Avid 2005 Annual Report Download - page 66

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AVID TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND OPERATIONS
Avid Technology, Inc. (“Avid” or the “Company”) develops, markets, sells and supports a wide range of software and hardware for
digital media production, management and distribution. Digital media are video, audio or graphic elements in which the image,
sound or picture is recorded and stored as digital values, as opposed to analog, or tape-based, signals. The Company’s products
are used worldwide in production and postproduction facilities; film studios; network, affiliate, independent and cable television
stations; recording studios; live sound performance venues; advertising agencies; government and educational institutions;
corporate communication departments; and by game developers and Internet professionals. Projects produced using Avid’s
products include major motion pictures and prime-time television, music, video and other recordings.
On August 9, 2005, Avid completed the acquisition of California-based Pinnacle Systems, Inc. (“Pinnacle”), a supplier of digital
video products to customers ranging from individuals to broadcasters. Under the terms of the agreement, Pinnacle common
shareholders received 0.0869 of a share of Avid common stock plus $1.00 in cash for each share of Pinnacle common stock
outstanding at the closing of the transaction. In total, Avid paid $72.1 million in cash and issued 6.2 million shares of common stock,
resulting in common stock consideration of approximately $362.9 million, in exchange for all of the outstanding shares of Pinnacle.
Avid also incurred $6.5 million of transaction costs (see Note F).
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company’s significant accounting policies follows:
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
Intercompany balances and transactions have been eliminated.
The Company’s preparation of financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues
and expenses during the reported periods. The most significant estimates reflected in these financial statements include revenue
recognition, accounts receivable and sales allowances, inventory valuation, intangible asset valuation and income tax valuation
allowances. Actual results could differ from those estimates.
During the year ended December 31, 2005, the Company began classifying certain European administrative expenses as general
and administrative expense rather than marketing and selling expense in the consolidated statement of operations. The Company
had previously classified these expenses as marketing and selling because the costs were primarily related to support the sales
function in Europe. Due to changes in the Company’s business and the acquisitions of Pinnacle, M-Audio and NXN that have
occurred since January 2004, the general and administrative group in Europe is supporting all functional areas of the business.
Therefore, the Company concluded that it was appropriate to reclassify such expenses. The corresponding amounts for all periods
prior to the current year have been reclassified to conform to the current year presentation. For the years ended December 31, 2004
and 2003, the Company has reclassified $5.7 million and $4.0 million, respectively, from marketing and selling expense to general
and administrative expense.
Translation of Foreign Currencies
The functional currency of each of the Company’s foreign subsidiaries is the local currency, except for the Irish manufacturing branch
whose functional currency is the U.S. dollar. The assets and liabilities of the subsidiaries whose functional currencies are other than
the U.S. dollar are translated into U.S. dollars at the current exchange rate in effect at the balance sheet date. Income and expense
items for these entities are translated using the average exchange rate for the period. Cumulative translation adjustments are
included in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity.
The Irish manufacturing branch and the U.S. parent company, both of whose functional currency is the U.S. dollar, carry monetary
assets and liabilities denominated in currencies other than the U.S. dollar. These assets and liabilities typically include cash, accounts
receivable and intercompany operating balances denominated in the euro, pound sterling, Japanese yen, Swedish krona, Danish
kroner, Norwegian krone, Canadian dollar, Singapore dollar, Australian dollar and Korean won. These assets and liabilities