TWST: What is ACD Systems International?

Dr. Sequeira: ACD Systems is a digital imaging company. ACD Systems International, founded in 1994, was one of the pioneers in the digital imaging industry. When the company first released its flagship product, ACDSee, it made a great impact in the marketplace because it enabled users to quickly load and view their images. Our users are extremely loyal because our product has three main components that they like: 1) speed, 2) ease of use and 3) power. From our founding to the present day, like a lot of companies, ACD Systems has changed and evolved. ACD Systems began as a shareware company, which means ACDSee could be downloaded and used without payment. In 1998, ACD Systems International entered the public markets with an initial public offering, or IPO, on the Toronto exchange. This IPO was shortly followed by the height of the dot-com era, so at that time, the markets were growing and the expectations for the company were very high. Following the company's IPO, the dot-coms experienced a meltdown, which created a lot of uncertainty in not only the investor world but also in the digital imaging world. Despite the dot-com meltdown, the company focused on growth and looked for various ways to expand its offering. One of the ways that the company did so was through the acquisition, in 2003, of Deneba, a technical illustrations company. At that time the executive management team believed that because of ACD Systems' strong electronic sales and distribution or ESD model, the company could acquire software products and be a software distributor as well as a digital imaging company. Today, we are focused on our digital imaging expertise. And ACD Systems is a leader in digital imaging.

TWST: What is the agenda at this point? What are your priorities for the next 12 months?

Dr. Sequeira: There are two priorities. One is what I would call defensive at this point, and one is offensive. From a defensive standpoint, the company's business model is software licensing. We've seen the licensing model attacked from different fronts; one is the maturing market in the digital imaging industry. So we've gotten a significant amount of competition from direct offerings from companies that try to offer similar products for the operating system platforms. These products are subsuming a lot more of the functionality that supports digital imaging. The acquisition of Canvas gave us another product but not one directly in support of digital imaging. ACD Systems has begun offering a better choice of products. The first step in this strategy is to solidify our position in the desktop, and what that means is to offer better choices surrounding the activities that digital imaging consumers and the industry are expecting from us today. So we are taking that first step. From an offensive perspective, we are also extending the market for the company. The digital imaging market is growing, but it has shifted significantly. It has gone from, 'What do I do with the few pictures that I have? How do I organize them so that I can get back to them?' to 'I've got all my pictures on my camera, I have all the software that I need. What do I do with it? How can I share it with my family? How can I express myself through the pictures that I take? How can I share this with other people with similar interests and who are part of the digital imaging community?' So we are shifting our focus to serving the needs of this growing digital imaging community, and therefore, our upcoming products and services will be focused on that area. There are two particular challenges that are of interest. China is one of them. Right now, we have a tremendous amount of credibility in China; our brand is even bigger than Adobe's or Microsoft's, at least in the digital imaging area. On the lower end of our estimation, there are 25 million people using our products in China; on the high end we estimate the number is between 52 million and 75 million. ACDSee is a widely recognized product in China with a very positive branding; the unfortunate thing is that it is all pirated. So that is an interesting challenge for us. How can we derive revenue from that very large installed base? Answering this question is both a challenge and an opportunity for ACD Systems. The second challenge has to do with wireless. How do we find a solution for the wireless equation? I know that a lot of online photo processing sites have been wracking their heads trying to figure out what to do with wireless, and I think it all hinges on what people are doing with their handsets. Our view is that handsets are not replacing standalone digital cameras as everyone first thought. I think they are a complement to them at this point, and therefore, what interests people is capturing in real time the event that is occurring in their life. But they are not going directly to printing from there. I think there is a self-publishing, sharing aspect to the process that comes before the step of printing. So we want to participate in this, and that is an opportunity and a challenge for us as well, given that we have not played in that market yet.

TWST: What are the dynamics in the competitive landscape? What will differentiate ACD Systems?

Dr. Sequeira: The key message that we send to everyone is, anyone with more than 500 photographs on their hard drive needs our products and will need our services. If you think about it, there are quite a few people now, if not everyone, who will reach that 500 number very fast. To give you an anecdote, just recently we spoke with one of our users who had an image base of 750,000 photographs, and he used our product because there was no other one that could get to those 750,000 images quickly enough. So our key distinction in the market place to this point has been to couple, as I said before, the speed, ease of use and power of ACDSee to those 500 photographs. Those are the key attributes that we offer. Those attributes have been recognized by PC World; we scored number 54 in their top 100 technology products. We have been recognized by a numerous other entities ' American Photo, Editor's Choice award in 2005; PC World, World Class 2005; Editor's Choice PC Photo 2005 as well. We keep being named the leader in this space. That said, we are seeing significant pressures from companies like Adobe and Microsoft that are seeing the digital imaging industry mature and become very core to their businesses. So we are competing with giants, and the only way we can compete with them is through being innovative and being nimble ' in other words, meeting the needs of our customers quicker than they can. An additional pressure is being placed on ACD Systems by Google's imaging software, Picasa. Google is signaling that digital imaging processing can become free. It can; there is the possibility, but there is also the possibility that when people think that everything is gloom and doom and everything is going to be for free, there is always room for innovation. There is always room for products that will lead the pack, and we believe our product will continue leading the pack.

TWST: What does the client space look like today? How might it change or evolve?

Dr. Sequeira: That is an interesting question; I think there are a couple of things that are happening. First is, as I mentioned before, the wireless space. The second one is the nature of the use of photography. I think we are seeing a market that has matured. We have a solid group of people who are starting to become acquainted with the joys of digital photography, so they are starting the learning curve, whereas there is quite a significant group of people who started the learning curve a few years ago and now they are becoming 'prosumers,' digital photography enthusiasts who have developed imaging skills that are close to being professional. So we are seeing a fairly sophisticated group as well, not to mention the pros who are at the top, who require the best tools, the most power, etc. So we are seeing the market segment itself that way. The impact of wireless is interesting, too, because most of the handsets that will be sold in the near future will contain digital cameras. The problem is, consumers don't view cameras in the handsets as serious photography tools. They still believe that you have to have a camera to take pictures; they still see a standalone camera as a serious camera. They don't see the handset as a serious way of taking pictures. Maybe part of the reason is that the carriers have not made it easy for users to get their photograph off their handsets into a place where they can use them. So there is an opportunity for someone to provide the technology that solves this difficulty. When this happens, the impact of handsets becoming more sophisticated and having multiple mega pixel cameras with more refined optical models will eventually become a very disruptive factor, almost as a side market to what digital imaging industry has seen so far and adding to the momentum that digital imaging is having in the world.

TWST: Introduce us to your top-level management team.

Dr. Sequeira: Doug Vandekerkhove founded the company. I would qualify him as a pioneer in this industry. When the term JPEG was not even part of the vocabulary of everyone, he saw the opportunity to build the digital imaging industry around JPEG. He has been with the company ever since its inception in 1993-1994. He has been tracking the industry for that long. He has had a lot of experience in business, and certainly, as I mentioned, he has had a significant background in terms of seeing the whole industry evolve and develop. We have also just announced that we are opening a Seattle office and have hired two seasoned professionals with global experience who will be based in the Seattle office. They are well qualified to identify and capitalize on the growth opportunities for ACD Systems. James Latham, our new VP, Marketing, is a visionary; he worked for Atlas at some point in time. So he is familiar with computing models. He used to work for IBM in the Lotus Notes group. So he is also familiar with markets that are starting to develop and technologies that are key. Nasir Sheikh, who is our VP of Sales, also comes from Atlas and has done significant multimillion-dollar deals over his lifetime. We are very happy to have him on board providing that kind of leadership because the place where we are going from here, as I discussed first, the defensive and offensive strategies, is that to serve our customers; we need to forge significant partnerships. So there will be a significant departure from where the company was before in terms of the kind of partners that we are going to see. Finally, we have just added some significant amount of help in the product management area; we just hired at the director level someone from Microsoft who has MSN experience. So we are fairly confident that we are doing the right things from that point of view.

TWST: As we look at bench strengths and skill sets, are there particular areas or positions you are looking to add or augment?

Dr. Sequeira: From the perspective of how the company has been managed financially, there are good points and points that we can improve upon. On the plus side, we've had a very healthy balance sheet over the last few years, even though the company has gone through significant transition of its executive team. I think the company has been able to maintain a good financial standing and is very healthy. So that is a strong plus. Our management has recognized the advantages of the capital markets; therefore, we are looking for some significant boost in that area. However, in looking at the balance sheet from an EBITDA perspective, whereas our cash flow has been extremely healthy, our EBITDA numbers have not, and part of the reason is the fact that ACD Systems was a pioneer in 1997-1998 in electronic sales and distribution. ACD Systems constructed its own mechanisms to do effective electronic sales and distribution as there was no third party e-commerce infrastructure at that time. Today, the problem is the necessary infrastructure is too massive for the company to support. We have a lot of home-brewed infrastructure that needs to be replaced and we need to partner with the best of breed providers. Obviously we are not going to have two companies. We are not going to compete against the Digital Rivers, the Asknets and the other companies that are better at online commerce and distribution than we are. So we are dismantling this infrastructure and transitioning to a healthier, less costly model where we are focused exclusively on digital imaging and not on other investments in areas that we are not competing in. I think then we will see a healthier EBITDA.

TWST: What role can M&A play as you look around you at consolidation and how that creates competitors? What are the barriers to entry? You mentioned briefly earlier about new entrants. How does that all work into your own growth strategy as far as ways to supplement your organic growth through M&A?

Dr. Sequeira: Right now we have focused mergers and acquisitions on areas that will strengthen the revenue of the company. If we are to do another merger or acquisition, we would look for companies that are growing in their market and that support the needs of our customers, most likely in the service area. Right now I think we understand the licensing model quite well. I think the company has not taken into account opportunities presented by its large customer base. To give an example, last year in 2004 there were between 5.3 million and 6 million downloads of our software in the western hemisphere and approximately 11.6 million in China alone. That gives us about 17 million downloads a year by different people and they all come in touch with our software. Overall, we estimate that throughout the lifetime of the company about 25 million people, excluding China, have touched our software in one way or another. So it seems that we have quite an installed base to offer services to. We are going to look for companies as partners or as acquisition targets that would help us reach the goal of being able to satisfy all the digital photography needs of all those people who touch our software.

TWST: What historically has been the shareholder base with ASA? Has that base undergone any changes or transitions?

Dr. Sequeira: As with all companies, our shareholder base has undergone changes since the IPO. We have been focused on building our brand awareness and expanding our product and service offerings. We are now ready to share our story with the Street. We recognize that we need to broaden our awareness and have begun to take the necessary steps to do so. We have a strong message. We are saying that we will solidify the desktop by improving our offering to match the needs of the customers. We are saying that we are going to extend into networks, so we are going deal with the Internet and with wireless networks. We are saying that we are going to extend into services and integrate these services with our desktop applications in a way that is compelling for the large customer base that we currently enjoy. This is a very direct message to our shareholders, and one that will help us solve the problem of our stock being undervalued as it is right now. It is at a ridiculously low price point and I believe that it is mostly due to us not articulating a sensible and direct message to our shareholders and, in general, to the market as to what we are doing today and where we are going. This has become a priority for us and you will start to see a clear message communicated to the market. This message will be backed up by business developments. For example, recently we released ACDSee 8 and you will see some interesting press releases from us in the next six or 12 months that will provide reality to the three initiatives that I have described ' new desktop offerings, extension into networks and the provision of services related to digital photography.

TWST: In your discussions with analysts, current investors and potential investors, are there any misperceptions or disconnects you've encountered?

Dr. Sequeira: One key one is that when Picasa came out, basically everybody said digital imaging would become free, so what they said is, 'We like your company, but your product that you now charge this amount of money for will become free. It will become commoditized, and nobody will want to pay for it.' There is a mistaken perception that this product is going to go away and become available for free. There will always be some free functionality, but the more sophisticated the functionality, the more people are willing to pay for it because it will meet a need that they have. It goes back to a basic principle of business: If there is value, the customer will pay for our products and services; if there is no value, they won't. I see a disconnect between ACD Systems and the market that is largely our responsibility since we have not been able to articulate clearly what we are going to do about Picasa, about Vista and Long Horn, about Spotlight and Google with the search technologies and so forth. So this is our turn, and we are starting to articulate that message. Hopefully starting with this interview and with others that we will have, we will start unraveling our strategy over the next 12 months, and I think we will have a very solid, very strong message to the market.

TWST: What compels investors to include ASA in their current long-term investment strategies?

Dr. Sequeira: First, we are the leaders in digital imaging; there is no question about that. We have successfully integrated the key components of Deneba and have started to leverage its code base into our current products and new products that have yet to be announced. Every one who has at least 500 photographs will have a need for our software, and they will recognize the ease with which they can share and organize their photos. This will become a key element for us. We will be extending into networks to facilitate the sharing of photos between our 25 million installed base, and the 6 million to 17 million users who touch our software every year. We will offer them digital photography services that they value, and we will capture a piece of their online transactions. So we are going into a market that is growing, that is extending, and we are completely focused on executing that. We hope to prove this to investors in the next 12 months.

TWST: Is there anything you would like to add?

Dr. Sequeira: There are a lot of changing factors in the industry, and what makes ACD Systems International very interesting is that it has managed to hold onto the grassroots support of its product. ACD Systems started out as a shareware company and created a very strong following for ACDSee. That support has not wavered and our sales of ACDSee continue to be strong. That is indicative of strong support from a loyal user base and people who believe that the company's products offer value. So we are going to capitalize on this goodwill and branding and we are going to prove to our loyal customers that they were right and we will continue to offer a lot of value to them as we evolve and deploy our strategy in the coming months. The customer base is extremely loyal and strong grassroots support is certainly one of ACD Systems' strongest assets.

TWST: Thank you. (DWA)

WILLIAM SEQUEIRA COO ACD Systems International Inc. 2261 Keating Cross Road Gateway Park, Block C Saanichton, British Columbia V8M 2Z5 Canada (250) 544-6700 (250) 544-0291 ' FAX www.acdsystems.com

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