Avid Technology, Inc.
AVID TECHNOLOGY, INC. (Form: 10-Q, Received: 11/04/2010 17:14:46)
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
__________________

FORM 10-Q
 
(Mark One)
 
 
S
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2010
     
 
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.)
 
75 Network Drive
Burlington, Massachusetts  01803
(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   S         No   o

Indicate by check mark whether the registrant has submitted and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   o         No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
Large Accelerated Filer  £
Non-accelerated Filer  £
(Do not check if smaller reporting company)
 
Accelerated Filer  S
Smaller Reporting Company  £
 
 

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

Yes   o         No   S

The number of shares outstanding of the registrant’s Common Stock as of November 1, 2010 was 38,136,389.
 
 

 

AVID TECHNOLOGY, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

TABLE OF CONTENTS

   
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42

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, or the Securities Act. For this purpose, any statements contained in this quarterly report 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, 2009, 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
September 30,
   
Nine Months Ended
September 30,
   
2010
   
2009
   
2010
   
2009
Net revenues:
                                     
   Products
 
$
134,231
     
$
123,522
     
$
397,044
     
$
369,075
 
   Services
   
30,828
       
28,597
       
86,131
       
85,216
 
      Total net revenues
   
165,059
       
152,119
       
483,175
       
454,291
 
                                       
Cost of revenues:
                                     
   Products
   
64,421
       
57,097
       
193,527
       
176,774
 
   Services
   
14,194
       
13,586
       
41,373
       
43,515
 
   Amortization of intangible assets
   
745
       
519
       
2,657
       
1,465
 
   Restructuring costs
   
       
       
       
799
 
      Total cost of revenues
   
79,360
       
71,202
       
237,557
       
222,553
 
Gross profit
   
85,699
       
80,917
       
245,618
       
231,738
 
                                       
Operating expenses:
                                     
   Research and development
   
28,929
       
29,262
       
89,348
       
90,974
 
   Marketing and selling
   
43,199
       
44,705
       
129,419
       
127,480
 
   General and administrative
   
19,698
       
12,093
       
48,179
       
39,765
 
   Amortization of intangible assets
   
2,283
       
2,782
       
7,557
       
7,779
 
   Restructuring and other costs, net
   
185
       
7,891
       
5,532
       
17,132
 
   (Gain) loss on sales of assets
   
(1,527
)
     
3,398
       
(1,527
)
     
3,398
 
      Total operating expenses
   
92,767
       
100,131
       
278,508
       
286,528
 
                                       
Operating loss
   
(7,068
)
     
(19,214
)
     
(32,890
)
     
(54,790
)
                                       
Interest income
   
82
       
177
       
222
       
680
 
Interest expense
   
(175
)
     
(406
)
     
(636
)
     
(641
)
Other income (expense), net
   
63
       
(11
)
     
282
       
(68
)
Loss before income taxes
   
(7,098
)
     
(19,454
)
     
(33,022
)
     
(54,819
)
Provision for (benefit from) income taxes, net
   
2,897
       
(2,246
)
     
3,361
       
(4,385
)
Net loss
 
$
(9,995
)
   
$
(17,208
)
   
$
(36,383
)
   
$
(50,434
)
                                       
Net loss per common share – basic and diluted
 
$
(0.26
)
   
$
(0.46
)
   
$
(0.96
)
   
$
(1.35
)
                                       
Weighted-average common shares outstanding – basic and diluted
   
38,045
       
37,341
       
37,826
       
37,251
 

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

 
1

 


AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)

   
September 30,
2010
   
December 31,
2009
         ASSETS
                 
Current assets:
                 
   Cash and cash equivalents
 
$
34,361
     
$
91,517
 
   Marketable securities
   
       
17,360
 
   Accounts receivable, net of allowances of $15,733 and $16,347 at
                 
         September 30, 2010 and December 31, 2009, respectively
   
89,674
       
79,741
 
   Inventories
   
96,306
       
77,243
 
   Deferred tax assets, net
   
2,292
       
770
 
   Prepaid expenses
   
8,232
       
7,789
 
   Other current assets
   
17,258
       
22,516
 
      Total current assets
   
248,123
       
296,936
 
                   
Property and equipment, net
   
65,088
       
37,217
 
Intangible assets, net
   
32,564
       
29,235
 
Goodwill
   
244,282
       
227,195
 
Other assets
   
9,859
       
20,455
 
      Total assets
 
$
599,916
     
$
611,038
 
                   
         LIABILITIES AND STOCKHOLDERS’ EQUITY
                 
Current liabilities:
                 
   Accounts payable
 
$
45,250
     
$
30,230
 
   Accrued compensation and benefits
   
28,501
       
25,281
 
   Accrued expenses and other current liabilities
   
31,878
       
55,591
 
   Income taxes payable
   
6,391
       
3,228
 
   Deferred revenues
   
46,822
       
39,107
 
      Total current liabilities
   
158,842
       
153,437
 
                   
Long-term liabilities
   
22,116
       
14,483
 
      Total liabilities
   
180,958
       
167,920
 
                   
Contingencies (Note 13)
                 
                   
Stockholders’ equity:
                 
   Common stock
   
423
       
423
 
   Additional paid-in capital
   
1,001,891
       
992,489
 
   Accumulated deficit
   
(494,927
)
     
(444,661
)
   Treasury stock at cost, net of reissuances
   
(92,355
)
     
(112,389
)
   Accumulated other comprehensive income
   
3,926
       
7,256
 
      Total stockholders’ equity
   
418,958
       
443,118
 
         Total liabilities and stockholders’ equity
 
$
599,916
     
$
611,038
 

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

 
2

 

AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
   
Nine Months Ended
September 30,
   
2010
     
2009
 
Cash flows from operating activities:
                 
   Net loss
 
$
(36,383
)
   
$
(50,434
)
   Adjustments to reconcile net loss to net cash used in operating activities:
                 
      Depreciation and amortization
   
25,026
       
24,058
 
      Provision for doubtful accounts
   
285
       
1,654
 
      Non-cash provision for restructuring
   
291
       
2,098
 
      (Gain) loss on sales of assets
   
(1,527
)
     
3,398
 
      (Gain) loss on disposal of fixed assets
   
(70
)
     
46
 
      Compensation expense from stock grants and options
   
10,614
       
9,908
 
      Changes in deferred tax assets and liabilities, excluding initial effects of acquisitions
   
(1,393
)
     
(2,015
)
      Changes in operating assets and liabilities, excluding initial effects of acquisitions:
                 
         Accounts receivable
   
(6,337
)
     
19,322
 
         Inventories
   
(15,344
)
     
3,313
 
         Prepaid expenses and other current assets
   
6,420
       
7,459
 
         Accounts payable
   
13,832
       
(6,732
)
         Accrued expenses, compensation and benefits and other liabilities
   
(25,021
)
     
(27,812
)
         Income taxes payable
   
2,290
       
(6,721
)
         Deferred revenues
   
6,763
       
(9,549
)
Net cash used in operating activities
   
(20,554
)
     
(32,007
)
                   
Cash flows from investing activities:
                 
   Purchases of property and equipment
   
(25,926
)
     
(9,631
)
   Increase in other long-term assets
   
(82
)
     
(1,584
)
   Payments for business acquisitions, net of cash acquired
   
(27,008
)
     
(4,413
)
   Purchases of marketable securities
   
(2,250
)
     
(52,592
)
   Proceeds from sales of marketable securities
   
19,605
       
53,676
 
   Proceeds from sales of assets
   
1,000
       
 
   Proceeds from notes receivable
   
       
1,989
 
Net cash used in investing activities
   
(34,661
)
     
(12,555
)
                   
Cash flows from financing activities:
                 
   Payments related to stock option purchase
   
       
(526
)
   (Payments related to) proceeds from the issuance of common stock under employee stock plans, net
   
(61
)
     
111
 
Net cash used in financing activities
   
(61
)
     
(415
)
                   
Effect of exchange rate changes on cash and cash equivalents
   
(1,880
)
     
1,303
 
Net decrease in cash and cash equivalents
   
(57,156
)
     
(43,674
)
Cash and cash equivalents at beginning of period
   
91,517
       
121,792
 
Cash and cash equivalents at end of period
 
$
34,361
     
$
78,118
 
                   
Supplemental information:
                 
   Cash paid for income taxes, net of refunds
 
$
2,761
     
$
3,469
 
Non-cash investing activities:
                 
   Landlord allowance for leasehold improvements
 
$
6,036
     
$
 
   Issuance of common stock for business acquisition
 
$
5,000
     
$
 

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 reflect all normal and 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 accounting principles generally accepted in the United States of America. The accompanying condensed consolidated balance sheet as of December 31, 2009 was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The Company filed audited consolidated financial statements for the year ended December 31, 2009 in its 2009 Annual Report on Form 10-K, which included all information and footnotes necessary for such presentation. The financial statements contained in this Form 10-Q should be read in conjunction with the audited consolidated financial statements in the Form 10-K.

The Company’s preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. The most significant estimates reflected in these financial statements include revenue recognition, stock-based compensation, accounts receivable and sales allowances, inventory valuation, goodwill and intangible asset valuations, fair value measurements and income tax asset valuation allowances. Actual results could differ from the Company’s estimates.

During the three months ended June 30, 2010, the Company determined it was appropriate to revise the way it classifies certain portions of its inventory. As a result, approximately $3.1 million of inventory previously reported as work in process at December 31, 2009 has been included as finished goods inventory for the current presentation. See Note 8 for the presentation of the inventory classifications at September 30, 2010 and December 31, 2009.

In the later part of 2009, the Company completed the reorganization of its business around functional groups rather than product categories. The Company’s evaluation of the discrete financial information that is regularly reviewed by the chief operating decision makers determined that the Company now has only one reportable segment. Effective January 1, 2010, the Company began reporting based on a single reportable segment and has reclassified its 2009 segment reporting to conform to the 2010 presentation. The change to the current presentation did not affect the Company’s consolidated operating results. See Note 15 for the Company’s segment reporting for the three- and nine-month periods ended September 30, 2010 and 2009.

The Company evaluated subsequent events to determine if any event since September 30, 2010, the date of these financial statements, required disclosure in these statements. The evaluation determined that a credit agreement entered into by the Company on October 1, 2010 should be disclosed in these financial statements (see Note 18). The Company further determined that no other recognized or unrecognized subsequent events required recognition or disclosure.

 
2.    NET LOSS PER COMMON SHARE

Net loss per common share is presented for both basic loss per share (“Basic EPS”) and diluted loss per share (“Diluted EPS”). Basic EPS is based on the weighted-average number of common shares outstanding during the period, excluding non-vested restricted stock held by employees. Diluted EPS is based on the weighted-average number of common shares and potential common shares outstanding during the period.

 
4

 


The following table sets forth (in thousands) potential common shares, on a weighted-average basis, that were considered anti-dilutive securities and excluded from the Diluted EPS calculations either because the sum of the exercise price per share and the unrecognized compensation cost per share was greater than the average market price of the Company’s common stock for the relevant period, or because they were considered contingently issuable. The contingently issuable potential common shares result from certain stock options and restricted stock units granted to the Company’s executive officers that vest based on performance and market conditions.

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   2010
 
   2009
 
   2010
 
   2009
Options
5,321
 
4,376
 
4,994
 
4,303
Non-vested restricted stock and restricted stock units
439
 
639
 
365
 
804
Anti-dilutive potential common shares
5,760
 
5,015
 
5,359
 
5,107

During periods of net loss, certain potential common shares that would otherwise be included in the Diluted EPS calculation are excluded because the effect would be anti-dilutive. The following table sets forth (in thousands) common stock equivalents that were excluded from the calculation of Diluted EPS due to the net loss for the relevant period.

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   2010
 
   2009
 
   2010
 
   2009
Options
4
 
16
 
9
 
13
Non-vested restricted stock and restricted stock units
16
 
19
 
32
 
9
Anti-dilutive common stock equivalents
20
 
35
 
41
 
22

 
3.    FOREIGN CURRENCY FORWARD CONTRACTS

The Company has significant international operations and, therefore, the Company’s revenues, earnings, cash flows and financial position are exposed to foreign currency risk from foreign-currency-denominated receivables, payables and sales transactions, as well as net investments in foreign operations. The Company derives more than half of its 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, the Company is exposed to the risks that changes in foreign currency could adversely affect its revenues, net income and cash flow. The Company uses derivatives in the form of foreign currency forward contracts to manage its short-term exposures to fluctuations in the foreign currency exchange rates that exist as part of its ongoing international business operations. The Company does not enter into any derivative instruments for trading or speculative purposes.

As required by Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 815, Derivatives and Hedging , the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as hedges of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk are considered fair value hedges. Derivatives designated and qualifying as hedges of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. Under hedge accounting, the determination of hedge effectiveness is dependent upon whether the gain or loss on the hedging derivative is highly effective in offsetting the gain or loss in the value of the item being hedged. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though the Company elects not to apply hedge accounting under FASB ASC Topic 815.


 
5

 

During the three months ended September 30, 2010 , the Company executed foreign currency forward contracts to hedge the foreign exchange currency risk associated with certain forecasted euro-denominated sales transactions. These contracts are designated and qualify as cash flow hedges under the criteria of FASB ASC Topic 815 . The effective portion of the changes in the fair value of derivatives designated and qualifying as cash flow hedges is initially reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity and subsequently reclassified into revenues at the time the hedged transactions affect earnings. The ineffective portion of the change in fair value is recognized directly into earnings. To date no amounts have been recorded as a result of hedging ineffectiveness.

At September 30, 2010, the Company had foreign currency forward contracts outstanding with notional values of $30.5 million as hedges against forecasted foreign-currency-denominated sales transactions. The following table sets forth the balance sheet locations and fair values of the Company’s foreign currency forward contracts at September 30, 2010 (in thousands):

Derivatives Designated as Hedging
Instruments under ASC Topic 815
 
Balance Sheet Location
 
Fair Value at
September 30, 2010
 
Financial liabilities:
         
    Foreign currency forward contracts
 
  Accrued expenses and other current liabilities
 
$2,314
 

The following tables set forth the effect of the Company’s foreign currency forward contracts designated as hedging instruments on the Company’s statements of operations or stockholders’ equity during the three- and nine-month periods ended September 30, 2010 (in thousands):

Derivatives Designated as Hedging
Instruments under ASC Topic 815
 
Amount of Loss Recognized in Accumulated Other Comprehensive Income (Loss) on Derivatives (Effective Portion)
 
Three and Nine Months Ended September 30, 2010
 
Foreign currency forward contracts
 
($2,314)
 

Derivatives Designated as Hedging
Instruments under ASC Topic 815
 
Amount of Loss Reclassified from Accumulated Other Comprehensive Income (Loss) into Revenues (Effective Portion)
 
Three and Nine Months Ended September 30, 2010
 
Foreign currency forward contracts
 
($35)
 

The net loss of $2.3 million remaining in accumulated other comprehensive income (loss) as of September 30, 2010 is subject to change as foreign currency exchange rates fluctuate and is expected to be recognized into earnings within the next 3 months.

As a hedge against the foreign exchange exposure of certain forecasted receivables, payables and cash balances of foreign subsidiaries, the Company enters into short-term foreign currency forward contracts. The changes in fair value of the foreign currency forward contracts intended to offset foreign currency exchange risk on forecasted cash flows and net monetary assets are recorded as gains or losses in the Company’s statement of operations in the period of change, because they do not meet the criteria of FASB ASC Topic 815 to be treated as hedges for accounting purposes. There are two objectives of the Company’s foreign currency forward contract program: (1) to offset any foreign exchange currency risk associated with cash receipts expected to be received from the Company’s customers and cash payments expected to be made to the Company’s vendors over the next 30-day period and (2) to offset the impact of foreign currency exchange on the Company’s net monetary assets denominated in currencies other than the functional currency of the legal entity. These forward contracts typically mature within 30 days of execution.

At September 30, 2010 and December 31, 2009, the Company had foreign currency forward contracts outstanding with notional values of $27.3 million and $46.2 million, respectively, as hedges against forecasted foreign-currency-denominated receivables, payables and cash balances. The following table sets forth the balance sheet locations and fair values of the Company’s foreign currency forward contracts at September 30, 2010 and December 31, 2009 (in thousands):

 
6

 


Derivatives Not Designated as Hedging
Instruments under ASC Topic 815
 
Balance Sheet Location
 
Fair Value at
September 30, 2010
 
Fair Value at
December 31, 2009
Financial assets:
           
    Foreign currency forward contracts
 
Other current assets
 
$612
 
$1,162
             
Financial liabilities:
           
    Foreign currency forward contracts
 
  Accrued expenses and other current liabilities
 
 
$546

The following table sets forth the net foreign exchange gains and losses recorded as marketing and selling expenses in the Company’s statements of operations during the three- and nine-month periods ended September 30 , 2010 and 2009 that resulted from the Company’s foreign exchange contracts not designated as hedging instruments and the revaluation of the related hedged items (in thousands) :

Derivatives Not Designated as Hedging
Instruments under ASC Topic 815
 
Net (Loss) Gain Recorded in Marketing and Selling Expenses
Three Months Ended September 30,
 
Nine Months Ended September 30,
2010
 
2009
 
2010
 
2009
Foreign currency forward contracts
 
($336)
 
$7
 
($55)
 
$1,588

See Note 4 for additional information on the fair value measurements for all financial assets and liabilities, including derivative assets and derivative liabilities, that are measured at fair value on a recurring basis.

 
4.    FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

On a recurring basis, the Company measures certain financial assets and liabilities at fair value, including cash equivalents, marketable securities and foreign currency forward contracts. At September 30, 2010, all of the Company’s financial assets and liabilities were classified as either Level 1 or Level 2 in the fair value hierarchy as defined by FASB ASC Topic 820, Fair Value Measurements and Disclosure . Instruments valued using quoted market prices in active markets and classified as Level 1 are deferred compensation investments. Instruments valued based on other observable inputs and classified as Level 2 are foreign currency forward contracts.

The following table summarizes the Company’s fair value hierarchy for financial assets and liabilities measured at fair value on a recurring basis at September 30, 2010 (in thousands):

         
Fair Value Measurements at Reporting Date Using
 
   
September 30,
2010
   
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   
Significant
Other
Observable
Inputs (Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
Financial Assets:
                               
   Deferred compensation plan investments
 
$
917
   
$
917
   
$
   
$
 
   Foreign currency forward contracts
   
612
     
     
612
     
 
                                 
Financial Liabilities:
                               
   Deferred compensation plan obligations
 
$
917
   
$
917
   
$
   
$
 
   Foreign currency forward contracts
   
2,314
             
2,314
         

The fair values of our foreign currency forward contracts are measured at fair value on a recurring basis based on the changes in fair value of the foreign currency forward contracts. See Note 3 for further information on the Company’s foreign currency forward contracts.


 
7

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The following table summarizes the Company’s fair value hierarchy for assets and liabilities measured at fair value on a nonrecurring basis during the three-month period ended September 30, 2010 (in thousands):

       
Fair Value Measurements Using
   
   
Three Months
Ended
September 30,
2010
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Related
Expenses
Liabilities:
                             
   Facilities-related restructuring accruals
 
$
236
 
$
—  
 
$
236
 
$
—  
 
$
236

The following table summarizes the Company’s fair value hierarchy for assets and liabilities measured at fair value on a nonrecurring basis during the nine-month period ended September 30, 2010 (in thousands):

       
Fair Value Measurements Using
   
   
Nine Months
Ended
September 30,
2010
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Related
Expenses
Liabilities:
                             
   Facilities-related restructuring accruals
 
$
1,368
 
$
—  
 
$
1,368
 
$
—  
 
$
1,368

The Company typically uses the following valuation techniques to determine fair values of assets and liabilities measured on a nonrecurring basis:

·  
Goodwill:   When performing goodwill impairment tests, the Company estimates the fair value of its reporting units using an income approach, which is generally a discounted cash flow methodology that includes assumptions for, among other things, forecasted revenues, gross profit margins, operating profit margins, working capital cash flow, growth rates, income tax rates, expected tax benefits and long-term discount rates, all of which require significant judgments by management. The Company also considers comparable market data based on multiples of revenue as well as the reconciliation of the Company’s market capitalization to the total fair value of its reporting units. If the estimated fair value of any reporting unit is less that its carrying value, an impairment exists.
·  
Intangible Assets:   When performing an intangible asset impairment test, the Company estimates the fair value of the asset using a discounted cash flow methodology, which includes assumptions for, among other things, budgets and economic projections, market trends, product development cycles and long-term discount rates. If the estimated fair value of the asset is less that its carrying value, an impairment exists.
·  
Facilities-Related Restructuring Accruals:   During the three- and nine-month periods ended September 30, 2010, the Company recorded accruals associated with exiting all or portions of certain leased facilities. The Company estimates the fair value of such liabilities, which are discounted to net present value at an assumed risk-free interest rate, based on observable inputs, including the remaining payments required under the existing lease agreements, utilities costs based on recent invoice amounts, and potential sublease receipts based on quoted market prices for similar sublease arrangements.


 
8

 

 
5.    ACQUISITIONS

Euphonix, Inc.

On April 21, 2010, the Company acquired Euphonix, Inc. (“Euphonix”), a California-based provider of large-format digital audio consoles, media controllers and peripherals, for cash, net of cash acquired, of $10.9 million and 327,439 shares of the Company’s common stock valued at $5.0 million. A preliminary allocation performed from the date of acquisition through September 30, 2010 allocated the purchase price as follows (in thousands):

Tangible assets acquired, net
 
$
2,297
 
Identifiable intangible assets:
       
   Developed technology
   
2,200
 
   Customer relationships
   
1,600
 
   Trademarks and trade name
   
700
 
   Non-compete agreement
   
200
 
Goodwill
   
8,924
 
Total assets acquired
 
$
15,921
 

During the three months ended September 30, 2010, the Company recorded the following adjustments to the Euphonix purchase price allocation as a result of revised fair value estimates (in thousands):

Tangible assets acquired, net
 
$
(390
)
Identifiable intangible assets
   
300
 
Goodwill
   
90
 
Change in total assets acquired
 
$
 

The Company used the income approach to determine the values of the identifiable intangible assets. The income approach presumes that the value of an asset can be estimated by the net economic benefit to be received over the life of the asset discounted to present value. The weighted-average discount rate (or rate of return) used to determine the value of Euphonix’s intangible assets was 23% and the effective tax rate used was 35%.

The values of the customer relationships, trademarks and trade names and non-compete agreement are being amortized on a straight-line basis over their estimated useful lives of four years, two years and two years, respectively. The value of the developed technology is being amortized over the greater of the amount calculated using the ratio of current quarter revenues to the total of current quarter and anticipated future revenues, and the straight-line method, over the estimated useful life of three years. The weighted-average amortization period for these amortizable identifiable intangible assets is approximately 3.2 years. Amortization expense for Euphonix identifiable intangible assets totaled $0.4 million and $0.7 million, respectively, for the three- and nine-month periods ended September 30, 2010.

The goodwill, which is not deductible for tax purposes, reflects the value of the assembled workforce and the company-specific synergies the Company expects to realize by selling Euphonix’s digital audio consoles, media controllers and peripherals to its existing customers.

The Company is continuing its evaluation of the information necessary to determine the fair value of the acquired assets and liabilities of Euphonix. Once this evaluation is complete, which in no event will occur more than one year from the date of acquisition, the Company will finalize the purchase price allocation.

The results of operations of Euphonix have been included prospectively in the results of operations of the Company since the date of acquisition. The Company’s results of operations giving effect to the Euphonix acquisition as if it had occurred at the beginning of 2009 would not differ materially from reported results.


 
9

 

Blue Order Solutions AG

On January 5, 2010, the Company acquired all the outstanding shares of Blue Order Solutions AG (“Blue Order”), a Germany-based developer and provider of workflow and media asset management solutions, for cash, net of cash acquired, of $16.1 million. A preliminary allocation of the purchase price performed from the date of acquisition through September 30, 2010 allocated the purchase price as follows (in thousands):

Tangible liabilities assumed, net
 
$
(1,237
)
Identifiable intangible assets:
       
   Core technology
   
4,597
 
   Customer relationships
   
3,160
 
   Non-compete agreements
   
1,293
 
   Trademarks and trade name
   
287
 
Goodwill
   
8,530
 
Deferred tax liabilities, net
   
(543
)
Total assets acquired
 
$
16,087
 

During the three months ended September 30, 2010, the Company recorded the following adjustments to the Blue Order purchase price allocation as a result of revised fair value estimates (in thousands):

Tangible liabilities assumed, net
 
$
(556
)
Identifiable intangible assets
   
575
 
Goodwill
   
152
 
Deferred tax liabilities, net
   
(171
)
Change in total assets acquired
 
$
 

The Company used the cost approach to value the core technology intangible asset and the income approach to determine the values of the customer relationships, non-compete agreements and trademarks and trade names intangible assets. The cost approach measures the value of an asset by quantifying the aggregate expenditures that would be required to replace the asset. The income approach presumes that the value of an asset can be estimated by the net economic benefit to be received over the life of the asset discounted to present value. The weighted-average discount rate (or rate of return) used to determine the value of Blue Order’s intangible assets was 20% and the effective tax rate used was 30%.

The values of the customer relationships, non-compete agreements, and trademarks and trade names are being amortized on a straight-line basis over their estimated useful lives of four years, three years and two years, respectively. The value of the developed technology is being amortized over the greater of the amount calculated using the ratio of current quarter revenues to the total of current quarter and anticipated future revenues, and the straight-line method, over the estimated useful life of three and one-half years. The weighted-average amortization period for these amortizable identifiable intangible assets is approximately 3.6 years. Amortization expense for Blue Order identifiable intangible assets totaled $0.6 million and $1.8 million, respectively, for the three- and nine-month periods ended September 30, 2010.

The goodwill, which is not deductible for tax purposes, reflects the value of the assembled workforce and the customer-specific synergies the Company expects to realize by incorporating Blue Order’s workflow and media asset management technology into future solutions offered to customers.

The Company is continuing its evaluation of the information necessary to determine the fair value of the acquired assets and liabilities of Blue Order. Once this evaluation is complete, which in no event will occur more than one year from the date of acquisition, the Company will finalize the purchase price allocation.

The results of operations of Blue Order have been included prospectively in the results of operations of the Company since the date of acquisition. The Company’s results of operations giving effect to the Blue Order acquisition as if it had occurred at the beginning of 2009 would not differ materially from reported results.


 
10

 

MaxT Systems Inc.

On July 31, 2009, the Company acquired all the outstanding shares of MaxT Systems Inc. (“MaxT”), a Canada-based developer of server-based media management and editing technology, for cash, net of cash acquired, of $4.4 million. The results of operations of MaxT have been included prospectively in the results of operations of the Company since the date of acquisition. The Company’s results of operations giving effect to the MaxT acquisition as if it had occurred at the beginning of 2009 would not differ materially from reported results.

 
6.    GOODWILL AND INTANGIBLE ASSETS

Goodwill

Goodwill resulting from the Company’s acquisitions consisted of the following at September 30, 2010 and December 31, 2009 (in thousands):

   
September 30,
2010 (a)
   
December 31,
2009
Goodwill
 
$
416,182
     
$
399,095
 
Accumulated impairment losses
   
(171,900
)
     
(171,900
)
   
$
244,282
     
$
227,195
 

 
(a)
The $17.1 million increase in goodwill from December 31, 2009 to September 30, 2010 was the result of the addition of $8.5 million related to the January 2010 acquisition of Blue Order and $8.9 million related to the April 2010 acquisition of Euphonix, partially offset by foreign currency translation adjustments of approximately $0.3 million. See Note 5 for further information regarding the goodwill related to the Blue Order and Euphonix acquisitions.

There were no interim indicators of goodwill impairment during the nine months ended September 30, 2010.

Identifiable Intangible Assets

Identifiable intangible assets resulting from the Company’s acquisitions consisted of the following at September 30, 2010 and December 31, 2009 (in thousands):

   
September 30, 2010
     
December 31, 2009
   
 
Gross (a)
     
Accumulated
Amortization
     
 
Net
     
 
Gross
     
Accumulated
Amortization
     
 
Net
Completed technologies
    and patents
 
$
74,815
     
$
(67,366)
     
$
7,449
     
$
68,186
     
$
(64,609)
     
$
3,577
Customer relationships
   
68,267
       
(45,497)
       
22,770
       
63,653
       
(40,221)
       
23,432
Trade names
   
14,775
       
(13,506)
       
1,269
       
13,800
       
(11,668)
       
2,132
License agreements
   
560
       
(560)
       
       
560
       
(560)
       
Non-compete agreements
   
1,593
       
(517)
       
1,076
       
162
       
(68)
       
94
   
$
160,010
     
$
(127,446)
     
$
32,564
     
$
146,361
     
$
(117,126)
     
$
29,235

(a)  
The September 30, 2010 gross amounts include the addition of $9.3 million for intangible assets related to the January 2010 acquisition of Blue Order and $4.7 million for intangible assets related to the April 2010 acquisition of Euphonix, partially offset by foreign currency translation adjustments of approximately $0.4 million. See Note 5 for further information regarding the identifiable intangible assets acquired from Blue Order and Euphonix.

Amortization expense related to all intangible assets in the aggregate was $3.0 million and $3.3 million for the three-month periods ended September 30, 2010 and 2009, respectively, and $10.2 million and $9.2 million for the nine-month periods ended September 30, 2010 and 2009, respectively. The Company expects amortization of these intangible assets to be approximately $3 million for the remainder of 2010, $11 million in 2011, $7 million in 2012, $5 million in 2013, $3 million in 2014, $2 million in 2015 and $2 million thereafter.

 
11

 

7.    ACCOUNTS RECEIVABLE

Accounts receivable, net of allowances, consisted of the following at September 30, 2010 and December 31, 2009 (in thousands):

   
September 30,
2010
   
December 31,
2009
Accounts receivable
 
$
105,407
     
$
96,088
 
Less:
                 
   Allowance for doubtful accounts
   
(2,770
)
     
(3,219
)
   Allowance for sales returns and rebates
   
(12,963
)
     
(13,128
)
   
$
89,674
     
$
79,741
 

The accounts receivable balances at September 30, 2010 and December 31, 2009 excluded approximately $23.4 million and $17.3 million, respectively, for large solution sales and certain distributor sales that were invoiced, but for which revenues had not yet been recognized and payments were not then due.

 
8.    INVENTORIES

Inventories consisted of the following at September 30, 2010 and December 31, 2009 (in thousands):

   
September 30,
2010
     
December 31,
2009
 
Raw materials
 
$
12,592
     
$
14,592
 
Work in process
   
937
       
2,559
 
Finished goods
   
82,777
       
60,092
 
   
$
96,306
     
$
77,243
 

At September 30, 2010 and December 31, 2009, the finished goods inventory included inventory at customer locations of $15.1 million and $10.6 million, respectively, associated with products shipped to customers for which revenues had not yet been recognized.

During 2010, the Company determined it was appropriate to revise the way it classifies certain portions of its inventory. As a result, approximately $3.1 million of inventory previously reported as work in process at December 31, 2009 has been included as finished goods inventory for the current presentation.

The decrease in raw materials and work in process at September 30, 2010, which is offset by an increase in finished goods, is related to our increased use of contractors to manufacture our products, components and subassemblies.

 
9.    PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consisted of the following at September 30, 2010 and December 31, 2009 (in thousands):

   
September 30,
2010
   
December 31,
2009
Computer and video equipment and software
 
$
123,527
     
$
115,248
 
Manufacturing tooling and testbeds
   
6,996
       
6,428
 
Office equipment
   
2,035
       
3,404
 
Furniture and fixtures
   
15,350
       
10,378
 
Leasehold improvements
   
37,590
       
31,777
 
     
185,498
       
167,235
 
Accumulated depreciation and amortization
   
(120,410
)
     
(130,018
)
   
$
65,088
     
$
37,217
 

 
12

 


During the first nine months of 2010, leasehold improvements, furniture and equipment related to the relocation of the Company’s corporate offices to Burlington, Massachusetts were placed in service and resulted in fixed asset additions of approximately $31.7 million, including a non-cash addition of $6.0 million resulting from landlord leasehold improvement funding. During the same period, the Company wrote off fixed assets related to the closure of the Company’s former headquarters facility with gross book values and net book values of approximately $22.7 million and $0.1 million, respectively.

 
10.    LONG-TERM LIABILITIES

Long-term liabilities consisted of the following at September 30, 2010 and December 31, 2009 (in thousands):

   
September 30,
2010
     
December 31,
2009
 
Long-term deferred tax liabilities, net
 
$
2,094
     
$
2,519
 
Long-term deferred revenue
   
8,434
       
7,296
 
Long-term deferred rent
   
10,241
       
1,974
 
Long-term accrued restructuring
   
1,347
       
2,694
 
   
$
22,116
     
$
14,483
 
 

 
11.    ACCOUNTING FOR STOCK-BASED COMPENSATION

Stock Incentive Plans

Under its stock incentive plans, the Company may grant stock awards or options to purchase the Company’s common stock to employees, officers, directors (subject to certain restrictions) and consultants, generally at the market price on the date of grant. 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 seven years. Restricted stock and restricted stock unit awards typically vest over four years. Shares available for issuance under the Company’s Amended and Restated 2005 Stock Incentive Plan totaled 4,146,511 at September 30, 2010, including 882,602 shares that may alternatively be issued as awards of restricted stock or restricted stock units.

The Company records stock-based compensation cost for stock-based awards over the requisite service periods for the individual awards, which generally equal the vesting periods. Stock-compensation expense is recognized using the straight-line attribution method. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option grants with time-based vesting. The Black-Scholes model relies on a number of key assumptions to calculate estimated fair values. The fair values of restricted stock awards with time-based vesting, including restricted stock and restricted stock units, are based on the intrinsic values of the awards at the date of grant.

The following table sets forth the weighted-average key assumptions and fair value results for stock options with time-based vesting granted during the three- and nine-month periods ended September 30, 2010 and 2009:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2010
 
2009
 
2010
 
2009
Expected dividend yield
0.00%
 
0.00%
 
0.00%
 
0.00%
Risk-free interest rate
1.07%
 
1.83%
 
1.79%
 
1.94%
Expected volatility
44.5%
 
52.8%
 
45.9%
 
55.7%
Expected life (in years)
4.55
 
4.62
 
4.54
 
4.58
Weighted-average fair value of options granted
$4.39
 
$5.71
 
$5.56
 
$6.12


 
13

 

The Company also issues stock option grants or restricted stock awards with vesting based on market conditions, specifically the Company’s stock price, or a combination of performance and market conditions. The compensation costs and derived service periods for such grants are estimated using the Monte Carlo valuation method. For stock option grants with vesting based on a combination of performance and market conditions, the compensation costs are also estimated using the Black-Scholes valuation method factored for the estimated probability of achieving the performance goals, and compensation costs for these grants are recorded based on the higher estimate for each vesting tranche. For restricted stock unit grants with vesting based on a combination of performance and market conditions, the compensation costs are also estimated based on the intrinsic values of the awards at the date of grant factored for the estimated probability of achieving the performance goals, and compensation costs for these grants are also recorded based on the higher estimate for each vesting tranche. For each stock option grant and restricted stock award with vesting based on a combination of performance and market conditions where vesting will occur if either condition is met, the related compensation costs are recognized over the shorter of the derived service period or implicit service period.

The following table sets forth the weighted-average key assumptions and fair value results for stock options with vesting based on market conditions or a combination of performance and market conditions granted during the three- and nine-month periods ended September 30, 2010 and 2009:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2010
 
2009
 
2010
 
2009
Expected dividend yield
0.00%
 
0.00%
 
0.00%
 
0.00%
Risk-free interest rate
2.05%
 
3.23%
 
2.86%
 
3.25%
Expected volatility
44.6%
 
53.1%
 
46.4%
 
54.3%
Expected life (in years)
3.08
 
3.79
 
3.63
 
3.79
Weighted-average fair value of options granted
$4.81
 
$5.48
 
$4.95
 
$5.41

The following table sets forth the weighted-average key assumptions and fair value results for restricted stock units with vesting based on market conditions or a combination of performance and market conditions granted during the three- and nine-month periods ended September 30, 2010:

 
Three Months Ended
September 30, 2010
 
Nine Months Ended
September 30, 2010
Expected dividend yield
0.00%
 
0.00%
Risk-free interest rate
2.05%
 
4.09%
Expected volatility
44.5%
 
46.7%
Expected life (in years)
4.48
 
4.49
Weighted-average fair value of awards granted
$8.75 
 
$10.71 

No restricted stock units with vesting based on market conditions or a combination of performance and market conditions were granted during the three- or nine-month periods ended September 30, 2009.

During the first quarter of 2010, the Company modified the vesting terms of certain outstanding stock options that had vesting based on market conditions. The modifications, which affected 16 employees, provide that the vesting of the underlying shares can also occur based on the achievement of certain additional performance-based criteria and resulted in a total incremental compensation charge of $0.9 million, which is being recognized over the remaining derived service period of the stock options. The incremental compensation costs for the option modifications were based on the excess fair values of the modified options immediately after the modification, which were estimated using the Black Scholes valuation method factored for the estimated probability of achieving the performance goals, compared to the fair values immediately before the modification estimated using the Monte Carlo valuation method.

The Company estimates forfeiture rates at the time awards are made based on historical turnover rates and applies these rates in the calculation of estimated compensation cost. At September 30, 2010, the Company’s annualized estimated forfeiture rates were 0% for non-employee director awards, and 10% for both executive management staff and other employee awards.

 
14

 


The following table summarizes changes in the Company’s stock options outstanding during the nine months ended September 30, 2010:

   
Stock Options
   
Shares
   
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
(in thousands)
Options outstanding at December 31, 2009
 
4,290,422
   
$21.80
       
                   
Granted
 
1,605,410
   
$13.78
       
Exercised
 
(28,664
)
 
$11.66
       
Forfeited or expired
 
(515,785
)
 
$19.10
       
Options outstanding at September 30, 2010 (a)
 
5,351,383
   
$19.71
 
5.40 years
 
$860
Options vested at September 30, 2010 or expected to vest
 
4,582,045
   
$20.00
 
5.41 years
 
$709
Options exercisable at September 30, 2010
 
1,409,275
   
$26.18
 
4.74 years
 
$200

(a)  
Options outstanding at September 30, 2010 included 1,719,905 options that had vesting based on either market conditions or a combination of performance and market conditions.

The aggregate intrinsic values of stock options exercised during the nine-month periods ended September 30, 2010 and 2009 were approximately $0.1 million and $0.1 million, respectively. Cash amounts received from the exercise of stock options were $0.3 million and $0.2 million for the nine-month periods ended September 30, 2010 and 2009, respectively. The Company did not realize any actual tax benefit from the tax deductions for stock option exercises during the nine-month periods ended September 30, 2010 and 2009 due to the full valuation allowance on the Company’s U.S. deferred tax assets.

The following table summarizes changes in the Company’s non-vested restricted stock units during the nine months ended September 30, 2010:

   
Non-Vested Restricted Stock Units
   
Shares
   
Weighted-
Average
Grant-Date
Fair Value
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
(in thousands)
Non-vested at December 31, 2009
 
643,355
   
$25.14
       
                   
Granted (a)
 
288,000
   
$11.08
       
Vested
 
(276,171
)
 
$25.38
       
Forfeited
 
(62,462
)
 
$23.23
       
Non-vested at September 30, 2010 (b)
 
592,722
   
$18.40
 
1.92 years
 
$7,765
Expected to vest
 
490,810
   
$19.31
 
1.73 years
 
$6,430

(a)  
Restricted stock units granted during the nine months ended September 30, 2010 included 238,500 units that had vesting based on either market conditions or a combination of performance and market conditions.
(b)  
Non-vested restricted stock units at September 30, 2010 included 243,300 units that had vesting based on either market conditions or a combination of performance and market conditions.

 
15

 


The following table summarizes changes in the Company’s non-vested restricted stock during the nine months ended September 30, 2010:

   
Non-Vested Restricted Stock
   
Shares
   
Weighted-
Average
Grant-Date
Fair Value
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
(in thousands)
Non-vested at December 31, 2009
 
50,000
   
$25.41
       
                   
Granted
 
   
       
Vested
 
(18,750
)
 
$25.41
       
Forfeited
 
   
       
Non-vested at September 30, 2010
 
31,250
   
$25.41
 
1.22 years
 
$409

Stock Option Purchase

In June 2009, the Company completed a cash tender offer for certain employee stock options. The tender offer applied to 547,133 outstanding stock options having an exercise price equal to or greater than $40.00 per share and granted under the Company’s Amended and Restated 2005 Stock Incentive Plan, Amended and Restated 1999 Stock Option Plan (including the U.K. sub-plan), 1998 Stock Option Plan, 1997 Stock Option Plan, 1997 Stock Incentive Plan, as amended, and 1994 Stock Option Plan, as amended. Members of the Company’s Board of Directors, officers who file reports under Section 16(a) of the Securities Exchange Act of 1934 and members of the Company’s executive staff were not eligible to participate in this offer. Under the offer, eligible options with exercise prices equal to or greater than $40.00 and less than $50.00 per share were eligible to receive a cash payment of $1.50 per share, and eligible options with exercise prices equal to or greater than $50.00 per share were eligible to receive a cash payment of $1.00 per share.

Options to purchase a total of 419,042 shares of the Company’s common stock, of which 366,769 shares became available for future grant, were tendered under the offer for an aggregate purchase price of approximately $0.5 million paid in exchange for the cancellation of the eligible options. As a result of the tender offer, the Company incurred stock-based compensation charges of approximately $0.1 million in its condensed consolidated statements of operations during the second quarter of 2009. This was the first time the Company offered to purchase outstanding stock options in exchange for cash, and there is no current intent to make another such offer in the future.

Employee Stock Purchase Plan

The Company’s Second Amended and Restated 1996 Employee Stock Purchase Plan (the “ESPP”) offers the Company’s shares for purchase at a price equal to 85% of the closing price on the applicable offering period termination date. Shares issued under the ESPP are considered compensatory under FASB ASC Subtopic 718-50, Compensation-Stock Compensation: Employee Stock Purchase Plans . Accordingly, the Company is required to assign fair value to, and record compensation expense for, shares issued from the ESPP.

The following table sets forth the weighted-average key assumptions and fair value results for shares issued under the ESPP during the three- and nine-month periods ended September 30, 2010 and 2009:

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2010
 
2009
 
2010
 
2009
Expected dividend yield
0.00%
 
0.00%
 
0.00%
 
0.00%
Risk-free interest rate
1.40%
 
1.25%
 
1.24%
 
1.68%
Expected volatility
47.1%
 
56.5%
 
45.7%
 
58.7%
Expected life (in years)
0.24
 
0.25
 
0.24
 
0.25
Weighted-average fair value of shares issued
$2.11
 
$2.11
 
$2.19
 
$1.92

 
16

 


Under the ESPP, the Company issued 78,889 shares at an average price per share of $11.33 and 99,601 shares at an average price per share of $9.38 during the nine months ended September 30, 2010 and 2009, respectively. A total of 765,585 shares remained available for issuance under the ESPP at September 30, 2010.

Stock-Based Compensation

Stock-based compensation was included in the following captions in the Company’s condensed consolidated statements of operations for the three- and nine-month periods ended September 30, 2010 and 2009 (in thousands):

 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
2010
     
2009
   
2010
     
2009
Cost of product revenues
$
176
     
$
163
   
$
562
     
$
666
Cost of services revenues
 
287
       
247
     
822
       
868
Research and development expenses
 
506
       
655
     
1,704
       
1,737
Marketing and selling expenses
 
1,078
       
895
     
3,153
       
2,522
General and administrative expenses
 
1,581
       
906
     
4,373
       
4,115
    Total stock-based compensation
$
3,628
     
$
2,866
   
$
10,614
     
$
9,908

At September 30, 2010, the Company had $26.0 million of unrecognized compensation costs before forfeitures related to non-vested stock-based compensation awards granted under its stock-based compensation plans.

 
12.    STOCK REPURCHASES

In April 2007, the Company initiated a stock repurchase program that ultimately authorized the repurchase of up to $200 million of the Company’s common stock through transactions on the open market, in block trades or otherwise. At September 30, 2010, $80.3 million remained available for future stock repurchases under the program. The stock repurchase program is funded through working capital and has no expiration date. No shares of common stock have been repurchased under this program since March 2008.

During the nine months ended September 30, 2010, the Company repurchased 5,946 shares of restricted stock from an employee to pay the minimum required withholding taxes upon the vesting of restricted stock.

At September 30, 2010 and December 31, 2009, treasury shares held by the Company totaled 4,236,774 shares and 4,852,738 shares, respectively.

 
13.    CONTINGENCIES

The Company receives inquiries from time to time claiming possible patent infringement by the Company. 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 matters such as contractual or employee relations, intellectual property rights and product performance. Settlements related to any such claim are generally included in the “general and administrative expenses” caption in the Company’s consolidated statements of operations. Management generally does not believe these claims will have a material adverse effect on the financial position or results of operations of the Company.

On May 24, 2007, David Engelke and Bryan Engelke filed a complaint in Pinellas County (Florida) Circuit Court against our Pinnacle subsidiary claiming damages of approximately $15 million for the alleged breach of two contracts by Pinnacle and that the Engelkes were entitled to indemnification for damages, attorneys fees and accrued interest assessed against them in litigation with a third party, Athle-Tech Computer Systems, Inc. (“Athle-Tech”). The parties reached a settlement in this matter on September 24, 2010 pursuant to which Pinnacle paid $5.6 million, which was recorded in the Company’s general and administrative expenses, and obtained a full release of claims from each of the Engelkes and Athle-Tech. The lawsuit was dismissed with prejudice on September 24, 2010.

 
17

 


Opengate SpA, (“Opengate”) an entity in liquidation, represented by the Trustee in Bankruptcy Dr. Marco Fiorentini, brought a claim against the Company’s subsidiary, Pinnacle Systems GmbH (“Pinnacle GmbH”), in the Varese, Italy Tribunal on July 21, 2009. The Trustee in Bankruptcy is seeking to recover €2,700,000 in payments made by Opengate to Pinnacle GmbH between 2002 and 2003, the year prior to Opengate being placed into administration. The initial Writ of Summons, dated in September 2009, was never received by the Company and was declared improperly served at a May 2010 hearing on the matter, which the Company did not attend. The Writ was later received by the Company in September 2010. A hearing is to be held in this matter on February 18, 2011, at which Pinnacle GmbH intends to submit its defense. Because the Company cannot predict the outcome of this action at this time, no costs have been accrued for any loss contingency; however, this matter is not expected to have a material effect on the Company’s financial position or results of operations.

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 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 the Company’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, the Company 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 three standby letters of credit at a bank that are used as security deposits in connection with the Company’s Burlington, Massachusetts office space. In the event of default on the underlying leases, the landlords would, at September 30, 2010, be eligible to draw against the letters of credit to a maximum of $2.6 million in the aggregate. The letters of credit are subject to aggregate reductions of approximately $0.4 million at the end of each of the second, third and fifth years, provided the Company is not in default of the underlying leases and meets certain financial performance conditions. In no case will the letters of credit amounts be reduced to below $1.3 million in the aggregate throughout the lease periods, all of which extend to May 2020. At September 30, 2010, the Company was not in default of any of the underlying leases.

The Company also 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, at September 30, 2010, be eligible to draw against this letter of credit to a maximum of $0.8 million. The letter of credit will remain in effect at $0.8 million throughout the remaining lease period, which extends to September 2014. At September 30, 2010, the Company was not in default of this lease.


 
18

 

The Company has in the past, through third parties, provided lease financing options to its customers, including end users and, on a limited basis, resellers. This program was terminated by mutual agreement among the parties in the fourth quarter of 2008; however, balances outstanding as of the termination date continue to be collected by the third-party lessors as they become due. During the terms of these leases, which are generally three years, and until all remaining outstanding balances are collected, the Company may remain 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 September 30, 2010 and December 31, 2009, the Company’s maximum recourse exposure totaled approximately $1.3 million and $2.5 million, respectively. The Company recorded revenues from these transactions upon the shipment of products, provided that all other revenue recognition criteria, including collectibility being reasonably assured, were met. The Company maintains a reserve for estimated losses under this program based on historical default rates applied to the amount outstanding at period end. At September 30, 2010 and December 31, 2009, the Company’s accruals for estimated losses were $0.8 million and $1.3 million, respectively.

The Company provides warranties on externally sourced and internally developed hardware and software. 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 the Company’s products is generally 30 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 for the nine-month periods ended September 30, 2010 and 2009 (in thousands):

   
Nine Months Ended
September 30,
   
2010
   
2009
Accrual balance at beginning of period
 
$
4,454
     
$
5,193
 
   Accruals for product warranties
   
3,924
       
4,644
 
   Cost of warranty claims
   
(3,941
)
     
(5,098
)
Accrual balance at end of period
 
$
4,437
     
$
4,739
 

 
14.    COMPREHENSIVE LOSS

Total comprehensive loss, net of taxes, consists of net loss and the net changes in foreign currency translation adjustment and net unrealized gains and losses on available-for-sale securities, foreign-currency derivatives and other investments. The following is a summary of the Company’s comprehensive loss for the three- and nine-month periods ended September 30, 2010 and 2009 (in thousands):

   
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
   
2010
     
2009
     
2010
     
2009
Net loss
 
$
(9,995
)
     
$
(17,208
)
     
$
(36,383
)
     
$
(50,434
)
Net changes in:
                                           
   Foreign currency translation adjustment
   
9,241
         
3,722
         
(1,012
)
       
5,012
 
   Unrealized gains (losses) on investments
   
         
7
         
(4
)
       
45
 
   Unrealized losses on foreign-currency derivatives
   
(2,314
)
       
         
(2,314
)
       
 
Total comprehensive loss
 
$
(3,068
)
     
$
(13,479
)
     
$
(39,713
)
     
$
(45,377
)


 
19

 


15.    SEGMENT INFORMATION

During 2009, the Company was organized into two business units, Video and Audio, which were also its reportable segments. As a result of the business transformation started in 2008, in the later part of 2009 the Company completed the reorganization of its business around functional groups rather than product categories. As a result, the Company’s evaluation of the discrete financial information that is regularly reviewed by the chief operating decision makers determined that the Company now has one reportable segment, and, effective January 1, 2010, the Company began reporting based on a single reportable segment. The Company has reclassified its 2009 segment reporting to conform to the 2010 presentation. The change to the current presentation did not affect the Company’s consolidated operating results.

The following table sets forth activity for the Company’s revenues by type for the three- and nine-month periods ended September 30, 2010 and 2009 (in thousands):

   
Three Months Ended
September 30,
     
Nine Months Ended
September 30,
 
   
2010
     
2009
     
2010
     
2009
 
Video product revenues
 
$
70,835
     
$
65,124
     
$
195,883
     
$
186,581
 
Video services revenues
   
29,351
       
27,493
       
82,177
       
82,237
 
     
100,186
       
92,617
       
278,060
       
268,818
 
                                       
Audio product revenues:
   
63,396
       
58,398
       
201,161
       
182,494
 
Audio services revenues
   
1,477
       
1,104
       
3,954
       
2,979
 
     
64,873
       
59,502
       
205,115
       
185,473
 
                                       
    Total net revenues
 
$
165,059
     
$
152,119
     
$
483,175
     
$
454,291
 

 
16.    RESTRUCTURING AND OTHER COSTS AND ACCRUALS

In October 2008, the Company initiated a company-wide restructuring plan (the “Plan”) that included a reduction in force of approximately 500 positions, including employees related to product line divestitures, and the closure of all or parts of some facilities worldwide. The Plan is intended to improve operational efficiencies and bring costs in line with expected revenues. In connection with the Plan, during the fourth quarter of 2008 the Company recorded restructuring charges of $20.4 million related to employee termination costs and $0.5 million for the closure of three small facilities. In addition, as a result of the decision to sell the PCTV product line, the Company recorded a non-cash restructuring charge of $1.9 million in cost of revenues related to the write-down of inventory.

During the first six months of 2009, the Company recorded new restructuring charges totaling $8.2 million under the Plan, of which $3.1 million related to employee termination costs; $4.3 million related to the closure of all or part of nine facilities; and $0.8 million, recorded in cost of revenues, related to the write-down of PCTV inventory. During the third and fourth quarters of 2009, as a result of the expanded use of offshore development resources for R&D projects and our desire to better align our 2010 cost structure with revenue expectations, the Company initiated new restructuring actions under the Plan resulting in additional restructuring charges totaling $18.9 million. The third and fourth quarter charges included $11.7 million related to an additional reduction in force of approximately 320 positions and $7.2 million, including non-cash charges of $2.2 million for the write-off of fixed assets, primarily related to the closure of one floor of our Daly City, California facility. Also during 2009, the Company recorded additional charges of $0.8 million for revised estimates of severance obligations previously recorded under the Plan and restructuring reductions of ($0.2) million for revised estimates of previously initiated restructuring plans.

During the first quarter of 2010, the Company recorded new restructuring charges under the Plan totaling $0.8 million as a result of the closure of all or part of four additional facilities. Also during the first nine months of 2010, the Company recorded additional charges of $0.5 million for revised estimates of facilities costs and a reduction of ($0.3) million for revised estimates of severance obligations previously recorded under the Plan. In connection with restructuring actions taken under the Plan, the Company has incurred total restructuring charges of approximately $52 million.


 
20

 

During the three- and nine-month periods ended September 30, 2010, the Company also recorded acquisition-related restructuring charges of $0.1 million and $0.8 million, respectively, primarily for severance costs for approximately 24 former Euphonix employees and the closure of two Euphonix facilities. Future actions anticipated under the acquisition-related plan are limited to the closure of Euphonix facilities and are expected to result in additional 2010 restructuring charges of approximately $1.1 million.

For the three and nine months ended September 30, 2010, also included in the Company’s results of operations under the caption “restructuring and other costs, net” were costs of $3.7 million related to the Company’s exit from its Tewksbury, Massachusetts headquarters lease.

The Company recorded the employee-related restructuring charges as an ongoing benefit arrangement in accordance with FASB ASC Topic 712, Compensation – Nonretirement Postemployment Benefits , and the facility-related restructuring charges in accordance with the guidance of FASB ASC Topic 420, Liabilities: Exit or Disposal Cost Obligations . 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.

The following table sets forth the activity in the restructuring accruals for the nine months ended September 30, 2010 (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, 2009
 
$
9,234
     
$
7,261
     
$
     
$
472
     
$
16,967
 
New restructuring charges
   
       
801
       
725
       
64
       
1,590
 
Revisions of estimated liabilities
   
(349
)
     
503
       
40
       
       
194
 
Accretion
   
       
174
       
       
10
       
184
 
Cash payments for employee-related charges
   
(7,749
)
     
       
(171
)
     
       
(7,920
)
Cash payments for facilities, net of sublease income
   
       
(3,926
)
               
(424
)
     
(4,350
)
Non-cash write-offs
   
       
(291
)
     
       
       
(291
)
Foreign exchange impact on ending balance
   
(287
)
     
(18
)
     
8
       
(28
)
     
(325
)
Accrual balance at September 30, 2010
 
$
849
     
$
4,504
     
$
602
     
$
94
     
$
6,049
 

The employee-related accruals at September 30, 2010 represent severance and outplacement costs to former employees that will be paid out within the next twelve months and are, therefore, included in the caption “accrued expenses and other current liabilities” in the Company’s consolidated balance sheet at September 30, 2010.

The facilities-related accruals at September 30, 2010 represent estimated losses, net of subleases, on space vacated as part of the Company’s restructuring actions. The leases, and payments against the amounts accrued, will extend through 2017 unless the Company is able to negotiate earlier terminations. Of the total facilities-related accruals, $3.3 million is included in the caption “accrued expenses and other current liabilities” and $1.3 million is included in the caption “long-term liabilities” in the Company’s consolidated balance sheet at September 30, 2010.

 
21

 


 
17.    RECENT ACCOUNTING PRONOUNCEMENTS

In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements , an amendment to FASB ASC Topic 605, Revenue Recognition , and Accounting Standards Update No. 2009-14, Certain Revenue Arrangements That Include Software Elements , an amendment to FASB ASC Subtopic 985-605, Software – Revenue Recognition (the “Updates”). The Updates provide guidance on arrangements that include software elements, including tangible products that have software components that are essential to the functionality of the tangible product and will no longer be within the scope of the software revenue recognition guidance, and software-enabled products that will now be subject to other relevant revenue recognition guidance. The Updates also provide authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor-specific objective evidence or third-party evidence of fair value for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The Updates also include new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. The Updates must be adopted in the same period using the same transition method and are effective prospectively, with retrospective adoption permitted, for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, or January 1, 2011 for Avid. Early adoption is also permitted; however, early adoption during an interim period requires retrospective application from the beginning of the fiscal year. The Company plans to adopt the Updates prospectively on January 1, 2011. While the Company is continuing its evaluation of the impact of adoption, management does not currently believe adoption will have a material impact on the Company’s financial position or results of operations.

 
18.    SUBSEQUENT EVENT

On October 1, 2010, Avid Technology, Inc. (“Avid Technology”) and certain of its subsidiaries entered into a Credit Agreement with Wells Fargo Capital Finance LLC (“Wells Fargo”). Pursuant to the Credit Agreement, Wells Fargo agreed to provide revolving credit facilities for Avid Technology of up to a maximum of $40 million and for the Avid Technology International B.V. (“Avid Europe”) subsidiary of up to a maximum of an additional $20 million. The borrowing availability under the credit facilities is based on the lesser of (1) the foregoing commitments for Avid Technology and Avid Europe (the “Borrowers”), as applicable, and (2) a borrowing base which is a percentage of the accounts receivable and inventory of the Borrowers, as applicable. The actual amount of credit available to the Borrowers will vary depending upon changes in the level of their respective accounts receivable and inventory, and is subject to other terms and conditions which are more specifically described in the Credit Agreement. The borrowing availability is also subject to other reserve requirements which may be established by Wells Fargo as provided in the Credit Agreement. The credit facilities have a maturity of four years, at which time Wells Fargo’s commitments to provide additional credit shall be terminated and all outstanding borrowings by the Borrowers must be repaid. Prior to the maturity of the credit facilities, any amounts borrowed may be repaid and, subject to the terms and conditions of the Credit Agreement, reborrowed in whole or in part without penalty. The Credit Agreement contains customary representations and warranties, covenants, mandatory prepayments, and events of default under which the Borrower’s payment obligations may be accelerated.

Interest accrues on outstanding borrowings under the credit facilities at a rate of either LIBOR (as defined in the Credit Agreement) plus 2.75% or a Base Rate (as defined in the Credit Agreement) plus 1.75%, at the option of Avid Technology or Avid Europe, as applicable. The Borrowers must also pay to Wells Fargo, on a monthly basis, an unused line fee at a rate of 0.625% per annum on an amount equal to (1) the average lending commitments under the credit facilities during the immediately preceding month less (2) the average daily amount of the outstanding borrowings plus the undrawn amount of any outstanding letters of credit under the credit facilities during the immediately preceding month. During the term of the credit facilities, the Borrowers are entitled to reduce the maximum amounts of Wells Fargo’s commitments, subject to the payment of certain fees based on the amount of any reduction.


 
22

 

Avid Technology and certain of its subsidiaries have provided guarantees and liens on substantially all of their assets to secure their obligations under the Credit Agreement. The Credit Agreement requires that Avid Technology maintain liquidity (comprised of unused availability under Avid Technology’s portion of the credit facilities plus certain unrestricted cash and cash equivalents) of $10 million, at least $5 million of which must be from unused availability under Avid Technology’s portion of the credit facilities.  Avid Europe is required to maintain liquidity (comprised of unused availability under Avid Europe’s portion of the credit facilities plus certain unrestricted cash and cash equivalents) of $5 million, at least $2.5 million of which must be from unused availability under Avid Europe’s portion of the credit facilities.

The Company has not yet borrowed against the credit facilities and currently has no specific plans to draw against them; however, the line may be used from time-to-time to cover short-term cash requirements in certain geographies or to otherwise meet the funding needs of the business.


 
23

 


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 
EXECUTIVE OVERVIEW

Our Company

We create digital audio and video technology used to make the most listened to, most watched and most loved media in the world – from the most prestigious and award-winning feature films, music recordings, television shows, live concert tours and news broadcasts, to music and movies made at home. Our influential and pioneering solutions include Media Composer, Pro Tools, Interplay, ISIS, VENUE, Oxygen 8, Sibelius and Pinnacle Studio. Our mission is to inspire passion, unleash creativity and enable our customers to realize their dreams in a digital world. Anyone who enjoys movies, television or music has almost certainly experienced the work of content creators who use our solutions to bring their creative visions to life.

We operate our business based on the following five customer-centric strategic principles:

Ÿ  
Drive customer success .   We are committed to making each and every customer successful. Period. It’s that simple.

Ÿ  
From enthusiasts to the enterprise.   Whether performing live or telling a story to sharing a vision or broadcasting the news – we create products to support our customers at all stages.

Ÿ  
Fluid, dependable workflows .   Reliability. Flexibility. Ease of Use. High Performance. We provide best-in-class workflows to make our customers more productive and competitive.

Ÿ  
Collaborative support .   For the individual user, the workgroup, a community or the enterprise, we enable a collaborative environment for success.

Ÿ  
Avid optimized in an open ecosystem .   Our products are innovative, reliable, integrated and best-of-breed. We work in partnership with a third-party community resulting in superior interoperability.

We are deeply committed to the long-term success of our company and that of our customers. In 2008, we initiated a significant transformation of our business that included, among other things, establishing a new management team, developing a new corporate strategy, restructuring our internal organization, improving operational efficiencies, divesting non-core product lines and reducing the size of our workforce. We have established a strategic and organizational foundation from which we are positioned to build momentum in our core business and expand our operating margins with the ultimate goal of sustainable growth. As part of our business transformation, in the later part of 2009 we completed a reorganization of our business around functional groups rather than product categories. As a result, effective January 1, 2010, we commenced reporting based on a single reportable segment.

We routinely post important information for investors on the Investors page of our website at www.avid.com.

Financial Summary

Our revenues for the three-month period ended September 30, 2010 were $165.1 million, an increase of 8.5% compared to the same period last year, with revenues from video products and services increasing by 8.2%, and revenues from audio products and services increasing by 9.0%. For the three-month period, product revenues increased by 8.7% and services revenues increased by 7.8%. Our revenues for the nine-month period ended September 30, 2010 were $483.2 million, an increase of 6.4% compared to the same period last year, with revenues from video products and services increasing by 3.4%, and revenues from audio products and services increasing by 10.6%. For the nine month period, product revenues increased by 7.6% and services revenues increased by 1.1%. Currency exchange rates had a negative impact on our revenues for both the three- and nine-month periods, compared to the same periods in 2009. The changes in revenues are discussed in further detail in the section titled “Results of Operations” below.


 
24

 

Our total gross margin percentage for the three-month period ended September 30, 2010 decreased to 51.9% from 53.2% for the comparable 2009 period. Our total gross margin percentage for the nine-month period ended September 30, 2010 decreased slightly to 50.8% from 51.0% for the comparable 2009 period. The decreases for both periods were driven by decreases in products gross margin percentage. Increased freight costs resulting from increased shipment volumes, including the increased use of more expensive air freight to support new product introductions and meet increased demand for certain products, were a significant factor in the percentage decreases for both periods. For the three-month period, changes in currency exchange rates also had a negative impact on our gross margin percentage compared to the 2009 period. Our services gross margin percentages improved for both periods, which was largely the result of improved utilization of services resources.

Our operating expenses for the three- and nine-month periods ended September 30, 2010 were $92.8 million and $278.5 million, respectively, compared to $100.1 million and $286.5 million for the same periods in 2009. The decreases for both periods are even more significant in light of the fact that our operating expenses for both 2010 periods included a legal settlement of $5.6 million for a breach of contract claim, which is related to activities that occurred at Pinnacle Systems prior to our 2005 acquisition of that company, and operating expenses added by our 2010 Euphonix, Inc. and Blue Order Solutions AG acquisitions.

In June 2010, we relocated our corporate offices to Burlington, Massachusetts upon expiration of our lease in Tewksbury, Massachusetts. The Burlington facility was chosen after reviewing many potential sites, because we believe it will accommodate our business over the long term and provide a more employee and customer friendly environment in a cost effective manner. During the first nine months of 2010, leasehold improvements, furniture and equipment related to this relocation were placed in service and resulted in fixed asset additions of approximately $31.7 million, of which $15.7 million represented cash expenditures during the period. During the same period, we wrote off fixed assets with gross book values and net book values of approximately $22.7 million and $0.1 million, respectively, that were related to the closure of our former headquarters facility.

As a result of our business transformation, we initiated a restructuring plan in the fourth quarter of 2008. This restructuring plan resulted in 2008 and 2009 charges related to a reduction in force of approximately 820 positions, including employees associated with product line divestitures, and the closure of all or parts of 18 facilities worldwide. During the second quarter of 2010, we initiated an acquisition-related restructuring plan that has resulted in charges to date of $0.8 million. Cash expenditures resulting from restructuring obligations totaled approximately $12.3 million during the first nine months of 2010. We may engage in additional cost reduction programs in the future, including restructuring actions, as a result of changing economic conditions.

 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. However, 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; the valuation of business combinations, goodwill and intangible assets; divestitures; and income tax assets and liabilities. We believe these policies are critical because they most significantly affect the portrayal of our financial condition and results of operations and involve our most difficult and subjective estimates and judgments. Our critical accounting policies may be found in our 2009 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.”


 
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RESULTS OF OPERATIONS

Net Revenues

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 maintenance contracts.

 
Three Months Ended September 30 , 2010 and 2009
 
(dollars in thousands)
 
2010
Net Revenues
 
% of
Consolidated
Net Revenues
 
2009
Net Revenues
 
% of
Consolidated
Net Revenues
 
Change
 
% Change
in Revenues
Video product revenues
$
70,835
 
   42.9%
 
$
65,124
 
   42.8%
 
$
5,711
   
  8.8%
Video services revenues
 
29,351
 
   17.8%
   
27,493
 
   18.1%
   
1,858
   
  6.8%
   
100,186
 
   60.7%
   
92,617
 
   60.9%
   
7,569
   
  8.2%
                               
Audio product revenues
 
63,396
 
   38.4%
   
58,398
 
   38.4%
   
4,998
   
  8.6%
Audio services revenues
 
1,477
 
     0.9%
   
1,104
 
     0.7%
   
373
   
33.8%
   
64,873
 
   39.3%
   
59,502
 
   39.1%
   
5,371
   
  9.0%
                               
    Total net revenues
$
165,059
 
100.0%
 
$
152,119
 
100.0%
 
$
12,940
   
  8.5%


 
Nine Months Ended September 30, 2010 and 2009
 
(dollars in thousands)
 
2010
Net Revenues
 
% of
Consolidated
Net Revenues
 
2009
Net Revenues
 
% of
Consolidated
Net Revenues
 
Change
 
% Change
in Revenues
Video product revenues
$
195,883
 
   40.6%
 
$
186,581
 
   41.1%
 
$
9,302
   
  5.0%
Video services revenues
 
82,177
 
   17.0%
   
82,237
 
   18.1%
   
(60
)
 
  (0.1%)
   
278,060
 
   57.6%
   
268,818
 
   59.2%
   
9,242
   
  3.4%
                               
Audio product revenues
 
201,161
 
   41.6%
   
182,494
 
   40.2%
   
18,667
   
  10.2%
Audio services revenues
 
3,954
 
    0. 8%
   
2,979
 
     0.6%
   
975
   
  32.7%
   
205,115
 
   42.4%
   
185,473
 
   40.8%
   
19,642
   
  10.6%
                               
    Total net revenues
$
483,175
 
100.0%
 
$
454,291
 
100.0%
 
$
28,884
   
  6.4%

The overall 8.5% increase in our revenues for the three-month period was driven by increased revenues from our video and audio products, as well as from our video and audio services. For the three-month period, compared to the same period in 2009, the increase in revenues was net of a $4.6 million decrease for the unfavorable impact of currency exchange rates.

The overall 6.4% increase in our revenues for the nine-month period was primarily driven by increased revenues from our video and audio products. For the nine-month period, compared to the same period in 2009, the increase in revenues was net of a $1.6 million decrease for the unfavorable impact of currency exchange rates.


 
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The increases in revenues from our video products for both the three- and nine-month periods were primarily the result of increased revenues from sales of our ISIS shared storage systems and professional editors, as well as increased revenues from our Interplay production and media-asset management products and our broadcast newsroom product lines. The release of a new version of Media Composer during the second quarter of 2010 has been a significant factor in the improvement in professional editor revenues. In both periods, these increases were partially offset by decreased revenues from our consumer editor product lines, which was in part due to overall weakness in that market. The increases in video product revenues for both periods were primarily in the Americas and APAC regions, as our EMEA revenues were impacted by unfavorable currency exchange rates.

The increases in revenues from our audio product lines for the three- and nine-month periods included revenues of $3.6 million and $7.2 million, respectively, related to our April 2010 acquisition of Euphonix. While this accounted for most of the increase for the three-month period, the increase for the nine-month period was also driven by increased revenues from our professional audio products and VENUE live sound product line. The increased revenues from our professional audio products largely resulted from sales promotions offered during the first six months of 2010. The increases in audio product revenues for both periods were in all geographic regions despite the impact of unfavorable currency exchange rates on our EMEA revenues.

Services revenues are derived primarily from maintenance contracts, as well as professional and integration services and training. For both the three- and nine-month periods, increased professional services revenues were partially offset by decreases in training and maintenance revenues. The decreases in maintenance revenues for both periods were largely the result of declining renewal rates for previously discontinued product lines.

Net revenues derived through indirect channels were 62% and 65% of our net revenues for the three- and nine-month periods ended September 30, 2010, respectively, compared to 67% and 66% for the same periods in 2009.

Sales to customers outside the United States accounted for 56% and 57% of our net revenues for the three- and nine-month periods ended September 30, 2010, respectively, compared to 59% and 57% for the same periods in 2009.

Gross Margin

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 business combinations. Amortization of technology is described further in the “Amortization of Intangible Assets” section below. Cost of revenues for the nine-month period ended September 30, 2009 included a charge of $0.8 million for the write-down of inventory during the first quarter of 2009 related to the 2008 divestiture of our PCTV product line.

Gross margins fluctuate based on factors such as the mix of products and services 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 and currency exchange rate fluctuations.

 
27

 


 
Three Months Ended September 30, 2010 and 2009
 
(dollars in thousands)
 
2010
 
Gross
Margin %
 
2009
 
Gross
Margin %
 
Change in
Gross Margin %
Cost of products revenues
$
64,421
 
52.0%
 
$
57,097
 
53.8%
 
(1.8%)
Cost of services revenues
 
14,194
 
54.0%
   
13,586
 
52.5%
 
1.5%
Amortization of intangible assets
 
745
 
   
519