and administrative expense

1,563

 

1,513

 

2,799

 

3,023

Total stock-based compensation expense

$4,551

 

$4,354

 

$8,103

 

$8,860

 

As of June 30, 2007, the Company had $46.8 million of total unrecognized compensation cost before forfeitures related to non-vested stock-based compensation awards granted under its stock-based compensation plans. This cost will be recognized over the next four years. The Company expects this amount to be amortized as follows: $9.9 million during the remainder of 2007, $15.3 million in 2008, $11.9 million in 2009 and $9.7 million thereafter. The weighted-average recognition period of the total unrecognized compensation cost is 1.64 years.

 

The following table sets forth the weighted-average key assumptions and fair value results for stock options granted during the three- and six-month periods ended June 30, 2007 and 2006:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

2007

 

2006

 

2007

 

2006

Expected dividend yield

0.00%

 

0.00%

 

0.00%

 

0.00%

Risk-free interest rate

4.85%

 

5.01%

 

4.80%

 

4.86%

Expected volatility

31.2%

 

34.3%

 

32.9%

 

34.5%

Expected life (in years)

4.63 

 

4.63 

 

4.37 

 

4.48 

Weighted-average fair value of options granted

$11.49 

 

$14.17 

 

$11.80 

 

$15.11 

 

Based primarily on the Company’s historical turnover rates, an annualized estimated forfeiture rate of 6.5% has been used in calculating the estimated compensation cost for the three- and six-month periods ended June 30, 2007 and 2006. Additional expense will be recorded if the actual forfeiture rates are lower than estimated and a recovery of prior expense will be recorded if the actual forfeitures are higher than estimated.

 

10

 


The following table summarizes changes in the Company’s stock option plans during the six-month period ended June 30, 2007:

 

 

 

Stock Options

 

 

 

 

Shares

 

 

Weighted-
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contractual
Term

 

Aggregate
Intrinsic
Value
(in thousands)

 

Options outstanding at December 31, 2006

 

3,972,043

 

 

$38.17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

612,753

 

 

$33.97

 

 

 

 

 

Exercised

 

(239,656

)

 

$15.28

 

 

 

 

 

Forfeited

 

(117,034

)

 

$45.92

 

 

 

 

 

Canceled

 

(235,776

)

 

$51.72

 

 

 

 

 

Options outstanding at June 30, 2007

 

3,992,330

 

 

$37.89

 

7.02

 

$19,899

 

Options vested at June 30, 2007 or expected to vest

 

3,862,381

 

 

$37.85

 

6.95

 

$19,781

 

Options exercisable at June 30, 2007

 

2,458,270

 

 

$36.46

 

6.02

 

$18,130

 

 

The aggregate intrinsic value of stock options exercised during the six-month periods ended June 30, 2007 and 2006 was approximately $3.5 million and $5.3 million, respectively. Cash received from the exercise of stock options was $3.7 million and $3.4 million for the six-month periods ended June 30, 2007 and 2006, respectively. The Company did not realize any actual tax benefit from the tax deductions for stock option exercises during the six-month periods ended June 30, 2007 and 2006 due to the full valuation allowance on the Company’s U.S. deferred tax assets.

 

The following tables summarize the changes in the Company’s non-vested restricted stock units and non-vested restricted stock during the six-month period ended June 30, 2007:

 

 

 

Non-Vested Restricted Stock Units

 

 

 

 

 

 

Shares

 

 

 

Weighted-
Average
Grant-Date
Fair Value

 

Weighted-
Average
Remaining
Recognition
Period

 

 

Aggregate
Intrinsic
Value
(in thousands)

Non-vested at December 31, 2006

 

181,619

 

 

$47.01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

684,477

 

 

$33.85

 

 

 

 

Vested

 

(43,557

)

 

$47.01

 

 

 

 

Forfeited

 

(33,500

)

 

$41.45

 

 

 

 

Non-vested at June 30, 2007

 

789,039

 

 

$35.84

 

2.08

 

$27,885

 

 

 

 

Non-Vested Restricted Stock

 

 

 

 

 

 

Shares

 

 

 

Weighted-
Average
Grant-Date
Fair Value

 

Weighted-
Average
Remaining
Recognition
Period

 

 

Aggregate
Intrinsic
Value
(in thousands)

Non-vested at December 31, 2006

 

10,618

 

 

$48.84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Vested

 

(2,155

)

 

$47.01

 

 

 

 

Forfeited

 

(2,000

)

 

$56.72

 

 

 

 

Non-vested at June 30, 2007

 

6,463

 

 

$47.01

 

1.68

 

$228

 

 

11

 


The Company’s Amended and Restated 1996 Employee Stock Purchase Plan 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 June 30, 2007, 270,426 shares remain available for issuance under this plan. Based on the plan design, the Company’s Amended and Restated 1996 Employee Stock Purchase Plan is considered noncompensatory under SFAS No. 123(R). Accordingly, the Company is not required to assign fair value to shares issued from this plan.

 

9.

STOCK REPURCHASES

 

A stock repurchase program was approved by the Company’s board of directors effective May 1, 2007. Under this program, the Company is authorized to repurchase up to $100 million of the Company’s common stock through transactions on the open market, in block trades or otherwise. Between May 1, 2007 and May 11, 2007, the Company repurchased 706,001 shares of the Company’s common stock for a total of $23.7 million. The average price per share, including commissions, paid for these shares was $33.55. This stock repurchase program is being funded using the Company’s working capital.

 

A stock repurchase program was approved by the Company’s board of directors effective July 21, 2006. Under this program, the Company was authorized to repurchase up to $50 million of the Company’s common stock through transactions on the open market, in block trades or otherwise. The program was completed on August 7, 2006 with 1,432,327 shares of the Company’s common stock repurchased from July 25, 2006 through the completion date. The average price per share, including commissions, paid for these shares was $34.94. This stock repurchase program was funded using the Company’s working capital.

 

At June 30, 2007 and December 31, 2006, treasury shares held by the Company totaled 1.7 million shares and 1.2 million shares, respectively.

 

10.

CONTINGENCIES

 

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 of the Company, 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. On February 16, 2006, in response to a second petition filed by Neat, the KFTC reaffirmed its earlier decision in favor of Avid and concluded its review of the case. On October 14, 2005, Neat filed a related civil lawsuit in Seoul Central District Court against Avid Technology Worldwide, Inc. alleging tortious conduct and unfair trade practices. On August 11, 2006, Neat filed an identical complaint against Avid Technology, Inc. Neat sought alleged damages of approximately $1.1 million, plus interest and attorneys’ fees. The parties have reached a settlement. Settlement of this matter did not have a material effect on the Company’s financial position or results of operation.

 

On August 16, 2006, Trevor Blumenau filed a complaint against the Company in the U.S. District Court, Northern District of Texas, alleging infringement of U.S. Patent 5,664,216, entitled Iconic Audiovisual Data Editing Environment . The complaint asserts that Avid develops, markets and sells software that infringes on a patent owned by the plaintiff. The plaintiff seeks unspecified compensatory damages, attorneys’ fees, costs and interest. On March 12, 2007, Avid filed an answer, denying infringement and making counterclaims seeking a declaratory judgment that the patent is invalid and unenforceable. Because the Company cannot predict the outcome of this action at this time, no costs have been accrued for any loss contingency.

 

On April 10, 2007, Disc Link Corporation filed a complaint against Avid Technology, Inc. and 25 other defendants in the U.S. District Court, Eastern District of Texas, alleging infringement of U.S. Patent 6,314,574 (“the ‘574 patent”), entitled Information Distribution System . The complaint alleged that Avid manufactures, uses, distributes and/or offers for sale products and/or systems that infringe one or more claims in the ‘574 patent, or induces and/or contributes to the infringement of the ‘574 patent by others. The complaint asserted that the ‘574 patent relates to products distributed on portable, read-only storage devices that include a link to retrieve additional data via the Internet. The parties have reached a tentative settlement that will not have a material effect on the Company’s financial position or results of operations.

 

12

 


 

In addition, the Company is involved in legal proceedings from time to time arising from the normal course of business activities, including claims of alleged infringement of intellectual property rights and commercial, employment, piracy prosecution and other matters. Avid does not believe these matters will have a material adverse effect on its financial position or results of operations. However, the Company’s financial position or results of operations may be negatively impacted by the unfavorable resolution of one or more of these proceedings.

 

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.

 

As permitted under Delaware law and pursuant to Avid’s Third Amended and Restated Certificate of Incorporation, as amended, the Company is obligated to indemnify its current and former officers and directors for certain events that occur or occurred while the officer or director is or was 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 obligations 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 coverage, the Company believes the estimated fair value of these indemnification obligations is minimal.

 

The Company has a standby letter of credit at a bank that is used as a security deposit in connection with the lease for the Company’s Daly City, California office. In the event of default on this lease, the landlord would, as of June 30, 2007, be eligible to draw against this letter of credit up to a maximum of $0.75 million. The letter of credit will remain in effect in the amount of $0.75 million throughout the remaining lease period, which extends to September 2014. As of June 30, 2007, the Company was not in default under the terms of the 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 customer, 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 June 30, 2007 and December 31, 2006, Avid’s maximum recourse exposure totaled approximately $9.4 million and $11.0 million, respectively. The Company records revenues 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, reseller 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 because the third-party leasing company diligently screens applicants and collects 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 the historical default rates applied to the funded amount outstanding at period end. At June 30, 2007 and December 31, 2006, the Company’s accrual for estimated losses was $1.1 million and $1.5 million, respectively.

 

13

 


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 activity for the Company’s product warranty accrual (in thousands):

 

 

 

Six Months Ended
June 30,

 

 

 

2007

 

 

 

2006

 

Accrual balance at beginning of period

 

$

6,072

 

 

 

$

6,190

 

 

 

 

 

 

 

 

 

 

 

Acquired product warranties

 

 

 

 

 

 

67

 

Accruals for product warranties

 

 

2,547

 

 

 

 

3,313

 

Cost of warranty claims

 

 

(2,625

)

 

 

 

(3,365

)

Accrual balance at end of period

 

$

5,994

 

 

 

$

6,205

 

 

11.

COMPREHENSIVE INCOME

 

Total comprehensive income net of taxes consists of net income and 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
June 30,

 

 

 

Six Months Ended
June 30,

 

 

 

2007

 

 

 

2006

 

 

 

2007

 

 

 

2006

 

Net income (loss)

 

$

(5,999

)

 

 

$

2,699

 

 

 

$

(5,979

)

 

 

$

6,045

 

Net changes in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

2,051

 

 

 

 

2,416

 

 

 

 

2,417

 

 

 

 

3,746

 

Unrealized gains (losses) on securities

 

 

16

 

 

 

 

(18

)

 

 

 

27

 

 

 

 

(102

)

Total comprehensive income (loss)

 

$

(3,932

)

 

 

$

5,097

 

 

 

$

(3,535

)

 

 

$

9,689

 

 

12.

SEGMENT INFORMATION

 

The Company’s organizational structure consists of three strategic business units, Professional Video, Audio, and Consumer Video, each of which is a reportable segment. During the first quarter of 2007, the Company revised the methodology it uses to allocate certain general and administrative and shared facility expenses among these segments. This change in methodology was implemented to allow for more consistent allocation of such expenses on a worldwide basis. Accordingly, the corresponding amounts for 2006 have been reclassified to conform to the current allocation method. As a result, for the six months ended June 30, 2006, operating income for the Professional Video segment increased by $2.0 million, operating income for the Audio segment decreased by $1.7 million and operating loss for the Consumer Video segment increased by $0.3 million. The change in methodology did not affect the Company’s consolidated operating results.

 

14

 


The following is a summary of the Company’s operations by reportable segment (in thousands):

 

 

 

Three Months Ended
June 30,

 

 

 

Six Months Ended
June 30,

 

 

 

2007

 

 

 

2006

 

 

 

2007

 

 

 

2006

 

Professional Video:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

120,318

 

 

 

$

118,864

 

 

 

$

232,989

 

 

 

$

235,064

 

Operating income

 

 

2,340

 

 

 

 

7,297

 

 

 

 

3,916

 

 

 

 

18,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Audio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

76,763

 

 

 

$

74,262

 

 

 

$

155,686

 

 

 

$

147,009

 

Operating income

 

 

6,432

 

 

 

 

9,337

 

 

 

 

13,698

 

 

 

 

18,090

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Video:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

28,245

 

 

 

$

29,100

 

 

 

$

55,549

 

 

 

$

58,223

 

Operating loss

 

 

(962

)

 

 

 

(1,809

)

 

 

 

(3,333

)

 

 

 

(4,381

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Combined Segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

225,326

 

 

 

$

222,226

 

 

 

$

444,224

 

 

 

$

440,296

 

Operating income

 

 

7,810

 

 

 

 

14,825

 

 

 

 

14,281

 

 

 

 

32,109

 

 

Certain expenses are not considered when evaluating the operating results of the reportable segments and have, therefore, been excluded from the calculation of segment operating income (loss). The following table reconciles operating income (loss) for reportable segments to the total consolidated amounts for the three- and six-month periods ended June 30, 2007 and 2006 (in thousands):

 

 

 

Three Months Ended
June 30,

 

 

 

Six Months Ended
June 30,

 

 

 

2007

 

 

 

2006

 

 

 

2007

 

 

 

2006

 

Total operating income for reportable segments

 

$

7,810

 

 

 

$

14,825

 

 

 

$

14,281

 

 

 

$

32,109

 

Unallocated amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquisition-related intangible assets

 

 

(8,192

)

 

 

 

(8,993

)

 

 

 

(16,096

)

 

 

 

(17,738

)

Stock-based compensation

 

 

(4,551

)

 

 

 

(4,283

)

 

 

 

(8,103

)

 

 

 

(8,718

)

Restructuring costs, net

 

 

(1,517

)

 

 

 

 

 

 

 

(1,775

)

 

 

 

(1,066

)

Legal settlements

 

 

(1,025

)

 

 

 

 

 

 

 

(1,025

)

 

 

 

 

In-process research and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(310

)

Consolidated operating income (loss)

 

$

(7,475

)

 

 

$

1,549

 

 

 

$

(12,718

)

 

 

$

4,277

 

 

13.

RESTRUCTURING COSTS AND ACCRUALS

 

On July 26, 2007, the Company announced corporate restructuring plans that are intended to enable the Company’s Professional Video and Consumer Video segments to better serve their respective customers. In connection with these restructurings, the Company intends to eliminate duplicative business functions, improve operational efficiencies and align key business skill sets with future opportunities. The restructuring plans include a net reduction in force of approximately 100 employees after the planned addition of approximately 50 new employees with skill sets, or at locations, that better fit the Company’s future plans. The restructurings also include the reduction of office space at the Company’s facilities in Tewksbury, Massachusetts; Mountain View, California; Munich, Germany and Chicago, Illinois. The Company anticipates that it will complete the restructurings by January 2008 and expects to incur total expenses relating to the restructurings of $8.0 million to $10.0 million. With the exception of non-cash expenses of up to $0.5 million for non-cancelable purchase commitments and fixed asset disposals, these charges represent cash expenditures. The Company expects to record the majority of these restructuring charges in the quarter ending September 30, 2007.

 

15

 


 

During the quarter ended June 30, 2007, the Company recorded restructuring charges of $1.5 million, of which $1.3 million related to actions taken under the Company’s 2007 restructuring plans within the Professional Video and Consumer Video segments, as well as corporate operations. As a result of these actions, 19 employees, primarily in the marketing and selling and general and administrative teams, were notified that their employment would be terminated, and the Company closed facilities in Munich, Germany and Chicago, Illinois. The estimated costs for the employee terminations totaled $0.8 million and the costs for the facility closures totaled $0.5 million.

 

During the fourth quarter of 2006, the Company implemented restructuring programs within both the Professional Video and Consumer Video segments resulting in restructuring charges of $2.9 million and $0.9 million, respectively. The purpose of both programs was to reduce costs and improve the effectiveness of each segment.

 

As a result of the fourth quarter 2006 Professional Video restructuring program, 41 employees worldwide, primarily in the management and selling teams, were notified that their employment would be terminated, and the Company closed a leased office in Australia. The total estimated costs recorded in 2006 were $2.8 million for the employment terminations and $0.1 million for the facility closure. During the first and second quarters of 2007, the Company recorded revisions to the estimate for this restructuring resulting in additional restructuring charges totaling $0.2 million.

 

As a result of the fourth quarter 2006 Consumer Video restructuring program, 11 employees worldwide, primarily in the selling and engineering teams, were notified that their employment would be terminated and a portion of a leased facility in Germany was vacated. The total estimated costs recorded in 2006 were $0.8 million for the employment terminations and $0.1 million for the facility closure.

 

Also during the fourth quarter of 2006, a new subtenant was found for a portion of a United Kingdom facility vacated as part of a 1999 restructuring program. This resulted in a lower estimate of the restructuring accrual required for this facility and a recovery of $0.6 million was recorded in the Company’s statement of operations during 2006.

 

During the third quarter of 2006, the lease for the Company’s Daly City, California facility was amended and the term of the lease extended through September 2014. Based on the terms of the amendment and the Company’s changing facilities requirements, the Company has determined that it will re-occupy space in this building that had previously been vacated under a 2002 restructuring plan. Accordingly, the $1.5 million restructuring accrual for that facility was reversed during 2006.

 

In March 2006 the Company implemented a restructuring program within the Consumer Video segment under which the employment of 23 employees worldwide, primarily in the marketing and selling and research and development teams, was terminated. The purpose of this program was to reduce costs and improve the effectiveness of the segment. In connection with this action, the Company recorded a charge of $1.1 million. Payments to these employees were completed during 2006, and approximately $0.1 million remaining in the related restructuring accrual was reversed.

 

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. During the second quarter of 2007, the Company increased its estimate for the restructuring costs for the Montreal facility resulting in a restructuring charge of $0.1 million. The revision was the result of the Company’s increased estimate of the time it will take to find a subtenant for the vacated space.

 

In connection with the August 2005 Pinnacle acquisition and the January 2006 Medea acquisition, the Company recorded accruals of $14.4 million and $1.1 million, respectively, related to severance agreements and lease or other contract terminations in accordance with Emerging Issues Task Force Issue 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination . These amounts are reflected in the purchase price allocations for each acquisition. Decreases to the cost estimates for such acquisition-related restructuring activities are recorded as adjustments to goodwill indefinitely, while increases to the estimates are recorded as goodwill during the purchase

 

16

 


price allocation period (generally within one year of the acquisition date) and as operating expenses in the Company’s statement of operations thereafter. Accordingly, during the first quarter of 2007, the Company recorded a $0.1 million increase in the estimate for the Medea restructuring and a corresponding restructuring charge in the Company’s statement of operations as the increase in estimate occurred after the purchase price allocation period.

 

The following table sets forth the activity in the restructuring and other costs accruals for the six-month period ended June 30, 2007 (in thousands):

 

 

 

Non-Acquisition-Related
Restructuring
Liabilities

 

 

 

Acquisition-Related
Restructuring
Liabilities

 

 

 

 

 

 

 

Employee-
Related

 

 

 

Facilities-
Related

 

 

 

Employee-
Related

 

 

 

Facilities-
Related

 

 

 

Total

 

Accrual balance at December 31, 2006

 

$

2,433

 

 

 

$

1,594

 

 

 

$

932

 

 

 

$

1,504

 

 

 

$

6,463

 

New restructuring charges

 

 

1,018

 

 

 

 

478

 

 

 

 

 

 

 

 

 

 

 

 

1,496

 

Revisions of estimated liabilities

 

 

64

 

 

 

 

69

 

 

 

 

 

 

 

 

146

 

 

 

 

279

 

Accretion

 

 

 

 

 

 

47

 

 

 

 

 

 

 

 

19

 

 

 

 

66

 

Cash payments for employee-related charges

 

 

(2,474

)

 

 

 

 

 

 

 

(455

)

 

 

 

 

 

 

 

(2,929

)

Cash payments for facilities, net of sublease income

 

 

 

 

 

 

(328

)

 

 

 

 

 

 

 

(211

)

 

 

 

(539

)

Non-cash

 

 

 

 

 

 

(49

)

 

 

 

 

 

 

 

(53

)

 

 

 

(102

)

Foreign exchange impact on ending balance

 

 

6

 

 

 

 

46

 

 

 

 

8

 

 

 

 

23

 

 

 

 

83

 

Accrual balance at June 30, 2007

 

$

1,047

 

 

 

$

1,857

 

 

 

$

485

 

 

 

$

1,428

 

 

 

$

4,817

 

 

The employee-related accruals at June 30, 2007 represent severance and outplacement costs to former employees that will be paid within the next 12 months and are, therefore, included in the caption “accrued expenses and other current liabilities” in the condensed consolidated balance sheet at June 30, 2007.

 

The facilities-related accruals at June 30, 2007 represent estimated losses on subleases of space vacated as part of the Company’s restructuring actions. The leases, and payments against the amounts accrued, will extend through 2010 unless the Company is able to negotiate earlier terminations. Of the total facilities-related accruals, $1.2 million is included in the caption “accrued expenses and other current liabilities” and $2.1 million is included in the caption “long-term liabilities” in the condensed consolidated balance sheet at June 30, 2007.

 

14.

RECENT ACCOUNTING PRONOUNCEMENTS

 

In February 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No.   115 . SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for fiscal years beginning after November 15, 2007, or January 1, 2008 for Avid. Adoption of SFAS No. 159 is not expected to have a material impact on the Company’s financial position or results of operations.

 

In September 2006 the FASB issued SFAS No. 157, Fair Value Measurements , which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but its provisions apply to all other accounting pronouncements that require or permit fair value measurement. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, or January 1, 2008 for Avid. Adoption of SFAS No. 157 is not expected to have a material impact on the Company’s financial position or results of operations.

 

In June 2006 the FASB ratified Emerging Issue Task Force (“EITF”) No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement . EITF No. 06-3 addresses the income statement presentation of any tax collected from customers and remitted to a government authority and provides that the presentation of taxes on either a gross basis or a net basis is an accounting policy decision that should be disclosed pursuant to Accounting Principles Board Opinion No. 22, Disclosure of Accounting Policies . The Company’s policy is to present revenues net of any such taxes.

 

17

 


ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

EXECUTIVE OVERVIEW

 

Our Markets and Strategy

 

We develop, market, sell and support a wide range of software and hardware products for the production, management and distribution of digital media content. Our products help every class of user, from the home hobbyist to the feature-film professional, create and use video and audio assets. Our technology enables users to share media content for real-time collaboration and cost-effectively manage and store media assets. Our products also allow our customers to distribute media over multiple platforms, including airwaves, cable and the Internet.

 

In order to serve the needs of our customers, we are organized into strategic business units that reflect the principal markets in which our products are sold: Professional Video, Audio and Consumer Video. These business units are also our reportable segments. The following is an overview of our business units and the vertical markets they serve.

 

Professional Video.   This business unit offers innovative video- and film-editing systems, as well as 3D and special-effects software, which allow users to manipulate moving pictures and sound in fast, creative and cost-effective ways. Our solutions include integrated workflow and asset management tools and a comprehensive range of services ranging from product support and training to consultancy and managed services. We market these solutions to a broad range of professional users, broadcast and cable companies, corporations, governmental entities and educational institutions. Professional users include production and post-production companies that produce feature films, music videos, commercials, entertainment and documentary programming, and industrial videos, as well as professional character animators, video-game developers and film studios. Our broadcast and cable customers include national and international broadcasters, such as the National Broadcasting Company, Reuters, CBS News, Fox Television, the British Broadcasting Corporation and DirectTV, as well as network affiliates, local independent television stations, web news providers and local and regional cable operators.

 

Audio.   This business unit offers solutions for audio creation, mixing, post-production, collaboration, distribution and scoring to professional music studios, project studios, film and television production and post-production facilities, television and radio broadcasters, “new media” production studios (for example, creators of DVD and web content), performance venues, corporations, governmental entities and educational institutions, as well as home hobbyists and enthusiasts. Users of our audio products range from home studio novices to award-winning, multi-platinum recording artists, film and television professionals and large multinational corporations. Customers use our audio systems for a wide variety of content creation needs in both studio and live environments, including recording, editing, mixing, processing, mastering, composing and performing.

 

Consumer Video.   This business unit markets video-editing and digital lifestyle products to the home user who wishes to create, edit, share, publish and view video content easily, creatively and effectively. Our two vertical market segments consist of home video editing and TV viewing. The home video-editing market includes novice and advanced home video editors, as well as corporations, governmental entities and educational institutions. Our TV-viewing market includes virtually any consumer who wants to watch and record television programming on a personal computer.

 

Our strategy consists of four key elements:

 

 

deliver best-of-breed, stand-alone products to content creators;

 

 

deliver an integrated workflow for customers who work with multiple systems or within multiple media disciplines;

 

 

support open standards for media, metadata and application program interfaces; and

 

18

 


 

 

deliver excellent customer service, support and training.

 

Financial Summary

 

Our revenues for the three months ended June 30, 2007 were $225 million, up slightly in comparison to the same quarter last year. Broken down by business unit, Professional Video revenues increased 1% compared to the second quarter of 2006, due in part to recognition of revenue from large broadcast installations booked in prior quarters. Audio revenues increased 3% primarily due to the addition of revenues from Sibelius, which we acquired in 2006. Compared to the second quarter of 2006, the Consumer Video segment had lower sales of TV-viewing products in Europe that were only partially offset by increased sales from the video-editing software line, resulting in a 3% decrease in revenues compared to the second quarter of 2006. The revenues of each business unit are discussed in further detail in the section titled “Results of Operations” below.

 

The business experienced an overall decline in operating income due to a number of factors, including competitive pressures and an increase in our cost structure resulting from several recent acquisitions. To address this, we recently announced restructuring plans that will result in charges of between $8.0 million and $10.0 million, $1.3 million of which we recorded in the quarter ended June 30, 2007. We estimate the annualized cost savings expected to result from the announced restructuring plans will total between $12.0 million and $14.0 million. We also recently announced that we have engaged the consulting firm Bain and Company to assist us in evaluating our processes, systems, strategies and culture to align ourselves for future growth. We expect the cost of this consulting arrangement to be between $1.5 million and $4.0 million for the remainder of this year depending upon the length of the engagement.

 

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 2006 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, stock-based compensation, allowance for bad debts and reserves for recourse under financing transactions, inventories, business combinations, goodwill and intangible assets, 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 may be found in our 2006 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.” In June 2006 the Financial Standards Accounting Board, or FASB, issued Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 . As a result of our adoption of FIN 48 on January 1, 2007, our critical accounting policy titled “Income Tax Assets” has been revised as follows.

 

Income Tax Assets

 

We record deferred tax assets and liabilities based on the net tax effects of tax credits, operating loss carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes compared to the amounts used for income tax purposes. We regularly review our deferred tax assets for recoverability with consideration for such factors as historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. Statement of Financial Accounting Standards, or SFAS, No. 109, Accounting for Income Taxes , requires us to record a valuation allowance when it is more likely

 

19

 


than not that some portion or all of the deferred tax assets will not be realized. Based on our level of deferred tax assets as of June 30, 2007 and our level of historical U.S. losses, we have determined that the uncertainty regarding the realization of these assets is sufficient to warrant the need for a full valuation allowance against our U.S. net deferred tax assets.

 

Our assessment of the valuation allowance on our U.S. deferred tax assets could change in the future based upon our levels of pre-tax income and other tax-related adjustments. Reversal of the valuation allowance in whole or in part would result in a non-cash reduction in income tax expense during the period of reversal. To the extent some or all of our valuation allowance is reversed, future financial statements would reflect an increase in non-cash income tax expense until such time as our deferred tax assets are fully utilized.

 

In addition to the tax assets described above, we have deferred tax assets resulting from the exercise of employee stock options. In accordance with SFAS No. 109 and SFAS No. 123(R), recognition of these assets would occur upon their utilization 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.

 

We adopted the provisions of FIN 48 on January 1, 2007. FIN 48 clarified the accounting for uncertainty in income taxes recognized in an enterprise’s financial statement in accordance with SFAS No. 109, Accounting for Income Taxes . FIN 48 requires that a tax position must be more likely than not to be sustained before being recognized in the financial statements. The interpretation also requires us to accrue interest and penalties as applicable on our unrecognized tax positions. We recognized no adjustment in the liability for unrecognized income tax benefits as a result of the adoption of FIN 48.

 

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 sales of computer-based digital, nonlinear, media-editing and finishing systems and related peripherals, including shared-storage systems, software licenses, and related professional services and software maintenance contracts.

 

 

Three Months Ended June 30, 2007 and 2006

 

(dollars in thousands)

 

2007
Net Revenues

 

% of
Consolidated
Net Revenues

 

2006
Net Revenues

 

% of
Consolidated
Net Revenues

 

Change

 

% Change
in Revenues

Professional Video:

 

 

 

 

 

 

 

 

 

 

 

Product revenues

$  87,838

 

39.0%

 

$  94,972

 

42.7%

 

($7,134)

 

(7.5%)

Services revenues

32,480

 

14.4%

 

23,892

 

10.8%

 

8,588 

 

35.9%

Total

120,318

 

53.4%

 

118,864

 

53.5%

 

1,454 

 

1.2%

 

 

 

 

 

 

 

 

 

 

 

 

Audio:

 

 

 

 

 

 

 

 

 

 

 

Product revenues

76,287

 

33.9%

 

73,888

 

33.2%

 

2,399 

 

3.2%

Services revenues

476

 

0.2%

 

374

 

0.2%

 

102 

 

27.3%

Total

76,763

 

34.1%

 

74,262

 

33.4%

 

2,501 

 

3.4%

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Video:

 

 

 

 

 

 

 

 

 

 

 

Product revenues

28,245

 

12.5%

 

29,100

 

13.1%

 

(855)

 

(2.9%)

Total

28,245

 

12.5%

 

29,100

 

13.1%

 

(855)

 

(2.9%)

 

 

 

 

 

 

 

 

 

 

 

 

Total net revenues:

$225,326

 

100.0%

 

$222,226

 

100.0%

 

$3,100 

 

1.4%

 

 

20

 


 

 

Six Months Ended June 30, 2007 and 2006

 

(dollars in thousands)

 

2007
Net Revenues

 

% of
Consolidated
Net Revenues

 

2006
Net Revenues

 

% of
Consolidated
Net Revenues

 

Change

 

% Change
in Revenues

Professional Video:

 

 

 

 

 

 

 

 

 

 

 

Product revenues

$174,469

 

39.3%

 

$187,713

 

42.6%

 

($13,244)

 

(7.1%)

Services revenues

58,520

 

13.2%

 

47,351

 

10.8%

 

11,169 

 

23.6%

Total

232,989

 

52.5%

 

235,064

 

53.4%

 

(2,075)

 

(0.9%)

 

 

 

 

 

 

 

 

 

 

 

 

Audio:

 

 

 

 

 

 

 

 

 

 

 

Product revenues

154,795

 

34.8%

 

146,387

 

33.2%

 

8,408 

 

5.7%

Services revenues

891

 

0.2%

 

622

 

0.2%

 

269 

 

43.2%

Total

155,686

 

35.0%

 

147,009

 

33.4%

 

8,677 

 

5.9%

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Video:

 

 

 

 

 

 

 

 

 

 

 

Product revenues

55,549

 

12.5%

 

58,223

 

13.2%

 

(2,674)

 

(4.6%)

Total

55,549

 

12.5%

 

58,223

 

13.2%

 

(2,674)

 

(4.6%)

 

 

 

 

 

 

 

 

 

 

 

 

Total net revenues:

$444,224

 

100.0%

 

$440,296

 

100.0%

 

$3,928 

 

0.9%

 

The decrease in Professional Video product revenues for the three months ended June 30, 2007, compared to the same period in 2006, was due to decreased revenues from our video-editing products. For the six months ended June 30, 2007, compared to the same period in 2006, the decrease in Professional Video revenues was the result of decreased revenues from both our video-editing products and broadcast products. The decreases from our video-editing products were associated with Media Composer Adrenaline migration issues that caused longer than expected customer transitions to the latest versions, decreased revenues from our Avid DS and Symphony Nitris product family and a shift in product mix in our Media Composer product family. In the second quarter of 2006, we introduced a software-only version of Media Composer that has significantly lower average selling prices than the Media Composer Adrenaline product. Although total unit sales for the Media Composer product family increased from the first six months of 2006 to the same period in 2007, the shift in product mix to the software-only version led to a revenues decrease for this product family. The decrease in revenues from our broadcast products for the six months ended June 30, 2007, compared to the same period in 2006, was the result of weakness in revenues from our MedeaStream video-server products. However, revenues from our broadcast products increased for the three months ended June 30, 2007, compared to the same period in 2006, as a result of customer acceptance of a large broadcast news installation. The overall decreases in Professional Video product revenues for both the three- and six-month periods ended June 30, 2007, compared to the same periods in 2006, were also partially mitigated by increased revenues from our shared-storage systems and workgroup tools.

 

Professional Video services revenues are derived primarily from maintenance contracts, installation services and training. The increases in services revenues for both the three and six months ended June 30, 2007, as compared to the same periods in 2006, were due to increases in revenues generated from professional services, such as installation services provided in connection with large broadcast news deals, as well as increases in revenues from maintenance contracts sold in connection with our products. During the three months ended June 30, 2007, we experienced an increase in professional services revenue as a result of customer acceptance of a large broadcast installation.

 

Of the total $2.4 million and $8.4 million increases in Audio product revenues during the three and six months ended June 30, 2007, approximately $3.2 million and $6.6 million, respectively, related to our acquisition of Sibelius in July 2006. For the six-month period ended June 30, 2007, in addition to the revenues increase from Sibelius, we had increased revenues from our Digidesign products, primarily the VENUE live sound mixing

 

21

 


console. These increases for both the three- and six-month periods were partially offset by decreased sales of Pro Tools HD upgrade systems.

 

The $2.7 million decrease in Consumer Video product revenues during the six months ended June 30, 2007, compared to the same period in 2006, was primarily the result of decreased revenues from our TV-viewing product line. Although revenues for this product line increased in the first quarter of 2007, primarily due to the release of Pinnacle’s PCTV HD Pro Stick into the U.S. market late in 2006, revenues decreased in the second quarter of 2007. Also, revenues for this product line were high in the second quarter of 2006 as a result of the release of the PCTV products in Europe in early 2006 and increased consumer demand due to the 2006 World Cup tournament in that quarter. For the three months ended June 30, 2007, the decrease in revenues from the TV-viewing product line was partially offset by an increase in revenues for the video-editing product line, resulting in a $0.9 million decrease in segment revenue when compared to the same quarter of 2006. This increase in revenues from our video-editing products was the result of an increase in revenues from our Studio product line, compared to the same period in 2006, that related to the release of version 11 in May 2007. This followed a decrease in revenues for this product line in the first quarter of 2007, which we believe was largely due to customers delaying their purchases in anticipation of the release of the new version.

 

Net revenues derived through indirect channels were 68% and 70% of total net revenues, respectively, for the three- and six-month periods ended June 30, 2007, compared to 73% for both periods in 2006.

 

International sales accounted for 58% of our net revenues for both the three- and six-month periods ended June 30, 2007, compared to 55% and 56%, respectively, for the same periods in 2006.

 

Gross Profit

 

Cost of revenues consists primarily of costs associated with:

 

 

the procurement of components;

 

the assembly, testing and distribution of finished products;

 

warehousing;

 

customer support costs related to maintenance contract revenues and other services; and

 

royalties for third-party software and hardware included in our products.

 

Cost of revenues also includes amortization of technology, which represents the amortization of developed technology assets acquired in the August 2005 Pinnacle acquisition and, to a lesser extent, other acquisitions we have made since August 2004. Amortization of technology is described further in the “Amortization of Intangible Assets” section below.

 

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 products 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.

 

 

Three Months Ended June 30, 2007 and 2006

 

(dollars in thousands)

 

2007

 

Gross Margin

 

2006

 

Gross Margin

 

Gross Margin
% Change

Product cost of revenues

$  92,991

 

51.7%

 

$  93,819

 

52.6%

 

(0.9%)

Services cost of revenues

17,454

 

47.0%

 

13,812

 

43.1%

 

3.9% 

Amortization of intangible assets

4,761