AVID-09.30.2012-10Q



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
 
(Mark One)
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended September 30, 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 (§232.405 of this chapter) 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 November 5, 2012 was 38,925,247.



AVID TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011 (Revised)
 
2012
 
2011 (Revised)
Net revenues:
 
 
 
 
 
 
 
Products
$
89,071

 
$
131,655

 
$
334,882

 
$
397,889

Services
36,297

 
33,043

 
102,905

 
94,343

Recoveries (allowances) related to divestitures
1,807

 
—

 
(1,041
)
 
—

Total net revenues
127,175

 
164,698

 
436,746

 
492,232

 
 
 
 
 
 
 
 
Cost of revenues:
 
 
 
 
 
 
 
Products
43,784

 
60,063

 
171,633

 
187,952

Services
15,107

 
15,586

 
42,149

 
44,346

Amortization of intangible assets
634

 
684

 
1,928

 
2,036

Restructuring costs
528

 
—

 
3,161

 
—

Total cost of revenues
60,053

 
76,333

 
218,871

 
234,334

Gross profit
67,122

 
88,365

 
217,875

 
257,898

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Research and development
23,099

 
28,960

 
77,474

 
89,386

Marketing and selling
36,629

 
45,395

 
126,017

 
136,312

General and administrative
10,542

 
13,518

 
39,338

 
42,737

Amortization of intangible assets
782

 
2,159

 
3,499

 
6,465

Restructuring costs, net
12,674

 
2,707

 
28,683

 
1,392

(Gain) loss on sales of assets
(206
)
 
—

 
9,493

 
597

Total operating expenses
83,520

 
92,739

 
284,504

 
276,889

 
 
 
 
 
 
 
 
Operating loss
(16,398
)
 
(4,374
)
 
(66,629
)
 
(18,991
)
 
 
 
 
 
 
 
 
Interest income
49

 
10

 
164

 
78

Interest expense
(404
)
 
(556
)
 
(1,124
)
 
(1,572
)
Other income, net
37

 
43

 
69

 
46

Loss before income taxes
(16,716
)
 
(4,877
)
 
(67,520
)
 
(20,439
)
Provision for income taxes, net
672

 
2,672

 
2,097

 
3,039

Net loss
$
(17,388
)
 
$
(7,549
)
 
$
(69,617
)
 
$
(23,478
)
 
 
 
 
 
 
 
 
Net loss per common share – basic and diluted
$
(0.45
)
 
$
(0.20
)
 
$
(1.80
)
 
$
(0.61
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – basic and diluted
38,859

 
38,511

 
38,767

 
38,386


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


1


AVID TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands, unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011 (Revised)
 
2012
 
2011 (Revised)
Net loss
$
(17,388
)
 
$
(7,549
)
 
$
(69,617
)
 
$
(23,478
)
 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Net change in defined benefit plan
—

 
—

 
—

 
143

Foreign currency translation adjustments, net of taxes
2,621

 
(8,211
)
 
1,435

 
(687
)
 
 
 
 
 
 
 
 
Comprehensive loss
$
(14,767
)
 
$
(15,760
)
 
$
(68,182
)
 
$
(24,022
)

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



2


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

 
September 30,
2012
 
December 31, 2011 (Revised)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
71,359

 
$
32,855

Accounts receivable, net of allowances of $14,663 and $15,985 at September 30, 2012 and December 31, 2011, respectively
75,074

 
104,305

Inventories
80,435

 
111,397

Deferred tax assets, net
1,475

 
1,480

Prepaid expenses
7,616

 
7,652

Other current assets
16,303

 
14,405

Total current assets
252,262

 
272,094

Property and equipment, net
43,825

 
53,487

Goodwill
238,553

 
246,592

Intangible assets, net
9,637

 
18,524

Other assets
9,689

 
11,568

Total assets
$
553,966

 
$
602,265

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
36,307

 
$
42,533

Accrued compensation and benefits
22,706

 
31,750

Accrued expenses and other current liabilities
41,897

 
35,108

Income taxes payable
8,972

 
8,950

Deferred revenues
58,180

 
45,768

Total current liabilities
168,062

 
164,109

Long-term liabilities
36,581

 
27,885

Total liabilities
204,643

 
191,994

 
 
 
 
Contingencies (Note 11)

 

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock
423

 
423

Additional paid-in capital
1,025,640

 
1,019,200

Accumulated deficit
(606,915
)
 
(532,477
)
Treasury stock at cost, net of reissuances
(76,686
)
 
(82,301
)
Accumulated other comprehensive income
6,861

 
5,426

Total stockholders’ equity
349,323

 
410,271

Total liabilities and stockholders’ equity
$
553,966

 
$
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)
 
Nine Months Ended
 
September 30,
 
2012
 
2011 (Revised)
Cash flows from operating activities:
 
 
 
Net loss
$
(69,617
)
 
$
(23,478
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
20,905

 
23,540

(Recovery from) provision for doubtful accounts
(101
)
 
534

Non-cash provision for restructuring
4,950

 
258

Non-cash provision for allowances for divestiture
1,041

 
—

Loss on sales of assets
9,745

 
597

Gain on disposal of fixed assets
(257
)
 
(10
)
Compensation expense from stock grants and options
7,074

 
11,835

Non-cash interest expense
220

 
228

Foreign currency transaction losses
1,211

 
3,988

Changes in deferred tax assets and liabilities, excluding initial effects of acquisitions
823

 
(4
)
Changes in operating assets and liabilities, excluding initial effects of acquisitions:
 
 
 
Accounts receivable
28,201

 
8,754

Inventories
16,995

 
(18,587
)
Prepaid expenses and other current assets
(2,705
)
 
631

Accounts payable
(6,247
)
 
(12,026
)
Accrued expenses, compensation and benefits and other liabilities
2,351

 
(25,830
)
Income taxes payable
84

 
(146
)
Deferred revenues
16,282

 
15,701

Net cash provided by (used in) operating activities
30,955

 
(14,015
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(6,659
)
 
(8,862
)
Proceeds from sales of assets
13,309

 
—

Decrease (increase) in other long-term assets
191

 
(511
)
Net cash provided by (used in) investing activities
6,841

 
(9,373
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from the issuance of common stock under employee stock plans
160

 
1,753

Proceeds from revolving credit facilities
14,000

 
21,000

Payments on revolving credit facilities
(14,000
)
 
(8,000
)
Net cash provided by financing activities
160

 
14,753

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
548

 
(495
)
Net increase (decrease) in cash and cash equivalents
38,504

 
(9,130
)
Cash and cash equivalents at beginning of period
32,855

 
42,782

Cash and cash equivalents at end of period
$
71,359

 
$
33,652

 
 
 
 
Supplemental information:
 
 
 
Cash paid for income taxes, net of refunds
$
4,073

 
$
2,922


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 (Revised) 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, as well as the condensed consolidated financial statements in the Form 10-Q for the period ended March 31, 2012 as it pertains to the "Revised Prior Period Amounts" section below. Certain prior period amounts disclosed in these condensed consolidated financial statements have also been reclassified to conform to the current year presentation. None of these reclassifications or changes in presentation is considered material.

The Company's preparation of condensed consolidated 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. The most significant estimates reflected in these condensed consolidated financial statements include revenue recognition, stock-based compensation, accounts receivable and sales allowances, inventory valuation, goodwill and intangible asset valuations, loss on assets held-for-sale, fair value measurements, restructuring charges 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 no recognized or unrecognized subsequent events required recognition or disclosure in these financial statements.

Divestiture of Consumer Audio and Video Businesses and 2012 Restructuring Plan

On July 2, 2012, the Company announced a series of strategic actions that it initiated that allowed it to focus on its Media Enterprise and Post and Professionals market segments and to drive improved operating performance. These strategic actions include the divestiture of certain of the Company's consumer focused product lines, a rationalization of the business operations and a reduction in force.
As part of these actions, on July 2, 2012, the Company sold a group of consumer audio products to Numark Industries, L.P. (“Numark”) for approximately $11.8 million and sold a group of consumer video products to Corel Corporation (“Corel”) for approximately $3.0 million. The consumer audio products that were sold include M-Audio brand keyboards, controllers, certain interfaces, speakers and digital DJ equipment and other product lines, as well as certain associated intellectual property, including the M-Audio trademark. Avid will continue to develop and sell its Pro Tools line of software and hardware, as well as certain associated I/O devices including Mbox and Fast Track. The consumer video products that were sold include the Pinnacle and Avid Studio range of software and hardware. This includes Avid Studio and Pinnacle Studio desktop editing software and the Avid studio for the iPad as well as legacy video capture offerings and certain associated intellectual property including the Pinnacle trademark. Total revenues for 2011 from these divested product lines were approximately $93.5 million, or 14% of the Company's consolidated net revenues for the year ended December 31, 2011 (Revised).
On July 2, 2012, as part of the announcement of strategic actions, the Company announced a restructuring plan (the “2012 Plan”) intended to improve operational efficiencies. Actions under the 2012 Plan included a reduction in force and the closure or partial closure of certain facilities. Together, the transfer of employees to Corel and Numark as part of the divestitures and the reduction in force have reduced the Company's permanent employee headcount by approximately 330 positions. The Company anticipates that it will complete all actions under the 2012 Plan prior to the year ending December 31, 2012. The Company expects to incur total expenses relating to termination benefits, facility and other costs associated with the reduction in force and related actions of approximately $25.1 million, which primarily represent cash expenditures. During the quarter ended September 30, 2012, the

5


Company recorded restructuring charges of approximately $10.2 million under this plan.
See Note 7, Divestitures, and Note 13, Restructuring Costs and Accruals, for further details and the related accounting for these consumer product line divestitures and the 2012 Plan. See also Notes 4, 5, 6, 9 and 12 for other disclosures related to these divestitures and restructuring plan.

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 through December 31, 2011. Additionally, as the tax was not withheld and paid to the taxing authority, the Company might be 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 $1.2 million ($0.8 million interest and $0.4 million penalties) and $1.0 million ($0.6 million interest and $0.4 million penalties) at September 30, 2012 and December 31, 2011 (Revised), respectively. During the three months ended June 30, 2012, the Company recorded a discrete tax benefit of approximately $3.8 million when it determined that it would repay the intercompany note and file a refund claim for the withholding taxes due (see Note 16). In addition, after repaying the intercompany note, the Company requested a refund from the taxing authority for any penalties assessed under a voluntary compliance approach, although there can be no assurance that an abatement of the penalties will be obtained.

In accordance with Securities and Exchange Commission ("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 SEC 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 believed the impact would have been significant and would impact comparisons to prior periods. Therefore, as required by SAB 108, the Company revised in its Form 10-Q for the period ended March 31, 2012 previously reported financial information for each quarter of 2011 and for the years ended December 31, 2011 (Revised) and 2010. In addition to correcting the 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, as amended.

The Condensed Consolidated Statements of Operations for the years ended December 31, 2011 (Revised) and 2010 and the three months ended March 31, 2011 (Revised), June 30, 2011 (Revised), September 30, 2011 (Revised), and December 31, 2011 (Revised) have been revised to reflect the effect of the withholding tax errors described above and the other immaterial errors and were presented in the Form 10-Q for the period ended March 31, 2012. Revised Condensed Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2011 (Revised) have been presented herein.

The Condensed Consolidated Balance Sheets at December 31, 2011 (Revised) 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 Sheets resulted in increases in accumulated deficit of $7.9 million, $8.2 million, and $6.3 million, respectively, at December 31, 2011 (Revised), 2010 and 2009 and were presented in the Form 10-Q for the period ended March 31, 2012. Revised Condensed Consolidated Balance Sheets for December 31, 2011 (Revised) 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.










6




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

 
$
32,855

Accounts receivable, net
104,305

 
104,305

Inventories
111,833

 
111,397

Deferred tax assets, net
1,480

 
1,480

Prepaid expenses
7,652

 
7,652

Other current assets
14,509

 
14,405

Total current assets
272,634

 
272,094

Property and equipment, net
53,487

 
53,487

Goodwill
246,398

 
246,592

Intangible assets, net
18,524

 
18,524

Other assets
11,568

 
11,568

Total assets
$
602,611

 
$
602,265

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

 
$
42,533

Accrued compensation and benefits
31,350

 
31,750

Accrued expenses and other current liabilities
34,174

 
35,108

Income taxes payable
3,898

 
8,950

Deferred revenues
45,768

 
45,768

Total current liabilities
157,723

 
164,109

Long-term liabilities
27,885

 
27,885

Total liabilities
185,608

 
191,994

Stockholders’ equity:
 
 
 
Common stock
423

 
423

Additional paid-in capital
1,018,604

 
1,019,200

Accumulated deficit
(524,530
)
 
(532,477
)
Treasury stock at cost, net of reissuances
(82,301
)
 
(82,301
)
Accumulated other comprehensive income
4,807

 
5,426

Total stockholders’ equity
417,003

 
410,271

Total liabilities and stockholders’ equity
$
602,611

 
$
602,265













7




Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2011
(in thousands except per share date, unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2011
 
September 30, 2011
 
As Reported
 
As Revised
 
As Reported
 
As Revised
Net revenues:
 
 
 
 
 
 
 
Products
$
131,875

 
$
131,655

 
$
398,400

 
$
397,889

Services
33,090

 
33,043

 
94,232

 
94,343

Total net revenues
164,965

 
164,698

 
492,632

 
492,232

 
 
 
 
 
 
 
 
Cost of revenues:
 
 
 
 
 
 
 
Products (a)
60,048

 
60,063

 
187,663

 
187,952

Services (a)
16,497

 
15,586

 
46,196

 
44,346

Amortization of intangible assets
685

 
684

 
2,036

 
2,036

Total cost of revenues
77,230

 
76,333

 
235,895

 
234,334

Gross profit
87,735

 
88,365

 
256,737

 
257,898

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Research and development
28,960

 
28,960

 
89,386

 
89,386

Marketing and selling
45,411

 
45,395

 
136,273

 
136,312

General and administrative
13,240

 
13,518

 
43,458

 
42,737

Amortization of intangible assets
2,159

 
2,159

 
6,465

 
6,465

Restructuring costs
2,707

 
2,707

 
328

 
1,392

Loss on sale of assets
—

 
—

 
597

 
597

Total operating expenses
92,477

 
92,739

 
276,507

 
276,889

 
 
 
 
 
 
 
 
Operating loss
(4,742
)
 
(4,374
)
 
(19,770
)
 
(18,991
)
 
 
 
 
 
 
 
 
Interest income
10

 
10

 
78

 
78

Interest expense
(556
)
 
(556
)
 
(1,695
)
 
(1,572
)
Other income
43

 
43

 
46

 
46

Loss before income taxes
(5,245
)
 
(4,877
)
 
(21,341
)
 
(20,439
)
Provision for income taxes, net
2,774

 
2,672

 
3,657

 
3,039

Net loss
$
(8,019
)
 
$
(7,549
)
 
$
(24,998
)
 
$
(23,478
)
 
 
 
 
 
 
 
 
Net loss per common share – basic and diluted
$
(0.21
)
 
$
(0.20
)
 
$
(0.65
)
 
$
(0.61
)
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – basic and diluted
38,511

 
38,511

 
38,386

 
38,386


(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 (Revised).


8



Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU allows an organization the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An organization electing to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment, that it is “more likely than not” that the asset is impaired.  ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company will adopt this ASU for the year ending December 31, 2013. Adoption is not expected to have an impact on the Company's consolidated financial position, results of operations or cash flows.

In September 2011, the FASB issued 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 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.

9


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Options
6,125

 
5,653

 
6,193

 
4,692

Non-vested restricted stock and restricted stock units
609

 
691

 
643

 
471

Anti-dilutive potential common shares
6,734

 
6,344

 
6,836

 
5,163


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 common stock equivalents that were excluded from the calculation of Diluted EPS due to the net loss for the relevant period (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Options
—

 
6

 
—

 
68

Non-vested restricted stock and restricted stock units
31

 
13

 
52

 
89

Total anti-dilutive common stock equivalents
31

 
19

 
52

 
157


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 condensed consolidated 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 September 30, 2012 and December 31, 2011 (Revised), the Company had foreign currency forward contracts outstanding with notional values of $27.4 million and $69.1 million, respectively, as hedges against forecasted foreign-currency-denominated receivables, payables and cash balances. The following table sets forth where the Company recorded the foreign currency forward contracts within its consolidated condensed balance sheet and the related fair values at September 30, 2012 and December 31, 2011 (Revised) (in thousands):
Derivatives Not Designated as Hedging
Instruments under ASC Topic 815
 
Balance Sheet Location
 
Fair Value at September 30, 2012
 
Fair Value at December 31, 2011 (Revised)
Financial assets:
 
 
 
 
 
 
Foreign currency forward contracts
 
Other current assets
 
$206
 
$—
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
Foreign currency forward contracts
 
Accrued expenses and other current liabilities
 
$17
 
$1,430










10


The following table sets forth the net foreign exchange losses recorded as marketing and selling expenses in the Company's condensed consolidated statements of operations during the three and nine months ended September 30, 2012 and September 30, 2011 (Revised) 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) Gain Recorded in Marketing and Selling Expenses
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
(Revised)
 
 
 
(Revised)
Foreign currency forward contracts and revaluation of hedged items, net
 
$(213)
 
$459
 
$(646)
 
$999

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.


11



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 deferred compensation assets and foreign-currency forward contracts. At September 30, 2012 and December 31, 2011 (Revised), 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 September 30, 2012 and December 31, 2011 (Revised) (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using
 
September 30,
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
$
1,636

 
$
1,076

 
$
560

 
$
—

Foreign currency forward contracts
206

 
—

 
206

 
—

 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
Deferred compensation obligations
$
4,052

 
$
1,076

 
$
2,976

 
$
—

Foreign currency forward contracts
17

 
—

 
17

 
—


 
 
 
Fair Value Measurements at Reporting Date Using
 
December 31, 2011(Revised)
 
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.


12


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 nine months ended September 30, 2012 and the year ended December 31, 2011 (Revised) (in thousands):
 
 
 
Fair Value Measurements Using
 
 
 
Nine Months Ended September 30, 2012
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Recognized
Loss/Related
Expenses
Assets:
 
 
 
 
 
 
 
 
 
Net assets sold in divestitures
$
14,841

 
$
—

 
$
14,841

 
$
—

 
$
9,745

Liabilities:
 
 
 
 
 
 
 
 
 
Facilities-related restructuring accruals
$
11,977

 
$
—

 
$
11,977

 
$
—

 
$
11,977


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

 
$
—

 
$
2,593

 
$
—

 
$
2,593


The Company's level 2 assets consist of net assets that were sold in the divestitures that closed on July 2, 2012. The Company classified its consumer businesses as held for sale as of June 30, 2012 and recorded the impairment as a loss on sale of assets held for sale within operating expenses in the statement of operations.

During the nine months ended September 30, 2012 and the year ended December 31, 2011 (Revised), 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 13 for further information on the Company's restructuring activities.

13



5.
ACCOUNTS RECEIVABLE

Accounts receivable, net of allowances, consisted of the following at September 30, 2012 and December 31, 2011 (Revised) (in thousands):
 
September 30, 2012
 
December 31, 2011 (Revised)
Accounts receivable
$
89,737

 
$
120,290

Less:
 
 
 
Allowance for doubtful accounts
(1,482
)
 
(2,342
)
   Allowance for sales returns related to divestitures
(1,484
)
 
—

Allowance for sales returns and rebates
(11,697
)
 
(13,643
)
 
$
75,074

 
$
104,305


The accounts receivable balances at September 30, 2012 and December 31, 2011 (Revised) exclude approximately $4.8 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. The allowance for sales returns related to divestitures has been reduced by $1.8 million during the three-month period ended September 30, 2012 due to a change in estimate.

6.
INVENTORIES

Inventories consisted of the following at September 30, 2012 and December 31, 2011 (Revised) (in thousands):
 
September 30, 2012
 
December 31, 2011 (Revised)
Raw materials
$
10,200

 
$
11,306

Work in process
306

 
415

Finished goods
69,929

 
99,676

 
$
80,435

 
$
111,397


At September 30, 2012 and December 31, 2011 (Revised), finished goods inventory included $5.4 million and $7.2 million, respectively, associated with products shipped to customers and deferred labor costs for revenue arrangements that had not yet been recognized. In connection with the divestitures referenced in Note 7, during the nine-month period ended September 30, 2012, approximately $10.8 million of inventory, including finished goods inventory and capitalized overhead, related to the consumer audio and consumer video product lines was allocated to the divestitures and included in the loss on sales of assets in our consolidated statements of operations, and approximately $3.2 million of inventory to be disposed was recorded as a restructuring charge within cost of revenues.

7. DIVESTITURES

On July 2, 2012, the Company sold a group of consumer audio products and certain related intellectual property to Numark for approximately $11.8 million. The Company received $10.9 million of the purchase price in the third quarter of 2012, with the remaining balance to be held in escrow until the final release date in 2013. The divestiture met the criteria for held-for-sale accounting and the assets of this business were included as a single line item in the asset section of the condensed consolidated financial statements as of June 30, 2012. The Company determined that the consumer audio product line constituted a business, as defined by The Financial Accounting Standards Board's Accounting Standards Codification (ASC) Topic 350, Intangibles-Goodwill and Other, and therefore, the assets held-for-sale of this business included an allocation of $6.3 million of goodwill from the Company's single reporting unit. Even though the consumer audio product line constituted a business, the Company determined that this business did not represent a component of the Company that would require the presentation of the divestiture as a discontinued operation. This decision was based on the fact that the consumer audio product line does not have operations or cash flows that are clearly distinguishable and largely independent from the rest of the Company's single reporting unit.

On July 2, 2012, the Company sold a group of consumer video products and certain related intellectual property to Corel for approximately $3.0 million. The Company received $2.4 million of the purchase price in the third quarter of 2012, with the

14


remaining balance to be held in escrow until the final release date in 2014. The divestiture met the criteria for held-for-sale accounting and the assets of this business were included as a single line item in the asset section of the condensed consolidated financial statements as of June 30, 2012. The Company determined that the consumer video product line constituted a business, as defined by (ASC) Topic 350, Intangibles-Goodwill and Other, and therefore, the assets held-for-sale of this business included an allocation of $1.7 million of goodwill from the Company's single reporting unit. Even though the consumer video product line constituted a business, the Company determined that this business did not represent a component of the Company that would require the presentation of the divestiture as a discontinued operation. This decision was based on the fact that the consumer video product line does not have operations or cash flows that are clearly distinguishable and largely independent from the rest of the Company's single reporting unit.

As of June 30, 2012, the Company measured the net assets held-for-sale at estimated fair value less costs to sell. Accordingly, during the quarter ended June 30, 2012, the Company recorded total estimated write-downs and costs to sell on the assets held-for-sale of approximately $10.0 million, within operating expenses, representing the excess of the aggregate carrying amount of such net assets over the aggregate of their fair value plus costs to sell. During the three-month period ended September 30, 2012, the Company recorded a gain on the sales of assets of approximately $0.2 million, primarily driven by a change in the estimated warranty obligation related to the divestitures.

The total net assets that were sold in connection with the consumer audio and consumer video divestitures were approximately $12.9 million. The net book value of the assets and liabilities that were sold and the related write-downs to fair value for each of the consumer audio and consumer video divestitures were as follows (in thousands):

 
 
 
Consumer Audio
 
Consumer Video
 
Total
Inventory
$
7,707

 
$
3,058

 
$
10,765

Prepaid expense
—

 
60

 
60

Capitalized software
102

 
270

 
372

Fixed assets
454

 
24

 
478

Goodwill and intangible assets
9,855

 
1,662

 
11,517

Accrued warranty
—

 
(507
)
 
(507
)
Net book value of divested assets and liabilities
18,118

 
4,567

 
22,685

Less write down to fair value
(6,277
)
 
(1,567
)
 
(7,844
)
Estimated fair value
$
11,841

 
$
3,000

 
$
14,841

 
 
 
 
 
 
Less costs to sell
$
(1,013
)
 
$
(888
)
 
$
(1,901
)
Net assets and liabilities sold
$
10,828

 
$
2,112

 
$
12,940

    
8.
PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at September 30, 2012 and December 31, 2011 (Revised) (in thousands):
 
 
September 30, 2012
 
December 31, 2011 (Revised)
Computer and video equipment and software
 
$
132,352

 
$
132,022

Manufacturing tooling and testbeds
 
5,500

 
6,407

Office equipment
 
4,812

 
4,709

Furniture, fixtures and other
 
11,437

 
11,819

Leasehold improvements
 
32,831

 
34,786

 
 
186,932

 
189,743

Less accumulated depreciation and amortization (a)
 
143,107

 
136,256

 
 
$
43,825

 
$
53,487

(a) In the nine months ended September 30, 2012 the company wrote off approximately $8.7 million of fully depreciated fixed assets.

15



9.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

Goodwill

Goodwill resulting from the Company's acquisitions consisted of the following at September 30, 2012 and December 31, 2011 (Revised) (in thousands):
 
September 30, 2012
 
December 31, 2011 (Revised)
Goodwill acquired (a)
$
418,497

 
$
418,492

Accumulated impairment losses
(171,900
)
 
(171,900
)
Allocated to loss on sales of assets
(8,044
)
 
—

Goodwill (a)
$
238,553

 
$
246,592

 
(a)
The September 30, 2012 gross and net goodwill amounts include total foreign currency translation increases of approximately $0.1 million from the December 31, 2011 (Revised) 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.

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%.

At September 30, 2012, as a result of lower than expected year-to-date 2012 revenues and operating results and a reduction in forecasted 2012 results, the Company performed an interim step one goodwill impairment test. The interim step one test at September 30, 2012 indicated that the estimated fair value of the Company's single reporting unit (approximately $510 million) exceeded its carrying value of approximately $349.3 million by approximately 46%. Therefore, no goodwill impairment existed at September 30, 2012, and the Company was not required to perform step two. In connection with its interim goodwill step one impairment test at September 30, 2012, 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, 2012 ($9.60 per share). If the Company had used the closing stock price of its common stock on September 28, 2012 ($9.46 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 unit would have exceeded its carrying value by approximately 45% at September 30, 2012. The Company's market capitalization based on the closing stock price at September 28, 2012 was approximately $367.8 million, compared to the carrying value of the Company's single reporting unit of $349.3 million.


16


The Company's market capitalization based on the closing price at November 5, 2012 ($6.30 per share) was approximately $245.2 million compared to the carrying value of the Company's single reporting unit of $349.3 million at September 30, 2012. This implies a control premium of 43%.
The Company will perform its annual goodwill impairment test during the fourth quarter of 2012. Given the recent decline and continued volatility in the price of the Company's common stock, it is possible that the Company will fail the step one goodwill impairment test and will be required to perform step two of the goodwill impairment test. Step two would require the Company to perform a hypothetical purchase price allocation for its single reporting unit, allocating the reporting unit's estimated fair value to its assets and liabilities, and to determine the implied fair value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss would be recognized for the difference. While the Company cannot make a determination at this time, it is possible that a goodwill impairment loss will be recorded in the fourth quarter of 2012.
Acquisition-Related Identifiable Intangible Assets

Amortizing identifiable intangible assets related to the Company's acquisitions consisted of the following at September 30, 2012 and December 31, 2011 (Revised) (in thousands):
 
September 30, 2012
 
December 31, 2011 (Revised)
 
 Gross
 
Accumulated Amortization
 
 Net
 
 Gross
 
Accumulated Amortization
 
Net
Completed technologies and patents
$
52,646

 
$
(50,459
)
 
$
2,187

 
$
74,624

 
$
(70,536
)
 
$
4,088

Customer relationships (a)
49,475

 
(42,122
)
 
7,353

 
68,226

 
(54,396
)
 
13,830

Trade names
5,965

 
(5,965
)
 
—

 
14,763

 
(14,577
)
 
186

License agreements
—

 
—

 
—

 
560

 
(560
)
 
—

Non-compete covenants
1,159

 
(1,062
)
 
97

 
1,368

 
(948
)
 
420

Total (b)
$
109,245

 
$
(99,608
)
 
$
9,637

 
$
159,541

 
$
(141,017
)
 
$
18,524

 
(a)
In connection with the divestitures referenced in Note 7, during the nine-month period ended September 30, 2012, approximately $3.5 million of net customer relationships, related to the consumer audio product line, was allocated to the divestiture and included in the loss on sales of assets in our consolidated statements of operations.
(b) In the nine months ended September 30, 2012 the company wrote off approximately $40.1 million of fully amortized intangible assets.

Amortization expense related to all intangible assets in the aggregate was $1.4 million and $2.8 million, respectively, for the
three months ended September 30, 2012 and September 30, 2011 (Revised), and $5.4 million and $8.5 million, respectively, for
the nine months ended September 30, 2012 and 2011. The Company expects amortization of these intangible assets to be
approximately $2.0 million for the remainder of 2012, $4.0 million in 2013, $2.0 million in 2014, $1.0 million in 2015 and $1.0 million in 2016.

In connection with the Company's goodwill impairment test at September 30, 2012 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 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 September 30, 2012 and December 31, 2011 (Revised) (in thousands):
 
September 30, 2012
 
December 31, 2011 (Revised)
 
 
Gross
 
Accumulated
Amortization
 
 
Net
 
 
Gross
 
Accumulated
Amortization
 
 
Net
Capitalized software costs
$
5,934

 
$
(4,873
)
 
$
1,061

 
$
6,876

 
$
(4,730
)
 
$
2,146


17



Capitalized software development costs amortized to cost of product revenues were $0.1 million and $0.3 million for the three months ended September 30, 2012 and September 30, 2011 (Revised), respectively, and $0.7 million and $0.9 million for the nine months ended September 30, 2012 and 2011 (Revised), respectively. In connection with the divestitures referenced in Note 7, during the nine-month period ended September 30, 2012, approximately $0.4 million of net capitalized software related to the consumer audio and consumer video product lines was allocated to the divestiture and included in the loss on sales of assets in our consolidated statements of operations. The Company expects amortization of capitalized software costs to be approximately $0.1 million for the remainder of 2012, $0.4 million in 2013 and $0.6 million thereafter.

10.
LONG-TERM LIABILITIES

Long-term liabilities consisted of the following at September 30, 2012 and December 31, 2011 (Revised) (in thousands):
 
September 30, 2012
 
December 31, 2011 (Revised)
Long-term deferred tax liabilities, net
$
2,218

 
$
1,754

Long-term deferred revenue
13,249

 
9,378

Long-term deferred rent
9,660

 
10,666

Long-term accrued restructuring
8,478

 
3,185

Long-term deferred compensation
2,976

 
2,902

 
$
36,581

 
$
27,885


11.
CONTINGENCIES

At September 30, 2012, the Company was subject to various litigations 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 operation of the Company. Also, in connection with the 2012 Plan and the sale of certain assets to Numark and Corel, various claims have been asserted, and unasserted claims may exist, against the Company from or related to contractual, employee relations, or other matters. At this time, the Company believes that a loss in excess of recorded accruals and allowances related to the 2012 Plan and the divestitures is neither probable nor remote, and based on the information currently available regarding these claims, the Company is unable to determine an estimate, or range of estimates, of potential losses above the recorded accruals and allowances. See Notes 13 and 5 for the amounts recorded as accruals and allowances related to the 2012 Plan and the divestitures of the consumer audio and consumer video product lines.

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 September 30, 2012 and December 31, 2011 (Revised). 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,

18


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 September 30, 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 September 30, 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 September 30, 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 September 30, 2012, the Company was not in default of this lease.

The Company has letters of credit totaling approximately $3.7 million and $4.3 million for Avid Technology and Avid Europe, 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 nine months ended September 30, 2012 and September 30, 2011 (Revised) (in thousands):
 
Nine Months Ended September 30,
 
2012
 
2011
Accrual balance at beginning of year (revised)
$
5,960

 
$
5,894

Accruals for product warranties
8,601

 
5,523

Costs of warranty claims
(7,345
)
 
(6,326
)
Allocation to divestitures
(507
)
 
—

Accrual balance at end of period
$
6,709

 
$
5,091


The total warranty accrual of $6.7 million is included in the caption “accrued expenses and other current liabilities” in the Company's consolidated balance sheet at September 30, 2012.


12.
STOCKHOLDERS' EQUITY

Stock Incentive Plans


19


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 2,853,252 at September 30, 2012, including 317,347 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 nine months ended September 30, 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)
2,010,400

 
$11.17
 
 
 
 
Exercised
(1,121
)
 
$9.55
 
 
 
 
Forfeited or canceled
(1,522,014
)
 
$16.78
 
 
 
 
Options outstanding at September 30, 2012 (b)
5,854,410

 
$17.81
 
4.22
 
$155,177
Options vested at September 30, 2012 or expected to vest
5,200,369

 
$17.84
 
4.19
 
$133,833
Options exercisable at September 30, 2012
2,260,515

 
$20.00
 
3.10
 
$2,194
 
(a)
Options granted during the nine months ended September 30, 2012 included 111,000 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 September 30, 2012 included 1,763,155 options that had vesting based on either performance conditions, market conditions or a combination of performance and market conditions.

The following table sets forth the valuation weighted-average key assumptions and fair value results for stock options granted during the nine months ended September 30, 2012 and September 30, 2011 (Revised):
 
 
Nine Months Ended September 30,
 
 
2012
 
2011 (Revised)
Expected dividend yield
 
0.00%
 
0.00%
Risk-free interest rate
 
0.94%
 
2.06%
Expected volatility
 
52.81%
 
41.2%
Expected life (in years)
 
4.56
 
4.48
Weighted-average fair value of options granted (per share)
 
$4.91
 
$7.63

During the nine months ended September 30, 2012, there were no material proceeds from option exercises. During the nine months ended September 30, 2011 (Revised), the aggregate intrinsic value of stock options exercised was approximately $1.1 million and the cash received from the exercise of stock options totaled $2.2 million. The Company did not realize any actual tax benefit from tax deductions for stock option exercises during the nine months ended September 30, 2012 or September 30, 2011 (Revised) 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 nine months ended September 30, 2012 is as follows:

20


 
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)
352,500

 
$11.00
 
 
 
 
Vested
(232,572
)
 
$19.70
 
 
 
 
Forfeited
(241,339
)
 
$16.56
 
 
 
 
Non-vested at September 30, 2012 (b)
700,622

 
$15.86
 
3.21
 
$6,621
Expected to vest
607,928

 
$15.69
 
2.05
 
$5,745
 
(a)
Restricted stock units granted during the nine months ended September 30, 2012 included 155,250 units that had vesting based on performance conditions.
(b)
Non-vested restricted stock units at September 30, 2012 included 416,500 units that had vesting based on either performance conditions, or market conditions or a combination of performance and 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 nine months ended September 30, 2011 (Revised). No restricted stock units with vesting based on market conditions or a combination of performance and market conditions were granted during the nine months ended September 30, 2012.
 
Nine Months Ended September 30, 2011 (Revised)
Expected dividend yield
0.00%
Risk-free interest rate
3.9%
Expected volatility
41.5%
Expected life (in years)
3.04

The weighted-average grant date fair value of restricted stock units granted during the nine months ended September 30, 2011 (Revised) was $25.16. The total fair value of restricted stock units vested during the nine months ended September 30, 2012 and September 30, 2011 (Revised) was $4.6 million and $5.1 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 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 nine months ended September 30, 2012 and September 30, 2011 (Revised):
 
Nine Months Ended September 30,
 
2012
 
2011 (Revised)
Expected dividend yield
0.00%
 
0.00%
Risk-free interest rate
0.08%
 
0.42%
Expected volatility
51.7%
 
42.1%
Expected life (in years)
0.25
 
0.24
Weighted-average fair value of shares issued (per share)
$1.45
 
$2.55

The following table sets forth the quantities and average prices of shares issued under the ESPP for the nine months ended

21


September 30, 2012 and September 30, 2011 (Revised):
 
Nine Months Ended September 30,
 
2012
 
2011
Shares issued under the ESPP
100,320
 
67,342
Average price of shares issued under ESPP
$7.79
 
$13.46

A total of 512,187 shares remained available for issuance under the ESPP at September 30, 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 September 30, 2012, the Company's annualized estimated forfeiture rates were 0% for non-employee director awards, 10% for executive management awards 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 and nine months ended September 30, 2012 and December 31, 2011 (Revised), respectively (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011 (Revised)
 
2012
 
2011 (Revised)
Cost of products revenues
$
79

 
$
168

 
$
283

 
$
417

Cost of services revenues
129

 
63

 
436

 
608

Research and development expenses
212

 
435

 
787

 
1,334

Marketing and selling expenses
620

 
1,051

 
1,818

 
3,625

General and administrative expenses
659

 
1,970

 
3,750

 
5,851

 
$
1,699

 
$
3,687

 
$
7,074

 
$
11,835


As a result of the 2012 restructuring plan, certain time based stock options and restricted stock unit awards were accelerated resulting in $1.0 million of expense which was offset by $2.1 million of reduced expense due to the forfeiture of performance based options and restricted stock units. The net effect to operating expenses was a benefit of $1.1 million within marketing and selling expenses in the Company's consolidated statements of operations for the three and nine months ended September 30, 2012. During the three and nine month period ended September 30, 2012 it was determined that certain targets for performance based options would not be met prior to the expiration of their term. This resulted in a $0.8 million reduction in stock based compensation in the general and administrative expenses in the Company's consolidated statements of operations for the three and nine month period ended September 30, 2012. At September 30, 2012, there was approximately $19 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.

13.
RESTRUCTURING COSTS AND ACCRUALS

2012 Restructuring Plan

In June 2012, the Company committed to a series of strategic actions (the "2012 Plan") to focus on its Media Enterprise and Post and Professionals market segments and to drive improved operating performance. These actions included the divestiture of certain of the Company's consumer-focused product lines, a rationalization of the business operations and a reduction in force. Actions under the plan included the elimination of approximately 330 positions and the closure of one of the Company's facilities in Burlington, Massachusetts and partial closure of facilities in Mountain View and Daly City, California. The Company recorded restructuring charges of $15.4 million related to severance costs and $9.4 million for the closure or partial closure of facilities and $0.3 million for contract termination costs. To date the Company has recorded total restructuring charges of approximately $25.1 million under the 2012 Plan. The Company does not expect any significant further charges and expects to complete all actions under the 2012 Plan prior to December 31, 2012.

2011 Restructuring Plan

22



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, California. 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 nine months ended September 30, 2012, the Company recorded restructuring revisions of approximately $0.1 million for a revised estimate of the costs associated with a previously closed facility. To date the Company has recorded total restructuring charges of approximately $9.7 million under the 2011 Plan. No further restructuring actions are anticipated under the 2011 plan.


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 nine months ended September 30, 2012, the Company recorded additional facilities restructuring charges of approximately $0.9 million for revised estimate of the costs associated with a previously closed facility. To date, total restructuring charges of approximately $11.3 million have been recorded under the 2010 Plan, and no further restructuring actions are anticipated under the 2010 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 nine months ended September 30, 2012, the Company recorded additional facilities restructuring charges of approximately $0.6 million for a revised estimate of the costs associated with a previously closed facility. No further restructuring actions are anticipated in connection with these restructuring actions.

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 nine months ended September 30, 2012, the Company recorded restructuring charges of $2.1 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 and other 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 nine months ended September 30, 2012 (in thousands):

23


 
Non-Acquisition-Related
Restructuring
Liabilities
 
Acquisition-Related
Restructuring
Liabilities
 
 
 
Employee-
Related
 
Facilities/Other-
Related
 
Employee-
Related
 
Facilities-
Related
 
Total
Accrual balance at December 31, 2011 (revised)
$
4,422

 
$
6,445

 
$
—

 
$
470

 
$
11,337

New restructuring charges – operating expenses
14,623

 
9,685

 
—

 
—

 
24,308

Revisions of estimated liabilities
762

 
2,858

 
—

 
648

 
4,268

Accretion
—

 
166

 
—

 
(11
)
 
155

Cash payments
(10,421
)
 
(3,262
)
 
—

 
(312
)
 
(13,995
)
Non-cash write-offs
—

 
(867
)
 
—

 
—

 
(867
)
Foreign exchange impact on ending balance
12

 
(28
)
 
—

 
—

 
(16
)
Accrual balance at September 30, 2012
$
9,398

 
$
14,997

 
$
—

 
$
795

 
$
25,190


The employee-related accruals at September 30, 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 September 30, 2012. In connection with the divestitures referenced in Note 7, during the nine-month period ended September 30, 2012, approximately $3.2 million of inventory written of that related to the divestiture of certain consumer audio and video product lines was recorded within cost of revenues as a restructuring charge within cost of revenues.

The facilities/other-related accruals at September 30, 2012 represent estimated losses, net of subleases, on space vacated as part of the Company's restructuring actions and unused contracts. The leases, and payments against the amounts accrued, extend through 2021 unless the Company is able to negotiate earlier terminations. Of the total facilities-related accruals, $7.3 million is included in the caption “accrued expenses and other current liabilities” and $8.5 million is included in the caption “long-term liabilities” in the Company's consolidated balance sheet at September 30, 2012.

14.
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 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 and nine months ended September 30, 2012 and September 30, 2011 (Revised) (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
 2011 (Revised)
 
2012
 
 2011 (Revised)
Video product revenues
$
47,089

 
$
67,653

 
$
167,002

 
$
198,632

Audio product revenues
41,982

 
64,002

 
167,880

 
199,257

Recoveries (allowances) related to divestitures
1,807

 
—

 
(1,041
)
 
—

 
90,878

 
131,655

 
333,841

 
397,889

Services revenues
36,297

 
33,043

 
102,905

 
94,343

Total net revenues
$
127,175

 
$
164,698

 
$
436,746

 
$
492,232


The following table sets forth the Company's revenues by country for the three and nine months ended September 30, 2012 and September 30, 2011 (Revised) (in thousands). The categorization of revenues is based on the country in which the end user customer resides.


24


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011 (Revised)
 
2012
 
2011 (Revised)
Revenues:
 
 
 
 
 
 
 
United States
$
53,203

 
$
68,675

 
$
181,492

 
$
206,414

Other countries
73,972

 
96,023

 
255,254

 
285,818

Total revenues
$
127,175

 
$
164,698

 
$
436,746

 
$
492,232


The following table sets forth the Company's revenues by geographic region for the three and nine months ended September 30, 2012 and September 30, 2011 (Revised):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011 (Revised)
 
2012
 
2011 (Revised)
Revenues:
 
 
 
 
 
 
 
Americas
$
62,272

 
$
86,396

 
$
211,802

 
$
250,924

Europe, Middle East and Africa
47,502

 
56,114

 
162,093

 
175,793

Asia-Pacific
17,401

 
22,188

 
62,851

 
65,515

Total revenues
$
127,175

 
$
164,698

 
$
436,746

 
$
492,232



15.
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 September 30, 2012, the balance of the Company's deferred borrowing costs was $0.6 million, which is net of accumulated amortization costs of $0.6 million.

During the three months ended September 30, 2012, Avid Technology borrowed and repaid $13.0 million under the credit line to settle certain intercompany balances. At September 30, 2012, the Borrowers had no outstanding borrowings under the credit facilities. At September 30, 2012, Avid Technology and Avid Europe had certain reserves and letters of credit guaranteed under the credit facilities of $3.7 million and $4.8 million, respectively, and available borrowings under the credit facilities of approximately $31.3 million and $12.8 million, respectively, after taking into consideration the reserves, outstanding letters of credit and related liquidity covenant. At September 30, 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.

25




16.  INCOME TAXES

Our effective tax rate, which represents our tax provision as a percentage of loss before tax, was 3% and 15%, respectively, for the nine months ended September 30, 2012 and 2011.  Our provision for income taxes for the 2012 period increased by approximately $0.9 million from the 2011 period, primarily as a result of changes in the jurisdictional mix of earnings, changes in our transfer pricing strategy and overall lower profitability of the business.  During the nine-month period ended September 30, 2012, there was a net discrete tax benefit of approximately $0.1 million which is primarily comprised of a $3.8 million benefit for a refund claim related to a previously accrued Canadian withholding tax liability and a $0.7 million benefit for a release of a tax reserve, partially offset by a $2.0 million withholding tax liability on a Canadian dividend, a $1.4 million tax provision associated with an Irish income tax audit, a $0.5 million tax provision associated with a change in the Company's indefinite reinvestment assertion with respect to its Canadian subsidiary, and the establishment of a valuation allowance against certain foreign deferred tax assets of $0.4 million.  By comparison, during the nine-month period ended September 30, 2011 (Revised), there were no significant discrete items that impacted the tax provision.  No benefit is provided for losses generated in the United States and certain foreign jurisdictions, including Ireland, due to the full valuation allowance on the respective deferred tax assets.

We have significant net deferred tax assets which are primarily a result of tax credits and operating loss carryforwards.  The realization of the net deferred tax assets is dependent upon the generation of sufficient future taxable income in the applicable tax jurisdictions.   We regularly review our deferred tax assets for recoverability with consideration for such factors as historical losses, projected future taxable income, the expected timing of the reversals of existing temporary differences, and tax planning strategies.  ASC Topic 740, Income Taxes, requires us to record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Based on our level of deferred tax assets at September 30, 2012 and our level of historical U.S. and certain foreign losses, we have determined that the uncertainty regarding the realization of these assets is sufficient to warrant the need for a full valuation allowance against our U.S. net deferred tax assets and certain foreign deferred tax assets.

We file in multiple tax jurisdictions and from time to time are subject to audit in certain tax jurisdictions, but we believe that we are adequately reserved for these exposures.  ASC Topic 740 requires that a tax position must be more likely than not to be sustained before being recognized in the financial statements.  It also requires the accrual of interest and penalties as applicable on unrecognized tax positions.  At September 30, 2012, our unrecognized tax benefits and related accrued interest and penalties totaled $13.9 million, of which $0.1 million would affect our effective tax rate if recognized. At December 31, 2011 (Revised), our unrecognized tax benefits and related accrued interest and penalties totaled $12.9 million, of which $0.9 million would affect our effective tax rate if recognized.  The increase in our unrecognized tax benefits since December 31, 2011 (Revised) was the result of a $1.7 million increase related to uncertain tax positions embedded in our domestic tax loss carryforwards.  This increase did not have an impact on the effective tax rate because we had previously maintained a full valuation allowance on the tax loss carryforwards.  This increase was partially offset by a decrease of $0.6 million related to a reserve release resulting from the closure of a tax examination during the quarter ended March 31, 2012 and a decrease of $0.1 million related to a reserve release resulting from the expiration of the statute of limitations on a foreign tax reserve during the quarter ended June 30, 2012.

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

EXECUTIVE OVERVIEW

Our Company

We are a leading provider of digital media content-creation products and solutions for audio, film, video an broadcast professionals, as well as artists and musicians. Our audio and video solutions are designed to be extensions of the people using them, so that they amplify creativity, speed production processes and provide the science behind the art of making great creative experiences. We provide our products and solutions to customers in two market segments: Media Enterprise, which consists of broadcast, government, sports and other organizations that acquire, create, process, and/or distribute audio and video content to a large audience for communication, entertainment, analysis, and/or forensic purposes; and Post and Professionals, which is composed of individual artists and entities that create audio and video media as a paid service, but who do not distribute media to end consumers on a large scale.

We historically also served the Creative Enthusiast market segment, but on July 2, 2012, as a result of a strategic review of Avid's

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business and the markets we serve, we announced a series of strategic actions initiated to focus on our Media Enterprise and Post and Professionals market segments and to drive improved operating performance. These actions included the divestiture of most of our consumer focused product lines, a rationalization of our business operations, and a reduction in force (the "2012 Plan") . We believe that these actions will generate several advantages for us as they will allow us to focus on the Media Enterprise and Post and Professionals market segments, the markets where we expect the highest growth. In addition we expect these actions will reduce complexity of our operations, improve operational efficiencies, and allow us to change our cost structure, by moving away from lower growth, lower margin sectors to drive improved financial performance.

As part of these actions, on July 2, 2012, we sold a group of consumer audio products to Numark Industries, L.P. (“Numark”) for approximately $11.8 million and sold a group of consumer video products to Corel Corporation (“Corel”) for approximately $3.0 million.

During the nine months ended September 30, 2012, as part of the 2012 Plan we recorded restructuring charges of approximately $25.1 million, including approximately $15.4 million related to employee severance obligations and $9.4 million related to closure or partial closure of facilities and $0.3 million for contract termination costs. We do not expect any significant further actions under the plan which we expect to be completed prior to December 31, 2012. The proceeds from the divestitures of the consumer product lines are expected to offset the majority of the cash restructuring charges paid in 2012.

We expect to realize significant estimated annualized cost savings, from both the restructuring actions and the consumer product line divestitures. These savings will appear in each of our cost of sales and operating expenses lines in our statement of operations. In addition, since the product material margin from these divested product lines was lower than the average material margin for our ongoing products, we expect overall gross margins to improve going forward due to favorable product mix and our cost reduction efforts.

We remain firmly committed to the professional markets and the devices and control services that support the Media Enterprise and Post and Professionals customers. These strategic actions described above will enable us to focus effectively on our core business as the leading provider of video and audio content-creations and management solutions for these professional markets.

See Note 7, Divestitures, and Note 13, Restructuring Costs and Accruals, to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional details and the related accounting for these consumer product line divestitures and the 2012 restructuring plan. See also the Results of Operations section below for additional information on revenue from divested product lines and expected trends.

We evaluate goodwill for impairment on an annual basis or more frequently if impairment indicators are present based upon the fair value of our reporting unit. We will perform our annual goodwill impairment test during the fourth quarter of 2012. Given the recent decline and continued volatility in the price of our common stock, it is possible that we will need to perform a hypothetical purchase price allocation for our single reporting unit, allocating the reporting unit's estimated fair value to its assets and liabilities, and to determine the implied fair value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss would be recognized for the difference. In addition we review intangible assets and other long-lived assets for impairment whenever indicators of impairment exist. While we cannot make a determination at this time, it is possible that goodwill, intangible assets and other long-lived assets impairment loss will be recorded in the fourth quarter of 2012.

Revisions to Prior Period Amounts

While preparing our financial statements for the three months ended March 31, 2012, we identified and corrected certain errors related to the accounting for an intercompany note made between two of our international subsidiaries that occurred in the fourth quarter of 2007. We determined that we should have accrued withholding taxes of approximately $3.8 million at the time of the loan, and as a result, we had understated the provision for income taxes in 2007 and income taxes payable reported on our balance sheets for each period subsequent to the transaction. Additionally, as the tax was not withheld and paid to the taxing authority, we are 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 $1.2 million ($0.8 million interest and $0.4 million penalties) and $1.0 million ($0.6 million interest and $0.4 million penalties) at September 30, 2012 and December 31, 2011 (Revised), respectively. During the three months ended June 30, 2012, we recorded a discrete tax benefit of approximately $3.8 million when it determined that we would repay the intercompany note and file a refund claim for the withholding taxes due (see Note 16 to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q). During the three months ended September 30, 2012, the intercompany note was repaid. We have commenced an administrative proceeding requesting the abatement of any penalties from the taxing authorities. As of September 30, 2012 we have no assurance that these penalties will

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be abated.

In accordance with Securities and Exchange Commission ("SEC") Staff Accounting Bulletin Nos. 99 and 108 (“SAB 99” and “SAB 108”), we 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 SEC 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, we believe the impact would have been significant and would impact comparisons to prior periods. Therefore, as required by SAB 108, we have revised in our Form 10-Q for the period ended March 31, 2012 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, we recorded other adjustments to prior period amounts to correct other previously unrecorded immaterial errors. Also, in accordance with SAB 108, we will include this revised financial information when we file subsequent reports on Form 10-Q and Form 10-K or file a registration statement under the Securities Act of 1933, as amended.

The Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2011 (Revised) have been revised to reflect the effect of the withholding tax errors described above and the other immaterial errors and is presented herein. See Note 1 to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information on these revisions.

The Condensed Consolidated Balance Sheet at December 31, 2011 (Revised) has been revised to reflect the cumulative effect of the errors described above and other immaterial errors and are presented herein. See Note 1 to our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information on these revisions.
 
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.

Financial Summary

The following table sets forth certain items from our consolidated statements of operations as a percentage of net revenues for the three and nine months ended September 30, 2012 and 2011 (Revised):

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Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011 (Revised)
 
2012
 
2011 (Revised)
Net revenues:
 
 
 
 
 
 
 
Product revenues
71.5
 %
 
79.9
 %
 
76.4
 %
 
80.8
 %
Services revenues
28.5
 %
 
20.1
 %
 
23.6
 %