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
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.
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.
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.
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.
AVID TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
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 |
|
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 |
|
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. |
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.
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 |
|
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.
| |
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.
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.
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.
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.
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.
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. |
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.
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 |
|
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.
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.
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 |
|
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 |
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.
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.
| |
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.
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.
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 |
|
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 |
|
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.
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 carryf