AVID-03.31.2012-10Q




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
 
(Mark One)
 
 
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended March 31, 2012
 
 
OR
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from __________ to __________
 
Commission File Number:  0-21174
__________________
Avid Technology, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 
04-2977748
(I.R.S. Employer
Identification No.)
 
75 Network Drive
Burlington, Massachusetts  01803
(Address of Principal Executive Offices, Including Zip Code)

(978) 640-6789
(Registrant’s Telephone Number, Including Area Code)
__________________
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No ¨

Indicate by check mark whether the registrant has submitted and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer x
Non-accelerated Filer ¨
(Do not check if smaller reporting company)
 
Accelerated Filer ¨
Smaller Reporting Company ¨
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨   No x

The number of shares outstanding of the registrant’s Common Stock as of May 7, 2012 was 38,723,542.




AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012

TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this quarterly report that relate to future results or events are forward-looking statements. Forward-looking statements may be identified by use of forward-looking words, such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “confidence,” “may,” “plan,” “feel,” “should,” “will” and “would,” or similar expressions. Actual results and events in future periods may differ materially from those expressed or implied by these forward-looking statements. There are a number of factors that could cause actual events or results to differ materially from those expressed or implied by forward-looking statements, many of which are beyond our control, including the risk factors discussed in Part I - Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, and as referenced in Part II - Item 1A of this report. In addition, the forward-looking statements contained in this quarterly report represent our estimates only as of the date of this filing and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements or otherwise.





PART I - FINANCIAL INFORMATION


ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data, unaudited)
 
Three Months Ended
 
March 31,
 
2012
 
2011 (Revised)
Net revenues:
 
 
 
Products
$
119,938

 
$
136,765

Services
32,201

 
28,988

Total net revenues
152,139

 
165,753

 
 
 
 
Cost of revenues:
 
 
 
Products
61,208

 
63,867

Services
12,717

 
14,054

Amortization of intangible assets
650

 
666

Total cost of revenues
74,575

 
78,587

Gross profit
77,564

 
87,166

 
 
 
 
Operating expenses:
 
 
 
Research and development
27,482

 
29,973

Marketing and selling
45,927

 
45,050

General and administrative
14,638

 
15,000

Amortization of intangible assets
1,611

 
2,145

Restructuring costs (recoveries), net
168

 
(1,476
)
Total operating expenses
89,826

 
90,692

 
 
 
 
Operating loss
(12,262
)
 
(3,526
)
 
 
 
 
Interest income
129

 
59

Interest expense
(343
)
 
(422
)
Other income (expense), net
20

 
63

Loss before income taxes
(12,456
)
 
(3,826
)
Provision for income taxes, net
521

 
957

Net loss
$
(12,977
)
 
$
(4,783
)
 
 
 
 
Net loss per common share – basic and diluted
$
(0.34
)
 
$
(0.13
)
 
 
 
 
Weighted-average common shares outstanding – basic and diluted
38,662

 
38,228


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


1



AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, unaudited)
 
Three Months Ended
 
March 31,
 
2012
 
2011 (Revised)
Net loss
$
(12,977
)
 
$
(4,783
)
 
 
 
 
Other comprehensive income:
 
 
 
Foreign currency translation adjustments, net of taxes
2,425

 
5,376

 
 
 
 
Comprehensive (loss) income
$
(10,552
)
 
$
593


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



2



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

 
 
 
(Revised)
 
March 31,
2012
 
December 31,
2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
49,681

 
$
32,855

Accounts receivable, net of allowances of $15,859 and $15,985 at March 31, 2012 and December 31, 2011, respectively
87,506

 
104,305

Inventories
103,666

 
111,397

Deferred tax assets, net
1,482

 
1,480

Prepaid expenses
9,902

 
7,652

Other current assets
13,279

 
14,405

Total current assets
265,516

 
272,094

Property and equipment, net
52,213

 
53,487

Intangible assets, net
16,387

 
18,524

Goodwill
246,884

 
246,592

Other assets
9,526

 
11,568

Total assets
$
590,526

 
$
602,265

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
37,188

 
$
42,533

Accrued compensation and benefits
22,873

 
31,750

Accrued expenses and other current liabilities
32,503

 
35,109

Income taxes payable
8,254

 
8,951

Deferred revenues
57,908

 
45,768

Total current liabilities
158,726

 
164,111

Long-term liabilities
29,121

 
27,885

Total liabilities
187,847

 
191,996

 
 
 
 
Contingencies (Note 10)

 

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock
423

 
423

Additional paid-in capital
1,021,880

 
1,019,200

Accumulated deficit
(547,575
)
 
(532,478
)
Treasury stock at cost, net of reissuances
(79,899
)
 
(82,301
)
Accumulated other comprehensive income
7,850

 
5,425

Total stockholders’ equity
402,679

 
410,269

Total liabilities and stockholders’ equity
$
590,526

 
$
602,265


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


3



AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
 
Three Months Ended
 
March 31,
 
2012
 
2011 (Revised)
Cash flows from operating activities:
 
 
 
Net loss
$
(12,977
)
 
$
(4,783
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
7,574

 
7,892

(Recovery from) provision for doubtful accounts
(77
)
 
144

Non-cash provision for restructuring

 
125

Gain on disposal of fixed assets
(2
)
 
(5
)
Compensation expense from stock grants and options
3,133

 
4,133

Non-cash interest expense
73

 
80

Unrealized foreign currency transaction losses
2,298

 
3,785

Changes in deferred tax assets and liabilities, excluding initial effects of acquisitions
372

 

Changes in operating assets and liabilities, excluding initial effects of acquisitions:
 
 
 
Accounts receivable
16,857

 
5,280

Inventories
7,731

 
(16,876
)
Prepaid expenses and other current assets
(975
)
 
(1,699
)
Accounts payable
(5,376
)
 
107

Accrued expenses, compensation and benefits and other liabilities
(12,338
)
 
(15,242
)
Income taxes payable
(766
)
 
(541
)
Deferred revenues
13,431

 
11,544

Net cash provided by (used in) operating activities
18,958

 
(6,056
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment, net
(3,588
)
 
(3,545
)
Decrease (increase) in other long-term assets
1,318

 
(617
)
Net cash used in investing activities
(2,270
)
 
(4,162
)
 
 
 
 
Cash flows from financing activities:
 
 
 
(Payments related to) proceeds from the issuance of common stock under employee stock plans, net
(172
)
 
127

Proceeds from revolving credit facilities
1,000

 
8,000

Payments on revolving credit facilities
(1,000
)
 
(8,000
)
Net cash (used in) provided by financing activities
(172
)
 
127

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
310

 
529

Net increase (decrease) in cash and cash equivalents
16,826

 
(9,562
)
Cash and cash equivalents at beginning of period
32,855

 
42,782

Cash and cash equivalents at end of period
$
49,681

 
$
33,220

 
 
 
 
Supplemental information:
 
 
 
Cash paid for income taxes, net of refunds
$
785

 
$
2,021


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

4



AVID TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.
FINANCIAL INFORMATION

The accompanying condensed consolidated financial statements include the accounts of Avid Technology, Inc. and its wholly owned subsidiaries (collectively, “Avid” or the “Company”). These financial statements are unaudited. However, in the opinion of management, the condensed consolidated financial statements reflect all normal and recurring adjustments necessary for their fair statement. Interim results are not necessarily indicative of results expected for any other interim period or a full year. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of operations, financial position and cash flows of the Company in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying condensed consolidated balance sheet as of December 31, 2011 was derived from the Company's audited consolidated financial statements and revised for errors as described below, but does not include all disclosures required by U.S. GAAP. The Company filed audited consolidated financial statements for, and as of, the year ended December 31, 2011 in its 2011 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 U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. The most significant estimates reflected in these financial statements include revenue recognition, stock-based compensation, accounts receivable and sales allowances, inventory valuation, goodwill and intangible asset valuations, fair value measurements and income tax asset valuation allowances. Actual results could differ from the Company's estimates.

The Company evaluated subsequent events through the date of issuance of these financial statements and, except as disclosed in the “Revised Prior Period Amounts” section below and Note 15, no other recognized or unrecognized subsequent events required recognition or disclosure in these financial statements.

Revised Prior Period Amounts

While preparing its financial statements for the three months ended March 31, 2012, the Company identified and corrected certain errors related to the accounting for an intercompany note made between two of its international subsidiaries that occurred in the fourth quarter of 2007. The Company determined that it should have accrued withholding taxes of approximately $3.8 million at the time of the loan, and as a result, the Company had understated the provision for income taxes in 2007 and income taxes payable reported on its balance sheets for each period subsequent to the transaction. Additionally, as the tax was not withheld and paid to the taxing authority, the Company is subject to interest and penalties on the unpaid balance, commencing in the three months ended March 31, 2009 and for subsequent periods. Interest and penalties totaled approximately $1.1 million ($0.7 million interest and $0.4 million penalties) and $1.0 million ($0.6 million interest and $0.4 million penalties) at March 31, 2012 and December 31, 2011, respectively. The Company expects to recover the $3.8 million of withholding taxes in a subsequent period as the amount is refundable, if and when, the intercompany note is repaid. In addition, upon repayment of the intercompany note, the Company would request a refund from the taxing authority for any penalties paid under a voluntary compliance approach, although there can be no assurance that a refund of the penalties will be obtained.

In accordance with SEC Staff Accounting Bulletin Nos. 99 and 108 (“SAB 99” and “SAB 108”), the Company evaluated these errors and, based on an analysis of quantitative and qualitative factors, determined that they were immaterial to each of the prior reporting periods affected and, therefore, amendment of previously filed reports with the Securities and Exchange Commission was not required. However, if the adjustments to correct the cumulative effect of the aforementioned errors and other previously unrecorded immaterial errors had been recorded in the three months ended March 31, 2012, the Company believes the impact would have been significant and would impact comparisons to prior periods. Therefore, as required by SAB 108, the Company has revised in this filing previously reported financial information for each quarter of 2011 and for the years ended December 31, 2011 and 2010. In addition to correcting these withholding tax errors, the Company recorded other adjustments to prior period amounts to correct other previously unrecorded immaterial errors. Also, in accordance with SAB 108, the Company will include this revised financial information when it files subsequent reports on Form 10-Q and Form 10-K or files a registration statement under the Securities Act of 1933.

5



The Condensed Consolidated Statements of Operations for the years ended December 31, 2011 and 2010 and the three months ended March 31, 2011, June 30, 2011, September 30, 2011 and December 31, 2011 have been revised herein to reflect the effect of the withholding tax errors described above and the other immaterial errors. Revised Condensed Consolidated Statements of Operations for those periods have been presented herein.

The Condensed Consolidated Balance Sheets at December 31, 2011 and 2010 have been revised to reflect the cumulative effect of the errors described above and other immaterial errors. These revisions to the Condensed Consolidated Balance Sheet resulted in increases in accumulated deficit of $7.9 million, $8.2 million, and $6.3 million, respectively, at December 31, 2011, 2010 and 2009. Revised Condensed Consolidated Balance Sheets for December 31, 2011 and 2010 have been presented herein.
 
The adjustments to the Condensed Consolidated Statement of Cash Flows for each period resulted in immaterial changes to the amounts previously reported for net cash provided by (used in) operating activities, investing activities and financing activities in these periods.

Condensed Consolidated Balance Sheets
At December 31, 2011 and 2010
(in thousands except per share date, unaudited)
 
December 31, 2011
 
December 31, 2010
 
As Reported
 
As Revised
 
As Reported
 
As Revised
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
32,855

 
$
32,855

 
$
42,782

 
$
42,782

Accounts receivable
104,305

 
104,305

 
101,171

 
102,631

Inventories
111,833

 
111,397

 
108,357

 
106,785

Deferred tax assets, net
1,480

 
1,480

 
1,068

 
757

Prepaid expenses
7,652

 
7,652

 
7,688

 
7,688

Other current assets
14,509

 
14,405

 
15,701

 
15,701

Total current assets
272,634

 
272,094

 
276,767

 
276,344

Property and equipment, net
53,487

 
53,487

 
62,519

 
62,519

Intangible assets, net
18,524

 
18,524

 
29,750

 
29,750

Goodwill
246,398

 
246,592

 
246,997

 
246,997

Other assets
11,568

 
11,568

 
10,538

 
10,538

Total assets
$
602,611

 
$
602,265

 
$
626,571

 
$
626,148

 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
42,533

 
$
42,533

 
$
47,340

 
$
47,104

Accrued compensation and benefits
31,350

 
31,750

 
38,686

 
38,118

Accrued expenses and other current liabilities
34,174

 
35,109

 
40,986

 
42,059

Income taxes payable
3,898

 
8,951

 
4,640

 
9,823

Deferred revenues
45,768

 
45,768

 
43,634

 
44,173

Total current liabilities
157,723

 
164,111

 
175,286

 
181,277

Long-term liabilities
27,885

 
27,885

 
24,675

 
24,675

Total liabilities
185,608

 
191,996

 
199,961

 
205,952

Stockholders’ equity:
 
 
 
 
 
 
 
Common stock
423

 
423

 
423

 
423

Additional paid-in capital
1,018,604

 
1,019,200

 
1,005,198

 
1,006,029

Accumulated deficit
(524,530
)
 
(532,478
)
 
(495,254
)
 
(503,485
)
Treasury stock at cost, net of reissuances
(82,301
)
 
(82,301
)
 
(91,025
)
 
(91,025
)
Accumulated other comprehensive income
4,807

 
5,425

 
7,268

 
8,254

Total stockholders’ equity
417,003

 
410,269

 
426,610

 
420,196

Total liabilities and stockholders’ equity
$
602,611

 
$
602,265

 
$
626,571

 
$
626,148


6




Condensed Consolidated Statements of Operations
For the Year Ended December 31, 2011 and 2010
(in thousands except per share date, unaudited)
 
Twelve Months Ended
 
Twelve Months Ended
 
December 31, 2011
 
December 31, 2010
 
As Reported
 
As Revised
 
As Reported
 
As Revised
Net revenues:
 
 
 
 
 
 
 
Products
$
546,371

 
$
545,470

 
$
559,907

 
$
561,123

Services
131,565

 
131,565

 
118,615

 
118,615

Total net revenues
677,936

 
677,035

 
678,522

 
679,738

 
 
 
 
 
 
 
 
Cost of revenues: (a)
 
 
 
 
 
 
 
Products
255,735

 
254,522

 
267,985

 
269,978

Services
62,482

 
62,482

 
56,490

 
56,490

Amortization of intangible assets
2,693

 
2,693

 
3,299

 
3,299

Total cost of revenues
320,910

 
319,697

 
327,774

 
329,767

Gross profit
357,026

 
357,338

 
350,748

 
349,971

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Research and development
118,108

 
118,108

 
120,229

 
120,445

Marketing and selling
183,865

 
184,288

 
177,178

 
177,111

General and administrative
57,851

 
56,496

 
64,345

 
65,424

Amortization of intangible assets
8,528

 
8,528

 
9,743

 
9,743

Restructuring costs (recoveries), net
8,858

 
10,163

 
20,450

 
18,877

Loss on sale of assets
597

 
597

 
(5,029
)
 
(5,029
)
Total operating expenses
377,807

 
378,180

 
386,916

 
386,571

 
 
 
 
 
 
 
 
Operating loss
(20,781
)
 
(20,842
)
 
(36,168
)
 
(36,600
)
 
 
 
 
 
 
 
 
Interest income
144

 
144

 
173

 
173

Interest expense
(2,053
)
 
(1,930
)
 
(864
)
 
(987
)
Other income (expense), net
(159
)
 
(159
)
 
301

 
301

Loss before income taxes
(22,849
)
 
(22,787
)
 
(36,558
)
 
(37,113
)
Provision for income taxes, net
942

 
721

 
396

 
1,796

Net loss
$
(23,791
)
 
$
(23,508
)
 
$
(36,954
)
 
$
(38,909
)
 
 
 
 
 
 
 
 
Net loss per common share – basic and diluted
$
(0.62
)
 
$
(0.61
)
 
$
(0.98
)
 
$
(1.03
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – basic and diluted
38,435

 
38,435

 
37,895

 
37,895



7




Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2011, June 30, 2011, September 30, 2011 and December 31, 2011
(in thousands except per share date, unaudited)
 
Three Months Ended
 
Three Months Ended
 
Three Months Ended
 
Three Months Ended
 
March 31, 2011
 
June 30, 2011
 
September 30, 2011
 
December 31, 2011
 
As Reported
 
As Revised
 
As Reported
 
As Revised
 
As Reported
 
As Revised
 
As Reported
 
As Revised
Net revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Products
$
137,335

 
$
136,765

 
$
129,190

 
$
129,629

 
$
131,875

 
$
131,608

 
$
147,971

 
$
147,468

Services
28,988

 
28,988

 
32,154

 
32,154

 
33,090

 
33,090

 
37,333

 
37,333

Total net revenues
166,323

 
165,753

 
161,344

 
161,783

 
164,965

 
164,698

 
185,304

 
184,801

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Products (a)
64,651

 
63,867

 
62,964

 
64,024

 
60,048

 
60,063

 
66,221

 
66,568

Services (a)
14,387

 
14,054

 
15,312

 
14,706

 
16,497

 
15,585

 
18,137

 
18,137

Amortization of intangible assets
666

 
666

 
685

 
685

 
685

 
685

 
657

 
657

Total cost of revenues
79,704

 
78,587

 
78,961

 
79,415

 
77,230

 
76,333

 
85,015

 
85,362

Gross profit
86,619

 
87,166

 
82,383

 
82,368

 
87,735

 
88,365

 
100,289

 
99,439

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
29,973

 
29,973

 
30,453

 
30,453

 
28,960

 
28,960

 
28,722

 
28,722

Marketing and selling
44,810

 
45,050

 
46,052

 
45,867

 
45,411

 
45,395

 
47,592

 
47,976

General and administrative
15,298

 
15,000

 
14,920

 
14,219

 
13,240

 
13,518

 
14,393

 
13,759

Amortization of intangible assets
2,145

 
2,145

 
2,161

 
2,161

 
2,159

 
2,159

 
2,063

 
2,063

Restructuring costs (recoveries), net
(2,216
)
 
(1,476
)
 
(163
)
 
162

 
2,707

 
2,707

 
8,530

 
8,770

Loss on sale of assets

 

 
597

 
597

 

 

 

 

Total operating expenses
90,010

 
90,692

 
94,020

 
93,459

 
92,477

 
92,739

 
101,300

 
101,290

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating loss
(3,391
)
 
(3,526
)
 
(11,637
)
 
(11,091
)
 
(4,742
)
 
(4,374
)
 
(1,011
)
 
(1,851
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
59

 
59

 
9

 
9

 
10

 
10

 
66

 
66

Interest expense
(422
)
 
(422
)
 
(717
)
 
(594
)
 
(556
)
 
(556
)
 
(358
)
 
(358
)
Other income (expense), net
63

 
63

 
(60
)
 
(60
)
 
43

 
43

 
(205
)
 
(205
)
Loss before income taxes
(3,691
)
 
(3,826
)
 
(12,405
)
 
(11,736
)
 
(5,245
)
 
(4,877
)
 
(1,508
)
 
(2,348
)
Provision for (benefit from) income taxes, net
1,426

 
957

 
(543
)
 
(590
)
 
2,774

 
2,672

 
(2,715
)
 
(2,318
)
Net (loss) income
$
(5,117
)
 
$
(4,783
)
 
$
(11,862
)
 
$
(11,146
)
 
$
(8,019
)
 
$
(7,549
)
 
$
1,207

 
$
(30
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income per common share – basic
$
(0.13
)
 
$
(0.13
)
 
$
(0.31
)
 
$
(0.29
)
 
$
(0.21
)
 
$
(0.20
)
 
$
0.03

 
$
(0.00
)
Net (loss) income per common share – diluted
$
(0.13
)
 
$
(0.13
)
 
$
(0.31
)
 
$
(0.29
)
 
$
(0.21
)
 
$
(0.20
)
 
$
0.03

 
$
(0.00
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – basic
38,228

 
38,228

 
38,413

 
38,413

 
38,511

 
38,511

 
38,580

 
38,580

Weighted-average common shares outstanding – diluted
38,228

 
38,228

 
38,413

 
38,413

 
38,511

 
38,511

 
38,584

 
38,580


(a)
The “As Reported” products and services cost of revenues amounts do not sum to the annual “As Reported” products and services cost of revenues amounts due to a reclassification made to the financial statements for the year ended December 31, 2011.


8




Recently Adopted Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, Testing Goodwill for Impairment. This ASU allows an entity to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of such events or circumstances, an entity determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity will be required to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test will not be required. ASU No. 2011-08 was effective for fiscal years and interim periods beginning after December 15, 2011, and prospective application was required. The Company adopted this ASU on January 1, 2012. Adoption did not have an impact on the Company's consolidated financial position, results of operations or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. This ASU eliminates the current option to report other comprehensive income and its components in the statement of changes in equity and requires an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate consecutive statements. ASU No. 2011-05 is effective for fiscal years and interim periods beginning after December 15, 2011, which is January 1, 2012 for Avid, and retrospective application was required. The Company adopted this ASU on January 1, 2012. While this ASU changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance; therefore, adoption did not have an impact on the Company's consolidated financial position, results of operations or cash flows.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. This ASU amends current U.S. GAAP fair value measurement and disclosure guidance to be consistent with International Financial Reporting Standards, including increased transparency around valuation inputs and the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position, but for which the fair value of such items is required to be disclosed. ASU No. 2011-04 is effective for fiscal years and interim periods beginning after December 15, 2011 and prospective application was required. The Company adopted this ASU on January 1, 2012. Adoption did not have an impact on the Company's consolidated financial position, results of operations or cash flows.

2.
NET LOSS PER SHARE

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

The following table sets forth (in thousands) potential common shares, on a weighted-average basis, that were considered anti-dilutive securities and excluded from the Diluted EPS calculations for the relevant periods either because the sum of the exercise price per share and the unrecognized compensation cost per share was greater than the average market price of the Company's common stock for the relevant period, or because they were considered contingently issuable. The contingently issuable potential common shares result from certain stock options and restricted stock units granted to the Company's executive officers that vest based on performance or market conditions.
 
Three Months Ended
 
March 31,
 
2012
 
2011
Options
5,644

 
2,928

Non-vested restricted stock and restricted stock units
617

 
504

Anti-dilutive potential common shares
6,261

 
3,432



9



During periods of net loss, certain potential common shares that would otherwise be included in the Diluted EPS calculation are excluded because the effect would be anti-dilutive. The following table sets forth (in thousands) common stock equivalents that were excluded from the calculation of Diluted EPS due to the net loss for the relevant period.
 
Three Months Ended
 
March 31,
 
2012
 
2011
Options
2

 
329

Non-vested restricted stock and restricted stock units
57

 
125

Total anti-dilutive common stock equivalents
59

 
454


3.
FOREIGN CURRENCY FORWARD CONTRACTS

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

At March 31, 2012 and December 31, 2011, the Company had foreign currency forward contracts outstanding with notional values of $64.3 million and $69.1 million, respectively, as hedges against forecasted foreign-currency-denominated receivables, payables and cash balances. The following table sets forth the balance sheet locations and fair values of the Company's foreign currency forward contracts at March 31, 2012 and December 31, 2011 (in thousands):
Derivatives Not Designated as Hedging
Instruments under ASC Topic 815
 
Balance Sheet Location
 
Fair Value at March 31, 2012
 
Fair Value at December 31, 2011
Financial assets:
 
 
 
 
 
 
Foreign currency forward contracts
 
Other current assets
 
$49
 
$—
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
Foreign currency forward contracts
 
Accrued expenses and other current liabilities
 
$452
 
$1,430

The following table sets forth the net foreign exchange losses recorded as marketing and selling expenses in the Company's statements of operations during the three months ended March 31, 2012 and 2011 that resulted from the Company's foreign exchange contracts and the revaluation of the related hedged items (in thousands):
Derivatives Not Designated as Hedging
Instruments under ASC Topic 815
 
Net Loss Recorded in Marketing and Selling Expenses
 
Three Months Ended March 31,
 
2012
 
2011
Foreign currency forward contracts and revaluation of hedged items, net
 
$(123)
 
$(99)

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


10




4.
FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis

On a recurring basis, the Company measures certain financial assets and liabilities at fair value, including certain cash equivalents, marketable securities and foreign-currency forward contracts. At March 31, 2012 and December 31, 2011, all of the Company's financial assets and liabilities were classified as either Level 1 or Level 2 in the fair value hierarchy as defined by ASC Topic 820, Fair Value Measurements and Disclosure. Assets and liabilities valued using quoted market prices in active markets and classified as Level 1 are certain deferred compensation investments and related obligations. Assets and liabilities valued based on other observable inputs and classified as Level 2 are foreign currency forward contracts and certain deferred compensation obligations.

The following tables summarize the Company's fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011 (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using
 
March 31,
2012
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial Assets:
 
 
 
 
 
 
 
Deferred compensation assets
$
1,627

 
$
1,062

 
$
565

 
$

Foreign currency forward contracts
49

 

 
49

 

 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
Deferred compensation obligations
$
4,079

 
$
1,062

 
$
3,017

 
$

Foreign currency forward contracts
452

 

 
452

 


 
 
 
Fair Value Measurements at Reporting Date Using
 
December 31,
2011
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Financial Assets:
 
 
 
 
 
 
 
Deferred compensation assets
$
1,549

 
$
1,018

 
$
531

 
$

 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
Deferred compensation obligations
$
3,920

 
$
1,018

 
$
2,902

 
$

Foreign currency forward contracts
1,430

 

 
1,430

 


The fair values of level 1 benefit plan and deferred compensation assets and the corresponding obligations are determined using a market approach and are based on quoted market prices of the underlying securities. The fair values of level 2 benefit plan and deferred compensation assets are determined using an income approach based on observable inputs including the prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals. The fair values of level 2 benefit plan and deferred compensation liabilities are derived using valuation models, such as the projected unit credit method, with significant inputs derived from or corroborated by observable market data, such as mortality and disability rates from published sources, for example the RT 2005 G mortality tables, and discount rates that are observable at commonly quoted intervals.


11



The fair values of foreign currency forward contracts are classified as level 2 in the fair value hierarchy and are measured at fair value on a recurring basis using an income approach based on observable inputs. The primary inputs used to fair value foreign currency forward contracts are published foreign currency exchange rates as of the date of valuation. See Note 3 for information on the Company's foreign currency forward contracts.

The carrying amounts of the Company's other financial assets and liabilities including cash, cash equivalents, accounts receivable, borrowings under revolving credit facilities, accounts payable and accrued liabilities approximate their respective fair values because of the relatively short period of time between their origination and their expected realization.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The following tables summarize the Company's fair value hierarchy for assets and liabilities measured at fair value on a nonrecurring basis during the year ended March 31, 2012 and December 31, 2011 (in thousands):
 
 
 
Fair Value Measurements Using
 
 
 
Three Months Ended March 31, 2012
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Related
Expenses
Liabilities:
 
 
 
 
 
 
 
 
 
Facilities-related restructuring accruals
$
530

 
$

 
$
530

 
$

 
$
530


 
 
 
Fair Value Measurements Using
 
 
 
Year Ended December 31, 2011
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Related
Expenses
Liabilities:
 
 
 
 
 
 
 
 
 
Facilities-related restructuring accruals (revised)
$
2,593

 
$

 
$
2,593

 
$

 
$
2,593


During the three months ended March 31, 2012 and the year ended December 31, 2011, the Company recorded restructuring accruals associated with exiting all or portions of certain leased facilities and for revised estimates related to previously exited facilities. The Company estimates the fair value of such liabilities using an income approach based on observable inputs, including the remaining payments required under the existing lease agreements, utilities costs based on recent invoice amounts, and potential sublease receipts based on quoted market prices for similar sublease arrangements. The liabilities are discounted to net present value based on the Company's current borrowing rate. See Note 12 for further information on the Company's restructuring activities.

5.
ACCOUNTS RECEIVABLE

Accounts receivable, net of allowances, consisted of the following at March 31, 2012 and December 31, 2011 (in thousands):
 
March 31, 2012
 
December 31, 2011
Accounts receivable
$
103,365

 
$
120,290

Less:
 
 
 
Allowance for doubtful accounts
(2,231
)
 
(2,342
)
Allowance for sales returns and rebates
(13,628
)
 
(13,643
)
 
$
87,506

 
$
104,305


The accounts receivable balances at March 31, 2012 and December 31, 2011 exclude approximately $15.3 million and $10.3 million, respectively, for large solution sales and certain distributor sales that were invoiced, but for which revenues had not been recognized and payments were not then due.


12




6.
INVENTORIES

Inventories consisted of the following at March 31, 2012 and December 31, 2011 (in thousands):
 
 
 
(Revised)
 
March 31, 2012
 
December 31, 2011
Raw materials
$
11,458

 
$
11,306

Work in process
478

 
415

Finished goods
91,730

 
99,676

 
$
103,666

 
$
111,397


At March 31, 2012 and December 31, 2011, finished goods inventory included $10.8 million and $7.2 million, respectively, associated with products shipped to customers and deferred labor costs for revenue arrangements that have not yet been recognized.

7.
PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at March 31, 2012 and December 31, 2011 (in thousands):
 
 
March 31, 2012
 
December 31, 2011
Computer and video equipment and software
 
$
135,414

 
$
132,022

Manufacturing tooling and testbeds
 
6,458

 
6,407

Office equipment
 
4,717

 
4,709

Furniture, fixtures and other
 
11,829

 
11,819

Leasehold improvements
 
35,132

 
34,786

 
 
193,550

 
189,743

Less accumulated depreciation and amortization
 
141,337

 
136,256

 
 
$
52,213

 
$
53,487


8.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

Goodwill

Goodwill resulting from the Company's acquisitions consisted of the following at March 31, 2012 and December 31, 2011 (in thousands):
 
 
 
(Revised)
 
March 31, 2012
 
December 31, 2011
Goodwill acquired (a)
$
418,784

 
$
418,492

Accumulated impairment losses
(171,900
)
 
(171,900
)
Goodwill (a)
$
246,884

 
$
246,592

 
(a)
The March 31, 2012 gross and net goodwill amounts include total foreign currency translation increases of approximately $0.3 million from the December 31, 2011 amounts.

The Company performs a goodwill impairment analysis annually in the fourth quarter of each year, or whenever events and circumstances occur that indicate that the recorded goodwill may be impaired, in accordance with ASC Subtopic 350-20, Intangibles - Goodwill and Others - Goodwill, a two-step process is used to test for goodwill impairment. The first step determines if there is an indication of impairment by comparing the estimated fair value of each reporting unit to its carrying value including existing goodwill. Upon an indication of impairment from the first step, a second step is performed to determine if goodwill impairment exists.

13




At September 30, 2011, as a result of a decline in the Company's stock price since its fourth quarter 2010 goodwill impairment testing, lower than expected year-to-date 2011 revenues and operating results, and a reduction in forecasted 2011 results, the Company performed an interim step one goodwill impairment test. The interim step one test at September 30, 2011 indicated that the estimated fair value of the Company's single reporting unit (approximately $530 million) exceeded its carrying value of $414.9 million by approximately 28%. Therefore, no goodwill impairment existed at September 30, 2011, and the Company was not required to perform step two. In connection with its interim goodwill step one impairment test at September 30, 2011, the Company weighted the direct market capitalization approach at 67%, the income approaches at 11%, the guideline public company market approaches at 11%, and the guideline transaction market approaches at 11%. The estimated fair value under the direct market capitalization approach was calculated by applying control premiums of approximately 45% to the Company's market capitalization. The Company's market capitalization was calculated using the average stock price of the Company's common stock for the 20 trading days prior to September 30, 2011 ($8.73 per share). If the Company had used the closing stock price of its common stock on September 30, 2011 ($7.74 per share) in the direct market capitalization described above and applied similar weightings described above, the estimated fair value of the Company's single reporting would have exceeded its carrying value by approximately 20% at September 30, 2011. The Company's market capitalization based on the closing stock price at September 30, 2011 was approximately $298.3 million, compared to the carrying value of the Company's single reporting unit of $414.9 million. This implied a control premium of approximately 39%.

The Company's annual goodwill analyses performed in the fourth quarter of 2011 indicated there was no goodwill impairment at December 31, 2011. The step one test at December 31, 2011 indicated that the estimated fair value of the Company's single reporting unit (approximately $506 million) exceeded its carrying value of $417.0 million by approximately 21%. Therefore, no goodwill impairment existed at December 31, 2011, and the Company was not required to perform step two. In connection with its annual goodwill step one impairment test at December 31, 2011, the Company weighted the direct market capitalization approach at 67%, the income approaches at 11%, the guideline public company market approaches at 11%, and the guideline transaction market approaches at 11%. The estimated fair value under the direct market capitalization approach was calculated by applying control premiums of approximately 45% to the Company's market capitalization. The Company's market capitalization was calculated using the average stock price of the Company's common stock for the 20 trading days prior to December 31, 2011 ($8.04 per share). If the Company used the closing stock price of its common stock on December 31, 2011 ($8.53 per share), the last trading day in 2011, in the direct market capitalization described above and applied similar weightings described above, the estimated fair value of the Company's single reporting would have exceeded its carrying value by approximately 26%. The Company's market capitalization based on the closing stock price at December 31, 2011 was approximately $329.3 million, compared to the carrying value of the Company's single reporting unit of $417.0 million. This implied a control premium of approximately 27%.

There were no indicators of goodwill impairment at March 31, 2012.

Acquisition-Related Identifiable Intangible Assets

Amortizing identifiable intangible assets related to the Company's acquisitions consisted of the following at March 31, 2012 and December 31, 2011 (in thousands):
 
March 31, 2012
 
December 31, 2011
 
 Gross
 
Accumulated Amortization
 
 Net (a)
 
 Gross
 
Accumulated Amortization
 
Net
Completed technologies and patents
$
74,805

 
$
(71,290
)
 
$
3,515

 
$
74,624

 
$
(70,536
)
 
$
4,088

Customer relationships
68,320

 
(55,819
)
 
12,501

 
68,226

 
(54,396
)
 
13,830

Trade names
14,772

 
(14,707
)
 
65

 
14,763

 
(14,577
)
 
186

License agreements
560

 
(560
)
 

 
560

 
(560
)
 

Non-compete covenants
1,401

 
(1,095
)
 
306

 
1,368

 
(948
)
 
420

 
$
159,858

 
$
(143,471
)
 
$
16,387

 
$
159,541

 
$
(141,017
)
 
$
18,524

 
(a)
The March 31, 2012 net amounts include total foreign currency translation increases of approximately $0.1 million from the December 31, 2011 amounts.


14



Amortization expense related to all intangible assets in the aggregate was $2.3 million and $2.8 million, respectively, for the three months ended March 31, 2012 and 2011. The Company expects amortization of these intangible assets to be approximately $5 million for the remainder of 2012, $5 million in 2013, $2 million in 2014, $2 million in 2015 and $2 million in 2016.

In connection with the Company's goodwill impairment test at September 30, 2011, the Company performed an impairment analysis of its long-lived assets, including its intangible assets, in accordance with ASC Section 360-10-35, Property, Plant and Equipment - Overall - Subsequent Measurement. This analysis included grouping the intangible assets with other operating assets and liabilities that would not otherwise be subject to impairment testing because the grouped assets and liabilities represent the lowest level for which cash flows are largely independent of the cash flows of other groups of assets and liabilities within the Company. The analysis determined that the undiscounted cash flows of the long-lived assets were significantly greater than their carrying value, indicating no impairment existed.

Capitalized Software Development Costs

In accordance with ASC Subtopic 985-20, Software - Costs of Software to be Sold, Leased or Marketed, the Company is required to capitalize certain costs of internally developed or externally purchased software. Capitalized software costs included in “other assets” consisted of the following at March 31, 2012 and December 31, 2011 (in thousands):
 
March 31, 2012
 
December 31, 2011
 
 
Gross
 
Accumulated
Amortization
 
 
Net
 
 
Gross
 
Accumulated
Amortization
 
 
Net
Capitalized software costs
$
6,906

 
$
(5,047
)
 
$
1,859

 
$
6,876

 
$
(4,730
)
 
$
2,146


Capitalized software development costs amortized to cost of product revenues were $0.3 million and $0.3 million, respectively, for the three months ended March 31, 2012 and 2011. The Company expects amortization of capitalized software costs to be approximately $1 million for the remainder of 2012 and $1 million thereafter.

9.
LONG-TERM LIABILITIES

Long-term liabilities consisted of the following at March 31, 2012 and December 31, 2011 (in thousands):
 
March 31, 2012
 
December 31, 2011
Long-term deferred tax liabilities, net
$
1,779

 
$
1,754

Long-term deferred revenue
10,670

 
9,378

Long-term deferred rent
10,741

 
10,666

Long-term accrued restructuring
2,914

 
3,185

Long-term deferred compensation
3,017

 
2,902

 
$
29,121

 
$
27,885


10.
CONTINGENCIES

At March 31, 2012, the Company was subject to various litigation claiming patent infringement by the Company.  If any infringement is determined to exist, the Company may seek licenses or settlements. At this time, the Company believes that a loss is neither probable nor remote, and based on the information currently available regarding these legal proceedings, the Company is unable to determine an estimate, or range of estimates, of potential losses. 

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, employee relations, intellectual property rights, product performance, or other matters.  Management is not aware of any such current claims that will have a material adverse effect on the financial position or results of operations of the Company.


15



Additionally, the Company provides indemnification to certain customers for losses incurred in connection with intellectual property infringement claims brought by third parties 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 and the maximum potential amount of future payments the Company could be required to make under these indemnification provisions is theoretically unlimited.  To date, the Company has not incurred material costs related to these indemnification provisions; accordingly, the Company believes the estimated fair value of these indemnification provisions is immaterial. 

Further, certain of the Company's arrangements with customers include clauses whereby the Company may be subject to penalties for failure to meet certain performance obligations; however, the Company has not recorded any related material penalties to date. 

The Company's Canadian subsidiary, Avid Technology Canada Corporation, was assessed and paid to the Ministry of Revenue Quebec (“MRQ”) approximately CAN $1.7 million for social tax assessments on Canadian employee stock-based compensation related to the Company's stock plans. The Company is currently attempting to recover the payments against these assessments through litigation with the MRQ. The payment amounts were recorded in “other current assets” in the Company's consolidated balance sheets at March 31, 2012 and December 31, 2011. Because the Company cannot predict the outcome of the litigation at this time or the amount of potential losses, if any, no costs have been accrued for any loss contingency; however, this matter is not expected to have a material effect on the Company's financial position or results of operations.

As permitted under Delaware law and pursuant to the Company's Third Amended and Restated Certificate of Incorporation, as amended, the Company is obligated to indemnify its current and former officers and directors for certain events that occur or occurred while the officer or director is or was serving in such capacity. The term of the indemnification period is for each respective officer's or director's lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is unlimited; however, the Company has mitigated the exposure through the purchase of directors and officers insurance, which is intended to limit the risk and, in most cases, enable the Company to recover all or a portion of any future amounts paid. As a result of this insurance coverage, the Company believes the estimated fair value of these indemnification obligations is minimal.

The Company has letters of credit at a bank that are used as security deposits in connection with the Company's Burlington, Massachusetts office space. In the event of default on the underlying leases, the landlords would, at March 31, 2012, be eligible to draw against the letters of credit to a maximum of $2.6 million in the aggregate. The letters of credit are subject to aggregate reductions of approximately $0.4 million at the end of each of the second, third and fifth years, provided the Company is not in default of the underlying leases and meets certain financial performance conditions. In no case will the letters of credit amounts be reduced to below $1.3 million in the aggregate throughout the lease periods, all of which extend to May 2020. At March 31, 2012, the Company was not in default of any of the underlying leases.

The Company also has a standby letter of credit at a bank that is used as a security deposit in connection with the Company's Daly City, California office space lease. In the event of default on this lease, the landlord would, at March 31, 2012, be eligible to draw against this letter of credit to a maximum of $0.8 million. The letter of credit will remain in effect at this amount throughout the remaining lease period, which extends to September 2014. At March 31, 2012, the Company was not in default of this lease.

The Company also has additional letters of credit totaling approximately $3.7 million that support its ongoing operations. These letters of credit have various terms and expire during 2012 and 2013. Some of the letters of credit may automatically renew based on the terms of the underlying agreements.

The Company provides warranties on externally sourced and internally developed hardware and software. For internally developed hardware and in cases where the warranty granted to customers for externally sourced hardware is greater than that provided by the manufacturer, the Company records an accrual for the related liability based on historical trends and actual material and labor costs. For software, the Company records an accrual for the costs of providing bug fixes. 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.


16



The following table sets forth the activity in the warranty accrual account for the three months ended ended March 31, 2012 and 2011 (in thousands):
 
Three Months Ended March 31,
 
2012
 
2011 (Revised)
Accrual balance at beginning of year (revised)
$
5,960

 
$
5,894

Accruals for product warranties
3,108

 
2,388

Costs of warranty claims
(2,943
)
 
(2,637
)
Accrual balance at end of period
$
6,125

 
$
5,645



11.
STOCKHOLDERS' EQUITY

Stock Incentive Plans

Under its stock incentive plans, the Company may grant stock awards or options to purchase the Company's common stock to employees, officers, directors (subject to certain restrictions) and consultants, generally at the market price on the date of grant. Current option grants become exercisable over various periods, typically four years for employees and one year for non-employee directors, and have a maximum term of seven years. Time-based restricted stock and restricted stock unit awards typically vest over four years. Shares available for issuance under the Company's Amended and Restated 2005 Stock Incentive Plan, which is the only plan the Company currently makes grants from, totaled 2,356,459 at March 31, 2012, including 144,864 shares that may alternatively be issued as awards of restricted stock or restricted stock units.

Information with respect to options granted under all stock option plans for the three months ended March 31, 2012 is as follows:
 
 
 
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term (years)
 
Aggregate
Intrinsic
Value
(in thousands)
Options outstanding at December 31, 2011
5,367,145

 
$20.01
 
 
 
 
Granted (a)
1,081,700

 
$11.57
 
 
 
 
Exercised
(1,121
)
 
$9.55
 
 
 
 
Forfeited or canceled
(264,033
)
 
$20.39
 
 
 
 
Options outstanding at March 31, 2012 (b)
6,183,691

 
$18.52
 
4.80
 
$323
Options vested at March 31, 2012 or expected to vest
5,320,651

 
$18.57
 
4.77
 
$270
Options exercisable at March 31, 2012
1,936,210

 
$20.93
 
3.78
 
$55
 
(a)
Options granted during the three months ended March 31, 2012 included 47,500 options that had vesting based on performance conditions and 15,000 options that had vesting based on either market conditions or a combination of performance or market conditions.
(b)
Options outstanding at March 31, 2012 included 1,716,155 options that had vesting based on either performance conditions, or market conditions or a combination of performance or market conditions.

The following table sets forth the valuation weighted-average key assumptions and fair value results for stock options granted during the three months ended March 31, 2012 and 2011:
 
 
Three Months Ended March 31,
 
 
2012
 
2011
Expected dividend yield
 
0.00%
 
0.00%
Risk-free interest rate
 
0.89%
 
2.29%
Expected volatility
 
53.8%
 
41.6%
Expected life (in years)
 
4.55
 
4.77
Weighted-average fair value of options granted (per share)
 
$5.15
 
$7.58


17



During the three months ended March 31, 2012, there were no material proceeds from option exercises. During the three months ended March 31, 2011, the aggregate intrinsic value of stock options exercised was approximately $0.6 million and the cash received from the exercise of stock options totaled $1.0 million. The Company did not realize any actual tax benefit from tax deductions for stock option exercises during the three months ended March 31, 2012 or 2011 due to the full valuation allowance on the Company's U.S. deferred tax assets.

Information with respect to non-vested restricted stock units for the three months ended March 31, 2012 is as follows:
 
Non-Vested Restricted Stock Units
 
Shares
 
Weighted-
Average
Grant-Date
Fair Value
 
Weighted-
Average
Remaining
Contractual
Term (years)
 
Aggregate
Intrinsic
Value
(in thousands)
Non-vested at December 31, 2011
822,033

 
$19.45
 
 
 
 
Granted (a)
287,500

 
$11.70
 
 
 
 
Vested
(119,773
)
 
$22.99
 
 
 
 
Forfeited
(3,856
)
 
$19.26
 
 
 
 
Non-vested at March 31, 2012 (b)
985,904

 
$16.76
 
2.21
 
$10,835
Expected to vest
786,946

 
$16.90
 
2.09
 
$8,649
 
(a)
Restricted stock units granted during the three months ended March 31, 2012 included 143,750 units that had vesting based on performance conditions.
(b)
Non-vested restricted stock units at March 31, 2012 included 582,250 units that had vesting based on either performance conditions, or market conditions or a combination of performance or market conditions.

The following table sets forth the valuation weighted-average key assumptions for restricted stock units with vesting based on market conditions or a combination of performance or market conditions granted during the three months ended March 31, 2011. No restricted stock units with vesting based on market conditions or a combination of performance or market conditions were granted during the three months ended March 31, 2012 .
 
Three Months Ended March 31, 2011
Expected dividend yield
0.00%
Risk-free interest rate
4.11%
Expected volatility
41.4%
Expected life (in years)
3.00

The weighted-average grant date fair value of restricted stock units granted during the three months ended March 31, 2011 was $22.16. The total fair value of restricted stock units vested during the three months ended March 31, 2012 and 2011 was $1.3 million and $3.3 million, respectively.

Employee Stock Purchase Plan

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


18



The following table sets forth the valuation weighted-average key assumptions and fair value results for shares issued under the ESPP for the three months ended March 31, 2012 and 2011:
 
Three Months Ended March 31,
 
2012
 
2011
Expected dividend yield
0.00%
 
0.00%
Risk-free interest rate
0.06%
 
0.15%
Expected volatility
54.5%
 
40.0%
Expected life (in years)
0.24
 
0.24
Weighted-average fair value of shares issued (per share)
$1.64
 
$2.73

The following table sets forth the quantities and average prices of shares issued under the ESPP for the three months ended March 31, 2012 and 2011:
 
Three Months Ended March 31,
 
2012
 
2011
Shares issued under the ESPP
32,841
 
20,766
Average price of shares issued
$8.24
 
$14.15

A total of 579,666 shares remained available for issuance under the ESPP at March 31, 2012.

Stock-Based Compensation Expense

The Company estimates forfeiture rates at the time awards are made based on historical turnover rates and applies these rates in the calculation of estimated compensation cost. At March 31, 2012, the Company's annualized estimated forfeiture rates were 0% for non-employee director awards, 10% for executive management awards and and 10% for awards to all other employees.

Stock-based compensation was included in the following captions in the Company's consolidated statements of operations for the three months ended March 31, 2012 and 2011, respectively (in thousands):
 
Three Months Ended March 31,
 
2012
 
2011 (Revised)
Cost of products revenues
$
94

 
$
139

Cost of services revenues
157

 
268

Research and development expenses
306

 
472

Marketing and selling expenses
1,261

 
1,218

General and administrative expenses
1,315

 
2,036

 
$
3,133

 
$
4,133


At March 31, 2012, there was approximately $27 million of total unrecognized compensation cost, before forfeitures, related to non-vested stock-based compensation awards granted under the Company's stock-based compensation plans.

19




12.
RESTRUCTURING COSTS AND ACCRUALS

2011 Restructuring Plan

In October 2011, the Company committed to a restructuring plan (the “2011 Plan”) intended to improve operational efficiencies. Actions under the 2011 Plan included the elimination of approximately 190 positions and the closure of the Company's facility in Irwindale, CA. During 2011, the Company recorded restructuring charges of $9.1 million related to severance costs and $0.5 million for the closure of the Irwindale facility, which included non-cash amounts totaling $0.1 million for fixed asset write offs. During the three months ended March 31, 2012, the Company recorded restructuring recoveries of approximately $0.4 million for reductions of the estimated severance obligations. Under the 2011 Plan, the Company expects to incur total expenses related to termination benefits and facility costs of $9 million to $10 million, most of which represents cash expenditures. The Company expects to complete all actions under the 2011 Plan prior to June 30, 2012.

2010 Restructuring Plans
 
In December 2010, the Company initiated a worldwide restructuring plan (the “2010 Plan”) designed to better align financial and human resources in accordance with its strategic plans for the 2011 fiscal year.  During the fourth quarter of 2010, the Company recorded restructuring charges of $9.2 million related to severance costs for the elimination of 145 positions and $1.4 million for the partial closure of a facility. During 2011, the Company revised its previously recorded estimates of severance costs resulting in a restructuring benefit of $1.5 million and also recorded a restructuring charge of $0.3 million for the revised estimate of the costs associated with the partial facility closure. The severance revisions primarily resulted from the final severance negotiations for certain European employees, as well as the transferring of certain employees into alternative positions at Avid. During 2011, the Company also recorded facilities restructuring charges of approximately $1.0 million related to the closure of a facility in Germany, which included non-cash amounts totaling $0.1 million for fixed asset write offs. During the three months ended March 31, 2012, the Company recorded additional facilities restructuring charges of approximately $0.1 million for revised estimate of the costs associated with a previously closed facility. To date, total restructuring charges of approximately $10 million have been recorded under the 2010 Plan, and no further restructuring actions are anticipated under this plan.

During 2010, the Company also initiated acquisition-related restructuring actions and recorded related 2010 and 2011 restructuring charges of $2.0 million for the severance costs for 24 former Euphonix employees and the closure of three Euphonix facilities. During the three months ended March 31, 2012, the Company recorded additional facilities restructuring charges of approximately $0.2 million for a revised estimate of the costs associated with a previously closed facility. No further restructuring actions are anticipated under this plan.

2008 Restructuring Plan

In October 2008, the Company initiated a company-wide restructuring plan (the “2008 Plan”) that included a reduction in force of approximately 820 positions, including employees related to product line divestitures, and the closure of all or parts of eighteen facilities worldwide. During the fourth quarter of 2008 and in 2009, 2010 and 2011, the Company recorded total restructuring charges of $35.2 million related to employee termination costs, $12.8 million for the closure of facilities, $2.7 million related to the write-down of inventory and $4.3 million for revisions to previous estimates. During the three months ended March 31, 2012, the Company recorded restructuring charges of $0.2 million for a revised estimate of the costs associated with a previously closed facility. No further restructuring actions are anticipated under the 2008 Plan.

Accounting for Restructuring Plans

The Company records facility-related restructuring charges in accordance with ASC Topic 420, Liabilities: Exit or Disposal Cost Obligations. Based on the Company's policies for the calculation and payment of severance benefits, the Company accounts for employee-related restructuring charges as an ongoing benefit arrangement in accordance with ASC Topic 712, Compensation - Nonretirement Postemployment Benefits. Restructuring charges and accruals require significant estimates and assumptions, including sub-lease income assumptions. These estimates and assumptions are monitored on at least a quarterly basis for changes in circumstances and any corresponding adjustments to the accrual are recorded in the Company's statement of operations in the period when such changes are known.


20



The following table sets forth the activity in the restructuring accruals for the three months ended March 31, 2012 (in thousands):
 
Non-Acquisition-Related
Restructuring
Liabilities
 
Acquisition-Related
Restructuring
Liabilities
 
 
 
Employee-
Related
 
Facilities-
Related
 
Employee-
Related
 
Facilities-
Related
 
Total
Accrual balance at December 31, 2011 (revised)
$
4,422

 
$
6,445

 
$

 
$
470

 
$
11,337

Revisions of estimated liabilities
(362
)
 
360

 

 
170

 
168

Accretion

 
50

 

 

 
50

Cash payments for employee-related charges
(2,826
)
 

 

 

 
(2,826
)
Cash payments for facilities, net of sublease income

 
(1,024
)
 

 
(109
)
 
(1,133
)
Foreign exchange impact on ending balance
35

 
26

 

 

 
61

Accrual balance at March 31, 2012
$
1,269

 
$
5,857

 
$

 
$
531

 
$
7,657


The employee-related accruals at March 31, 2012 represent severance and outplacement costs to former employees that will be paid out within the next twelve months and are, therefore, included in the caption “accrued expenses and other current liabilities” in the Company's consolidated balance sheet at March 31, 2012.

The facilities-related accruals at March 31, 2012 represent estimated losses, net of subleases, on space vacated as part of the Company's restructuring actions. The leases, and payments against the amounts accrued, extend through 2017 unless the Company is able to negotiate earlier terminations. Of the total facilities-related accruals, $3.5 million is included in the caption “accrued expenses and other current liabilities” and $2.9 million is included in the caption “long-term liabilities” in the Company's consolidated balance sheet at March 31, 2012.

13.
SEGMENT INFORMATION

The Company's evaluation of the discrete financial information that is regularly reviewed by the chief operating decision makers, which include the Company's chief executive officer, chief operating officer and chief financial officer, has determined that since January 1, 2010 the Company has one reportable segment. The following table is a summary of the Company's revenues by type for the three months ended March 31, 2012 and 2011 (in thousands):
 
Three Months Ended March 31,
 
2012
 
 2011 (Revised)
Video product revenues
$
53,422

 
$
67,084

Audio product revenues
66,516

 
69,681

 
119,938

 
136,765

Services revenues
32,201

 
28,988

Total net revenues
$
152,139

 
$
165,753


The following table sets forth the Company's revenues by country for the three months ended March 31, 2012 and 2011 (in thousands). The categorization of revenues is based on the country in which the end user customer resides.
 
Three Months Ended March 31,
 
2012
 
2011 (Revised)
Revenues:
 
 
 
United States
$
60,573

 
$
65,469

Other countries
91,566

 
100,284

Total revenues
$
152,139

 
$
165,753



21



The following table sets forth the Company's revenues by geographic region for the three months ended March 31, 2012 and 2011:
 
Three Months Ended March 31,
 
2012
 
2011 (Revised)
Revenues:
 
 
 
Americas
$
73,490

 
$
79,219

Europe, Middle East and Africa
55,520

 
64,560

Asia-Pacific
23,129

 
21,974

Total revenues
$
152,139

 
$
165,753



14.
CREDIT AGREEMENT

On October 1, 2010, Avid Technology, Inc. and certain of its subsidiaries (the “Borrowers”) entered into a Credit Agreement with Wells Fargo Capital Finance LLC (“Wells Fargo”), which established two revolving credit facilities with combined maximum availability of up to $60 million for borrowings and letter of credit guarantees. The actual amount of credit available to the Borrowers will vary depending upon changes in the level of the respective accounts receivable and inventory, and is subject to other terms and conditions which are more specifically described in the Credit Agreement. The credit facilities have a maturity date of October 1, 2014, at which time Wells Fargo's commitments to provide additional credit will terminate and all outstanding borrowings by the Borrowers must be repaid. Prior to the maturity of the credit facilities, any amounts borrowed may be repaid and, subject to the terms and conditions of the Credit Agreement, reborrowed in whole or in part without penalty.

The Credit Agreement contains customary representations and warranties, covenants, mandatory prepayments, and events of default under which the Borrowers' payment obligations may be accelerated, including guarantees and liens on substantially all of the Borrowers' assets to secure their obligations under the Credit Agreement. The Credit Agreement requires that Avid Technology, Inc. (“Avid Technology”) maintain liquidity (comprised of unused availability under its portion of the credit facilities plus certain unrestricted cash and cash equivalents) of $10 million, at least $5 million of which must be from unused availability under its portion of the credit facilities. In addition, its subsidiary, Avid Technology International B.V. (“Avid Europe”), is required to maintain liquidity (comprised of unused availability under Avid Europe's portion of the credit facilities plus certain unrestricted cash and cash equivalents) of $5 million, at least $2.5 million of which must be from unused availability under Avid Europe's portion of the credit facilities. Interest accrues on outstanding borrowings under the credit facilities at a rate of either LIBOR plus 2.75% or a base rate (as defined in the Credit Agreement) plus 1.75%, at the option of Avid Technology or Avid Europe, as applicable. The Borrowers must also pay Wells Fargo a monthly unused line fee at a rate of 0.625% per annum.

The Company incurs certain loan fees and costs associated with its credit facilities. Such costs are capitalized as deferred borrowing costs and amortized as interest expense on a straight-line basis over the term of the Credit Agreement. At March 31, 2012, the balance of the Company's deferred borrowing costs was $0.7 million, which is net of accumulated amortization costs of $0.4 million.

During the three months ended March 31, 2012, Avid Technology borrowed and repaid $1.0 million under the credit line. At March 31, 2012, the Borrowers had no outstanding borrowings under the credit facilities. At March 31, 2012, Avid Technology and Avid Europe had letters of credit guaranteed under the credit facilities of $3.7 million and $2.1 million, respectively, and available borrowings under the credit facilities of approximately $30.9 million and $15.1 million, respectively, after taking into consideration the outstanding letters of credit and related liquidity covenant. At March 31, 2012, the Borrowers were in compliance with all covenants under the credit facilities. The Borrowers may borrow against the line of credit above the current outstanding borrowings to cover short-term cash requirements during 2012 as may be required to meet the funding needs of the business.


22




15. SUBSEQUENT EVENT

Subsequent to March 31, 2012 and prior to the filing of these financial statements, the Company received a proposal from a foreign tax authority regarding an in-process tax inquiry. The Company is currently evaluating the proposal.  If the proposal is accepted, the Company would receive previously recorded tax refund claims of approximately $3.0 million, and the Company would also agree to convert a previously recorded tax refund claim of approximately $1.5 million into a tax loss