Attached files
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EX-33.1 - CEO & CFO SECTION 906 CERTIFICATIONS - AVID TECHNOLOGY, INC. | exhibit_32-1.htm |
EX-10.2 - MARTIN VANN EXECUTIVE EMPLOYMENT AGREEMENT - AVID TECHNOLOGY, INC. | exhibit_10-2.htm |
EX-31.2 - CFO CERTIFICATION - AVID TECHNOLOGY, INC. | exhibit_31-2.htm |
EX-31.1 - CEO CERTIFICATION - AVID TECHNOLOGY, INC. | exhibit_31-1.htm |
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 March 31, 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.)
|
One
Park West
Tewksbury,
Massachusetts 01876
(Address
of Principal Executive Offices, Including Zip Code)
(978)
640-6789
(Registrant’s
Telephone Number, Including Area Code)
__________________
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes 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 May 4, 2010
was 38,033,911.
AVID
TECHNOLOGY, INC.
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2010
Page
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32
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33
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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.
(in
thousands except per share data, unaudited)
Three
Months Ended
March
31,
|
|||||||||
2010
|
2009
|
||||||||
Net
revenues:
|
|||||||||
Products
|
$
|
128,679
|
$
|
123,641
|
|||||
Services
|
27,277
|
27,988
|
|||||||
Total
net revenues
|
155,956
|
151,629
|
|||||||
Cost
of revenues:
|
|||||||||
Products
|
63,269
|
61,248
|
|||||||
Services
|
14,040
|
15,839
|
|||||||
Amortization
of intangible assets
|
966
|
520
|
|||||||
Restructuring
costs
|
—
|
799
|
|||||||
Total
cost of revenues
|
78,275
|
78,406
|
|||||||
Gross
profit
|
77,681
|
73,223
|
|||||||
Operating
expenses:
|
|||||||||
Research
and development
|
30,151
|
31,051
|
|||||||
Marketing
and selling
|
41,746
|
40,781
|
|||||||
General
and administrative
|
14,602
|
15,113
|
|||||||
Amortization
of intangible assets
|
2,857
|
2,375
|
|||||||
Restructuring
costs, net
|
1,340
|
4,222
|
|||||||
Total
operating expenses
|
90,696
|
93,542
|
|||||||
Operating
loss
|
(13,015
|
)
|
(20,319
|
)
|
|||||
Interest
income
|
135
|
264
|
|||||||
Interest
expense
|
(209
|
)
|
(50
|
)
|
|||||
Other
income (expense), net
|
74
|
(61
|
)
|
||||||
Loss
before income taxes
|
(13,015
|
)
|
(20,166
|
)
|
|||||
Provision
for (benefit from) income taxes, net
|
467
|
(2,889
|
)
|
||||||
Net
loss
|
$
|
(13,482
|
)
|
$
|
(17,277
|
)
|
|||
Net
loss per common share – basic and diluted
|
$
|
(0.36
|
)
|
$
|
(0.47
|
)
|
|||
Weighted-average
common shares outstanding – basic and diluted
|
37,516
|
37,130
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
1
AVID
TECHNOLOGY, INC.
(in
thousands, unaudited)
March
31,
2010
|
December
31,
2009
|
||||||||
ASSETS
|
|||||||||
Current
assets:
|
|||||||||
Cash
and cash equivalents
|
$
|
73,735
|
$
|
91,517
|
|||||
Marketable
securities
|
500
|
17,360
|
|||||||
Accounts
receivable, net of allowances of $14,498 and $16,347 at
|
|||||||||
March
31, 2010 and December 31, 2009, respectively
|
84,257
|
79,741
|
|||||||
Inventories
|
71,794
|
77,243
|
|||||||
Deferred
tax assets, net
|
1,818
|
770
|
|||||||
Prepaid
expenses
|
10,076
|
7,789
|
|||||||
Other
current assets
|
21,063
|
22,516
|
|||||||
Total
current assets
|
263,243
|
296,936
|
|||||||
Property
and equipment, net
|
52,708
|
37,217
|
|||||||
Intangible
assets, net
|
36,585
|
29,235
|
|||||||
Goodwill
|
230,777
|
227,195
|
|||||||
Other
assets
|
9,640
|
20,455
|
|||||||
Total
assets
|
$
|
592,953
|
$
|
611,038
|
|||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||||
Current
liabilities:
|
|||||||||
Accounts
payable
|
$
|
33,431
|
$
|
30,230
|
|||||
Accrued
compensation and benefits
|
25,160
|
25,281
|
|||||||
Accrued
expenses and other current liabilities
|
40,856
|
55,591
|
|||||||
Income
taxes payable
|
3,610
|
3,228
|
|||||||
Deferred
revenues
|
45,621
|
39,107
|
|||||||
Total
current liabilities
|
148,678
|
153,437
|
|||||||
Long-term
liabilities
|
16,282
|
14,483
|
|||||||
Total
liabilities
|
164,960
|
167,920
|
|||||||
Contingencies
(Note 13)
|
|||||||||
Stockholders’
equity:
|
|||||||||
Common
stock
|
423
|
423
|
|||||||
Additional
paid-in capital
|
994,700
|
992,489
|
|||||||
Accumulated
deficit
|
(464,048
|
)
|
(444,661
|
)
|
|||||
Treasury
stock at cost, net of reissuances
|
(106,099
|
)
|
(112,389
|
)
|
|||||
Accumulated
other comprehensive income
|
3,017
|
7,256
|
|||||||
Total
stockholders’ equity
|
427,993
|
443,118
|
|||||||
Total
liabilities and stockholders’ equity
|
$
|
592,953
|
$
|
611,038
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
2
AVID
TECHNOLOGY, INC.
(in
thousands, unaudited)
Three
Months Ended
March
31,
|
|||||||||
2010
|
2009
|
||||||||
Cash
flows from operating activities:
|
|||||||||
Net
loss
|
$
|
(13,482
|
)
|
$
|
(17,277
|
)
|
|||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||||
Depreciation
and amortization
|
8,303
|
7,750
|
|||||||
(Recovery
of) provision for doubtful accounts
|
(170
|
)
|
1,011
|
||||||
Non-cash
provision for restructuring
|
—
|
925
|
|||||||
(Gain)
loss on disposal of fixed assets
|
(13
|
)
|
79
|
||||||
Compensation
expense from stock grants and options
|
3,322
|
4,148
|
|||||||
Changes
in deferred tax assets and liabilities, excluding initial effects of
acquisitions
|
—
|
(372
|
)
|
||||||
Changes
in operating assets and liabilities, excluding initial effects of
acquisitions:
|
|||||||||
Accounts
receivable
|
(4,605
|
)
|
19,735
|
||||||
Inventories
|
5,703
|
(334
|
)
|
||||||
Prepaid
expenses and other current assets
|
(690
|
)
|
7,216
|
||||||
Accounts
payable
|
2,803
|
(5,442
|
)
|
||||||
Accrued
expenses, compensation and benefits and other liabilities
|
(15,453
|
)
|
(20,830
|
)
|
|||||
Income
taxes payable
|
205
|
(2,957
|
)
|
||||||
Deferred
revenues
|
7,560
|
(4,444
|
)
|
||||||
Net
cash used in operating activities
|
(6,517
|
)
|
(10,792
|
)
|
|||||
Cash
flows from investing activities:
|
|||||||||
Purchases
of property and equipment
|
(10,009
|
)
|
(3,637
|
)
|
|||||
Decrease
(increase) in other long-term assets
|
281
|
(571
|
)
|
||||||
Payments
for business acquisitions, net of cash acquired
|
(16,087
|
)
|
—
|
||||||
Purchases
of marketable securities
|
(1,750
|
)
|
(29,993
|
)
|
|||||
Proceeds
from sales of marketable securities
|
18,605
|
22,340
|
|||||||
Proceeds
from notes receivable
|
—
|
732
|
|||||||
Net
cash used in investing activities
|
(8,960
|
)
|
(11,129
|
)
|
|||||
Cash
flows from financing activities:
|
|||||||||
Payments
related to the issuance of common stock under employee stock plans,
net
|
(727
|
)
|
(602
|
)
|
|||||
Net
cash used in financing activities
|
(727
|
)
|
(602
|
)
|
|||||
Effect
of exchange rate changes on cash and cash equivalents
|
(1,578
|
)
|
(1,118
|
)
|
|||||
Net
decrease in cash and cash equivalents
|
(17,782
|
)
|
(23,641
|
)
|
|||||
Cash
and cash equivalents at beginning of period
|
91,517
|
121,792
|
|||||||
Cash
and cash equivalents at end of period
|
$
|
73,735
|
$
|
98,151
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
3
AVID
TECHNOLOGY, INC.
(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
generally accepted accounting principles. The accompanying condensed
consolidated balance sheet as of December 31, 2009 was derived from Avid’s
audited consolidated financial statements, but does not include all disclosures
required by generally accepted accounting principles. The Company filed audited
consolidated financial statements for the year ended December 31, 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.
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-month periods ended March 31, 2010 and
2009.
The
Company evaluated subsequent events to determine if any event since March 31,
2010, the date of these financial statements, required disclosure in these
statements. The evaluation determined that the Company’s acquisition of
Euphonix, Inc. on April 21, 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
INCOME (LOSS) PER COMMON SHARE
Net
income (loss) per common share is presented for both basic earnings (loss) per
share (“Basic EPS”) and diluted earnings (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
March
31,
|
|||
2010
|
2009
|
||
Options
|
4,368
|
4,287
|
|
Non-vested
restricted stock and restricted stock units
|
514
|
956
|
|
Anti-dilutive
potential common shares
|
4,882
|
5,243
|
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
March
31,
|
|||
2010
|
2009
|
||
Options
|
10
|
10
|
|
Non-vested
restricted stock and restricted stock units
|
37
|
2
|
|
Anti-dilutive
common stock equivalents
|
47
|
12
|
3. FAIR
VALUE MEASUREMENTS
Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
topic 820, Fair Value
Measurements, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles and requires certain
disclosures about fair value measurements. FASB ASC topic 820 also establishes a
fair value hierarchy that requires the use of observable market data, when
available, and prioritizes the inputs to valuation techniques used to measure
fair value in the following categories:
·
|
Level
1 – Quoted unadjusted prices for identical instruments in active
markets.
|
·
|
Level
2 – Quoted prices for similar instruments in active markets, quoted prices
for identical or similar instruments in markets that are not active, and
model-derived valuations in which all observable inputs and significant
value drivers are observable in active
markets.
|
·
|
Level
3 – Model-derived valuations in which one or more significant inputs or
significant value drivers are unobservable, including assumptions
developed by the Company.
|
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. All of the Company’s financial assets and
liabilities were classified as either Level 1 or Level 2 in the fair value
hierarchy at March 31, 2010. Instruments valued using quoted market prices in
active markets and classified as Level 1 are primarily money market securities
and deferred compensation investments. Investments valued based on other
observable inputs and classified as Level 2 include foreign currency contracts
and a municipal bond.
5
The
following table summarizes the Company’s fair value hierarchy for financial
assets and liabilities measured at fair value on a recurring basis at March 31,
2010 (in thousands):
Fair
Value Measurements at Reporting Date Using
|
||||||||||||||||
March
31,
2010
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level
3)
|
|||||||||||||
Financial
Assets:
|
||||||||||||||||
Available
for sale securities
|
$
|
556
|
$
|
56
|
$
|
500
|
$
|
—
|
||||||||
Deferred
compensation plan investments
|
870
|
870
|
—
|
—
|
||||||||||||
Foreign
currency forward contracts
|
601
|
—
|
601
|
—
|
||||||||||||
Financial
Liabilities:
|
||||||||||||||||
Deferred
compensation plan
|
$
|
870
|
$
|
870
|
$
|
—
|
$
|
—
|
||||||||
Foreign
currency forward contracts
|
150
|
—
|
150
|
—
|
The
following table summarizes the costs (amortized costs of debt instruments) and
fair values of the Company’s available for sale securities at March 31, 2010 (in
thousands):
Costs
|
Net
Unrealized
Gains
(Losses)
|
Fair
Values
|
||||||||||
Money
market
|
$
|
56
|
$
|
—
|
$
|
56
|
||||||
Municipal
bond
|
500
|
—
|
500
|
|||||||||
$
|
556
|
$
|
—
|
$
|
556
|
All
available for sale securities held at March 31, 2010 had effective maturities of
less than one year. All income generated from these investments has been
recorded as interest income. The Company calculates realized gains and losses on
a specific identification basis. Realized gains and losses from the sale of
marketable securities were not material for the three months ended March 31,
2010. There were no available for sale securities with unrealized losses at
March 31, 2010.
The
Company used the following valuation techniques to determine fair values of its
investment instruments:
·
|
Money
Market: The fair value of the Company’s money market
fund investment was determined using the unadjusted quoted price from an
active market of identical assets.
|
·
|
Municipal
Bond: The determination of the fair value of the
municipal bond included the use of observable inputs from market sources
and incorporating relative credit information, observed market movements
and sector news into a pricing
model.
|
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 4 for further information on the Company’s foreign
currency forward contracts.
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
months ended March 31, 2010 (in thousands):
Fair
Value Measurements Using
|
|||||||||||||||
Three
Months
Ended
March
31,
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
|
$
|
801
|
$
|
—
|
$
|
801
|
$
|
—
|
$
|
801
|
6
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 months ended
March 31, 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.
|
4. 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. To 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. 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 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.
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, Derivatives and
Hedging, to be treated as hedges for accounting purposes.
The
following table sets forth the effect of the Company’s foreign currency forward
contracts recorded as marketing and selling expenses in the Company’s statements
of operations during the three-month periods ended March 31, 2010 and 2009 (in
thousands):
Derivatives
Not Designated as Hedging Instruments under ASC Topic 815
|
Net
Gain Recorded in Operating Expenses
|
|||
Three
Months Ended March 31,
|
||||
2010
|
2009
|
|||
Foreign
currency forward contracts
|
$276
|
$1,824
|
7
At March
31, 2010 and December 31, 2009, the Company had foreign currency forward
contracts outstanding with notional values of $34.9 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 March 31, 2010 and December 31, 2009 (in
thousands):
Derivatives
Not Designated as Hedging
Instruments
under ASC Topic 815
|
Balance
Sheet Location
|
Fair
Value at
March
31, 2010
|
Fair
Value at
December
31, 2009
|
|||
Financial
assets:
|
||||||
Foreign
currency forward contracts
|
Other
current assets
|
$601
|
$1,162
|
|||
Financial
liabilities:
|
||||||
Foreign
currency forward contracts
|
Accrued
expenses and other current liabilities
|
$150
|
$546
|
See Note
3 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.
5. ACQUISITIONS
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 during the
three months ended March 31, 2010, allocated the purchase price as
follows: $1.2 million to net assets acquired, $11.8 million to
amortizable identifiable intangible assets, ($0.6) million to net deferred tax
liabilities and the remaining $3.7 million to goodwill. The goodwill, which is
not deductible for tax purposes, reflects the value of the assembled workforce
and the synergies the Company expects to realize by incorporating Blue Order’s
workflow and media asset management technology into future solutions offered to
customers.
The
amortizable identifiable intangible assets acquired include developed technology
of $5.9 million, customer relationships of $3.9 million, non-compete agreements
of $1.6 million, and trademarks and trade names of $0.4 million. 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 Blue Order’s intangible assets was 21% and the effective
tax rate used was 35%.
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 three 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 3.2 years. Amortization expense for Blue Order intangibles totaled
$0.9 million for the three-month period ended March 31, 2010.
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 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.
8
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 Company’s
allocation of the purchase price resulted in $3.3 million allocated to
amortizable identifiable intangible assets and the remaining $1.1 million to
goodwill. In addition, the Company recorded related net deferred tax liabilities
of $0.8 million, increasing the goodwill to $1.9 million. The goodwill, which
reflects the value of the assembled workforce and the synergies the Company
expects to realize by incorporating MaxT’s media management and editing
technology into future solutions offered to customers, is not deductible for tax
purposes.
The
results of operations of MaxT have been included 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 March
31, 2010 and December 31, 2009 (in thousands):
March
31,
2010
(a)
|
December
31,
2009
|
||||||||
Goodwill
|
$
|
402,677
|
$
|
399,095
|
|||||
Accumulated
impairment losses
|
(171,900
|
)
|
(171,900
|
)
|
|||||
$
|
230,777
|
$
|
227,195
|
|
(a)
|
The
$3.6 million increase in goodwill from December 31, 2009 to March 31, 2010
was the result of the addition of $3.7 million related to the January 2010
acquisition of Blue Order, partially offset by foreign currency
translation adjustments of approximately $0.1 million. See Note 5 for
further information regarding the goodwill related to the Blue Order
acquisition.
|
Identifiable
Intangible Assets
Identifiable
intangible assets resulting from the Company’s acquisitions consisted of the
following at March 31, 2010 and December 31, 2009 (in thousands):
March
31, 2010
|
December
31, 2009
|
|||||||||||||||||||||||||||
Gross
(a)
|
Accumulated
Amortization
|
Net
|
Gross
|
Accumulated
Amortization
|
Net
|
|||||||||||||||||||||||
Completed
technologies
and
patents
|
$
|
73,826
|
$
|
(65,636)
|
$
|
8,190
|
$
|
68,186
|
$
|
(64,609)
|
$
|
3,577
|
||||||||||||||||
Customer
relationships
|
67,323
|
(42,145)
|
25,178
|
63,653
|
(40,221)
|
23,432
|
||||||||||||||||||||||
Trade
names
|
14,209
|
(12,411)
|
1,798
|
13,800
|
(11,668)
|
2,132
|
||||||||||||||||||||||
License
agreements
|
560
|
(560)
|
—
|
560
|
(560)
|
—
|
||||||||||||||||||||||
Non-compete
agreements
|
1,655
|
(236)
|
1,419
|
162
|
(68)
|
94
|
||||||||||||||||||||||
$
|
157,573
|
$
|
(120,988)
|
$
|
36,585
|
$
|
146,361
|
$
|
(117,126)
|
$
|
29,235
|
(a)
|
The
March 31, 2010 gross amounts include the addition of $11.8 million for
intangible assets related to the January 2010 acquisition of Blue Order,
partially offset by foreign currency translation adjustments of
approximately $0.6 million. See Note 5 for further information regarding
the identifiable intangible assets acquired from Blue
Order.
|
Amortization
expense related to all intangible assets in the aggregate was $3.8 million and
$2.9 million for the three-month periods ended March 31, 2010 and 2009,
respectively. The Company expects amortization of these intangible assets to be
approximately $9 million for the remainder of 2010, $11 million in 2011, $7
million in 2012, $4 million in 2013, $2 million in 2014, $2 million in 2015 and
$2 million thereafter.
9
7. ACCOUNTS RECEIVABLE
Accounts
receivable, net of allowances, consisted of the following at March 31, 2010 and
December 31, 2009 (in thousands):
March
31,
2010
|
December
31,
2009
|
||||||||
Accounts
receivable
|
$
|
98,755
|
$
|
96,088
|
|||||
Less:
|
|||||||||
Allowance
for doubtful accounts
|
(2,592
|
)
|
(3,219
|
)
|
|||||
Allowance
for sales returns and rebates
|
(11,906
|
)
|
(13,128
|
)
|
|||||
$
|
84,257
|
$
|
79,741
|
The
accounts receivable balances at March 31, 2010 and December 31, 2009 excluded
approximately $17.4 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 March 31, 2010 and December 31, 2009 (in
thousands):
March
31,
2010
|
December
31,
2009
|
|||||||
Raw
materials
|
$
|
13,609
|
$
|
14,592
|
||||
Work
in process
|
4,871
|
5,624
|
||||||
Finished
goods
|
53,314
|
57,027
|
||||||
$
|
71,794
|
$
|
77,243
|
At March
31, 2010 and December 31, 2009, the finished goods inventory included inventory
at customer locations of $11.0 million and $10.6 million, respectively,
associated with products shipped to customers for which revenues had not yet
been recognized.
9. PROPERTY
AND EQUIPMENT, NET
Property
and equipment, net, consisted of the following at March 31, 2010 and December
31, 2009 (in thousands):
March
31,
2010
|
December
31,
2009
|
||||||||
Computer
and video equipment and software
|
$
|
120,839
|
$
|
115,248
|
|||||
Manufacturing
tooling and testbeds
|
6,727
|
6,428
|
|||||||
Office
equipment
|
3,392
|
3,404
|
|||||||
Furniture
and fixtures
|
10,251
|
10,378
|
|||||||
Leasehold
improvements
|
44,763
|
31,777
|
|||||||
185,972
|
167,235
|
||||||||
Accumulated
depreciation and amortization
|
(133,264
|
)
|
(130,018
|
)
|
|||||
$
|
52,708
|
$
|
37,217
|
10
10. LONG-TERM
LIABILITIES
Long-term
liabilities consisted of the following at March 31, 2010 and December 31, 2009
(in thousands):
March
31,
2010
|
December
31,
2009
|
|||||||
Long-term
deferred tax liabilities, net
|
$
|
3,818
|
$
|
2,519
|
||||
Long-term
deferred revenue
|
8,357
|
7,296
|
||||||
Long-term
deferred rent
|
1,875
|
1,974
|
||||||
Long-term
accrued restructuring
|
2,232
|
2,694
|
||||||
$
|
16,282
|
$
|
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. At March 31, 2010, 4,849,842 shares were available for issuance
under the Company’s Amended and Restated 2005 Stock Incentive Plan, including
900,100 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-month
periods ended March 31, 2010 and 2009:
Three
Months Ended
March
31,
|
|||
2010
|
2009
|
||
Expected
dividend yield
|
0.00%
|
0.00%
|
|
Risk-free
interest rate
|
1.73%
|
1.48%
|
|
Expected
volatility
|
47.0%
|
58.6%
|
|
Expected
life (in years)
|
4.53
|
4.55
|
|
Weighted-average
fair value of options granted
|
$5.66
|
$4.83
|
11
The
Company also issues stock option grants or restricted stock awards with vesting
based on market conditions, specifically Avid’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-month
periods ended March 31, 2010 and 2009:
Three
Months Ended
March
31,
|
|||
2010
|
2009
|
||
Expected
dividend yield
|
0.00%
|
0.00%
|
|
Risk-free
interest rate
|
3.33%
|
3.10%
|
|
Expected
volatility
|
47.9%
|
59.2%
|
|
Expected
life (in years)
|
4.01
|
4.08
|
|
Weighted-average
fair value of options granted
|
$4.81
|
$4.22
|
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-month
period ended March 31, 2010:
Three
Months Ended
March
31, 2010
|
|
Expected
dividend yield
|
0.00%
|
Risk-free
interest rate
|
4.18%
|
Expected
volatility
|
47.0%
|
Expected
life (in years)
|
4.48
|
Weighted-average
fair value of awards granted
|
$10.79
|
No
restricted stock units with vesting based on market conditions or a combination
of performance and market conditions were granted during the three-month period
ended March 31, 2009.
During
the three months ended March 31, 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 March 31, 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.
12
The
following table summarizes changes in the Company’s stock options outstanding
during the three-month period ended March 31, 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
|
586,560
|
$13.76
|
|||||||
Exercised
|
(8,865
|
)
|
$11.96
|
||||||
Forfeited
or expired
|
(170,040
|
)
|
$19.76
|
||||||
Options
outstanding at March 31, 2010 (a)
|
4,698,077
|
$20.89
|
5.54
years
|
$1,540
|
|||||
Options
vested at March 31, 2010 or expected to vest
|
3,911,258
|
$21.34
|
5.51
years
|
$1,235
|
|||||
Options
exercisable at March 31, 2010
|
1,160,056
|
$29.37
|
4.56
years
|
$228
|
(a)
|
Options
outstanding at March 31, 2010 included 1,707,405 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 three-month
periods ended March 31, 2010 and 2009 were approximately $21 thousand and $11
thousand, respectively. Cash amounts received from the exercise of stock options
were $106 thousand and $46 thousand for the three-month periods ended March 31,
2010 and 2009, respectively. The Company did not realize any actual tax benefit
from the tax deductions for stock option exercises during the three-month
periods ended March 31, 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 three-month period ended March 31, 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)
|
234,500
|
$13.87
|
|||||||
Vested
|
(231,546
|
)
|
$27.11
|
||||||
Forfeited
|
(22,344
|
)
|
$27.27
|
||||||
Non-vested
at March 31, 2010 (b)
|
623,965
|
$20.10
|
2.21
years
|
$8,592
|
|||||
Expected
to vest
|
500,476
|
$20.74
|
2.01
years
|
$6,892
|
(a)
|
Restricted
stock units granted during the three months ended March 31, 2010 included
215,000 units that had vesting based on either market conditions or a
combination of performance and market
conditions.
|
(b)
|
Non-vested
restricted stock units at March 31, 2010 included 219,800 units that had
vesting based on either market conditions or a combination of performance
and market conditions.
|
13
The
following table summarizes changes in the Company’s non-vested restricted stock
during the three-month period ended March 31, 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
|
(6,250
|
)
|
$25.41
|
||||||
Forfeited
|
—
|
—
|
|||||||
Non-vested
at March 31, 2010
|
43,750
|
$25.41
|
1.72
years
|
$602
|
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 Avid 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 for the three-month periods ended March
31, 2010 and 2009:
Three
Months Ended
March
31,
|
||||
2010
|
2009
|
|||
Expected
dividend yield
|
0.00%
|
0.00%
|
||
Risk-free
interest rate
|
0.84%
|
1.98%
|
||
Expected
volatility
|
48.1%
|
50.9%
|
||
Expected
life (in years)
|
0.24
|
0.25
|
||
Weighted-average
fair value of shares issued
|
$2.08
|
$2.43
|
14
Under the
ESPP, the Company issued 28,308 shares at $10.74 per share and 37,559 shares at
$8.51 per share during the three months ended March 31, 2010 and 2009,
respectively. At March 31, 2010, 816,166 shares remained available for issuance
under the ESPP.
Stock-Based
Compensation
Stock-based
compensation was included in the following captions in the Company’s condensed
consolidated statements of operations for the three-month period ended March 31,
2010 and 2009 (in thousands):
Three
Months Ended
March
31,
|
||||||||
2010
|
2009
|
|||||||
Cost
of product revenues
|
$
|
189
|
$
|
350
|
||||
Cost
of services revenues
|
253
|
390
|
||||||
Research
and development expenses
|
651
|
470
|
||||||
Marketing
and selling expenses
|
968
|
821
|
||||||
General
and administrative expenses
|
1,261
|
2,117
|
||||||
Total
stock-based compensation
|
$
|
3,322
|
$
|
4,148
|
At March
31, 2010, the Company had $28.6 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 March
31, 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 three months ended March 31, 2010, the Company repurchased 1,982 shares of
restricted stock from an employee to pay required withholding taxes upon the
vesting of restricted stock.
At March
31, 2010 and December 31, 2009, treasury shares held by the Company totaled
4,670,671 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 against our Pinnacle
subsidiary in Pinellas County (Florida) Circuit Court, claiming that the
Engelkes are entitled to indemnification for damages and accrued interest
awarded against them in litigation with a third party of $9 million, currently
under appeal. In addition, the Engelkes are seeking damages for the alleged
breach of certain contracts by Pinnacle and attorneys’ fees estimated to be
approximately $6 million. The Engelkes’ suit against Pinnacle is expected to go
to trial in September 2010. We believe that the Engelkes’ claims are without
merit and intend to vigorously defend these claims. Because we cannot predict
the outcome of this action at this time, no costs have been accrued for any loss
contingency.
15
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 recently leased Burlington,
Massachusetts office space. In the event of default on the underlying leases,
the landlords would, at March 31, 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 March 31, 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 March 31,
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 March 31, 2010,
the Company was not in default of this lease.
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 March 31, 2010 and December 31,
2009, the Company’s maximum recourse exposure totaled approximately $2.2 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 March 31, 2010 and December 31, 2009, the Company’s accruals for
estimated losses were $1.2 million and $1.3 million, respectively.
The
Company provides warranties on externally sourced and internally developed
hardware. For internally developed hardware and in cases where the warranty
granted to customers for externally sourced hardware is greater than that
provided by the manufacturer, the Company records an accrual for the related
liability based on historical trends and actual material and labor costs. The
warranty period for the Company’s products is generally 90 days to one year, but
can extend up to five years depending on the manufacturer’s warranty or local
law.
16
The
following table sets forth activity for the Company’s product warranty accrual
for the three-month periods ended March 31, 2010 and 2009 (in
thousands):
Three
Months Ended
March
31,
|
|||||||||
2010
|
2009
|
||||||||
Accrual
balance at beginning of period
|
$
|
4,454
|
$
|
5,193
|
|||||
Accruals
for product warranties
|
1,098
|
1,468
|
|||||||
Cost
of warranty claims
|
(1,269
|
)
|
(1,701
|
)
|
|||||
Accrual
balance at end of period
|
$
|
4,283
|
$
|
4,960
|
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 and other investments. The following is a summary
of the Company’s comprehensive loss for the three-month periods ended March 31,
2010 and 2009 (in thousands):
Three
Months Ended
March
31,
|
|||||||||
2010
|
2009
|
||||||||
Net
loss
|
$
|
(13,482
|
)
|
$
|
(17,277
|
)
|
|||
Net
changes in:
|
|||||||||
Foreign
currency translation adjustment
|
(4,235
|
)
|
(3,921
|
)
|
|||||
Unrealized
losses on investments
|
(4
|
)
|
(41
|
)
|
|||||
Total
comprehensive loss
|
$
|
(17,721
|
)
|
$
|
(21,239
|
)
|
15. SEGMENT
INFORMATION
During
2009, the Company was organized into two business units, Video and Audio, which
were also its reportable segments. 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 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.
The
following is a summary of the Company’s revenues by type for the three-month
periods ended March 31, 2010 and 2009 (in thousands):
Three
Months Ended
March
31,
|
|||||||||
2010
|
2009
|
||||||||
Video
product revenues
|
$
|
58,135
|
$
|
60,555
|
|||||
Video
services revenues
|
26,218
|
26,947
|
|||||||
84,353
|
87,502
|
||||||||
Audio
product revenues:
|
70,544
|
63,086
|
|||||||
Audio
services revenues
|
1,059
|
1,041
|
|||||||
71,603
|
64,127
|
||||||||
Total
net revenues
|
$
|
155,956
|
$
|
151,629
|
17
16. RESTRUCTURING
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 not included in assets held-for-sale. 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 recoveries of
($0.2) million for revised estimates of previously initiated restructuring
plans.
During
the first three months of 2010, the Company recorded new restructuring charges
under the Plan totaling $0.8 million resulting from the closure of all or part
of four additional facilities. Also during the first three months of 2010, the
Company recorded additional charges of $0.5 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 or expects
to incur total restructuring charges of approximately $53 million.
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.
In
connection with the 2005 Pinnacle acquisition, the Company recorded
restructuring accruals related to severance agreements and lease or other
contract terminations in accordance with the then current accounting guidance of
Emerging Issues Task Force Issue No. 95-3, Recognition of Liabilities in
Connection with a Purchase Business Combination. At March 31, 2010, the
restructuring accrual balance related to the Pinnacle acquisition totaled
approximately $0.3 million.
18
The
following table sets forth the activity in the restructuring accruals for the
three months ended March 31, 2010 (in thousands):
Non-Acquisition-Related
Restructuring
Liabilities
|
Acquisition-
Related
Facilities
Restructuring
Liabilities
|
|||||||||||||||||
Employee-
Related
|
Facilities-
Related
&
Other
|
Total
|
||||||||||||||||
Accrual
balance at December 31, 2009
|
$
|
9,234
|
$
|
7,261
|
$
|
472
|
$
|
16,967
|
||||||||||
New
restructuring charges – operating expenses
|
—
|
801
|
—
|
801
|
||||||||||||||
Revisions
of estimated liabilities
|
490
|
49
|
—
|
539
|
||||||||||||||
Accretion
|
—
|
72
|
5
|
77
|
||||||||||||||
Cash
payments for employee-related charges
|
(5,292
|
)
|
—
|
—
|
(5,292
|
)
|
||||||||||||
Cash
payments for facilities, net of sublease income
|
—
|
(1,420
|
)
|
(101
|
)
|
(1,521
|
)
|
|||||||||||
Foreign
exchange impact on ending balance
|
(194
|
)
|
(18
|
)
|
(30
|
)
|
(242
|
)
|
||||||||||
Accrual
balance at March 31, 2010
|
$
|
4,238
|
$
|
6,745
|
$
|
346
|
$
|
11,329
|
The
employee-related accruals at March 31, 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 March 31,
2010.
The
facilities-related accruals at March 31, 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, $4.9 million is included in the caption “accrued
expenses and other current liabilities” and $2.2 million is included in the
caption “long-term liabilities” in the Company’s consolidated balance sheet at
March 31, 2010.
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 is currently
assessing the timing and method of adoption, as well as the possible impact of
this guidance on its financial position and results of operations.
In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R) (now codified within FASB ASC topic 810, Consolidation). This guidance
requires an enterprise to perform an analysis to determine whether the
enterprise’s variable interest or interests give it a controlling financial
interest in a variable interest entity. This analysis identifies the primary
beneficiary of a variable interest entity as one with the power to direct the
activities of a variable interest entity that most significantly impact the
entity’s economic performance and the obligation to absorb losses of the entity
that could potentially be significant to the variable interest. The Company
adopted this guidance on January 1, 2010. As the Company does not currently
have any interest in variable interest entities, adoption had no impact on the
Company’s financial position or results of operations.
19
18. SUBSEQUENT
EVENT
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 total consideration of approximately $17.6 million. The
consideration included cash of $12.6 million and the issuance of 327,439 shares
of common stock valued at $5 million.
20
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, Avid Unity, Interplay,
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 months ended March 31, 2010 were $156.0 million, an
increase of 2.9% compared to the same period last year, with revenues from audio
products and services increasing by 11.7%, and revenues from video products and
services decreasing by 3.6%. Overall, product revenues increased by 4.1% and
services revenues decreased by 2.5%. Our gross margin percentage increased to
49.8% from 48.3% for the comparable 2009 period, largely driven by a 5.1%
improvement in our services gross margin percentage. The gross margin increase
was primarily the result of improved efficiencies resulting from our transition
to a single company-wide production and delivery organization.
21
Our
operating expenses for the three months ended March 31, 2010 were $90.7 million,
compared to $93.5 million for the same period in 2009. This decrease was
primarily attributable to our business transformation and a restructuring plan
initiated in the fourth quarter of 2008. To date, this restructuring plan has
resulted in 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. Cash expenditures
resulting from restructuring obligations totaled approximately $6.8 million
during the first three 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.”
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 March 31, 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
|
$
|
58,135
|
37.3%
|
$
|
60,555
|
39.9%
|
$
|
(2,420
|
)
|
(4.0%)
|
|||||
Video
services revenues
|
26,218
|
16.8%
|
26,947
|
17.8%
|
(729
|
)
|
(2.7%)
|
||||||||
84,353
|
54.1%
|
87,502
|
57.7%
|
(3,149
|
)
|
(3.6%)
|
|||||||||
Audio
product revenues
|
70,544
|
45.2%
|
63,086
|
41.6%
|
7,458
|
11.8%
|
|||||||||
Audio
services revenues
|
1,059
|
0.7%
|
1,041
|
0.7%
|
18
|
1.7%
|
|||||||||
71,603
|
45.9%
|
64,127
|
42.3%
|
7,476
|
11.7%
|
||||||||||
Total
net revenues
|
$
|
155,956
|
100.0%
|
$
|
151,629
|
100.0%
|
$
|
4,327
|
2.9%
|
The
overall 2.9% increase in our revenues was largely driven by increased revenues
from our audio products. This increase was partially offset by decreased
revenues from both our video products and services offerings. During the first
three months of 2010, compared to the first three months of 2009, favorable
currency exchange rates also contributed to our overall revenue
growth.
22
The
increase in revenues from our audio products was primarily the result of
increased revenues for most of our audio product lines, which we believe largely
resulted from sales promotions for certain higher-end audio products offered
during the first three months of 2010, as well as increased consumer spending
during that period. During the first quarter of 2010, compared to the same
period in 2009, revenues from our professional audio products and our live
system VENUE product line were strong, as were consumer sales of our musical
instrument and speaker offerings.
The
decrease in revenues from our video products was primarily the result of lower
sales volumes of our broadcast news products, which we believe was the result of
continued pressure on spending in some segments of the broadcast industry. This
decrease was partially offset by increased revenues from strong sales of our
ISIS shared storage systems and Interplay production and media-asset management
products in the first quarter of 2010.
Services
revenues are derived primarily from maintenance contracts and to a lesser extent
professional and installation services and training. The decrease in video
services revenues was largely the result of our decision to end the maintenance
service offerings for certain previously discontinued product
lines.
Net
revenues derived through indirect channels were 70% of our net revenues for the
three-month period ended March 31, 2010, compared to 67% for the same period in
2009.
Sales to
customers outside the United States accounted for 58% of our net revenues for
the three-month period ended March 31, 2010, compared to 55% for the same period
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 three-month period
ended March 31, 2009 included a charge of $0.8 million for the write-down of
inventory 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.
Three
Months Ended March 31, 2010 and 2009
|
|||||||||||
(dollars
in thousands)
|
|||||||||||
2010
|
Gross
Margin
%
|
2009
|
Gross
Margin
%
|
Change
in
Gross
Margin %
|
|||||||
Cost
of products revenues
|
$
|
63,269
|
50.8%
|
$
|
61,248
|
50.5%
|
0.3%
|
||||
Cost
of services revenues
|
14,040
|
48.5%
|
15,839
|
43.4%
|
5.1%
|
||||||
Amortization
of intangible assets
|
966
|
–
|
520
|
–
|
–
|
||||||
Restructuring
costs
|
–
|
–
|
799
|
–
|
–
|
||||||
Total
|
$
|
78,275
|
49.8%
|
$
|
78,406
|
48.3%
|
1.5%
|
The 1.5%
improvement in our total gross margin was largely driven by decreased services
costs and the increase in our total revenues. The decrease in services costs
resulted in a 5.1% improvement in services gross margin percentage and was
largely the result of the improved efficiencies resulting from our transition to
a single company-wide production and delivery organization.
23
Research
and Development
Research
and development expenses include costs associated with the development of new
products and the enhancement of existing products, and consist primarily of
employee salaries and benefits, facilities costs, depreciation, costs for
consulting and temporary employees, and prototype and other development
expenses.
Three
Months Ended March 31, 2010 and 2009
|
||||||||||
(dollars
in thousands)
|
||||||||||
2010
Expenses
|
2009
Expenses
|
Change
|
%
Change
|
|||||||
Research
and development
|
$
|
30,151
|
$
|
31,051
|
$
|
(900)
|
(2.9%)
|
|||
As
a percentage of net revenues
|
19.3%
|
20.5%
|
(1.2%)
|
The
decrease in research and development, or R&D, expenses for the three-month
period ended March 31, 2010, compared to the same period in 2009, was primarily
due to our increased use of offshore development resources. The increased use of
offshore development resources resulted in lower facilities and information
technology infrastructure costs of $1.0 million and a decrease in
personnel-related expenses of $0.6 million, partially offset by a $0.9 million
increase in consulting and outside services costs.
The
decrease in R&D expenses as a percentage of revenues was the result of both
the decrease in R&D expenses and the increase in revenues for the 2010
period compared to the same period in 2009.
Marketing
and Selling
Marketing
and selling expenses consist primarily of employee salaries and benefits for
selling, marketing and pre-sales customer support personnel; commissions; travel
expenses; advertising and promotional expenses; and facilities
costs.
Three
Months Ended March 31, 2010 and 2009
|
||||||||||
(dollars
in thousands)
|
||||||||||
2010
Expenses
|
2009
Expenses
|
Change
|
%
Change
|
|||||||
Marketing
and selling
|
$
|
41,746
|
$
|
40,781
|
$
|
965
|
2.4%
|
|||
As
a percentage of net revenues
|
26.8%
|
26.9%
|
(0.1%)
|
The
increase in marketing and selling expenses for the three-month period ended
March 31, 2010, compared to the same period in 2009, was largely due to
increased personnel-related costs, higher consulting and outside services costs
and less favorable foreign exchange translations, partially offset by lower
tradeshow and other promotional expenses and a decrease in bad debt expense.
Personnel-related costs increased by $1.7 million, primarily resulting from
higher compensation and benefits costs, while consulting and outside services
costs increased by $0.4 million. During the first three months of 2010, net
foreign exchange gains (specifically, remeasurement gains and losses on net
monetary assets denominated in foreign currencies, offset by non-designated
foreign currency hedging gains and losses), which are included in marketing and
selling expenses, were $0.3 million, compared to gains of $1.8 million for the
2009 period, resulting in a $1.5 million decrease in the offset to expense.
Tradeshow and other promotional expenses decreased by $1.6 million, while bad
debt expense decreased by $1.2 million. The decrease in bad debt expense was
primarily the result of a lease default in the first quarter of 2009, which
initiated an increase in our lease recourse reserves during that
period.
The
decrease in marketing and selling expenses as a percentage of revenues for the
three-month period ended March 31, 2010 was the result of the increase in
revenues for the period compared to the same period in 2009.
24
General
and Administrative
General
and administrative expenses consist primarily of employee salaries and benefits
for administrative, executive, finance and legal personnel; audit, legal and
strategic consulting fees; and insurance, information systems and facilities
costs. Information systems and facilities costs reported within general and
administrative expenses are net of allocations to other expenses
categories.
Three
Months Ended March 31, 2010 and 2009
|
||||||||||
(dollars
in thousands)
|
||||||||||
2010
Expenses
|
2009
Expenses
|
Change
|
%
Change
|
|||||||
General
and administrative
|
$
|
14,602
|
$
|
15,113
|
$
|
(511)
|
(3.4%)
|
|||
As
a percentage of net revenues
|
9.4%
|
10.0%
|
(0.6%)
|
The
decrease in general and administrative expenses for the three-month period ended
March 31, 2010, compared to the same period in 2009, was due to lower
personnel-related expenses and a decrease in facilities and information
technology infrastructure costs, partially offset by increased costs related to
our acquisition activities. Personnel-related costs decreased by $0.8 million,
primarily resulting from reduced headcount, and facilities and information
technology infrastructure costs decreased by $0.2 million. Costs related to our
acquisition activities increased by $0.7 million.
The
decrease in general and administrative expenses as a percentage of revenues was
the result of both the decrease in general and administrative expenses and the
increase in revenues for the 2010 period compared to the same period in
2009.
Amortization
of Intangible Assets
Intangible
assets result from acquisitions and include developed technology,
customer-related intangibles, trade names and other identifiable intangible
assets with finite lives. With the exception of developed technology, these
intangible assets are amortized using the straight-line method. Developed
technology is amortized using the greater of (1) the amount calculated using the
ratio of current quarter revenues to the total of current quarter and
anticipated future revenues over the estimated useful life of the developed
technology and (2) the straight-line method, over each developed technology’s
remaining useful life. Amortization of developed technology is recorded within
cost of revenues. Amortization of customer-related intangibles, trade names and
other identifiable intangible assets is recorded within operating
expenses.
Three
Months Ended March 31, 2010 and 2009
|
||||||||||
(dollars
in thousands)
|
||||||||||
2010
|
2009
|
Change
|
%
Change
|
|||||||
Amortization
of intangible assets recorded in cost of revenues
|
$
|
966
|
$
|
520
|
$
|
446
|
85.8%
|
|||
Amortization
of intangible assets recorded in operating expenses
|
2,857
|
2,375
|
482
|
20.3%
|
||||||
Total
amortization of intangible assets
|
$
|
3,823
|
$
|
2,895
|
$
|
928
|
32.1%
|
|||
Total
amortization of intangible assets as a percentage of net
revenues
|
2.5%
|
1.9%
|
0.6%
|
For the
three-month period ended March 31, 2010, compared to the same period in 2009,
the increases in amortization of intangible assets recorded in both cost of
revenues and operating expenses were primarily the result of the amortization of
intangible assets related to our acquisitions of Blue Order Solutions AG in
January 2010 and MaxT Systems Inc. in July 2009. See Notes 5 and 6 to our
unaudited condensed consolidated financial statements included in Item 1 of
this report for further information on our acquisition-related identifiable
intangible assets.
25
Restructuring
Costs, Net
In
October 2008, we initiated a company-wide restructuring plan that included a
reduction in force of approximately 500 positions, including employees related
to our product line divestitures, and the closure of all or parts of some of our
worldwide facilities. The restructuring plan is intended to improve operational
efficiencies and bring our costs in line with expected revenues. In connection
with the plan, during the fourth quarter of 2008, we 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, we recorded a non-cash restructuring
charge of $1.9 million in cost of revenues related to the write-down of
inventory.
During
2009, we recorded restructuring charges of $27.7 million, of which $27.9 million
related to this plan and a recovery of ($0.2) million was the result of revised
estimates for amounts recorded under previous restructuring plans. Charges under
the plan included new restructuring charges of $27.1 million and revisions to
previously recorded estimates under the plan of $0.8 million. The new
restructuring charges included $14.8 million related to employee termination
costs, including those for approximately 320 additional employees; $11.5 million
related to the closure of all or part of eleven facilities; and $0.8 million,
recorded in cost of revenues, related to the write-down of PCTV inventory. The
charges resulting from the reduction in force of 320 additional employees were
recorded in the third and fourth quarters and were primarily the 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.
During
the first three months of 2010, we recorded new restructuring charges totaling
$0.8 million as a result of the closure of all or part of four additional
facilities. Also during the first quarter of 2010, we recorded charges of $0.5
million as a result of increased estimates for previously recorded severance
obligations.
Interest
and Other Income (Expense), Net
Interest
and other income (expense), net, generally consists of interest income and
interest expense.
Three
Months Ended March 31, 2010 and 2009
|
||||||||||
(dollars
in thousands)
|
||||||||||
2010
|
2009
|
Change
|
%
Change
|
|||||||
Interest
and other income (expense), net
|
$
|
—
|
$
|
153
|
$
|
(153)
|
(100%)
|
|||
As
a percentage of net revenues
|
0.0%
|
0.1%
|
(0.1%)
|
The
decrease in interest and other income (expense), net for the three-month period
ended March 31, 2010, compared to the same period in 2009, was primarily the
result of lower interest rates paid on lower average cash balances, as well as
an increase in interest expense during the 2010 period.
Provision
for (Benefit from) Income Taxes, Net
Three
Months Ended March 31, 2010 and 2009
|
||||||||
(dollars
in thousands)
|
||||||||
2010
|
2009
|
Change
|
||||||
Provision
for (benefit from) income taxes, net
|
$
|
467
|
$
|
(2,889)
|
$
|
3,356
|
||
As
a percentage of net revenues
|
0.3%
|
(1.9%)
|
2.2%
|
26
Our
effective tax rate, which represents a tax provision as a percentage of loss
before income taxes, was 4% for the three-month period ended March 31, 2010. Our
effective tax rate, which represents a tax benefit as a percentage of loss
before income taxes, was 14% for the three-month period ended March 31, 2009.
The change from a tax benefit to a tax provision was the result of foreign
operating profits for the three-month period ended March 31, 2010, compared to
foreign operating losses recorded in the same period in 2009. Additionally, in
the three-month period ended March 31, 2009, there was a discrete tax benefit of
$0.4 million resulting from the utilization of unused R&D tax credits. The
change in the effective tax rates resulted from a large tax benefit recorded on
the foreign operating losses for the three-month period ended March 31, 2009,
compared to a small tax provision recorded on foreign operating profits for the
three-month period ended March 31, 2010. No tax benefit is provided for losses
generated in the United States due to the full valuation allowance on our U.S.
deferred tax assets.
The tax
rate in each period is affected by net changes in the valuation allowance
against our deferred tax assets. Excluding the impact of our valuation
allowance, our effective tax rates would have been 64% and 41%, respectively,
for the three-month periods ended March 31, 2010 and 2009. These rates differ
from the Federal statutory rate of 35% primarily due to the mix of income and
losses in foreign jurisdictions, which have tax rates that differ from the
statutory rate.
LIQUIDITY
AND CAPITAL RESOURCES
Current
Cash Flows and Commitments
We have
funded our operations in recent years through cash flows from operations as well
as from the proceeds of the issuance of common stock under our employee stock
plans. At March 31, 2010, our principal sources of liquidity included cash, cash
equivalents and marketable securities totaling $74.2 million.
Net cash
used in operating activities was ($6.5) million for the three months ended March
31, 2010, compared to ($10.8) million used in operating activities for the same
period in 2009. For the three months ended March 31, 2010, net cash used in
operating activities primarily reflected our net loss adjusted for depreciation
and amortization and stock-based compensation expense, as well as changes in
working capital items, in particular a decrease in accrued liabilities and an
increase in accounts receivable, partially offset by an increase in deferred
revenues and a decrease in inventories. For the three months ended March 31,
2009, net cash used in operating activities primarily reflected our net loss
adjusted for depreciation and amortization and stock-based compensation expense,
as well as changes in working capital items, in particular decreases in accrued
liabilities, accounts payable and deferred revenues, partially offset by
decreases in accounts receivable and prepaid expenses.
Accrued
liabilities decreased by $14.9 million during the first three months of 2010 as
a result of cash expenditures related to restructuring obligations of $6.8
million, as well as payments for other obligations accrued at December 31, 2009.
In connection with restructuring activities during 2010 and prior periods, at
March 31, 2010, we had restructuring accruals of $4.2 million and $7.1 million
related to severance and lease obligations, respectively. Our future cash
obligations for leases for which we have vacated the underlying facilities total
approximately $12.3 million. The lease accruals represent the present value of
the excess of our lease commitments on the vacated space over expected payments
to be received on subleases of the relevant facilities. The lease payments will
be made over the remaining terms of the leases, which have varying expiration
dates through 2017, unless we are able to negotiate earlier terminations. The
severance payments will be made during the next twelve months. All payments
related to restructuring actions are expected to be funded through working
capital. See Note 16 of the unaudited condensed consolidated financial
statements in Item 1 of this report for the restructuring costs and accruals
activity for the three months ended March 31, 2010.
Accounts
receivable increased by $4.5 million to $84.3 million at March 31, 2010 from
$79.7 million at December 31, 2009. These balances are net of allowances for
sales returns, bad debts and customer rebates, all of which we estimate and
record based primarily on historical experience. Days sales outstanding in
accounts receivable, or DSO, was 49 days at March 31, 2010, compared to 41 days
at December 31, 2009. During the first quarter of 2010, our account receivable
aging improved slightly, and we consider the DSO of 49 days to be consistent
with our historical performance.
27
Deferred
revenues increased by $6.5 million to $45.6 million at March 31, 2010, from
$39.1 million at December 31, 2009. This increase was largely the result of an
increase in deferrals related to maintenance contracts, primarily resulting from
the timing of contract renewals.
At March
31, 2010 and December 31, 2009, we held inventories in the amounts of $71.8
million and $77.2 million, respectively. These balances included stockroom,
spares and demonstration equipment inventories at various locations, as well as
inventory at customer sites related to shipments for which we had not yet
recognized revenue. We review all inventory balances regularly for excess
quantities or potential obsolescence and make appropriate adjustments as needed
to write down the inventories to reflect their estimated realizable value. We
source inventory products and components pursuant to purchase orders placed from
time to time.
Net cash
flow used in investing activities was ($9.0) million for the three months ended
March 31, 2010, compared to ($11.1) million for the same period in 2009. The net
cash flow used in investing activities for the three months ended March 31, 2010
primarily reflected $16.1 million paid to acquire Blue Order and $10.0 million
used for the purchase of property and equipment, partially offset by net
proceeds of $16.9 million resulting from the timing of the sale and purchase of
marketable securities. The net cash flow used in investing activities for the
three months ended March 31, 2009 primarily reflected net purchases of $7.7
million resulting from the timing of the sale and purchase of marketable
securities, as well as $3.6 million used for the purchase of property and
equipment. Our purchases of property and equipment typically consist of computer
hardware and software to support our R&D activities and information systems.
The increase in property and equipment purchases in the 2010 period primarily
resulted from leasehold improvement, furniture and equipment costs associated
with the scheduled relocation of our corporate offices to Burlington,
Massachusetts in June 2010.
During
the three months ended March 31, 2010, cash used in financing activities was
($0.7) million, compared to ($0.6) million for the same period in 2009. In both
periods, the amounts used primarily reflected costs associated with tax
withholding obligations resulting from the issuance of common stock under
employee stock plans.
We
believe that our existing cash, cash equivalents, marketable securities and
funds generated from operations will be sufficient to meet our operating cash
requirements for at least the next twelve months. Our cash requirements vary
depending on factors such as our growth, capital expenditures, acquisitions of
businesses or technologies and obligations under restructuring programs. In the
event that we require additional financing, we believe that we will be able to
obtain such financing; however, there can be no assurance that we would be
successful in doing so or that we could do so on favorable terms.
Fair
Value Measurements
We value
our cash and investment instruments using quoted market prices, broker or dealer
quotations, or alternative pricing sources with reasonable levels of price
transparency. See Notes 3 and 4 to our unaudited condensed consolidated
financial statements included in Item 1 of this report for the disclosure
of the fair values and the inputs used to determine the fair values of our
financial assets and financial liabilities.
RECENT
ACCOUNTING PRONOUNCEMENTS
See Note
17 to our unaudited condensed consolidated financial statements included in
Item 1 of this report for disclosure of the impact that recent accounting
pronouncements have had or may have on our consolidated financial
statements.
Foreign
Currency Exchange Risk
We have
significant international operations and, therefore, our revenues, earnings,
cash flows and financial position are exposed to foreign currency risk from
foreign-currency-denominated receivables, payables, sales transactions and net
investments in foreign operations.
28
We derive
more than half of our revenues from customers outside the United States. This
business is, for the most part, transacted through international subsidiaries
and generally in the currency of the end-user customers. Therefore, we are
exposed to the risks that changes in foreign currency could adversely affect our
revenues, net income and cash flow. To hedge against the foreign exchange
exposure of certain forecasted receivables, payables and cash balances, we enter
into short-term foreign currency forward contracts. There are two objectives of
our foreign currency forward-contract program: (1) to offset any foreign
exchange currency risk associated with cash receipts expected to be received
from our customers over the next 30-day period and (2) to offset the impact of
foreign currency exchange on our net monetary assets denominated in currencies
other than the functional currency of the legal entity. These forward contracts
typically mature within 30 days of execution. We record gains and losses
associated with currency rate changes on these contracts in results of
operations, offsetting gains and losses on the related assets and liabilities.
The success of this hedging program depends on forecasts of transaction activity
in the various currencies and contract rates versus financial statement rates.
To the extent these forecasts are overstated or understated during periods of
currency volatility, we could experience unanticipated currency gains or
losses.
At March
31, 2010, we had foreign currency forward contracts outstanding with an
aggregate notional value of $34.9 million, denominated in the euro, British
pound, Japanese yen and Canadian dollar, as a hedge against actual and
forecasted foreign-currency-denominated receivables, payables and cash balances.
The mark-to-market effect associated with foreign currency forward contracts was
a net unrealized gain of $0.5 million at March 31, 2010. For the three months
ended March 31, 2010, net gains of $1.4 million resulting from forward contracts
and $1.1 million of net transaction and remeasurement losses on the related
assets and liabilities were included in our results of operations.
As it
relates to our use of foreign currency forward contracts, a hypothetical 10%
change in foreign currency rates would not have a material impact on our
financial position, assuming the above-mentioned forecast of foreign currency
exposure is accurate, because the impact on the forward contracts as a result of
a 10% change would at least partially offset the impact on the asset and
liability positions of our foreign subsidiaries.
Interest
Rate Risk
At March
31, 2010, we held $74.2 million in cash, cash equivalents and marketable
securities, including a municipal, bond and a money market fund investment.
Marketable securities are classified as “available for sale” and are recorded on
the balance sheet at market value, with any unrealized gain or loss recorded in
other comprehensive income (loss). A hypothetical 10% increase or decrease in
interest rates would not have a material impact on the fair market value of
these instruments due to their short maturities.
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of March 31, 2010. The term “disclosure controls and procedures,”
as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Security and Exchange
Commission’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers,
as appropriate, to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of March 31, 2010, our
chief executive officer and chief financial officer concluded that, as of that
date, our disclosure controls and procedures were effective at the reasonable
assurance level.
No change
in our internal control over financial reporting occurred during the fiscal
quarter ended March 31, 2010 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
29
PART
II. OTHER INFORMATION
We are
involved in legal proceedings from time to time arising from the normal course
of business activities, including but not limited to claims of alleged
infringement of intellectual property rights and commercial, employment, piracy
prosecution and other matters. We do not believe these matters will have a
material adverse effect on our financial position or results of operations.
However, our financial position or results of operations may be negatively
affected by the unfavorable resolution of one or more of these
proceedings.
Investing
in our common stock involves a high degree of risk. You should carefully
consider the risks and uncertainties described 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 in addition to the other information included or incorporated
by reference in this quarterly report before making an investment decision
regarding our common stock. If any of these risks actually occurs, our business,
financial condition or operating results would likely suffer, possibly
materially, the trading price of our common stock could decline, and you could
lose part or all of your investment.
During
the three months ended March 31, 2010, there were no material changes to the
risk factors that were disclosed in Part 1 - Item 1A of our Annual Report on
Form 10-K for the year ended December 31, 2009.
Issuer
Purchases of Equity Securities
The
following table is a summary of our stock repurchases during the three months
ended March 31, 2010:
Period
|
Total
Number
of
Shares
Repurchased(a)
|
Average
Price
Paid
Per Share
|
Total
Number of
Shares
Repurchased
as
Part of the
Publicly
Announced
Program
|
Dollar
Value of
Shares
That May
Yet
be Purchased
Under
the Program(b)
|
||||||
January
1 – January 31, 2010
|
–
|
$
|
–
|
–
|
$
|
80,325,905
|
||||
February
1 – February 28, 2010
|
–
|
–
|
–
|
80,325,905
|
||||||
March
1 – March 31, 2010
|
1,982
|
14.17
|
–
|
80,325,905
|
||||||
1,982
|
$
|
14.17
|
–
|
$
|
80,325,905
|
(a)
|
In
March 2010, we repurchased 1,982 shares of restricted stock from an
employee to pay required withholding taxes upon the vesting of restricted
stock.
|
(b)
|
In
April 2007, we initiated a stock repurchase program that ultimately
authorized the repurchase of up to $200 million of our common stock
through transactions on the open market, in block trades or otherwise. At
March 31, 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. The last repurchase of
shares of our common stock under this program was in March
2008.
|
30
We held
our annual meeting of stockholders on May 4, 2010. At the meeting, Robert M.
Bakish, Gary G. Greenfield and Louis Hernandez, Jr. were re-elected as Class II
Directors for terms expiring at our 2013 annual meeting. The vote with respect
to each nominee is set forth below:
Votes
For
|
Votes
Against
|
Votes
Abstaining
|
||||
Mr.
Bakish
|
31,948,162
|
133,383
|
8,483
|
|||
Mr.
Greenfield
|
27,561,746
|
4,523,744
|
4,538
|
|||
Mr.
Hernandez
|
24,426,233
|
7,656,764
|
7,031
|
The
additional directors whose terms of office continued after the meeting were
George H. Billings, Elizabeth M. Daley, Nancy Hawthorne, Youngme E. Moon, David
B. Mullen and John H. Park.
In
addition, the stockholders ratified the selection of Ernst & Young LLP as
our independent registered public accounting firm for the fiscal year ending
December 31, 2010 by a vote of 36,121,179 shares for, 26,343 shares against and
17,333 shares abstaining.
The list
of exhibits, which are filed or furnished with this report or which are
incorporated herein by reference, is set forth in the Exhibit Index
immediately preceding the exhibits and is incorporated herein by
reference.
31
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: May
7, 2010
|
By:
|
/s/ Ken
Sexton
|
Ken
Sexton
Executive
Vice President, Chief Financial Officer and Chief Administrative
Officer
(Principal
Financial Officer)
|
32
Incorporated
by Reference
|
||||||||||
Exhibit
No.
|
Description
|
Filed
with
this
Form
10-Q
|
Form
or
Schedule
|
SEC
Filing
Date
|
SEC
File
Number
|
|||||
3.1
|
Amended
and Restated By-Laws of the Registrant, as amended
|
10-K
|
March
16, 2010
|
000-21174
|
||||||
#10.1
|
2010
Executive Bonus Plan
|
8-K
|
February
12, 2010
|
000-21174
|
||||||
#10.2
|
Executive
Employment Agreement dated March 15, 2010 between the Registrant and
Martin Vann
|
X
|
||||||||
31.1
|
Certification
of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14 under
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
X
|
||||||||
31.2
|
Certification
of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14 under
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
X
|
||||||||
32.1
|
Certifications
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
X
|
__________________________
# Management
contract or compensatory plan identified pursuant to Item 15(a)3.
33