UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
Commission File Number 0-21174
AVID TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2977748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AVID TECHNOLOGY PARK
ONE PARK WEST
TEWKSBURY, MA 01876
(Address of principal executive offices)
Registrant's telephone number, including area code: (978) 640-6789
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No _____
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes _____ No X
The number of shares outstanding of the registrant's Common Stock as of October
27, 2005 was 41,668,062.
AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
a) Condensed Consolidated Statements of Operations (unaudited)
for the three and nine months ended September 30, 2005 and 2004.......1
b) Condensed Consolidated Balance Sheets (unaudited) as of
September 30, 2005 and December 31, 2004..............................2
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2005 and 2004.................3
d) Notes to Condensed Consolidated Financial Statements (unaudited)......4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................16
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk..........36
ITEM 4. Controls and Procedures............................................37
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..................................................38
ITEM 4. Submission of Matters to a Vote of Security Holders................38
ITEM 6. Exhibits...........................................................39
SIGNATURES..................................................................40
EXHIBIT INDEX...............................................................41
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, Septmeber 30,
------------------------ -----------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net revenues:
Product $183,515 $131,550 $472,327 $369,403
Services 20,905 15,824 58,145 45,231
----------- ----------- ----------- -----------
Total net revenues 204,420 147,374 530,472 414,634
----------- ----------- ----------- -----------
Cost of revenues:
Product 82,133 54,242 204,274 152,907
Services 11,587 8,603 31,684 25,036
Amortization of intangible assets 3,854 127 4,417 127
----------- ----------- ----------- -----------
Total cost of revenues 97,574 62,972 240,375 178,070
----------- ----------- ----------- -----------
Gross profit 106,846 84,402 290,097 236,564
----------- ----------- ----------- -----------
Operating expenses:
Research and development 29,636 23,879 79,225 69,096
Marketing and selling 44,601 32,009 120,895 93,354
General and administrative 12,188 9,266 32,961 23,500
In-process research and development 32,390 - 32,390 -
Restructuring costs 1,997 - 1,997 -
Amortization of intangible assets 2,544 988 5,729 1,976
----------- ----------- ----------- -----------
Total operating expenses 123,356 66,142 273,197 187,926
----------- ----------- ----------- -----------
Operating income (koss) (16,510) 18,260 16,900 48,638
Interest income 1,618 718 3,478 1,856
Interest expense (66) (105) (255) (250)
Other income (expense), net 167 38 512 (920)
----------- ----------- ----------- -----------
Income (loss) before income taxes (14,791) 18,911 20,635 49,324
Provision for (benefit from) income taxes 2,966 (63) 5,080 137
----------- ----------- ----------- -----------
Net income (loss) ($17,757) $18,974 $15,555 $49,187
=========== =========== =========== ===========
Net income (loss) per common share - basic ($0.46) $0.58 $0.43 $1.54
Net income (loss) per common share - diluted ($0.46) $0.54 $0.41 $1.43
Weighted average common shares outstanding - basic 38,935 32,737 36,381 31,857
Weighted average common shares outstanding - diluted 38,935 35,033 38,217 34,374
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
September 30, December 31,
2005 2004
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $113,739 $79,058
Marketable securities 114,900 76,361
Accounts receivable, net of allowances of
$21,399 and $9,334 at September 30, 2005
and December 31, 2004, respectively 127,743 97,536
Inventories 93,219 53,946
Current deferred tax assets, net 600 653
Prepaid expenses 10,030 7,550
Other current assets 13,726 11,204
------------- -------------
Total current assets 473,957 326,308
Property and equipment, net 39,237 29,092
Goodwill 395,832 165,803
Intangible assets, net 128,751 46,884
Long-term deferred tax assets, net 4,399 4,184
Other assets 5,147 3,963
------------- -------------
Total assets $1,047,323 $576,234
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $38,335 $26,517
Accrued compensation and benefits 31,831 30,468
Accrued expenses and other current liabilities 65,365 34,902
Income taxes payable 15,938 9,357
Deferred revenues 70,514 48,680
------------- -------------
Total current liabilities 221,983 149,924
Long-term liabilities 11,736 1,689
------------- -------------
Total liabilities 233,719 151,613
------------- -------------
Contingencies (Note 7)
Stockholders' equity:
Common stock 417 348
Additional paid-in capital 920,596 546,849
Accumulated deficit (107,220) (122,775)
Deferred compensation (2,308) (4,392)
Accumulated other comprehensive income 2,119 4,591
------------- -------------
Total stockholders' equity 813,604 424,621
------------- -------------
Total liabilities and stockholders' equity $1,047,323 $576,234
============= =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
-------------------------------
2005 2004
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $15,555 $49,187
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 21,971 10,931
Provision for doubtful accounts 687 91
In-process research and development 32,390 --
Gain on disposal of fixed assets (55) --
Compensation expense from stock grants and options 2,042 583
Equity in income of non-consolidated company (254) (85)
Changes in deferred tax assets and liabilities,
excluding effects of acquisitions (363) --
Changes in operating assets and liabilities, excluding
effects of acquisitions:
Accounts receivable (23,516) (14,281)
Inventories (16,744) (715)
Prepaid expenses and other current assets 2,348 956
Accounts payable 530 3,774
Income taxes payable 3,783 1,156
Accrued expenses, compensation and benefits (9,172) 2,236
Deferred revenues 10,103 3,301
- ---------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 39,305 57,134
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (12,916) (9,805)
Payments for other long-term assets (782) (485)
Payments for business acquisitions, including transaction
costs, net of cash acquired (5,049) (135,205)
Cash received in business acquisition, including transaction
costs, net of cash paid 24,942 --
Purchases of marketable securities (68,153) (45,808)
Proceeds from sales of marketable securities 47,618 86,981
- ---------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (14,340) (104,322)
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (64) (492)
Proceeds from issuance of common stock under employee stock plans 10,995 13,215
- ---------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,931 12,723
- ---------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (1,215) (924)
- ---------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 34,681 (35,389)
Cash and cash equivalents at beginning of period 79,058 77,123
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $113,739 $41,734
- ---------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
PART I. FINANCIAL INFORMATION
ITEM 1D. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL INFORMATION
The accompanying condensed consolidated financial statements include the
accounts of Avid Technology, Inc. and its wholly-owned subsidiaries
(collectively, "Avid" or the "Company"). These financial statements are
unaudited. However, in the opinion of management, the condensed consolidated
financial statements include all adjustments, consisting of only normal,
recurring adjustments, necessary for their fair statement. Interim results are
not necessarily indicative of results expected for a full year. The accompanying
unaudited condensed consolidated financial statements have been prepared in
accordance with the instructions for Form 10-Q and therefore do not include all
information and footnotes necessary for a complete presentation of operations,
financial position and cash flows of the Company in conformity with generally
accepted accounting principles. The accompanying condensed consolidated balance
sheet as of December 31, 2004 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, 2004 in its 2004 Annual Report on
Form 10-K, which included all information and footnotes necessary for such
presentation; the financial statements contained in this Form 10-Q should be
read in conjunction with the audited consolidated financial statements in the
Form 10-K.
The Company's preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the reported periods. The most significant estimates reflected
in these financial statements include accounts receivable and sales allowances,
purchase accounting, inventory valuation and income tax asset valuation
allowances. Actual results could differ from those estimates.
In connection with preparation of the Company's Annual Report on Form 10-K for
the year ended December 31, 2004, the Company concluded that it was appropriate
to classify its investments in auction rate securities as marketable securities.
Previously, such investments were classified as cash and cash equivalents.
Accordingly, the Company has revised the classification to exclude from cash and
cash equivalents $25.5 million of auction rate securities at December 31, 2003,
and to include such amounts as marketable securities. As a result, cash used in
investing activities decreased by $25.5 million for the nine months ended
September 30, 2004. In addition, the Company has made corresponding adjustments
to the accompanying statement of cash flows for the nine-month period ended
September 30, 2004 to reflect the gross purchases and sales of these securities
as investing activities. This change in classification does not affect
previously reported cash flows from operations or from financing activities.
During the three months ended September 30, 2005, the Company began classifying
certain European administrative expenses as general and administrative expense
rather than marketing and selling expense in the consolidated statement of
operations. The Company had previously classified these expenses as marketing
and selling because the costs were primarily related to support the sales
function in Europe. Due to changes in the Company's business and the
acquisitions of Pinnacle, M-Audio and NXN that have occurred since January 2004,
the general and administrative group in Europe is supporting all functional
areas of the business. Therefore, the Company concluded that it was appropriate
to reclassify such expenses. The corresponding amounts for all periods prior to
the current quarter have been reclassified to conform to the current quarter
presentation. For the six months ended June 30, 2005, the Company reclassified
$3.5 million from marketing and selling expense to general and administrative
expense. For the three- and nine-month periods ended September 30, 2004, the
Company reclassified $1.6 million and $3.7 million respectively, from marketing
and selling expense to general and administrative expense.
4
2. NET INCOME (LOSS) PER COMMON SHARE
Basic and diluted net income (loss) per share were as follows
(in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ---------------------
2005 2004 2005 2004
----------- ---------- ---------- ----------
Net income (loss) ($17,757) $18,974 $15,555 $49,187
=========== ========== ========== ==========
Weighted average common shares outstanding - basic 38,935 32,737 36,381 31,857
Weighted average potential common stock:
Options - 2,296 1,722 2,517
Warrant - - 114 -
----------- ---------- ---------- ----------
Weighted average common shares outstanding - diluted 38,935 35,033 38,217 34,374
=========== ========== ========== ==========
Net income (loss) per common share - basic ($0.46) $0.58 $0.43 $1.54
Net income (loss) per common share - diluted ($0.46) $0.54 $0.41 $1.43
For the three- and nine-month periods ended September 30, 2005 and 2004, certain
stock options and warrants have been excluded from the diluted net income (loss)
per share calculation as their effect would be anti-dilutive. For periods that
the Company reports a net loss, all potential common stock is considered
anti-dilutive; for periods when the Company reports net income, only potential
common shares with purchase prices in excess of the Company's average common
stock fair value for the related period are considered anti-dilutive.
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
(in thousands)
Options 4,230 242 786 191
Warrant 1,155 1,155 - 1,155
---------- ---------- ---------- ----------
Total anti-dilutive common stock
options and warrant 5,385 1,397 786 1,346
========== ========== ========== ==========
3. ACQUISITIONS
Pinnacle
On August 9, 2005, Avid completed the acquisition of California-based Pinnacle
Systems, Inc. ("Pinnacle"), a supplier of digital video products to customers
ranging from individuals to broadcasters. Under the terms of the agreement,
Pinnacle common shareholders received 0.0869 of a share of Avid common stock
plus $1.00 in cash for each share of Pinnacle common stock outstanding at the
closing of the transaction. In total, Avid paid $72.1 million in cash and issued
6.2 million shares of common stock, resulting in common stock consideration of
approximately $362.9 million in exchange for all of the outstanding shares of
Pinnacle. The price used to value the Avid shares issued as partial
consideration for Pinnacle was $58.09 per share of Avid common stock, which
represents the five-day average closing price of the stock during the period
beginning two days before and ending two days after the merger announcement date
of March 21, 2005. Avid also incurred $6.0 million of transaction costs.
The Company has integrated Pinnacle's broadcast and professional offerings,
including the Deko(R) on-air graphics system and the MediaStream(TM) playout
server, within its Professional Film, Video and Broadcast segment and has formed
a new Consumer Video segment that will offer Pinnacle's consumer products,
including Pinnacle Studio(TM) and other products. The Company has performed a
preliminary allocation of the total purchase price of $441 million to the net
tangible and intangible assets of Pinnacle based on their fair values as of the
consummation of the acquisition. The determination of these fair values included
Avid management's consideration of a valuation of Pinnacle's intangible assets
prepared by an independent valuation specialist. The purchase price allocation
as of September 30, 2005 is considered preliminary and a final determination of
5
the fair value of assets acquired and liabilities assumed, including
management's restructuring plan, will be made upon the finalization of Avid's
planned integration activities, which is expected in the fourth quarter of 2005.
The following table summarizes the preliminary purchase price allocation to the
estimated fair value of the assets acquired and liabilities assumed at the date
of acquisition (in thousands):
Cash and marketable securities $120,164
Accounts receivable, net 9,312
Inventories 20,099
Other current assets 7,859
Property and equipment and other long-term assets 12,413
Identifiable intangible assets:
Customer relationships 34,400
Trade name 15,200
Developed technology 41,200
In-process research and development 32,300
Goodwill 225,207
--------------
Total assets acquired 518,154
--------------
Accounts payable (11,069)
Accrued expenses and other current liabilities (44,587)
Deferred revenue and deposits (11,493)
Long-term deferred tax liabilities, net (10,110)
--------------
Total liabilities assumed (77,259)
--------------
Net assets acquired $440,895
==============
The identifiable intangible assets are being amortized over their estimated
useful lives of six to seven years for customer relationships, seven years for
the trade name, and two to three years for the developed technology. These
intangible assets are being amortized using the straight-line method, with the
exception of developed technology. Developed technology is being amortized on a
product-by-product basis over the greater of the amount calculated using the
ratio of current quarter revenues to the total of current quarter and
anticipated future revenues over the estimated useful lives of two to three
years, or the straight-line method over each product's remaining respective
useful lives. Amortization expense for the current quarter for these intangibles
and accumulated amortization at September 30, 2005 was $4.5 million.
The allocation of $32.3 million to in-process research and development ("R&D")
was determined through management's consideration of a valuation prepared by an
independent valuation specialist. This in-process R&D represents product
development efforts that were underway at Pinnacle at the time of acquisition,
for which technological feasibility had not yet been established. Technological
feasibility is established when either of the following criteria is met: 1) the
detail program design has been completed, documented, and traced to product
specifications and its high-risk development issues have been resolved; or 2) a
working model of the product has been finished and determined to be complete and
consistent with the product design. Upon the acquisition, Pinnacle did not have
a completed product design or working model for the in-process technology and
the Company believes that there is no future alternative use for such technology
beyond the stated purpose of the specific R&D project; therefore the in-process
R&D of $32.3 million was expensed during the three months ended September 30,
2005.
Based on the preliminary purchase price allocation, the goodwill of $225 million
resulting from the purchase price allocation reflects the value of the
underlying enterprise, as well as planned synergies that Avid expects to
realize, including incremental sales of legacy Avid video products. Of the total
$225 million of goodwill, $90 million has been assigned to the Company's
Professional Film, Video and Broadcast segment, and $135 million has been
assigned to the newly formed Consumer Video segment. This amount allocated to
goodwill will be finalized in conjunction with the finalization of the purchase
price allocation and the Company's integration activities. This goodwill will
not be amortized, in accordance with the requirements of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets".
This goodwill is not deductible for tax purposes.
6
Wizoo
In August 2005, Avid acquired all the outstanding shares of Wizoo Sound Design
GmbH ("Wizoo"), a Germany-based provider of virtual instruments for music
producers and sound designers, for cash of (euro) 4 million ($4.9 million) plus
transaction costs of $0.2 million. The purchase price was allocated as follows:
($0.6 million) to net liabilities assumed, $1.2 million to identifiable
intangible assets, $0.1 million to in-process research and development, and the
remaining $4.4 million to goodwill. The identifiable intangible assets, which
include developed technology of $0.6 million and license agreements of $0.6
million, are being amortized on a straight-line basis over their estimated
useful lives of two to four years and three to four years, respectively. The
goodwill of $4.4 million, which reflects the value of the assembled workforce
and the synergies the Company hopes to realize by integrating the Wizoo
technology with its other products, is reported within the Company's Audio
segment and is not deductible for tax purposes.
As part of the purchase agreement, Avid may be required to make additional
payments to the former shareholders of Wizoo of up to (euro) 1.0 million ($1.2
million), contingent upon Wizoo achieving certain engineering milestones through
January 2008. These payments, if required, will be recorded as additional
purchase consideration, allocated to goodwill. As of September 30, 2005, none of
the engineering milestones have been met; therefore, no amount has been recorded
as additional purchase price.
M-Audio
In August 2004, Avid completed the acquisition of Midiman, Inc. d/b/a M-Audio
("M-Audio"), a leading provider of digital audio and MIDI (Musical Instrument
Digital Interface) solutions for musicians and audio professionals. Avid paid
cash of $79.6 million, net of cash acquired, and issued stock and options with a
fair value of $96.5 million. The total purchase price was allocated as follows:
$13.5 million to net assets acquired, $5.5 million to deferred compensation,
$38.4 million to identifiable intangible assets, and the remaining $122.0
million to goodwill.
As part of the purchase agreement, Avid may be required to make additional
payments to the former shareholders and option holders of M-Audio of up to $45.0
million, contingent upon the operating results of M-Audio through December 31,
2005. These payments, if required, will be made through the issuance of
additional Avid shares or options based on the ten-day average closing price of
the stock ending two days prior to the date the earn-out shares are distributed.
Any such additional Avid shares issued to the former shareholders of M-Audio
will be recorded as additional purchase price allocated to goodwill. Any such
additional Avid options issued to former option holders of M-Audio will be
recorded as stock-based compensation expense because future service is required
for it to be earned. As of September 30, 2005, no additional shares or options
are due and thus, no amount has been recorded as additional purchase price.
The identifiable intangible assets are being amortized over their estimated
useful lives of twelve years for customer relationships, six years for the trade
name, four years for the developed technology and two years for the non-compete
covenant. The twelve year life for customer relationships, although longer than
that used for similar intangible assets for other acquisitions by Avid, is
considered reasonable due to the similarities in their business to Avid's
Digidesign division, which has enjoyed long-term relationships with its
customers. Amortization expense totaled $1.2 million and $3.6 million for the
three- and nine-month periods ended September 30, 2005, respectively and
accumulated amortization of these intangible assets was $5.4 million at
September 30, 2005. Also during the nine-month period ended September 30, 2005,
the $122.0 million of goodwill was reduced by $1.2 million to $120.8 million due
to the resolution of tax contingencies.
Avid Nordic AB
In September 2004, the Company acquired Avid Nordic AB, a Sweden-based exclusive
reseller of Avid products operating in the Nordic and Benelux regions of Europe,
for cash, net of cash acquired, of (euro) 6.1 million ($7.4 million) plus
transaction costs of $0.3 million. The purchase price was allocated as follows:
$1.0 million to net assets acquired, $4.7 million to an identifiable intangible
asset, and the remaining $2.0 million to goodwill.
The identifiable intangible asset represents customer relationships developed in
the region by Avid Nordic AB. This asset will be amortized over its estimated
useful life of five years. Amortization expense totaled $0.2 million and $0.7
million for the three- and nine-month periods ended September 30, 2005,
respectively and accumulated amortization of this asset was $1.0 million at
September 30, 2005. During the quarter ended December 31, 2004, the goodwill was
increased by $0.4 million to $2.4 million due to a reduction in the estimated
fair value of inventory and other current assets acquired from Avid Nordic AB.
7
As part of the purchase agreement, Avid was required to make additional payments
to the former shareholders of Avid Nordic AB of up to (euro) 1.3 million
contingent upon the operating results of Avid Nordic AB through August 31, 2005,
with the payments to be recorded as additional purchase consideration, allocated
to goodwill. Through the nine months ended September 30, 2005 the Company
estimated that the maximum additional purchase consideration of (euro) 1.3
million ($1.6 million) had been earned and accordingly recorded an increase to
goodwill of $1.6 million with a corresponding offset in accrued expenses.
NXN Software GmbH
In January 2004, Avid acquired Munich, Germany-based NXN Software GmbH ("NXN"),
a leading provider of asset and production management systems specifically
targeted for the entertainment and computer graphics industries, for cash of
(euro) 35 million ($43.7 million) less cash acquired of $0.8 million. The total
purchase price was allocated as follows: ($1.0 million) to net liabilities
assumed, $7.2 million to identifiable intangible assets and the remaining $38.8
million to goodwill.
The identifiable intangible assets include completed technology valued at $4.3
million, customer relationships valued at $2.1 million, and a trade name valued
at $0.8 million, which are being amortized over their estimated useful lives of
four to six years, three to six years, and six years, respectively. Amortization
expense relating to these intangibles was $0.3 million and $0.8 million for the
three- and nine-month periods ended September 30, 2005, respectively and
accumulated amortization of these assets was $1.7 million at September 30, 2005.
In December 2004, the Company reviewed the identifiable intangible assets
acquired in the NXN transaction and found the customer relationships intangible
assets and the trade name to be impaired. The Company recalculated the fair
values of these intangible assets based on revised expected future cash flows
reflecting the contract renegotiations and recorded a charge of $1.2 million in
December 2004 to write them down to their revised fair values. Also during the
year ended December 31, 2004, the $38.8 million of goodwill was reduced by $0.7
million to $38.1 million due to finalizing the estimated fair value of deferred
revenue acquired from NXN.
Pro Forma Financial Information for Acquisitions (Unaudited)
The results of operations of Pinnacle, Wizoo, M-Audio, Avid Nordic and NXN have
been included in the results of operations of the Company since the respective
date of each acquisition. The following unaudited pro forma financial
information presents the results of operations for the three- and nine-month
periods ended September 30, 2005 and 2004 as if the acquisitions of Pinnacle,
M-Audio and NXN had occurred at the beginning of 2004. The Company's pro forma
results of operations giving effect to the Wizoo and Avid Nordic AB acquisitions
as if each had occurred at the beginning of 2004 is not included as it would not
differ materially from reported results. The pro forma financial information for
the combined entities has been prepared for comparative purposes only and is not
indicative of what actual results would have been if the acquisitions had taken
place at the beginning of fiscal 2004, or of future results.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2005 2004 2005 2004
------------ ------------- ------------ ------------
(In thousands, except per share data)
Net revenues $212,692 $219,544 $658,482 $677,125
Net income (loss) ($8,051) $192 $2,709 ($19,218)
Net income (loss) per share:
Basic ($0.19) - $0.07 ($0.48)
Diluted ($0.19) - $0.06 ($0.48)
Included in the pro forma net income reported above for the nine-month period
ended September 30, 2004 is a charge of $32.3 million for in-process research
and development related to the Pinnacle acquisition.
8
4. ACCOUNTS RECEIVABLE
Accounts receivable, net consisted of the following (in thousands):
September 30, December 31,
2005 2004
-------------- --------------
Accounts receivable $149,142 $106,870
Less:
Allowance for doubtful accounts (5,644) (4,132)
Allowance for sales returns and rebates (15,755) (5,202)
-------------- --------------
$127,743 $97,536
============== ==============
The allowance for doubtful accounts represents an allowance for estimated bad
debt losses resulting from the inability of customers to make required payments
for products or services. When evaluating the adequacy of this allowance, the
Company analyzes accounts receivable balances, historical bad debt experience,
customer concentrations, customer credit-worthiness and current economic trends.
The allowance for sales returns and rebates, which includes allowances for
estimated returns, exchanges and credits for price protection are provided as a
reduction of revenues, in the same period that related revenues are recorded,
based upon the Company's historical experience. To date, actual returns and
other allowances have not differed materially from management's estimates.
Allowances for rebates on purchases of certain products, or rebates based on
purchasing volume, are also accounted for as reductions to revenue, in the same
period that related revenues are recorded, or upon expected achievement of
purchasing volumes. The increase in accounts receivable allowances is due
primarily to the acquisition of Pinnacle in the third quarter of 2005 and the
resulting inclusion of reserves for actual return rates and price protection
programs for the new Consumer Video segment. The Pinnacle-related allowance for
doubtful accounts and allowance for sales returns and rebates as of September
30, 2005 is $1.8 million and $10.6 million, respectively.
5. INVENTORIES
Inventories consisted of the following (in thousands):
September 30, December 31,
2005 2004
---------------- -----------------
Raw materials $29,514 $14,925
Work in process 9,618 3,622
Finished goods 54,087 35,399
---------------- -----------------
$93,219 $53,946
================ =================
As of September 30, 2005 and December 31, 2004, the finished goods inventory
included inventory at customer locations of $11.3 million and $9.0 million,
respectively, associated with product shipped to customers for which revenue had
not yet been recognized. Of the $39.3 million increase in inventory since
December 31, 2004, approximately $25.1 million relates to acquired Pinnacle
inventory, of which $4.6 million, $5.2 million, and $15.3 million represents raw
material, work in process, and finish goods as of September 30, 2005,
respectively.
6. ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no compensation expense is recorded for options issued to employees
and directors in fixed amounts and with fixed exercise prices at least equal to
the fair market value of the Company's common stock at the date of grant. When
the exercise price of stock options granted to employees is less than the fair
market value of common stock at the date of grant, the Company records that
difference multiplied by the number of shares under option as deferred
compensation, which is then amortized over the vesting period of the options.
Additionally, deferred compensation is recorded for restricted stock granted to
employees based on the fair market value of the Company's common stock at date
of grant and is amortized over the period in which the restrictions lapse. The
Company reverses deferred compensation associated with unvested options issued
with exercise prices at below fair market value as well as unvested restricted
stock upon the cancellation of such options or shares for terminated employees.
The Company provides the disclosures required by SFAS No. 123, "Accounting for
9
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure". All stock-based awards to
non-employees are accounted for at their fair value in accordance with SFAS No.
123. There were no stock-based awards granted to non-employees during the three-
and nine- month periods ended September 30, 2005 or 2004.
The following table illustrates the effect on net income and net income per
share as if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee awards (in thousands, except per share
data).
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Net income (loss) as reported ($17,757) $18,974 $15,555 $49,187
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects 528 557 2,042 583
Deduct: Total stock-based employee compensation
expense determined under the fair value-based
method for all awards, net of related tax effects (6,199) (4,346) (16,923) (11,657)
--------- --------- --------- ---------
Pro forma net income (loss) ($23,428) $15,185 $674 $38,113
========= ========= ========= =========
Net income (loss) per share:
Basic-as reported ($0.46) $0.58 $0.43 $1.54
Basic-pro forma ($0.60) $0.46 $0.02 $1.20
Diluted-as reported ($0.46) $0.54 $0.41 $1.43
Diluted-pro forma ($0.60) $0.44 $0.02 $1.12
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model and is amortized over the
stock option's vesting period.
In anticipation of the adoption of SFAS No. 123(R), on October 26, 2005, the
Company's Board of Directors approved a partial acceleration of the vesting of
all outstanding options to purchase the Company's common stock that were granted
on February 17, 2005. Vesting was accelerated for options to purchase 371,587
shares of the Company's common stock, par value $0.01 per share, with an
exercise price of $65.81 per share, including options to purchase 157,624 shares
of the Company's common stock held by the Company's executive officers. The
decision to accelerate vesting of these options was made to avoid recognizing
compensation cost related to these out-of-the-money options in the Company's
future statements of operations upon the effectiveness of SFAS 123(R). It is
estimated that the maximum future compensation expense that would have been
recorded in the Company's statements of operations had the vesting of these
options not been accelerated is approximately $4.9 million.
7. CONTINGENCIES
Avid receives inquiries from time to time with regard to possible patent
infringement claims. If any infringement is determined to exist, the Company may
seek licenses or settlements. In addition, as a normal incidence of the nature
of the Company's business, various claims, charges, and litigation have been
asserted or commenced from time to time against the Company arising from or
related to contractual or employee relations, intellectual property rights or
product performance. Management does not believe these claims will have a
material adverse effect on the financial position or results of operations of
the Company.
In April 2005, Avid was notified by the Korean Federal Trade Commission ("KFTC")
that a former reseller, Neat Information Telecommunication, Inc. ("Neat"), had
filed a complaint against Avid alleging unfair trade practices. On August 11,
10
2005, the KFTC issued a decision in favor of Avid regarding the complaint filed
by Neat. However, Neat filed a second complaint with the KFTC on October 25,
2005. In addition, on October 14, 2005, Neat filed a civil lawsuit in South
Korea against Avid alleging unfair trade practices. In the civil action, Neat is
seeking approximately $1,700,000 in damages, plus interest and attorneys' fees.
Avid believes that Neat's claims are without merit, and will defend itself
vigorously against the latest actions. Because the Company cannot predict the
outcome of these matters at this time, no costs have been accrued for the
possible loss contingency.
In September 2003, Pinnacle, which Avid recently acquired and is now a
wholly-owned subsidiary, was named as a defendant in a suit filed in the
Superior Court of California, Alameda County. The complaint was filed by
YouCre8, a/k/a DVDCre8, Inc., a software company whose software was distributed
by Dazzle Multimedia, Inc. The complaint alleges that in connection with
Pinnacle's acquisition of certain assets of Dazzle, Pinnacle tortiously
interfered with DVDCre8's relationship with Dazzle and others, engaged in acts
to restrain competition in the DVD software market, and distributed false and
misleading statements which caused harm to DVDCre8. Dazzle and its parent
company, SCM Microsystems, Inc., were also named as defendants in this matter.
The complaint seeks unspecified damages and injunctive relief. Pursuant to the
Asset Purchase Agreement among SCM, Dazzle and Pinnacle, Pinnacle is seeking
indemnification from SCM and Dazzle for all or part of the damages and the
expenses incurred to defend these claims. SCM and Dazzle, in turn, are seeking
indemnification from Pinnacle for all or part of the damages and expenses
incurred by them to defend these claims. Avid believes the complaint is without
merit and will defend it vigorously. However, an adverse resolution of this
litigation could have a material adverse effect on our consolidated financial
position in the period in which the litigation is resolved. Amounts accrued
related to this litigation as part of the Pinnacle purchase price allocation
during the three months ended September 30, 2005 are considered immaterial to
the Company's consolidated financial statements.
From time to time, the Company provides indemnification provisions in agreements
with customers covering potential claims by third parties of intellectual
property infringement. These agreements generally provide that the Company will
indemnify customers for losses incurred in connection with an infringement claim
brought by a third party with respect to the Company's products. These
indemnification provisions generally offer perpetual coverage for infringement
claims based upon the products covered by the agreement. The maximum potential
amount of future payments the Company could be required to make under these
indemnification provisions is theoretically unlimited; however, to date, the
Company has not incurred material costs related to these indemnification
provisions. As a result, the Company believes the estimated fair value of these
indemnification provisions is minimal.
As permitted under Delaware law, Avid has agreed to indemnify its officers and
directors for certain events that occur while the officer or director is serving
in such capacity. The term of the indemnification period is for each respective
officer's or director's lifetime. The maximum potential amount of future
payments the Company could be required to make under these indemnification
agreements is unlimited; however, Avid has mitigated the exposure through the
purchase of directors and officers insurance, which is intended to limit the
risk and, in most cases, enable the Company to recover all or a portion of any
future amounts paid. As a result of this insurance policy coverage and Avid's
related payment experience to date, the Company believes the estimated fair
value of these indemnification agreements is minimal.
The Company has a standby letter of credit at a bank that is used as a security
deposit in connection with the Company's Daly City, California office space
lease. In the event of default on this lease, the landlord would be eligible to
draw against this letter of credit to a maximum, as of September 30, 2005, of
$3.5 million, subject to an annual reduction of approximately $0.8 million but
not below $2.0 million. The letter of credit will remain in effect at $2.0
million throughout the remaining lease period, which extends to September 2009.
As of September 30, 2005, the Company was not in default of this lease.
The Company, through a third party, provides lease financing options to its
customers, including end-users and, on a limited basis, resellers. During the
terms of these leases, which are generally three years, the Company remains
liable for any unpaid principal balance upon default by the end-user, but such
liability is limited in the aggregate based on a percentage of initial amounts
funded or, in certain cases, amounts of unpaid balances. At September 30, 2005
and December 31, 2004, Avid's maximum recourse exposure totaled approximately
$13.4 million and $17.2 million, respectively. The Company records revenue from
these transactions upon the shipment of products, provided that all other
revenue recognition criteria, including collectibility being reasonably assured,
are met. Because the Company has been providing these financing options to its
customers for many years, the Company has a substantial history of collecting
under these arrangements without providing significant refunds or concessions to
the end user or financing party. To date, the payment default rate has
consistently been between 2% and 4% per year of the original funded amount. This
11
low default rate results from the diligence of the third party leasing company
in screening applicants and in collecting amounts due, and because Avid actively
monitors its exposures under the financing program and participates in the
approval process for any lessees outside of agreed-upon credit-worthiness
metrics. The Company maintains a reserve for estimated losses under this
recourse lease program based on these historical default rates compared to the
funded amount outstanding at period end. At September 30, 2005 and December 31,
2004, the Company's accrual for estimated losses was $2.0 million and $2.2
million, respectively.
Avid provides warranties on hardware sold through its Professional Film, Video
and Broadcast segment which generally mirrors the manufacturers' warranties. The
Company charges the related material, labor and freight expense to cost of
revenues in the period incurred. With respect to the Audio and Consumer Video
segments, Avid provides warranties on externally sourced and internally
developed hardware and records an accrual for the related liability based on
historical trends and actual material and labor costs. The warranty period for
all of the Company's products is generally 90 days to one year, but can extend
up to five years depending on the manufacturer's warranty or local law.
The following table sets forth the activity in the product warranty accrual
account (in thousands):
Nine Months Ended September 30,
2005 2004
-------------- --------------
Accrual balance at December 31, 2004 $2,261 $1,355
Acquired product warranty 3,510 -
Accruals for product warranties 3,458 2,651
Cost of warranty claims (2,800) (1,894)
-------------- --------------
Accrual balance at end of period $6,429 $2,112
============== ==============
8. COMPREHENSIVE INCOME
Total comprehensive income net of taxes consists of net income, the net changes
in foreign currency translation adjustment and net unrealized gains and losses
on available-for-sale securities. The following is a summary of the Company's
comprehensive income (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2005 2004 2005 2004
----------- ----------- ----------- ----------
Net income (loss) ($17,757) $18,974 $15,555 $49,187
Net changes in:
Foreign currency translation adjustment 575 1,459 (2,611) 75
Unrealized gains (losses) on securities 4 99 139 (206)
----------- ----------- ----------- ----------
Total comprehensive income (loss) ($17,178) $20,532 $13,083 $49,056
=========== =========== =========== ==========
9. SEGMENT INFORMATION
The Company's organizational structure is based on strategic business units that
offer various products to the principal markets in which the Company's products
are sold. These business units equate to three reportable segments: Professional
Film, Video and Broadcast, Audio, and Consumer Video. The following is a summary
of the Company's operations by reportable segment (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2005 2004 2005 2004
------------ ----------- ------------ ----------
Professional Film, Video and Broadcast:
Net revenues $118,924 $95,605 $318,393 $284,015
Operating income $13,402 $11,395 $35,600 $32,706
Audio:
Net revenues $66,986 $51,769 $193,569 $130,619
Operating income $11,144 $8,533 $27,476 $18,588
Consumer Video:
Net revenues $18,510 - $18,510 -
Operating income $187 - $187 -
Combined Segments:
Net revenues $204,420 $147,374 $530,472 $414,634
Operating income $24,733 $19,928 $63,263 $51,294
12
The following table reconciles operating income for reportable segments to the
total consolidated amounts for the three- and nine-month periods ended September
30, 2005 and 2004 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- -----------
Total operating income for reportable segments $24,733 $19,928 $63,263 $51,294
Unallocated amounts:
Restructuring costs (1,997) - (1,997) -
Stock-based compensation (458) (553) (1,830) (553)
In-process research and development (32,390) - (32,390) -
Amortization of acquisition-related (6,398) (1,115) (10,146) (2,103)
intangible assets
---------- ---------- ----------- -----------
Consolidated operating income ($16,510) $18,260 $16,900 $48,638
========== ========== =========== ===========
As of September 30, 2005, the Company estimates that the total Pinnacle assets
allocated to the Professional Film, Video and Broadcast segment and the newly
formed Consumer Video segment, which are considered by management in evaluating
the results of the segments, are approximately $29.0 million and $33.0 million,
respectively.
10. RESTRUCTURING COSTS AND ACCRUALS
In September 2005, the Company recorded a charge of $2.0 million in connection
with a revised estimate of the lease obligation associated with a facility that
was vacated as part of a restructuring plan in 1999. The revision was necessary
due to one of the subtenants in the facility giving notice of their intention to
discontinue their sublease. The lease extends through September 2010.
In connection with the Pinnacle acquisition, the Company recorded accruals of
$13.6 million as of September 30, 2005, the components of which are disclosed in
the table below, related to severance agreements and lease or other contract
terminations in accordance with EITF 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination".
In December 2002, the Company recorded a charge of $3.3 million in connection
with vacating excess space in its Tewksbury, Massachusetts; Daly City,
California; and Montreal, Canada facilities. The Daly City estimate was revised,
and an additional charge of $1.5 million was recorded in the fourth quarter of
2003.
The Company recorded the September 2005, December 2003 and 2002 charges in
accordance with the guidance of SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 requires that a liability be
recognized for an operating lease that is not terminated based on the estimated
remaining lease rental costs, measured at its fair value on a discounted cash
flow basis, when the entity ceases using the rights conveyed by the operating
lease. That amount is reduced by any estimated sublease rentals, regardless of
whether the entity intends to enter into a sublease. Future changes in the fair
value of the Company's obligations are recorded through operating expenses.
These restructuring charges and accruals require significant estimates and
assumptions, including sub-lease income assumptions. These estimates and
assumptions are monitored on at least a quarterly basis for changes in
circumstances and any corresponding adjustments to the accrual are recorded in
the period when such changes are known.
The following table sets forth the activity in the restructuring and other costs
accrual, which is included in Accrued expenses and other current liabilities,
for the nine months ended September 30, 2005 (in thousands):
13
Facilities Employee
Related Related Total
----------- ----------- -----------
Accrual balance at December 31, 2004 $3,534 - $3,534
Pinnacle acquisition-related liabilities 3,739 9,858 13,597
Revised estimate of lease obligations 1,997 - 1,997
Cash payments, net of sublease income (1,240) (5,793) (7,033)
----------- ----------- -----------
Accrual balance at September 30, 2005 $8,030 $4,065 $12,095
=========== =========== ===========
The leases, and payments against the amount accrued, extend through 2010 unless
the Company is able to negotiate an earlier termination.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 151, "Inventory Costs", an amendment of Accounting Research Bulletin No. 43,
which is the result of the FASB's efforts to converge U.S. accounting standards
for inventories with International Accounting Standards. SFAS No. 151 requires
idle facility expenses, freight, handling costs, and wasted material (spoilage)
costs to be recognized as current-period charges. It also requires that the
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. SFAS No. 151 will be effective
for inventory costs incurred during fiscal years beginning after June 15, 2005
(i.e., beginning January 1, 2006 for the Company). The Company is
currently evaluating the impact of SFAS No. 151 on its consolidated financial
statements. The adoption of this standard is not expected to have a material
impact on the Company's financial position or results of operations.
On December 16, 2004, the FASB released SFAS No. 123R. This new accounting
standard requires all forms of stock compensation, including stock options
issued to employees, to be reflected as an expense in the Company's financial
statements. On April 14, 2005, the Securities and Exchange Commission ("SEC")
approved a rule that delayed the effective date of SFAS No. 123R for public
companies to annual, rather than interim, periods that begin after June 15,
2005. SFAS No. 123R allows three alternative methods of transitioning to the
standard: modified prospective application ("MPA"); modified retrospective
application ("MRA") to all prior periods; or MRA to only interim periods of the
year of adoption. The Company intends to use the MPA without restatement
alternative and to apply the revised standard beginning January 1, 2006. Under
the modified prospective application, all unvested awards that were previously
included as part of the pro forma net income disclosure and are outstanding on
the effective date would be charged to expense over the remaining vesting
period, without any changes in measurement. All new awards that are granted or
modified after the effective date will be expensed using the FAS 123R
measurement model. Although the Company has not finalized its analysis, it
expects that the adoption of the revised standard will result in higher
operating expenses and lower earnings per share. See Footnote 6, Accounting for
Stock-Based Compensation, for the pro forma impact on net income and income per
common share as if the Company had historically applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee awards.
On October 22, 2004, the President signed the American Jobs Creation Act of 2004
("the Act"). The Act creates a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85 percent
dividends-received deduction for certain dividends from controlled foreign
corporations. The Act also creates a deduction on a percentage of the lesser of
qualified production activities income or taxable income. Although these
deductions are subject to a number of limitations and significant uncertainty
remains as to how to interpret numerous provisions in the Act, the Company
believes that it has the information necessary to make an informed decision on
the impact of the Act. Based on the information available, the Company has
determined that its cash position in the U.S. is sufficient to fund anticipated
needs. The Company also believes that the repatriation of income earned abroad
would result in significant foreign withholding taxes that otherwise would not
have been incurred, as well as additional U.S. tax liabilities that may not be
sufficiently offset by foreign tax credits. Therefore, the Company does not
currently plan to repatriate any income earned abroad. The Company has also
determined that the qualified production activities deduction will not have a
material impact on the fiscal 2005 tax provision due to the expected amount of
taxable income. These initial findings could change based on clarification of
the rules and changes in facts and circumstances of the Company's operations
and/or cash requirements in the U.S.
14
In June 2005, the FASB issued Staff Position No. FAS 143-1, "Accounting for
Electronic Equipment Waste Obligations" ("FSP 143-1"), which provides guidance
on the accounting for obligations associated with the European Union ("EU")
Directive on Waste Electrical and Electronic Equipment (the "WEEE Directive").
FSP 143-1 provides guidance on how to account for the effects of the WEEE
Directive with respect to historical waste associated with products in the
market on or before August 13, 2005. FSP 143-1 is required to be applied to the
later of the first reporting period ending after June 8, 2005 or the date of the
adoption of the WEEE Directive into law by the applicable EU member country. The
Company is in the process of registering with the member countries, as
appropriate, and is still awaiting guidance from these countries with respect
to the compliance costs and obligations for historical waste. The Company will
continue to work with each country to obtain guidance and will accrue for
compliance costs when they are probable and reasonably estimable. The accruals
for these compliance costs may have a material impact on the Company's
financial position or results of operations when guidance is issued by each
member country.
15
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We develop, market, sell and support a wide range of software and
hardware for digital media production, management and distribution. Digital
media are video, audio or graphic elements in which the image, sound or picture
is recorded and stored as digital values, as opposed to analog, or tape-based,
signals. Our diverse range of product and service offerings enables customers
to "Make, Manage and Move Media."
On August 9, 2005, we acquired Pinnacle Systems, Inc. ("Pinnacle"), a
supplier of digital video products to customers ranging from individuals to
broadcasters. We paid $72.1 million in cash and issued 6.2 million shares of
common stock valued at approximately $362.9 million in exchange for all of the
outstanding shares of Pinnacle. We have integrated Pinnacle's broadcast and
professional offerings, including the Deko(R) on-air graphics system and the
MediaStream(TM) playout server, within our Professional Film, Video and
Broadcast segment, and we have formed a new Consumer Video segment that will
offer Pinnacle's consumer products, including Pinnacle Studio(TM) and other
products.
Make Media. Our Professional Film, Video and Broadcast segment offers
digital, non-linear video and film editing systems and 3D and special-effects
software that enable users to manipulate moving pictures and sound in a faster,
easier, more creative, and more cost-effective manner than using traditional
analog tape-based systems. Non-linear systems allow editors to access material
instantaneously rather than requiring them to work sequentially. Our Audio
segment offers digital audio software applications and hardware systems for
music, film, television, video, broadcast, streaming media, and web
development. These systems are based upon proprietary audio hardware, software,
and control surfaces, and allow users to record, edit, mix, process, and master
audio in an integrated manner. Our Consumer Video segment develops and markets
products that are aimed primarily at the consumer market, and which allow users
to create, edit, view and distribute rich media content, including video,
photographs and audio using a personal computer and camcorder.
Manage Media. We provide complete network, storage, and database
solutions based on our Avid Unity MediaNetwork technology. This technology
enables users to simultaneously share and manage media assets throughout a
project or organization. The ability to manage digital media assets effectively
is a critical component of success for many broadcast and media companies with
multiple nonlinear editing workstations in a range of geographic locations. As
a result, professionals can collaborate seamlessly on all production elements,
and streamline the process for cost-effectively delivering compelling media
experiences and quickly "re-purposing" or finding new uses or markets for media
assets.
Move Media. We offer products that allow our customers to distribute
media over multiple platforms - including air, cable or satellite, or through
the Internet. In addition, we provide technology for playback directly to air
for broadcast television applications. Many of our products also support the
broadcast of streaming Internet video.
Our products are used worldwide in production and post-production
facilities; film studios; network, affiliate, independent and cable television
stations; recording studios; advertising agencies; government and educational
institutions; corporate communication departments; and by game developers and
Internet professionals, as well as by amateurs and home hobbyists. Projects
produced by customers using our products have been honored with Oscar(R),
Emmy(R), and Grammy(R) awards, in addition to a host of other international
awards. We have also received numerous awards for technical innovations,
including Oscars, Emmys and a Grammy. Oscar is a registered trademark and
service mark of the Academy of Motion Picture Arts and Sciences. Emmy is a
registered trademark of ATAS/NATAS. Grammy is a registered trademark of The
National Academy of Recording Arts and Sciences, Inc.
An important part of our strategy for the past few years has included
expanding and enhancing our product lines and increasing revenues through both
acquisitions and internal development of products. Our current quarter
acquisition of Pinnacle is discussed above. In August 2005, we acquired Wizoo
Sound Design GmbH ("Wizoo"), a Germany-based provider of virtual instruments for
music producers and sound designers. We have integrated Wizoo into our Audio
segment. In September 2004, we acquired Avid Nordic AB, a Sweden-based exclusive
reseller of our products operating in the Nordic and Benelux regions of Europe.
This acquisition allowed us to directly serve our customers in this region. In
August 2004, we completed the acquisition of M-Audio, a leading provider of
digital audio and MIDI solutions for musicians and audio professionals. We have
integrated M-Audio into our Audio segment and are marketing its line of audio
16
products alongside Digidesign's digital audio workstations for the professional
and home/hobbyist markets. In January 2004, we acquired Germany-based NXN
Software GmbH ("NXN"), a leading provider of asset and production management
systems specifically targeted for the entertainment and computer graphics
industries. This acquisition expanded our offering in digital asset management
by enabling our film and video post-production, broadcast, audio and 3D
animation customers to leverage the workflow capabilities of the NXN
Alienbrain(R) product line. NXN has been integrated into our Professional Film,
Video and Broadcast segment. The results of operations of Pinnacle, Wizoo, Avid
Nordic, M-Audio, and NXN, have been included in our results of operations since
the respective date of each acquisition.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in
conformity with U.S. generally accepted accounting principles and our discussion
and analysis of our financial condition and results of operations requires us to
make judgments, assumptions, and estimates that affect the amounts reported in
our consolidated financial statements and accompanying notes. Note B of the
Notes to Consolidated Financial Statements in our 2004 Annual Report on Form
10-K describes the significant accounting policies and methods used in the
preparation of our consolidated financial statements. We base our estimates on
historical experience and on various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
judgments about the carrying values of assets and liabilities. Actual results
may differ from these estimates.
We believe that our critical accounting policies are those related to
revenue recognition and allowances for product returns and exchanges, allowance
for bad debts and reserves for recourse under financing transactions,
inventories, business combinations, goodwill and intangible assets and income
tax assets. We believe these policies are critical because they are important to
the portrayal of our financial condition and results of operations, and they
require us to make judgments and estimates about matters that are inherently
uncertain. Additional information about these critical accounting policies may
by found in our 2004 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." Our critical
accounting policies have not significantly changed since our 2004 Annual Report
on Form 10-K, except that the following has been added to our revenue
recognition policy due to the acquisition of Pinnacle: Revenue from certain
channel partners, who have unlimited return rights and from whom payment is
contingent upon the product being sold through to their customers, is recognized
when the products are sold through to the customer, instead of being recognized
at the time products are shipped to these channel partners. All other critical
accounting policies related to Pinnacle have been conformed to those of Avid.
RESULTS OF OPERATIONS
On August 9, 2005, we acquired Pinnacle. As part of our ongoing
integration of Pinnacle with Avid, we compared accounting and reporting
conventions and, where different, determined the appropriate convention going
forward. As a result, we have made the following change to our reporting in the
third quarter of 2005:
Prior to the third quarter of 2005 we had classified
administrative expenses incurred in Europe both internally and externally as
marketing and selling expense because these costs were incurred primarily to
support our sales function in Europe. With the Pinnacle acquisition as well as
with the acquisitions of M-Audio, NXN and Avid Nordic over the past year, we
have increased the overall scope of our operations in Europe to include not only
sales but also research and development, manufacturing, customer service and
other functions, and our general and administrative infrastructure has increased
accordingly. For this reason, we have decided to classify the administrative
expenses being incurred in Europe to the general and administrative expense
caption in our income statement, as opposed to the marketing and selling expense
caption. All comparative periods have been reclassified to conform to the
current quarter presentation. The amounts reclassified were $3.5 million for the
six months ended June 30, 2005 and $1.6 million and $3.7 million, respectively
for the three- and nine-month periods ended September 30, 2004.
Net Revenues
We develop, market, sell and support a wide range of software and
hardware for digital media production, management and distribution. Our net
revenues are derived mainly from the sales of computer-based digital, nonlinear
media editing systems and related peripherals, licensing of related software,
and sales of related software maintenance contracts. We are organized into
strategic business units that reflect the principal markets in which our
products are sold: Professional Film, Video and Broadcast, Consumer Video and
Audio. These business units are at the level for which separate financial
17
information is available and evaluated regularly by us when deciding how to
allocate resources and assessing performance. As such, these business units
represent our reportable segments under SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information".
Our Professional Film, Video and Broadcast segment produces non-linear
video and film editing systems to improve the productivity of video and film
editors and broadcasters by enabling them to edit video, film and sound in a
faster, easier, more creative and more cost-effective manner than by use of
traditional analog tape-based systems. The products in this operating segment
are designed to provide capabilities for editing and finishing feature films,
television shows, broadcast news programs, commercials, music videos and
corporate and consumer videos. Our Consumer Video segment develops and markets
products that are aimed primarily at the consumer market, which allow users to
create, edit, view and distribute rich media content including video,
photographs and audio using a personal computer and camcorder. This segment is
comprised of certain product lines acquired in the Pinnacle transaction
discussed above. Our Audio segment produces digital audio systems for the audio
market. This operating segment includes products developed to provide audio
recording, editing, signal processing and automated mixing. This segment also
includes our M-Audio product family acquired in August 2004.
The following is a summary of our net revenues by segment for the three-
and nine-month periods ended September 30, 2005 and 2004 (dollars in thousands):
Three Months Ended September 30,
------------------------------------------------------------------------
2005 % of 2004 % of
Net Consolidated Net Consolidated % Change
Revenues Net revenues Revenues Net Revenues Change in revenues
----------- ------------- ----------- ------------- -------- -----------
Professional Film, Video and Broadcast
Product Revenues: $98,307 48.1% $79,781 54.2% $18,526 23.2%
Service Revenues: 20,617 10.1% 15,824 10.7% 4,793 30.3%
----------- ------------- ----------- ------------- --------
Total 118,924 58.2% 95,605 64.9% 23,319 24.4%
----------- ------------- ----------- ------------- --------
Audio
Product Revenues: 66,698 32.6% 51,769 35.1% 14,929 28.8%
Service Revenues: 288 0.2% - - 288 100.0%
----------- ------------- ----------- ------------- --------
Total 66,986 32.8% 51,769 35.1% 15,217 29.4%
----------- ------------- ----------- ------------- --------
Consumer Video
Product Revenues: 18,510 9.0% - - 18,510 100.0%
----------- ------------- ----------- ------------- --------
Total 18,510 9.0% - - 18,510 100.0%
----------- ------------- ----------- ------------- --------
Total Net Revenues: $204,420 100.0% $147,374 100.0% $57,046 38.7%
=========== ============= =========== ============= ========
Nine Months Ended September 30,
------------------------------------------------------------------------
2005 % of 2004 % of
Net Consolidated Net Consolidated % Change
Revenues Net revenues Revenues Net Revenues Change in revenues
----------- ------------- ----------- ------------- -------- -----------
Professional Film, Video and Broadcast
Product Revenues: $261,174 49.2% $238,784 57.6% $22,390 9.4%
Service Revenues: 57,219 10.8% 45,231 10.9% 11,988 26.5%
----------- ------------- ----------- ------------- --------
Total 318,393 60.0% 284,015 68.5% 34,378 12.1%
----------- ------------- ----------- ------------- --------
Audio
Product Revenues: 192,643 36.3% 130,619 31.5% 62,024 47.5%
Service Revenues: 926 0.2% - - 926 100.0%
----------- ------------- ----------- ------------- --------
Total 193,569 36.5% 130,619 31.5% 62,950 48.2%
----------- ------------- ----------- ------------- --------
Consumer Video
Product Revenues: 18,510 3.5% - - 18,510 100.0%
----------- ------------- ----------- ------------- --------
Total 18,510 3.5% - - 18,510 100.0%
----------- ------------- ----------- ------------- --------
Total Net Revenues: $530,472 100.0% $414,634 100.0% $115,838 27.9%
=========== ============= =========== ============= ========
18
The acquisition of Pinnacle accounted for $13.1 million of Professional
Film, Video and Broadcast product revenues during both the three-month and
nine-month periods ended September 30, 2005, all of which was recognized during
the period from August 9, 2005 through September 30, 2005. Revenues resulting
from the Pinnacle acquisition accounted for 71% and 59%, respectively, of the
increases in Professional Film, Video and Broadcast product revenues in the
three and nine months ended September 30, 2005. For the three months ended
September 30, 2005, the remaining $5.4 million increase in net product revenues
in this segment as compared to the same period in 2004 was related to increased
unit sales volume of certain key products, especially our Avid Unity
MediaNetwork product. This increase in net product revenues was offset in part
by lower average selling prices of our products. Average selling prices include
the mix of products (high or low-end) sold, impact of changes in foreign
currency exchange rates and the impact of price changes and discounting. For the
nine-month period ended September 30, 2005, the increase in net product revenues
of $9.3 million in this segment, excluding Pinnacle, as compared to the same
period in 2004 was related to increased unit sales volume of our products. This
increase in net product revenues was offset by lower average selling prices of
our products.
For the Audio segment, 79% and 81%, or $12.1 million and $51.2 million
of the increase in net revenues for the three- and nine-month periods ended
September 30, 2005, respectively, was due to M-Audio, which was acquired in
August 2004. We also saw increases in our core Digidesign Pro Tools products for
the professional and home markets in the three- and nine-month periods ended
September 30, 2005 as compared to the same periods in 2004.
The Consumer Video segment was formed in the third quarter of 2005 with
the acquisition of Pinnacle; therefore, there is no comparable data for 2004.
All of the revenues for the three- and nine-months periods ended September 30,
2005 represent revenue from the Pinnacle consumer business since the acquisition
date of August 9, 2005.
For the three- and nine-month periods ended September 30, 2005, the
increase in service revenues comes primarily from increases in maintenance
contracts sold on our products as well as increased professional services such
as, installation services provided in connection with large broadcast news
deals. Professional Film, Video and Broadcast service revenues from the Pinnacle
acquisition were $2.5 million for the three- and nine-month periods ended
September 30, 2005.
Net revenues derived through indirect channels were 72% and 69% for the
three-month periods ended September 30, 2005 and 2004, respectively. Indirect
channel revenues were 69% and 72% of net revenues for the nine-month periods
ended September 30, 2005 and 2004. The increase in indirect selling from the
three-month period ended September 30, 2004 to 2005 was due primarily to the
acquisition of Pinnacle, whose consumer products are sold almost exclusively
through indirect channels. The increase in direct selling from 2004 to 2005 for
the nine-month period was due primarily to the acquisition of Avid Nordic AB in
September 2004 and to the growth in sales to our broadcast news customers, which
are generally direct sales.
For the three-month period ended September 30, 2005, international sales
(i.e. sales to customers outside the United States) accounted for 56% of our net
revenues compared to 50% for the same period in 2004. For the nine-month period
ended September 30, 2005, international sales (i.e. sales to customers outside
the United States) accounted for 58% of our net revenues compared to 49% for the
same period in 2004. International sales increased by $41.2 million or 56% and
$102.1 million or 50% for the three- and nine-months periods ended September 30,
2005, respectively, from the corresponding 2004 periods. The increase in
international sales in 2005 occurred in all regions including Europe, Asia,
Canada and Latin America, and was due both to the acquisition of Pinnacle and to
an increased number of large broadcast deals in those regions.
Gross Profit
Cost of revenues consists primarily of costs associated with the
procurement of components; the assembly, testing, and distribution of finished
products; warehousing; post-sales customer support costs related to maintenance
contract revenue and other services; and royalties for third-party software and
hardware included in our products. The resulting gross margin fluctuates based
on factors such as the mix of products sold, the cost and proportion of
third-party hardware and software included in the systems sold, the offering of
product upgrades, price discounts and other sales promotion programs, the
distribution channels through which products are sold, the timing of new product
introductions, sales of aftermarket hardware products such as disk drives, and
currency exchange rate fluctuations.
19
The following is a summary of our cost of revenues and gross margin
percentages for the three-month and nine-month periods ended September 30, 2005
and 2004 (dollars in thousands):
Three Months Ended September 30,
-----------------------------------------------------------------------
% of Net % of Net
Related Gross Related Gross Gross Margin
2005 Revenues Margin % 2004 Revenues Margin % % Change
-----------------------------------------------------------------------
Product Cost of Revenues $82,133 44.8% 55.2% $54,242 41.2% 58.8% (3.6%)
Service Cost of Revenues 11,587 55.4% 44.6% 8,603 54.4% 45.6% (1.0%)
Amortization of Technology 3,854 2.1% - 127 - - -
--------- ---------
Total $97,574 47.7% 52.3% $62,972 42.7% 57.3% (5.0%)
========= =========
Nine Months Ended September 30,
-----------------------------------------------------------------------
% of Net % of Net
Related Gross Related Gross Gross Margin
2005 Revenues Margin % 2004 Revenues Margin % % Change
-----------------------------------------------------------------------
Product Cost of Revenues $204,274 43.2% 56.8% $152,907 41.4% 58.6% (1.8%)
Service Cost of Revenues 31,684 54.5% 45.5% 25,036 55.4% 44.6% 0.9%
Amortization of Technology 4,417 0.9% - 127 - - -
Technology --------- ---------
$240,375 45.3% 54.7% $178,070 42.9% 57.1% (2.4%)
Total ========= =========
The decreases in the product gross margin percentage for the three- and
nine-month periods ended September 30, 2005, as compared to the same period in
2004, reflect primarily the change in product mix due to the acquisitions of
Pinnacle and M-Audio, as well as increased price reductions and promotions,
which were partially offset by increased volumes and favorable impacts of
foreign currency exchange rates on revenues. The service gross margin decreases
for both the three- and nine-month periods ended September 30, 2005 as compared
to the same periods in 2004 primarily reflects the impact of the Pinnacle
acquisition. Amortization of technology included in costs of sales represents
the amortization of developed technology assets resulting from the Pinnacle
acquisition (since the acquisition date of August 9, 2005) and, to a lesser
extent, the M-Audio acquisition.
Research and Development
Three Months Ended September 30,
-----------------------------------------------
(dollars in thousands)
2005 2004
Expenses Expenses Change % Change
----------- ------------ ----------- -----------
Research and Development: $29,636 $23,879 $5,757 24.1%
Percentage of Net Revenues: 14.5% 16.2% (1.7%)
Nine Months Ended September 30,
-----------------------------------------------
(dollars in thousands)
2005 2004
Expenses Expenses Change % Change
----------- ------------ ----------- -----------
Research and Development: $79,225 $69,096 $10,129 14.7%
Percentage of Net Revenues: 14.9% 16.7% (1.8%)
Research and development expenses include costs associated with the
development of new products and enhancement of existing products, and consist
primarily of employee salaries and benefits, facilities costs, depreciation,
20
consulting and temporary help, and prototype and development expenses. For the
three- and nine-month periods ended September 30, 2005, the increase in research
and development expenditures was primarily due to higher personnel-related costs
and facilities costs, particularly related to the acquisitions of Pinnacle in
August 2005 and M-Audio in August 2004. Research and development expenses
decreased as a percentage of net revenues primarily as a result of the higher
revenue base for non-Pinnacle products in 2005 compared to 2004 and to a lesser
extent to the acquisition of Pinnacle.
Marketing and Selling
Three Months Ended September 30,
-----------------------------------------------
(dollars in thousands)
2005 2004
Expenses Expenses Change % Change
----------- ----------- ------------ -----------
Marketing and Selling $44,601 $32,009 $12,592 39.3%
Percentage of Net
Revenues: 21.8% 21.7% 0.1%
Nine Months Ended September 30,
-----------------------------------------------
(dollars in thousands)
2005 2004
Expenses Expenses Change % Change
----------- ------------ ----------- -----------
Marketing and Selling $120,895 $93,354 $27,541 29.5%
Percentage of Net
Revenues: 22.8% 22.5% 0.3%
Marketing and selling expenses consist primarily of employee salaries
and benefits for sales, marketing and pre-sales customer support personnel,
commissions, travel expenses, advertising and promotional expenses and
facilities costs. For the three- and nine-month periods ended September 30,
2005, the increase in marketing and selling expenses was primarily due to higher
personnel-related costs, including salaries and related taxes, benefits and
commissions, as well as higher facilities costs, all in large part due to the
acquisitions of Pinnacle in August 2005 and M-Audio and Avid Nordic in the third
quarter of 2004. We also spent more on advertising, trade shows and other
marketing programs during both the three- and nine-month periods ended September
30, 2005 as compared to the corresponding periods in 2004.
General and Administrative
Three Months Ended September 30,
-----------------------------------------------
(dollars in thousands)
2005 2004
Expenses Expenses Change % Change
----------- ------------ ----------- -----------
General and
Administrative $12,188 $9,266 $2,922 31.5%
Percentage of Net
Revenues: 6.0% 6.3% (0.3%)
Nine Months Ended September 30,
-----------------------------------------------
(dollars in thousands)
2005 2004
Expenses Expenses Change % Change
----------- ------------ ----------- -----------
General and
Administrative $32,961 $23,500 $9,461 40.3%
Percentage of Net
Revenues: 6.2% 5.7% 0.5%
General and administrative expenses consist primarily of employee
salaries and benefits for administrative, executive, finance and legal
personnel, audit and legal fees, insurance and facilities costs. For the three-
and nine-month periods ended September 30, 2005, the increase in general and
administrative expenditures was primarily due to higher personnel-related costs,
21
primarily related to our acquisitions of Pinnacle in August 2005 and M-Audio in
August 2004. We also incurred higher external legal fees, as well as consulting
and temporary help expenses, in both the three- and nine-month periods ended
September 30, 2005, as compared to 2004, in part related to the acquisitions
over the past year. For the nine-month period ended September 30, 2005, we also
incurred higher audit fees as a result of complying with the Sarbanes-Oxley Act
of 2002, as compared to the same period in 2004. The impact of the increase in
general and administrative expense was reduced by the higher revenue base in
2005.
In-process Research and Development
During the three months ended September 30, 2005, the Company recorded
an in-process research and development charge of $32.3 million related to the
acquisition of Pinnacle. The allocation of $32.3 million to in-process research
and development ("R&D") was determined through management's consideration of a
valuation prepared by an independent valuation specialist. This in-process R&D
represents product development efforts that were underway at Pinnacle at the
time of acquisition, for which technological feasibility had not yet been
established. Technological feasibility is established when either of the
following criteria is met: 1) the detail program design has been completed,
documented, and traced to product specifications and its high-risk development
issues have been resolved; or 2) a working model of the product has been
finished and determined to be complete and consistent with the product design.
Upon the acquisition, Pinnacle did not have a completed product design or
working model for the in-process technology and the Company believes that there
is no future alternative use for such technology beyond the stated purpose of
the specific R&D project; therefore the in-process R&D of $32.3 million was
expensed during the three months ended September 30, 2005.
Amortization of Acquisition-Related Intangible Assets
Three Months Ended September 30,
-------------------------------------
(dollars in thousands)
2005 2004 Change
------------ ----------- ------------
Amortization of Intangible Assets: $6,398 $1,115 $5,283
Percentage of Net Revenues: 3.1% 0.8%
Nine Months Ended September 30,
-------------------------------------
(dollars in thousands)
2005 2004 Change
------------ ----------- ------------
Amortization of Intangible Assets: $10,146 $2,103 $8,043
Percentage of Net Revenues: 1.9% 0.5%
Included in amortization of intangible assets for the three- and
nine-month periods ended September 30, 2005 is $3.9 million and $4.4 million,
respectively, that is recorded within cost of revenues. Acquisition-related
intangible assets result from acquisitions accounted for under the purchase
method of accounting and include customer-related intangibles, developed
technology, trade names and other identifiable intangible assets with finite
lives. These intangible assets are being amortized using the straight-line
method, with the exception of developed technology. Developed technology is
being amortized on a product-by-product basis over the greater of the amount
calculated using the ratio of current quarter revenues to the total of current
quarter and anticipated future revenues over the estimated useful lives of two
to three years, or the straight-line method over each product's remaining
respective useful lives. The increase in amortization expense for the
three-month and nine-month periods ended September 30, 2005, respectively, as
compared to the same periods in 2004 reflects acquisitions that occurred late in
2004 and during 2005 as discussed below. We would expect amortization of
acquisition-related intangibles in the fourth quarter of 2005 to be higher than
in the current quarter as the fourth quarter will include the full impact of the
Pinnacle acquisition.
On August 9, 2005, we acquired Pinnacle. We have performed a preliminary
allocation of the total purchase price of $441 million to the net tangible and
intangible assets of Pinnacle based on their fair values as of the consummation
of the acquisition. The determination of these fair values included management's
consideration of a valuation of Pinnacle's intangible assets prepared by an
independent valuation specialist. As part of the purchase
22
accounting allocation, we recorded $90.8 million of identifiable intangible
assets, consisting of completed technologies, customer relationships and trade
names.
In January 2004, we acquired NXN Software GmbH, for cash consideration
of (euro) 35 million ($43.7 million), less cash acquired. As part of the
purchase accounting allocation, we recorded $7.2 million of identifiable
intangible assets, consisting of completed technologies, customer relationships
and a trade name, of which $1.2 million were written off in December 2004 due to
an impairment of the customer relationships and trade name.
In August 2004, we acquired M-Audio, for cash, net of cash acquired, of
$79.6 million and stock and stock options with a fair value of $96.5 million. As
part of the purchase accounting allocation, we recorded $38.4 million of
identifiable intangible assets, consisting of completed technologies, customer
relationships, a trade name and a non-compete covenant. In September 2004, we
acquired Avid Nordic AB, for cash, net of cash acquired, of euro 6.1 million
($7.4 million). As part of the purchase accounting allocation, we recorded $4.7
million of identifiable intangible assets consisting solely of customer
relationships.
Other Income (Expense), Net
Three Months Ended September 30,
-------------------------------------
(dollars in thousands)
2005 2004 Change
----------- ------------- ----------
Other Income and Expense, Net: $1,719 $651 $1,068
Percentage of Net Revenues: 0.8% 0.4% 0.4%
Nine Months Ended September 30,
-------------------------------------
(dollars in thousands)
2005 2004 Change
----------- -------------- ---------
Other Income and Expense, Net: $3,735 $686 $3,049
Percentage of Net Revenues: 0.7% 0.2% 0.5%
Other income (expense), net, generally consists of interest income,
interest expense and equity in income of a non-consolidated company.
The increase in other income and expense, net for the three- and
nine-month periods ended September 30, 2005 was primarily due to increased
interest income earned in 2005 on higher average cash and marketable securities
balances. The nine-month period ended September 30, 2004 included a charge of
$1.1 million related to the settlement of a lawsuit. The fact that there was no
similar item in 2005 also contributed to the increase in other income and
expense, net for the nine-month period ended September 30, 2005, as compared
to 2004.
Provision for Income Taxes, Net
Three Months Ended September 30,
-----------------------------------
2005 2004 Change
----------- ----------- -----------
Provision for income taxes, net $2,966 ($63) $3,029
As a percentage of net revenues 1.5% 0.0% 1.5%
23
Nine Months Ended September 30,
-----------------------------------
2005 2004 Change
----------- ----------- -----------
Provision for income taxes, net $5,080 $137 $4,943
As a percentage of net revenues 1.0% 0.0% 1.0%
Our effective tax rate was (20.1)% and (0.3)% for the three-month
periods ended September 30, 2005 and 2004, respectively. The effective tax rate
for the nine month periods ended September 30, 2005 and 2004, respectively, was
24.6% and 0.3%. The net tax provision for the nine month period ended September
30, 2005 reflected a tax provision of $4.6 million, partially offset by $0.7
million of a tax benefit related to the amortization of non-deductible
acquisition-related intangible assets, and a non-cash deferred tax charge of
$1.2 million related to utilization of the acquired Pinnacle net operating loss
carryforward. The net tax provision for the nine-month period ended
September 30, 2004 reflected a tax provision of $1.6 million, partially offset
by the reversal of a $1.2 million tax reserve resulting from the expiration of
the statute of limitations on that reserve item and an adjustment for refunds of
approximately $0.3 million of taxes previously paid in Canada. Other than these
adjustments, the tax provisions for the nine month periods ended September 30,
2005 and 2004 were substantially comprised of taxes payable by our foreign
subsidiaries with only alternative minimum tax provided on anticipated U.S
taxable profits.
The tax rate in each year is significantly affected by net changes in
the valuation allowance against our deferred tax assets. We regularly review our
deferred tax assets for recoverability taking into consideration such factors as
historical losses after deductions for stock compensation, projected future
taxable income and the expected timing of the reversals of existing temporary
differences. SFAS No. 109, "Accounting for Income Taxes," requires us to record
a valuation allowance when it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Based on the level of deferred
tax assets as of September 30, 2005, the level of historical U.S. losses after
deductions for stock compensation, and the level of outstanding stock options
which we anticipate will generate significant U.S. tax deductions in the future,
we have determined that the uncertainty regarding the realization of these
assets is sufficient to warrant the continued establishment of a full valuation
allowance against the U.S. net deferred tax assets. In the quarter ended
December 31, 2004, we removed the valuation allowance related to deferred tax
assets of our Irish manufacturing operations. The decision to remove the
valuation allowance was based on the conclusion that it was more likely than not
that the deferred tax asset in Ireland would be realized. Due to the removal of
the valuation allowance, we now have a non-cash provision for income taxes
related to our Irish operations.
Our assessment of the valuation allowance on the U.S. deferred tax
assets could change in the future based upon our levels of pre-tax income and
other tax-related adjustments. Removal of the valuation allowance in whole or in
part would result in a non-cash reduction in income tax expense during the
period of removal. In addition, because a portion of the valuation allowance was
established to reserve certain deferred tax assets resulting from the exercise
of employee stock options, in accordance with SFAS No. 109, removal of the
valuation allowance related to these assets would result in a credit to
additional paid in capital. If the valuation allowance were to be removed in its
entirety, a non-cash reduction in income tax expense and a credit to paid in
capital would be recorded in the period of removal. To the extent no valuation
allowance is established for our deferred tax assets in future periods, future
financial statements would reflect an increase in income tax expense which would
be on a non-cash basis until such time as our deferred tax assets are all used
to reduce current taxes payable.
Excluding the impact of the valuation allowance, acquisition related
adjustments, in-process research & development, and other non-recurring items,
our effective tax rate would have been 38% and 31% for the three month periods
ended September 30, 2005 and 2004. The three months ended September 30, 2005 is
higher due to Pinnacle related year to date adjustments. Excluding the impact of
the valuation allowance, acquisition related adjustments, in-process research &
development, and other non-recurring items, our effective tax rate would have
been 29% and 31% for the nine month periods ended September 30, 2005 and 2004.
This rate differs from the Federal statutory rate of 35% primarily due to income
in foreign jurisdictions which have lower tax rates.
24
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations in recent years through cash flows from
operations as well as from stock option exercises from our employee stock plans.
As of September 30, 2005, our principal sources of liquidity included cash, cash
equivalents and marketable securities totaling $228.6 million.
With respect to cash flow, net cash provided by operating activities was
$39.3 million for the nine months ended September 30, 2005 compared to $57.1
million for the same period in 2004. The decrease from 2004 to 2005 relates
primarily to greater uses of cash for working capital purposes during 2005.
During the nine months ended September 30, 2005, net cash provided by operating
activities primarily reflects net income adjusted for depreciation and
amortization, the write-off of in-process research and development, as well as
an increase in deferred revenues, partially offset by an increase in accounts
receivable and inventories and a decrease in accrued expenses. During the nine
months ended September 30, 2004, net cash provided by operating activities
primarily reflects net income adjusted for depreciation and amortization as well
as increases in accounts receivable, accounts payable and deferred revenue.
At September 30, 2005 and December 31, 2004, we held inventory in the
amounts of $93.2 million and $53.9 million, respectively. These balances include
stockroom, spares, and demonstration equipment inventories at various locations,
and inventory at customer sites related to shipments for which we have not yet
recognized revenue. The increase from December 31, 2004 was primarily
attributable to the acquisition of Pinnacle, in-transit inventory from Audio
contract manufacturers resulting from a switch to a lower-cost shipping method
(specifically, using more ocean freight, rather than air freight), as well as
increased sales demonstration inventory in support of our broadcast business and
a build-up of finished goods inventory due to anticipated sales of our recently
announced Avid Unity ISIS product. 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. As of September 30, 2005, such purchase obligations
resulting from the acquisition of Pinnacle totaled approximately $17.4 million.
Accounts receivable increased by $30.2 million to $127.7 million at
September 30, 2005 from $97.5 million at December 31, 2004. These balances are
net of allowances for sales returns, bad debts and customer rebates, all of
which we estimate and record based on historical experience. The increase from
December 31, 2004 was primarily attributable to the acquisition of Pinnacle
during the three-months ended September 30, 2005. Days sales outstanding in
accounts receivable increased from 50 days at December 31, 2004 to 56 days at
September 30, 2005. The increase in days sales outstanding was primarily
attributable to the relative proportion of solution sales in each period, which
were higher in the December 2004 quarter than the September 2005 quarter. These
sales are typically paid prior to recognition and therefore lower our days sales
outstanding in the period when revenue is recognized.
Net cash flow used in investing activities was $14.3 million for the
nine months ended September 30, 2005 compared to $104.3 million for the same
period in 2004. During the nine-month period ended September 30, 2005 we
acquired Pinnacle for stock valued at approximately $362.9 million plus cash of
$72.1 million, and paid related transaction fees of approximately $6.0 million.
As Pinnacle's cash balance at the acquisition date was $103.0 million, this
acquisition resulted in a net cash increase of $24.9 million. We also paid cash
of (euro) 4 million ($4.9 million) plus transaction costs of $0.2 million for
Wizoo. During the nine-month period ended September 30, 2004, we expended
cash of $134.2 million for the purchases of NXN, M-Audio and Avid Nordic AB, net
of cash acquired. During this 2004 period, we also made a second payment of $1.0
million for our 2003 acquisition of Bomb Factory Digital, after resolution of
acquisition-related contingencies.
We purchased $12.9 million of property and equipment during the nine
months ended September 30, 2005 compared to $9.8 million in the same period of
2004. Purchases of property and equipment in both 2005 and 2004 consisted
primarily of computer hardware and software to support research and development
activities and our information systems.
During the nine months ended September 30, 2005 and 2004, we generated
cash of $10.9 million and $12.7 million, respectively, from financing
activities, primarily from the issuance of common stock related to the exercise
of stock options and our employee stock purchase plan.
25
In connection with restructuring efforts during 2001 and prior periods,
as well as with the identification in 2003 and 2002 of excess space in various
locations, as of September 30, 2005 we have future cash obligations of
approximately $14.7 million under leases for which we have vacated the
underlying facilities. We have an associated restructuring accrual of $4.3
million at September 30, 2005 representing the excess of our lease commitments
on space no longer used by us over expected payments to be received on subleases
of such facilities. This restructuring accrual requires significant estimates
and assumptions, including sub-lease income assumptions. These estimates and
assumptions are monitored on at least a quarterly basis for changes in
circumstances and any corresponding adjustments to the accrual are recorded in
the period when such changes are known. The lease payments will be made over the
remaining terms of the leases, which have varying expiration dates through 2010,
unless we are able to negotiate an earlier termination. In connection with the
Pinnacle acquisition, as of September 30, 2005, we have a restructuring accrual
of $4.1 million and $3.7 million related to severance and lease obligations,
respectively. The severance payments will be made over the next twelve months
and the lease payments will be made over the remaining terms of the leases,
which have varying expiration dates thru 2010. All payments related to
restructuring will be funded through working capital.
The following table sets forth the activity in the restructuring and other costs
accrual, which is included in accrued expenses and other current liabilities,
for the nine months ended September 30, 2005 (in thousands):
Facilities Employee
Related Related Total
----------- ----------- -----------
Accrual balance at December 31, 2004 $3,534 - $3,534
Pinnacle acquisition-related liabilities 3,739 9,858 13,597
Revised estimate of lease obligations 1,997 - 1,997
Cash payments, net of sublease income (1,240) (5,793) (7,033)
----------- ----------- -----------
Accrual balance at September 30, 2005 $8,030 $4,065 $12,095
=========== =========== ===========
Our cash requirements vary depending upon factors such as our planned
growth, capital expenditures, the possible acquisitions of businesses or
technologies complementary to our business, and obligations under past
restructuring programs. We believe that our existing cash, cash equivalents,
marketable securities and funds generated from operations will be sufficient to
meet our operating cash requirements for at least the next twelve months. In the
event that we require additional financing, we believe that we will be able to
obtain such financing; however, there can be no assurance that we would be
successful in doing so, or that we could do so on favorable terms.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs", an
amendment of Accounting Research Bulletin No. 43, which is the result of the
FASB's efforts to converge U.S. accounting standards for inventories with
International Accounting Standards. SFAS No. 151 requires idle facility
expenses, freight, handling costs, and wasted material (spoilage) costs to be
recognized as current-period charges. It also requires that the allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No. 151 will be effective for
inventory costs incurred during fiscal years beginning after June 15, 2005
(i.e., for us, beginning January 1, 2006). We are currently evaluating the
impact of SFAS No. 151 on our consolidated financial statements. The adoption of
this standard is not expected to have a material impact on our financial
position or results of operations.
On December 16, 2004, the FASB released SFAS No. 123R. This new
accounting standard requires all forms of stock compensation, including stock
options issued to employees, to be reflected as an expense in our financial
statements. On April 14, 2005, the SEC approved a rule that delayed the
effective date of SFAS No. 123R for public companies to annual, rather than
interim, periods that begin after June 15, 2005. SFAS No. 123R allows three
alternative methods of transitioning to the standard: modified prospective
application ("MPA"); modified retrospective application ("MRA") to all prior
periods; or MRA to only interim periods of the year of adoption. We intend to
use the MPA without restatement alternative and to apply the revised standard
beginning January 1, 2006. Under the modified prospective application, all
unvested awards that were previously included as part of the pro forma net
income disclosure and are outstanding on the effective date would be charged to
expense over the remaining vesting period, without any changes in measurement.
All new awards that are granted or modified after the effective date will be
expensed using the FAS 123R measurement model. Although we have not finalized
our analysis, we expect that the adoption of the revised standard will result in
higher operating expenses and lower earnings per share. See Footnote 6,
Accounting for Stock-Based Compensation, for the pro forma impact on net income
and income per common share as if we had historically applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee awards.
26
On October 22, 2004, the President signed the American Jobs Creation Act
of 2004 ("the Act"). The Act creates a temporary incentive for U.S. corporations
to repatriate accumulated income earned abroad by providing an 85 percent
dividends-received deduction for certain dividends from controlled foreign
corporations. The Act also creates a deduction on a percentage of the lesser of
qualified production activities income or taxable income. Although these
deductions are subject to a number of limitations and significant uncertainty
remains as to how to interpret numerous provisions in the Act, we believe that
we have the information necessary to make an informed decision on the impact of
the Act. Based on the information available, we have determined that our cash
position in the U.S. is sufficient to fund anticipated needs. We also believe
that the repatriation of income earned abroad would result in significant
foreign withholding taxes that otherwise would not have been incurred, as well
as additional U.S. tax liabilities that may not be sufficiently offset by
foreign tax credits. Therefore, we do not currently plan to repatriate any
income earned abroad. We have also determined that the qualified production
activities deduction will not have a material impact on the fiscal 2005 tax
provision due to the expected amount of taxable income. These initial findings
could change based on clarification of the rules and changes in facts and
circumstances of our operations and/or cash requirements in the U.S.
In June 2005, the FASB issued Staff Position No. FAS 143-1, "Accounting
for Electronic Equipment Waste Obligations" ("FSP 143-1"), which provides
guidance on the accounting for obligations associated with the European Union
("EU") Directive on Waste Electrical and Electronic Equipment (the "WEEE
Directive"). FSP 143-1 provides guidance on how to account for the effects of
the WEEE Directive with respect to historical waste associated with products in
the market on or before August 13, 2005. FSP 143-1 is required to be applied to
the later of the first reporting period ending after June 8, 2005 or the date of
the adoption of the WEEE Directive into law by the applicable EU member country.
We are in the process of registering with the member countries, as appropriate,
and are still awaiting guidance from these countries with respect to the
compliance costs and obligations for historical waste. We will continue to work
with each country to obtain guidance and will accrue for compliance costs when
they are probable and reasonably estimable. The accruals for these compliance
costs may have a material impact on our financial position or results of
operations when guidance is issued by each member country.
27
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Some of the statements in this Form 10-Q relating to our future
performance constitute forward-looking statements. Such forward-looking
statements are based upon management's current expectations and involve known
and unknown risks. Realization of any of these risks may cause actual results to
differ materially from the results described in the forward-looking statements.
Certain of these risks are as follows:
We may not be able to realize the expected benefits of our recently completed
merger with Pinnacle Systems, Inc.
As a result of our recent merger with Pinnacle Systems, Inc.,
("Pinnacle") we face challenges in several areas that could have an adverse
effect on our business. In addition, some of the assumptions that we have relied
upon, such as the achievement of operating synergies and revenue growth, may not
be realized. As a result of these and other factors, the merger may not result
in a financial condition superior to that which we would have achieved on a
stand-alone basis.
Our integration of Pinnacle will be a time-consuming and expensive
process which may disrupt our operations if it is not completed in a timely and
efficient manner. If this integration effort is not successful, our results of
operations could be harmed, employee morale could decline, key employees could
leave, and customers could cancel existing orders or choose not to place new
ones. With the completion of the integration, the combined company must operate
as a unified organization utilizing common information and communication
systems, operating procedures, financial controls, and human resources
practices. We may encounter difficulties, costs, and delays involved in
integrating the Pinnacle business, including:
o failure to successfully manage relationships with customers and with important
third parties;
o failure of customers to continue using the products and services of the
combined company;
o failure to properly integrate the professional film, video and broadcast
businesses of Avid and Pinnacle;
o challenges encountered in managing larger, more geographically dispersed
operations;
o difficulties in successfully integrating the management teams and employees
of Avid and Pinnacle;
o diversion of the attention of management from other ongoing business concerns;
o potential incompatibility of technologies and systems;
o potential impairment charges to write-down the carrying amount of goodwill
and other intangible assets; and
o potential incompatibility of business cultures.
We will also face challenges inherent in efficiently managing an
increased number of employees over large geographic distances, including the
need to develop appropriate systems, policies, benefits and compliance programs.
The inability to manage the organization of the combined company effectively
could have a material adverse effect on our business.
Our performance will depend in part on continued customer acceptance of our
products.
We regularly introduce new products, as well as upgrades and
enhancements to existing products. We will need to continue to focus marketing
and sales efforts on educating potential customers, as well as our resellers and
distributors, about the uses and benefits of these products. The future success
of certain of our video products, such as Avid DS Nitris, which enable
high-definition production, will also depend on demand for high definition
content and appliances, such as television sets and monitors, that utilize the
high definition standard. Other risks involved with offering new products in
general include, without limitation, the possibility of defects or errors,
failure to meet customer expectations, delays in shipping new products and the
introduction of similar products by our competitors. The introduction and
transition to new products could also have a negative impact on the market for
our existing products, which could adversely affect our revenues and business.
The digital media business is large, widely dispersed, and highly competitive,
and we may not be successful in growing our customer base or predicting customer
demand in this business.
We are continuing to enhance our status in the digital broadcast
business and have augmented our NewsCutter product offering with the Avid Unity
for News products, and other server, newsroom and browser products. In this
business, in addition to or in lieu of discrete point products, customers often
seek complex solutions involving highly integrated components (including the
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configuration of unique workflows) from a single or multiple vendors. Success in
this business will require, among other things, creating and implementing
compelling solutions and developing a strong, loyal customer base.
In addition, large, complex broadcast orders often require us to devote
significant sales, engineering, manufacturing, installation, and support
resources to ensure their successful and timely fulfillment. As the broadcast
business converts from analog to digital, our strategy has been to build our
broadcast solutions team in response to customer demand. To the extent that
customer demand for our broadcast solutions exceeds our expectations, we may
encounter difficulties in the short term meeting our customers' needs.
Meanwhile, our competitors may devote greater resources to the broadcast
business than we do, or may be able to leverage their presence more effectively.
If we are unsuccessful in expanding within the digital broadcast business or in
predicting and satisfying customer demand, our business and revenues could be
adversely affected.
We have a significant presence in the audio business, and therefore the growth
of our audio business will depend in part on our ability to successfully
introduce new products.
Our Digidesign division has a significant presence in the audio
business, due in large part to a series of successful product introductions. Our
future success will depend in part upon our ability to offer, on a timely and
cost-effective basis, new audio products and enhancements of our existing audio
products. This can be a complex and uncertain process, and we could experience
design, manufacturing, marketing, or other difficulties that delay or prevent
the introduction of new or enhanced products, or the integration of acquired
products, which, in turn, could harm our business.
We will face challenges associated with sales of video and audio products to
non-professional consumers.
As a result of our recent acquisition of Pinnacle, we expect a material
portion of our future revenue to come from sales to consumers of home video
editing and viewing products. In addition, M-Audio is expanding its sales
channel to include sales of its audio products through the consumer channel. The
market for these consumer video and audio products is highly competitive, and we
expect to face price-based competition from competitors selling similar
products. Although we acquired experienced personnel through our acquisitions of
M-Audio and Pinnacle, Avid's prior experience in the consumer market is limited.
If we are not successful marketing to non-professional consumers, our operating
results could suffer. Furthermore, sales of consumer electronics and software
typically increase in the second half of the year, reaching their peak during
the year-end holiday season. As a result, to the extent we increase sales of our
video and audio products through consumer channels, we expect to experience
greater seasonality in our revenues.
Another challenge that is particularly acute with respect to the sale of
consumer software is software piracy. The unauthorized use of our proprietary
technology is costly and efforts to restrict such unauthorized use are
time-consuming. We are unable to accurately measure the extent to which piracy
of our software exists, but we expect it to be a persistent problem.
A portion of our revenue is dependent on sales of large, complex solutions.
We expect sales of large, complex solutions to continue to constitute a
material portion of our net revenue, particularly as news stations convert from
analog, or tape-based, processes to digital formats. Our quarterly and annual
revenues could fluctuate if:
o sales to one or more of our customers are delayed or are not completed within
a given quarter;
o the contract terms preclude us from recognizing revenues relating to one or
more significant contracts during a particular quarter;
o news stations' migrations to networked digital infrastructure slows down;
o we are unable to complete complex customer installations on schedule;
o our customers reduce their capital investments in our products in response
to slowing economic growth; and
o any of our large customers terminates its relationship with us or
significantly reduces the amount of business it does with us.
We compete with many other enterprises, and we expect competition to intensify
in the future.
The business segments in which we operate are highly competitive, with
limited barriers to entry, and are characterized by pressure to reduce prices,
incorporate new features, and accelerate the release of new products. Some of
29
our current and potential competitors have substantially greater financial,
technical, distribution, support, and marketing resources than we do. Such
competitors may use these resources to lower their product costs, allowing them
to reduce prices to levels at which we could not operate profitably. Delays or
difficulties in product development and introduction may also harm our business.
In addition to price, our products must also compete favorably with our
competitors' products in terms of reliability, performance, ease of use, range
of features, product enhancements, reputation and training. If we are unable to
compete for our target customers effectively, our business and results of
operations could suffer.
New product announcements by our competitors and by us also could have
the effect of reducing customer demand for our existing products. New product
introductions require us to devote time and resources to training our sales
channels in product features and target customers, with the temporary result
that the sales channels may have less time to devote to selling our products. In
addition, our introduction of new products and expansion of existing product
offerings can put us into competition with companies with whom we formerly
collaborated. In the event such companies discontinue their alliances with us,
we could experience a negative impact on our business.
Potential future acquisitions could be difficult to integrate, divert the
attention of key personnel, disrupt our business, dilute stockholder value and
impair our financial results.
As part of our business strategy, we periodically acquire companies,
technologies and products that we believe can improve our ability to compete in
our core markets or allow us to enter new markets. For example, in August 2005,
we acquired Pinnacle Systems, Inc., and in August 2004, we acquired Midiman,
Inc. (d/b/a M-Audio). The risks associated with such acquisitions include, among
others:
o the difficulty of assimilating the operations, policies and personnel of the
target companies;
o the failure to realize anticipated returns on investment, cost savings
and synergies;
o the diversion of management's time and attention;
o the potential dilution to existing stockholders if we issue common stock or
other equity rights in the acquisition;
o the potential loss of key employees of the target company;
o the difficulty in complying with a variety of foreign laws and regulations, if
so required;
o the impairment of relationships with customers or suppliers;
o the risks associated with contingent payments and earn-outs;
o the possibility of incurring debt and amortization expenses, as well as
impairment charges, related to goodwill and other intangible assets; and
o unidentified issues not discovered in due diligence, which may include product
quality issues and legal contingencies.
Such acquisitions often involve significant transaction-related costs
and could cause disruption to normal operations. In the future, we may also make
debt or equity investments. If so, we may fail to realize anticipated returns on
such investments. If we are unable to overcome or mitigate these risks, they
could adversely affect our business and lower revenues.
Our products are complex, and may contain errors or defects resulting from such
complexity.
As we continue to enhance and expand our product offerings, our products
have grown increasingly complex and, despite extensive testing and quality
control, may contain errors or defects. Such errors or defects could cause us to
issue corrective releases and could result in loss of revenues, delay of revenue
recognition, increased product returns, lack of market acceptance and damage to
our reputation.
Poor global economic conditions could adversely affect demand for our products
and the financial condition of our suppliers, distributors and resellers.
The revenue growth and profitability of our business depends primarily
on the overall demand for our products. If global economic conditions worsen,
demand for our products may weaken, as could the financial health of our
suppliers, distributors and resellers, which could adversely affect our revenues
and business.
30
Our use of independent firms and contractors to perform some of our product
development and manufacturing activities could expose us to risks that could
adversely impact our revenues.
Independent firms and contractors, some of whom are located in other
countries, perform some of our product development activities. We generally own
the software developed by these contractors. We also rely on subcontractors for
most of our manufacturing activities.
Our strategy to rely on independent firms and contractors involves a
number of significant risks, including loss of control over the manufacturing
process, potential absence of adequate manufacturing capacity, potential delays
in lead times and reduced control over delivery schedules, manufacturing yields,
quality and cost. Furthermore, the use of independent firms and contractors,
especially those located abroad, could expose us to risks related to
governmental regulation, foreign taxation, intellectual property ownership and
rights, exchange rate fluctuation, political instability and unrest, natural
disasters, and other risks, which could adversely impact our revenues.
An interruption of our supply of certain products or key components from our
sole source suppliers, or a price increase in such products or components, could
hurt our business.
We are dependent on a number of specific suppliers for certain products
and key components of our products. We purchase these sole source products and
components pursuant to purchase orders placed from time to time. We generally do
not carry significant inventories of these sole source products and components
and have no guaranteed supply arrangements. If any of our sole source vendors
should fail to produce these products or components, our supply and our ability
to continue selling and servicing products that use these components could be
imperiled. Similarly, if any of our sole source vendors should encounter
technical, operating or financial difficulties, our supply of these products or
components would be threatened. While we believe that alternative sources for
these products and components could be developed, or our products could be
redesigned to permit the use of alternative components, an interruption of our
supply could damage our business and negatively affect our operating results.
Our gross profit margin varies from product to product depending
primarily on the proportion and cost of third-party hardware and software
included in each product. From time to time, we add functionality and features
to our products. If we effect such additions through the use of more, or more
costly, third-party hardware or software, and are not able to increase the price
of our products to offset the increased costs, our gross profit margin on these
products could decrease and our operating results could be adversely affected.
We rely on third party software for some of our products and if we are unable to
use or integrate such software, our product and service development may be
delayed.
We rely on certain software that we license from third parties,
including software that is bundled with our products and sold to end users and
software that is integrated with internally developed software and used in our
products to perform key functions. These third-party software licenses may not
continue to be available on commercially reasonable terms, and the software may
not be appropriately supported, maintained or enhanced by the licensors. The
loss of licenses to, or inability to support, maintain and enhance any such
software, could result in increased costs, or in delays or reductions in product
shipments until equivalent software could be developed, identified, licensed and
integrated, which could adversely affect our business.
Qualifying and supporting our products on multiple computer platforms is time
consuming and expensive.
Our software engineers devote significant time and effort to qualify and
support our products on various computer platforms, including Microsoft and
Apple platforms. Computer platform modifications and upgrades require additional
time to be spent to ensure that our products function properly. To the extent
that the current configuration of qualified and supported platforms changes or
we need to qualify and support new platforms, we could be required to expend
valuable engineering resources, which could adversely affect our operating
results.
31
Our operating results are dependent on several unpredictable factors.
The revenue and gross profit from our products depend on many factors,
including:
o mix of products sold;
o cost and proportion of third-party hardware and software included in
such products;
o product distribution channels;
o acceptance of our new product introductions;
o product offers and platform upgrades;
o price discounts and sales promotion programs;
o volume of sales of aftermarket hardware products;
o costs of swapping or fixing products released to the market with defects;
o provisions for inventory obsolescence;
o competitive pressure on product prices;
o costs incurred in connection with our broadcast and some of our audio solution
sales, which typically have longer selling and implementation cycles; and
o timing of delivery of solutions to customers.
Changes in any of these factors could adversely affect our operating results.
Our international operations expose us to significant exchange rate fluctuations
and regulatory, intellectual property and other risks which could harm our
operating results.
We generally derive approximately half of our revenues from customers
outside of the United States. This business is, for the most part, transacted
through international subsidiaries and generally in the currency of the end-user
customers. Therefore, we are exposed to the risks that changes in foreign
currency could adversely impact our revenues, net income (loss) and cash flow.
To hedge against the foreign exchange exposure of certain forecasted
receivables, payables and cash balances of our foreign subsidiaries, we enter
into foreign currency forward-exchange contracts. The success of our hedging
program depends on forecasts of transaction activity in the various currencies.
To the extent that these forecasts are over- or understated during periods of
currency volatility, we could experience currency gains or losses.
Other risks inherent in our international operations include changes in
regulatory practices, environmental laws, tax laws, trade restrictions and
tariffs, longer collection cycles for accounts receivable, and greater
difficulties in protecting our intellectual property.
New environmental regulations could negatively impact our future operating
results.
The European Union ("EU") has finalized the Waste Electrical and
Electronic Equipment ("WEEE") Directive, which makes producers, importers and/or
distributors of specified electronic products, including some of our products,
responsible for the collection, recycling, treatment, and disposal of covered
products. The WEEE Directive became effective in August 2005, although to date
not all EU countries have adopted rules implementing the WEEE Directive. The EU
has also passed the Restriction of Hazardous Substances ("RoHS") Directive,
which places restrictions on lead and certain other substances contained in
specified electronic products, including some of our products, sold in the EU
after June 2006. While the cost of compliance with these directives cannot be
determined before the member states issue their final implementation guidance,
the potential costs could be significant and could adversely affect our future
operating results. Furthermore, failure to comply with the directives could
result in substantial penalties and fines.
Our operating costs are tied to projections of future revenues, which may differ
from actual results.
Our operating expense levels are based, in part, on our expectations of
future revenues. Such future revenues are difficult to predict, especially as a
result of our recent acquisition of Pinnacle. A significant portion of our
business occurs near the end of each quarter, which can impact our ability to
forecast revenues on a quarterly basis with precision. Further, we are generally
unable to reduce quarterly operating expense levels rapidly in the event that
quarterly revenue levels fail to meet internal expectations. Therefore, if
quarterly revenue levels fail to meet internal expectations upon which expense
levels are based, our results of operations could be adversely affected.
32
Terrorism, acts of war, and other catastrophic events may seriously harm our
business.
Terrorism, acts of war, or other catastrophic events may disrupt our
business and harm our employees, facilities, suppliers, distributors, resellers
or customers, which could significantly impact our revenue and operating
results. The increasing presence of these threats has created many economic and
political uncertainties that could adversely affect our business and stock price
in ways that cannot be predicted. We are predominantly uninsured for losses and
interruptions caused by terrorism, acts of war, and other catastrophic events.
If we fail to maintain strong relationships with our resellers, distributors,
and suppliers, our ability to successfully deploy and sell our products may be
harmed.
We sell many of our video products and services, and substantially all
of our Audio and Consumer Video products and services, indirectly through
resellers and distributors. In our Audio and Consumer Video segments, a few
distributors account for a significant portion of the revenue in that segment.
The loss of one or more key distributors could reduce our revenues. The
resellers and distributors of our Profession Film, Video and Broadcast segment
products typically purchase Avid software and Avid-specific hardware from us,
and third-party components from various other vendors, in order to produce
complete systems for resale. Any disruption to our resellers and distributors,
or their third-party suppliers, could reduce our revenues. Increasingly, we are
distributing our broadcast products directly, which could put us in competition
with our resellers and distributors and could adversely affect our revenues. In
addition, our resellers could diversify the manufacturers from whom they
purchase products to sell to end-users, which could lead to a weakening of our
relationships with our resellers and could adversely affect our revenues.
Most of the resellers and distributors of our Professional Film, Video
and Broadcast products are not granted rights to return products after purchase,
and actual product returns from such resellers and distributors have been
insignificant to date. Our revenue from sales of Audio and Consumer Video
products is generally derived, however, from transactions with distributors and
authorized resellers that typically allow limited rights of return, inventory
stock rotation and price protection. Accordingly, reserves for estimated
returns, exchanges and credits for price protection are recorded as a reduction
of revenues upon shipment of the related products to such distributors and
resellers, based upon our historical experience. To date, actual returns have
not differed materially from management's estimates. However, if returns of our
Audio or Consumer Video segment products were to exceed estimated levels, our
revenues and operating results could be adversely impacted.
With respect to our Consumer Video segment, we have expanded our
distribution network to include several consumer channels, including large
distributors of products to computer software and hardware retailers, which in
turn sell products to end users. We also sell our Consumer Video products
directly to certain retailers. Our Consumer Video product distribution network
exposes us to the following risks, some of which are out of our control:
o we are obligated to provide price protection to our retailers and
distributors and, while the agreements limit the conditions under which
products can be returned to us, we may be faced with product returns or
price protection obligations;
o retailers or distributors may not continue to stock and sell our consumer
products; and
o retailers and distributors often carry competing products.
Changes in accounting rules could adversely affect our future operating results.
Our financial statements are prepared in accordance with U.S. generally
accepted accounting principles. These principles are subject to interpretation
by various governing bodies, including the Financial Accounting Standards Board
and the SEC, which promulgate and interpret appropriate accounting regulations.
Changes from current accounting regulations may have a significant effect on our
reported financial results. Furthermore, changes in the rules regarding
accounting for stock-based compensation, expected to take effect on January 1,
2006, will result in higher operating expenses and lower earnings per share.
Our future growth could be harmed if we lose the services of certain employees.
Our success depends upon the services of a talented and dedicated
workforce, including members of our executive team and employees in technical
positions. The loss of the services of one or more key employees could harm our
33
business. Our success also depends upon our ability to attract and retain highly
skilled new employees. Competition for such employees is intense in the
industries and geographic areas in which we operate. In the past, we have relied
on our ability to grant stock options as one mechanism for recruiting and
retaining highly skilled talent. However, changes in the accounting rules that
will require us to expense stock options will impair our ability to provide
these incentives without incurring compensation costs. If we are unable to
compete successfully for talented employees, our business could suffer.
If we fail to manage our growth effectively, our business could be harmed.
Our success depends on our ability to manage the growth of our
operations effectively. As a result of our acquisitions and increasing demand
for our products and services, the scope of our operations has grown both
domestically and internationally. Our management team will face challenges
inherent in efficiently managing an increased number of employees over larger
geographic distances. These challenges include implementing effective
operational systems, procedures and controls, as well as training new personnel.
Inability to successfully respond to these challenges could have a material
adverse effect on the growth of our business.
Our websites could subject us to legal claims that could harm our business.
Some of our websites provide interactive information and services to our
customers. To the extent that materials may be posted on or downloaded from
these websites and distributed to others, we may be subject to claims for
defamation, negligence, copyright or trademark infringement, personal injury, or
other theories of liability based on the nature, content, publication or
distribution of such materials. In addition, although we have attempted to limit
our exposure by contract, we may also be subject to claims for indemnification
by end users in the event that the security of our websites is compromised. As
these websites are available on a worldwide basis, they could potentially be
subject to a wide variety of international laws.
We could incur substantial costs protecting our intellectual property or
defending against a claim of infringement.
Our ability to compete successfully and achieve future revenue growth
depends, in part, on our ability to protect our proprietary technology and
operate without infringing upon the intellectual property rights of others. We
rely upon a combination of patent, copyright, trademark and trade secret laws,
confidentiality procedures, and contractual provisions, as well as required
hardware components and security keys, to protect our proprietary technology.
However, our means of protecting our proprietary rights may not be adequate. In
addition, the laws of certain countries do not protect our proprietary
technology to the same extent as do the laws of the United States. From time to
time unauthorized parties have obtained, copied, and used information that we
consider proprietary. Policing the unauthorized use of our proprietary
technology is costly and time-consuming and we are unable to measure the extent
to which such unauthorized use, including piracy, of our software exists. We
expect software piracy to continue to be a persistent problem.
We occasionally receive communications suggesting that our products may
infringe the intellectual property rights of others. It is our practice to
investigate the factual basis of such communications and negotiate licenses
where appropriate. While it may be necessary or desirable in the future to
obtain licenses relating to one or more products or relating to current or
future technologies, we may be unable to do so on commercially reasonable terms.
If we are unable to protect our proprietary technology or unable to negotiate
licenses for the use of others' intellectual property, our business could be
impaired.
We also may be liable to some of our customers for damages that they may
incur in connection with intellectual property claims. Although we attempt to
limit our exposure to liability arising from infringement of third-party
intellectual property rights in our agreements with customers, we may not always
be successful. If we are required to pay damages to our customers, or indemnify
our customers for damages they incur, our business could be harmed. Moreover,
even if a particular claim falls outside of our indemnity or warranty
obligations to our customers, our customers may be entitled to additional
contractual remedies against us.
Regulations could be enacted that restrict our Internet initiatives.
Federal, state, and international authorities may adopt new laws or
regulations governing the Internet, including laws or regulations covering
issues such as privacy, distribution, and content. For example, the EU has
issued several directives regarding privacy and data protection, including the
Directive on Data Protection and the Directive on Privacy and Electronic
34
Communications. The enactment of legislation implementing such directives by
EUmember countries is ongoing. The enactment of this and similar legislation or
regulations could curb our Internet sales and other initiatives, require changes
in our sales and marketing practices, and place additional financial burdens on
our business.
Our association with industry organizations could subject us to litigation.
We are members of several industry organizations, trade associations and
standards consortia. Membership in these and similar groups could subject us to
litigation as a result of the activities of such groups. For example, in
connection with our anti-piracy program, designed to enforce copyright
protection of our software, we are a member of the Business Software Alliance
("BSA"). From time to time the BSA undertakes litigation against suspected
copyright infringers. These lawsuits could lead to counterclaims alleging
improper use of litigation or a violation of other local laws. To date, none of
these lawsuits or counterclaims have had an adverse effect on our results of
operations, but should we become involved in material litigation, our cash flows
or financial position could be adversely affected.
Compliance with rules and regulations concerning corporate governance has caused
our operating expenses to increase and has put additional demands on our
management.
The Sarbanes-Oxley Act of 2002 and various rules and regulations
promulgated by the SEC and the National Association of Securities Dealers in
recent years have increased the scope, complexity and cost of our corporate
governance, reporting and disclosure practices. These laws, rules and
regulations also divert attention from business operations, increase the cost of
obtaining director and officer liability insurance, and may make it more
difficult for us to attract and retain qualified executive officers, key
personnel and members of our board of directors.
If we experience problems with our third-party leasing program, our revenues
could be adversely impacted.
We have an established leasing program with a third party that allows
certain of our customers to finance their purchases of our products. If this
program ended abruptly or unexpectedly, some of our customers might be unable to
purchase our products unless or until they were able to arrange for alternative
financing, which could adversely impact our revenues.
Our stock price may continue to be volatile.
The market price of our common stock has experienced volatility in the
past and could continue to fluctuate substantially in the future based upon a
number of factors, many of which are beyond our control. These factors include:
o changes in our quarterly operating results;
o shortfalls in our revenues or earnings compared to securities analysts'
expectations;
o changes in analysts' recommendations or projections;
o fluctuations in investors' perceptions of us or our competitors;
o shifts in the markets for our products;
o development and marketing of products by our competitors;
o changes in our relationships with suppliers, distributors, resellers, system
integrators or customers;
o announcements of major acquisitions;
o a shift in financial markets; and
o global macroeconomic conditions.
Furthermore, the market prices of equity securities of high technology
companies have generally demonstrated volatility in recent years, and this
volatility has, at times, appeared to be unrelated to or disproportionate to any
of the factors above.
35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk
Our primary exposures to market risk are financial, including the effect
of volatility in currencies on asset and liability positions and revenue and
operating expenses of our international subsidiaries that are denominated in
foreign currencies, and the effect of fluctuations in interest rates earned on
our cash equivalents and marketable securities.
Foreign Currency Exchange Risk
We generally derive more than half of our revenues from customers
outside the United States. This business is, for the most part, transacted
through international subsidiaries and generally in the currency of the end-user
customers. Therefore, we are exposed to the risks that changes in foreign
currency could adversely impact our revenues, net income (loss) and cash flow.
To hedge against the foreign exchange exposure of certain forecasted
receivables, payables and cash balances of our foreign subsidiaries, we enter
into short-term foreign currency forward-exchange contracts. There are two
objectives of our foreign currency forward-exchange contract program: (1) to
offset any foreign exchange currency risk associated with cash receipts expected
to be received from our customers over the next 30 day period and (2) to offset
the impact of foreign currency exchange on our net monetary assets denominated
in currencies other than the U.S. dollar. These forward-exchange contracts
typically mature within 30 days of purchase. We record gains and losses
associated with currency rate changes on these contracts in results of
operations, offsetting gains and losses on the related assets and liabilities.
The success of this hedging program depends on forecasts of transaction activity
in the various currencies, and contract rates versus financial statement rates.
To the extent that these forecasts are over- or understated during the periods
of currency volatility, we could experience unanticipated currency gains or
losses.
At September 30, 2005, we had $57.7 million of forward-exchange
contracts outstanding, denominated in the euro, British pound, Swedish krona,
Danish kroner, Norwegian krone, Canadian dollar, Singapore dollar, Australian
dollar and Korean won, as a hedge against forecasted foreign
currency-denominated receivables, payables and cash balances. For the
three-month period ended September 30, 2005, net gains resulting from
forward-exchange contracts of $58,000 were included in results of operations,
offset by net transaction and remeasurement losses on the related asset and
liabilities of $0.9 million. A hypothetical 10% change in foreign currency rates
would not have a material impact on our results of operations, assuming the
above-mentioned forecast of foreign currency exposure is accurate, because the
impact on the forward contracts as a result of a 10% change would at least
partially offset the impact on the asset and liability positions of our foreign
subsidiaries.
Interest Rate Risk
At September 30, 2005, we held $228.6 million in cash, cash equivalents
and marketable securities, including short-term corporate obligations, municipal
obligations, asset-backed securities, commercial paper and U.S. and Canadian
government and government agency obligations. Marketable securities are
classified as "available for sale" and are recorded on the balance sheet at
market value, with any unrealized gain or loss recorded in other comprehensive
income (loss). A hypothetical 10% increase or decrease in interest rates would
not have a material impact on the fair market value of these instruments due to
their short maturity.
36
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures as of September 30, 2005. The term "disclosure controls and
procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
means controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company's management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of September 30, 2005, our chief executive officer
and chief financial officer concluded that, as of such date, our disclosure
controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
Management considers the acquisition of Pinnacle Systems, Inc. on August 9, 2005
to be material to the results of operations, financial position and cash flows
of the Company from the date of acquisition through September 30, 2005 and
considers the internal controls and procedures of Pinnacle to have
a material effect on our internal control over financial reporting. We are
currently executing our post-acquisition integration plans, which include
merging accounting information systems and ongoing internal control evaluation.
We intend to extend our Sarbanes-Oxley Act Section 404 compliance program to
include Pinnacle in fiscal 2006.
Except as set forth above, no change in our internal control over financial
reporting occurred during the fiscal quarter ended September 30, 2005 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
37
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 2005, we were notified by the Korean Federal Trade Commission ("KFTC")
that a former reseller, Neat Information Telecommunication, Inc. ("Neat"), had
filed a complaint against us alleging unfair trade practices. On August 11,
2005, the KFTC issued a decision in favor of Avid regarding the complaint filed
by Neat. However, Neat filed a second complaint with the KFTC on October 25,
2005. In addition, on October 14, 2005, Neat filed a civil lawsuit in South
Korea against Avid Technology Worldwide, Inc. alleging, unfair trade practices.
In the civil action, Neat is seeking approximately $1,700,000 in damages, plus
interest and attorneys fees. We believe that Neat's claims are without merit and
we intend to defend ourselves vigorously in these actions. Because we cannot
predict the outcome of these actions at this time, no costs have been accrued
for any possible loss contingency.
In September 2003, Pinnacle Systems, Inc., which we recently acquired and is now
a wholly-owned subsidiary, was named as a defendant in a civil lawsuit filed in
the Superior Court of California, Alameda County. The complaint was filed by
YouCre8, a/k/a DVDCre8, Inc., a software company whose software was distributed
by Dazzle Multimedia, Inc. ("Dazzle"). The complaint alleges that in connection
with Pinnacle's acquisition of certain assets of Dazzle, Pinnacle tortiously
interfered with DVDCre8's relationship with Dazzle and others, engaged in acts
to restrain competition in the DVD software market, and distributed false and
misleading statements which caused harm to DVDCre8. Dazzle and its parent
company, SCM Microsystems, Inc. ("SCM"), were also named as defendants in this
matter. The complaint seeks unspecified damages and injunctive relief. Pursuant
to the Asset Purchase Agreement among SCM, Dazzle and Pinnacle, Pinnacle is
seeking indemnification from SCM and Dazzle for all or part of the damages and
the expenses incurred to defend these claims. SCM and Dazzle, in turn, are
seeking indemnification from Pinnacle for all or part of the damages and
expenses incurred by them to defend these claims. We believe the complaint is
without merit and intend to vigorously defend against it. However, an adverse
resolution of this litigation could have a material adverse effect on our
consolidated financial position in the period in which the litigation is
resolved. Amounts accrued related to this litigation as part of the Pinnacle
purchase price allocation during the three months ended September 30, 2005 are
considered immaterial to our consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Stockholders on July 27, 2005. At the meeting,
Elizabeth M. Daley and John V. Guttag were reelected as Class III Directors. The
vote with respect to each nominee is set forth below:
Total Vote For Total Vote Withheld
Each Director From Each Director
-------------- -------------------
Ms. Daley 30,426,130 1,218,875
Mr. Guttag 29,350,177 2,294,828
Additional directors whose terms of office continued after the meeting are
George H. Billings, Nancy Hawthorne, David A. Krall and Pamela F. Lenehan.
The stockholders also approved an amendment to our Third Amended and Restated
Certificate of Incorporation, as amended, to increase the number of authorized
shares of common stock from 50,000,000 to 100,000,000 by a vote of 28,123,323
shares for, 745,930 shares against, 19,680 shares abstaining, and 2,756,072
non-votes.
In addition, the stockholders approved our 2005 Stock Incentive Plan by a vote
of 21,096,754 shares for, 7,712,465 shares against, 79,714 shares abstaining,
and 2,756,072 non-votes.
The stockholders also ratified the selection of PricewaterhouseCoopers LLP as
our independent registered public accounting firm for the year ending December
31, 2005 by a vote of 30,127,950 shares for, 1,510,392 shares against, and 6,663
shares abstaining.
Finally, the stockholders did not approve adjournments or postponements of the
annual meeting, if necessary, to permit further solicitation of proxies if there
were not sufficient votes at the time of the meeting to approve the amendment to
our Third Amended and Restated Certificate of Incorporation. The vote for this
matter was 15,297,391 shares for, 15,933,314 shares against, and 414,300 shares
abstaining.
38
ITEM 6. EXHIBITS
*3.1 Third Amended and Restated Certificate of Incorporation, as amended.
*31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
- ---------------------
* Documents filed herewith
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Avid Technology, Inc.
Date: November 14, 2005 By: /s/ Paul J. Milbury
-----------------------------
Paul J. Milbury
Chief Financial Officer
(Principal Financial Officer)
40
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
*3.1 Third Amended and Restated Certificate of Incorporation, as amended.
*31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
- ---------------------
* Documents filed herewith
41