UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(D) OF THE SECURITIES ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
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Commission File Number 0-21174
AVID TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2977748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Avid Technology Park, One Park West, Tewksbury, MA 01876
(Address of principal executive offices) (Zip Code)
(978) 640-6789
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock $.01
Par Value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES v NO
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES NO v
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 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 v NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer v Accelerated Filer Non-accelerated Filer
Indicate by check mark whether the registrant is a shell company (as defined
in Exchange Act Rule 12b-2). YES NO v
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $1,875,590,479 based on the closing price of the
Common Stock on the NASDAQ National Market on June 30, 2005.
The number of shares outstanding of the registrant's Common Stock as of February
14, 2006, was 42,126,287.
Documents Incorporated by Reference
Document Description 10-K Part
-------------------- ---------
Portions of the Registrant's Proxy Statement
for the 2006 Annual Meeting of Stockholders ........... III
This Annual Report on Form 10-K contains a number of forward-looking
statements. Any statements contained herein (including without limitation
statements to the effect that Avid Technology, Inc. ("We", the "Company", or
"Avid") or our management "believes", "expects", "anticipates", "plans" and
similar expressions) that are not statements of historical fact should be
considered forward-looking statements. There are a number of important factors
that could cause our actual results to differ materially from those indicated by
such forward-looking statements. These factors include, without limitation,
those set forth in Item 1A "Risk Factors".
PART I
ITEM 1. BUSINESS
OVERVIEW
We develop, market, sell and support a wide range of software and hardware
products for digital media production, management and distribution. Digital
media are video, audio or graphic elements in which an image or sound is
recorded and stored in digital values, as opposed to analog, or tape-based,
signals. Our diverse range of product and service offerings enables customers to
"Make, Manage and Move Media".
Make Media. Our products help every class of user create and use video and
audio assets, from the home user to the feature film professional. Our
Professional Film, Video and Broadcast segment offers innovative video and film
editing systems, as well as 3D and special-effects software. These products
enable professionals, and aspiring professionals, in the post-production and
broadcast markets to manipulate moving pictures and sound in fast, easy,
creative and cost-effective ways. Our Audio segment offers consumer and
professional digital audio software applications and hardware systems for
music, film, television, video, broadcast, streaming media and web development.
These systems are based upon proprietary audio hardware, software and control
surfaces, and allow users to record, edit, mix, process and master audio in an
integrated manner. Our Consumer Video segment offers products for home video
editing and TV viewing. Our home video editing products allow users to create,
edit and share video content more easily and effectively, while our TV viewing
products allow consumers to view, record and time shift television programming
on their computers.
Manage Media. The ability to manage digital media assets effectively is a
critical component of success for all content creators. Our technology enables
users to simultaneously share and manage media assets throughout a project or
organization. As a result, professionals can collaborate in real time on all
production elements and streamline the process for cost-effective management
and delivery of media. In addition, our tools allow customers to easily
repurpose digital assets to take advantage of a variety of market
opportunities. For consumer applications, we also offer products that allow
users to manage their media projects, such as home movies or recorded music.
Move Media. Our products allow our customers to distribute media over
multiple platforms - including air, cable or satellite, or on the Internet. In
addition, we provide technology for playback directly to air for broadcast
television applications. Many of our products also support the broadcast of
streaming Internet video. For professionals as well as consumers, our
laptop-based editing systems, storage products and DVD authoring tools enable
easy portability of media.
Our products are used worldwide in production and post-production
facilities; film studios; network, affiliate, independent and cable television
stations; recording studios; performance venues; advertising agencies;
government and educational institutions; corporate communication departments;
and by game developers and Internet professionals, as well as by amateurs,
aspiring professionals and home hobbyists. Projects produced by customers using
our products have been honored with Oscar(R), Emmy(R) and Grammy(R) awards, in
addition to a host of other international awards. We have also received numerous
awards for technical innovations, including two Oscars, 12 Emmys and a Grammy.
Oscar is a registered trademark and service mark of the Academy of Motion
Picture Arts and Sciences. Emmy is a registered trademark of ATAS/NATAS. Grammy
is a registered trademark of The National Academy of Recording Arts and
Sciences, Inc.
In August 2005, we acquired California-based Pinnacle Systems, Inc., or
Pinnacle, a supplier of digital video products to customers ranging from
individuals to broadcasters. The acquisition of Pinnacle has allowed us to
expand our offerings within our Professional Film, Video and Broadcast segment
through the integration, into this segment, of Pinnacle's broadcast and
professional offerings, including the Deko on-air graphics system and the
MediaStream playout server. It has also provided entry into a new Consumer Video
segment through which we offer Pinnacle's consumer products, including Pinnacle
Studio and other products.
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DIGITAL MEDIA CONTENT MARKETS
Digital formats and tools continue to displace analog processes in the
markets that Make, Manage and Move Media. Technical advances in digital media
content-creation tools have made this migration easier for film, video and audio
professionals, as well as consumers, allowing all types of users to create,
store and manipulate more complex content incorporating multiple elements of
digital media. For example, many video games now include live-action video,
detailed 3D graphics and high-quality audio, all created, manipulated and played
back in digital form. Feature films such as "King Kong", "Brokeback Mountain"
and "Crash", to name a few, rely on our editing and computer-generated special
effects tools.
Our business is currently organized and operated to sell our products and
services in three reportable segments: Professional Film, Video and Broadcast;
Audio; and Consumer Video.
Our Professional Film, Video and Broadcast, or Professional Video, segment
markets to professional users, over-the-air broadcast and cable companies, and
corporate, government, and educational users. Professional users include
production and post-production companies that produce video and film material,
such as feature films, commercials, entertainment and documentary programming,
industrial videos and music videos; professional character animators and video
game developers; and television facilities, film studios and large corporations
that perform digital media production and post-production in-house. Our
customers also include a wide variety of companies that originate news
programming, including national and international broadcasters, such as National
Broadcasting Company, Reuters, CBS News, Fox Television and the British
Broadcasting Corporation, as well as network affiliates, local independent
television stations, web news providers and local and regional cable operators
that produce news programming. Finally, users in corporations and various other
institutional settings use digital media tools to create and distribute
information enriched by the addition of digital media content to their customers
and employees.
Our Audio segment markets to professional music studios, project studios,
film and television production and post-production facilities, television and
radio broadcasters, DVD, web and other "new media" production studios,
performance venues, corporate, government and educational facilities, as well as
home hobbyists and enthusiasts. These users range from individuals just getting
started in the music field to large professional acts and multinational
corporations. Our audio products are employed in a wide variety of applications,
including recording, editing, mixing, processing, mastering and live sound.
Our Consumer Video segment markets within two areas: home video editing
and TV viewing. Our home video editing business focuses primarily on novice and
advanced home video editors, although corporate, government and educational
institutions also use our consumer products to create, edit, view, and
distribute video, photographs and audio using a personal computer. TV viewing
products are marketed to consumers, primarily in Europe, who can watch and
record television on a personal computer.
STRATEGY
Our mission is to serve the industries that Make, Manage and Move Media.
Our strategy consists of four key elements:
Deliver Best-of-Breed Stand-alone Products to Content Creators.
We continue to focus on markets where digital media content creation takes
place, and we believe we enjoy a leadership position in each of these primary
markets. These include:
o Professional Film, Video and Broadcast Market - film and television
studios, independent production and post-production firms, and broadcast,
including hard news, long-form news and promotion;
o Audio Market - both professional and consumer music, audio production and
post-production; and
o Consumer Video Market - home users, students and hobbyists.
We plan to strengthen our positions in these areas by continuing to enhance our
existing products and by introducing new, easy-to-use products that satisfy a
broad range of customer needs. These products may be developed internally,
jointly with third parties or through acquisitions. In 2005, we acquired
Pinnacle, a provider of market leading products used by broadcasters and
consumers. We also acquired Wizoo Sound Design GmbH, a provider of virtual
instruments for music producers and sound designers.
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Deliver Integrated Workflow for Customers who Work with Multiple Systems or
Multiple Media Disciplines.
We continue to invest significant resources in enhancing the
interoperability of our broad array of products that Make, Manage and Move
Media. To satisfy the demands of the post-production, broadcast and audio
markets, we are committed to delivering to our users integrated solutions, not
just point products. For example, with Avid Unity network-based collaborative
workgroups we enable all of our Professional Video products to connect to one
another through the sharing of common media production assets and information
about the media, or metadata, in a seamless workflow that encompasses all the
disciplines in content creation - acquisition, editing, image manipulation,
graphics, audio, mastering, encoding and distribution. An Avid Unity for News
solution, for example, can facilitate all the tasks required to create news
stories for broadcast by leveraging the aggregate power of all of our tools. The
entire process, including capturing news feeds, managing scripts and announcer
recordings, editing and manipulating video, audio and graphics elements,
delivering the finished product to a video server for playback, automated
repurposing of the story for web distribution and streaming the repurposed
content to the consumer, can be accomplished seamlessly by an array of our
products working together, connected in an Avid Unity workgroup.
Support Open Standards for Media, Metadata and Application Program Interfaces
(APIs).
Beyond interoperability within the Avid family of products, we seek to
design all of our products so that they are based on and can work with a variety
of established industry-wide standards, including computer platforms, operating
systems, networking protocols, data compression and digital media handling
formats. We have been a leader in defining and developing the Advanced Authoring
Format, or AAF, a multimedia file format that enables content creators to easily
exchange digital media and metadata, across platforms and between systems and
applications. AAF saves time, simplifies project management and preserves
valuable metadata that can be lost when transferring media between applications.
We've also introduced a high definition, or HD, encoding format, known as Avid
DNxHD, which enables collaborative HD post-production with the same storage
bandwidth and capacity requirements as uncompressed standard definition, or SD,
files. While the size of Avid DNxHD files are similar to SD files, the quality
of the original HD image is preserved. The source code for Avid DNxHD technology
is licensable free of charge on our Web site, enabling users to compile it on
any platform.
Deliver Excellent Customer Service, Support and Training.
In order to succeed, we must provide experienced, accessible and
knowledgeable customer service. We try to create a culture at Avid that
encourages every employee to focus on exceptional customer service. We seek to
train our support staff in a broad range of applications, operating systems, and
storage and networking solutions. In addition, we work with resellers in the
major regions of the world to ensure that they have the capability to deliver
various levels of application and hardware support directly to end users. We
also offer training throughout the world in all areas of content creation
through a network of experienced educational specialists.
PRODUCTS
The following section describes our major products and product families
within each of our reportable segments. Information about our reportable
segments, including total revenues, operating income and total assets, as well
as a geographic breakdown of our revenues and long-lived assets, can be found in
Footnote M to our Consolidated Financial Statements in Item 8.
PROFESSIONAL FILM, VIDEO AND BROADCAST PRODUCTS
Video and Film Editing and Finishing
Our award-winning digital nonlinear editing and finishing tools are used
by film, video, audio, animation, game developers and broadcast professionals to
create the world's most recognizable media. Among Academy Award nominees for the
2005 eligibility year, every film nominated in the categories of Best Picture,
Directing, Film Editing, Sound Editing, Sound Mixing, Visual Effects and
Animated Feature employed at least one Avid solution in the post-production
process.
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Media Composer Family
This group of digital nonlinear editing products includes the Media
Composer Adrenaline and Media Composer Adrenaline HD systems. These products are
widely used for editing prime-time television programs, commercials, feature
films and independent films and comprised 12%, 17% and 16% of our consolidated
net revenues in 2005, 2004 and 2003, respectively.
Avid Xpress Family
The Avid Xpress family is made up of portable editing systems that include
the Avid Xpress DV, Avid Xpress Pro and Avid Xpress Studio systems. All Avid
Xpress Pro solutions can be enhanced with the Avid Mojo accelerator to perform
the compression and decompression of video functions, as well as other tasks,
which frees up a user's computer for other operations. The Avid Xpress family is
designed to meet the needs of media professionals, video and film educators,
Internet video developers and others involved with video and multimedia
production.
Liquid Products
The Avid Liquid brand is a new family of nonlinear editing software and
hardware offerings aimed at the event videography and corporate markets, which
we obtained as part of our 2005 acquisition of Pinnacle. These products contain
an integrated feature set that includes SD and HD video editing, surround audio
editing, real-time video effects that are designed to optimize workstation
computer capacity, DVD authoring and a wide variety of output formats. The Avid
Liquid family includes Avid Liquid Pro and Avid Liquid Chrome HD.
Finishing and Compositing
Professionals who create feature films, television programs, commercials
and music videos conform their projects with our offline editing systems using
the Avid Symphony Nitris, Avid DS Nitris and Avid DS Nitris Editor systems.
These real-time, uncompressed HD and SD solutions provide an efficient and
creative environment for sophisticated HD finishing, including master-quality
finishing, effects and color correction.
Storage & Workgroups
Shared Storage
Our shared media networks offer simultaneous, real-time collaboration
workflows that support a wide range of uncompressed SD and HD formats, as well
as the high-efficiency Avid DNxHD encoding technology. The product line includes
the enterprise-level Avid Unity ISIS (Infinitely Scalable Intelligent Storage),
providing high scalability and 24/7 availability based on industry-standard
Gigabit Ethernet networking; the 4-gigabit Fibre Channel-based Avid Unity
MediaNetwork for high performance in facility-class environments; and the Avid
Unity LANshare system for smaller broadcast operations and post-production
customers. This product family accounted for approximately 10%, 12% and 12% of
our consolidated net revenues in 2005, 2004 and 2003, respectively. Avid also
offers a variety of local storage products such as the Avid MediaDock Ultra 320,
MediaDock 2+, MediaDrive rS 320/LVD and MEDIArray II.
Workgroup Solutions
Avid Workgroup solutions are applications that support the digital content
creation process by intelligently and transparently handling non-creative but
essential workgroup tasks, while extending access to media. Most Workgroup
products operate in conjunction with Avid Unity MediaNetworks and encompass
asset management, file exchange and background file transcoding, as well as
viewing, logging and shot listing. These products include Avid Unity
MediaManager, Avid Unity TransferManager and Avid DMS ProEncode.
Broadcast
We offer broadcast organizations a wide range of solutions to fit their
needs - whether they are seeking to integrate new technology into existing
operations or implement all-digital workflows across a wide network of stations.
Broadcast products are clustered among four solution groups: Production,
Newsroom, On-Air Graphics and Play-to-Air.
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Production
Production solutions are primarily focused on news, sports, live event,
magazine and similar broadcast programming and are designed to help broadcasters
accelerate the production process and increase their capability and efficiency
from acquisition, through editing, to playout. These solutions can scale to meet
the needs of the smallest to the largest broadcast operations, linking all
aspects of production and distribution in a managed, real-time, shared storage
environment.
AirSpeed servers and NewsCutter editors are key components of our
Production solutions. The Avid AirSpeed ingest and playout server provides a
fast and highly scalable method for recording media directly into and playing
media from an Avid Unity MediaNetwork. NewsCutter editing systems build on our
core editing technology and provide special capabilities for broadcast news
editing. The NewsCutter Adrenaline system is designed to handle any editing
requirement in a broadcast facility, while the NewsCutter XP system provides
flexible news editing in turnkey desktop or laptop configurations for field
editing.
Newsroom
Avid Newsroom solutions are used by journalists, producers, assignment
editors, reporters and presenters throughout the process of researching,
creating, managing and delivering television news programs. The Avid iNEWS
newsroom computer system gives producers and assignment editors control of an
entire news production including gathering and reading wires, e-mail and other
messages; organizing assignments; writing stories; and preparing news programs.
In 2005 we introduced iNEWS Instinct, a visual storytelling tool that brings
together scriptwriting, shot selection, and video and audio editing in a tool
specifically designed for journalists. By providing the journalist with a simple
way to combine and manipulate all the elements of a television news story, iNEWS
Instinct is designed to make the tasks of creating news and sports segments more
efficient. At the 2005 National Association of Broadcasters, or NAB, show, iNEWS
Instinct received five awards for its innovative concept and intuitive design.
On-Air Graphics
Avid On-Air Graphics solutions are used to develop and deliver real-time
live graphics, promotions, station identities and other applications. These
systems integrate the graphic process from design to delivery, making graphic
elements and easy-to-use graphic templates available throughout production, news
and playout operations. On-Air Graphics solutions include the Deko, Thunder and
DekoCast product lines.
Play-to-Air
Our Play-to-Air solutions are focused on providing a reliable means of
playing program content to air and include digital server solutions for multiple
broadcast playout needs. As the most mission-critical of broadcast components,
reliability and serviceability are primary design considerations. Our
MediaStream video servers are designed to record, store, retrieve, process and
play out all types of digital video broadcast content. Applications include
commercial insertion, program acquisition and playout, store-and-forward, HD
transmission, near-video-on-demand and network time delay. HD video playout
capability is included, which simplifies the migration path to digital
transmission for broadcasters.
Avid Computer Graphics
The Avid Computer Graphics products encompass 3D animation and digital
asset management tools, including: SOFTIMAGE|XSI, our flagship 3D content
creation solution; Alienbrain Studio, our digital asset management software for
entertainment and computer graphics professionals; and SOFTIMAGE|FACE ROBOT, our
newest tool for creating realistic facial animations, which we plan to release
in 2006.
Avid Assurance Support
Avid Assurance is our annual maintenance support offering for the Avid
Professional Video products described above. Avid Assurance provides software
and application support to meet the needs of our customers including isolating
hardware issues, resolving software issues and generally helping our customers
to fully utilize their applications. In addition to Avid Assurance, we offer
other services to our customer including training programs and installation
services.
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AUDIO PRODUCTS
Our Audio segment's Digidesign product line includes digital audio
production systems for recording engineers, mixers, film sound editors, sound
designers, live sound engineers and other audio professionals. The Audio segment
also includes our M-Audio product line of digital audio and MIDI (Musical
Instrument Digital Interface) solutions for composers and performers of
electronic music and other audio professionals.
Digidesign Products
Pro Tools Digital Audio Workstation
Pro Tools is a multi-track, non-linear digital audio workstation
comprising a variety of hardware options and bundled software that runs on
Macintosh and Windows platforms. The Pro Tools workstation provides solutions
for the entire audio production process, including recording, editing, signal
processing, sound synthesis, integrated surround mixing and mastering, and
reference video playback. Pro Tools users work in the prosumer and professional
music, film, television, radio, multimedia, DVD and Internet production markets.
Pro Tools systems support a rich third-party development environment, with more
than 100 development partners providing a variety of additional software and
hardware add-on options.
Digidesign offers Pro Tools systems in a variety of price points and
configurations, ranging from high-end HD Accel systems for professional music
and post-production, to the affordable Mbox 2, Digi 002 and Digi 002 Rack
systems for home production studios. In addition to a wide range of audio
peripherals, our post-production customers can also choose between two of our
video peripherals, the Avid Mojo accelerator and AV|OptionV10, to provide
reference video track playback while working within Pro Tools.
The Pro Tools product family accounted for approximately 18%, 24% and 25%
of our consolidated net revenues in 2005, 2004 and 2003, respectively.
Control Surfaces
In the large-format digital mixing console category, the Digidesign ICON
(Integrated Console Equipment) system features the D-Control and D-Command
mixing surfaces, our high-end, expandable hardware control surfaces for tactile
control of Pro Tools software and hardware. ICON systems can be customized to
fit any studio, providing from 16 to 80 channels of simultaneous control.
Live Sound Mixing Consoles
In February 2005, we began shipping the VENUE product line, which is our
first system for mixing sound at live concert and theater performances, and
public address events. VENUE provides digital control and automation along with
plug-in processing capabilities to live production professionals. It can be
interconnected with Pro Tools systems to make live recordings. A growing number
of artists are using the system on tour, including U2 and Paul McCartney.
M-Audio Products
Audio Interfaces
M-Audio's audio interfaces dovetail with Digidesign's Pro Tools LE product
line, allowing users access to high-quality sound in and out of a computer at
affordable prices. Users can create audio recordings on their personal computers
using Pro Tools M-Powered software or with third-party software. In 2005,
M-Audio introduced the BlackBox and JamLab, products that appeal to guitarists
who make computer-based recordings. The BlackBox provides realistic simulations
of the sounds of premium tube-based guitar amplifiers and speaker cabinets, and
can operate as a stand-alone unit or in conjunction with a computer.
Keyboards
M-Audio's USB-based keyboards allow users to send MIDI messages directly
to a personal computer to access sound creation software and control a variety
of other musical functions without the need for additional MIDI interface
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peripherals. In addition, the ProKeys 88 stage piano recreates the experience of
playing an acoustic grand piano with weighted hammer-action keys and
high-fidelity samples.
Speakers, Add-On Software and Microphones
M-Audio provides a variety of affordable, high-quality, self-powered
monitor speakers that provide stereo or multi-channel surround monitoring, aimed
at the recording studio, home music hobbyist, gaming and home-theater markets.
M-Audio also provides a suite of high-quality yet affordable condenser and
dynamic microphones, and distributes several software product lines popular in
music production. These additional products allow customers to purchase entire
home recording packages that include all of the essential tools required to make
music recordings from a single supplier.
CONSUMER VIDEO PRODUCTS
Our Consumer Video segment, Pinnacle, develops and markets video editing
products that are aimed at the home consumer who wishes to create, edit and
share video content more easily, creatively and effectively.
Studio and Dazzle Products
The Pinnacle Studio family of products are non-linear video editing
software and hardware tools that run on Microsoft Windows. Pinnacle Studio is
available in two lines of products:
o Studio - which is designed for entry level storytellers looking for a
quick and easy way to enhance and share their projects with family and
friends; and
o Studio Plus - which is intended for advanced video enthusiasts who
require additional power, control and quality to create more
professional looking results.
Both products contain a wide range of features that streamline the
three-step `Capture, Enhance and Share' process. For example, consumers can
"drag and drop" video clips in the order they desire, as well as add transitions
between scenes, simple graphics, titles, music or narration to their personal
productions. The current version of Studio software, version 10, incorporates
significant new features, such as:
o video and audio cleaning tools to fix old or poorly captured videos;
o SmartMovie, a tool for creating a home movie or music video;
o surround sound (on multi-channel systems); and
o the ability for users to add third-party plug-ins to further advance
the capabilities of the program.
Studio Plus, the product designed for advanced home video editors, also has HD
capabilities.
In addition to selling Studio as a stand-alone software product, Pinnacle
also sells versions of Studio software bundled with a variety of video
input/output hardware.
Our line of Dazzle products offers another range of software editing
products such as Dazzle DVC80, Dazzle DVC90 and Dazzle DVC150. The Dazzle
product line offers an inexpensive and easy way to convert video tapes to DVD
and digital movies.
TV Viewing Products
Pinnacle's PCTV line of products allows users to view television
programming on their computer monitors wherever and whenever they choose.
A television program can be viewed on its own or in conjunction with other
applications on the computer. ShowCenter is a digital media receiver that
expands the viewing and listening options beyond the personal computer; it
allows consumers to stream videos, music and photos from a PC to a TV and/or
stereo system.
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SALES AND SERVICE
We market and sell our products through a combination of direct and
indirect sales channels. From our traditional presence in the high-end
post-production market to broadcast news, low-cost post-production, audio
solutions and consumer products, we strive for balanced market and geographic
sales coverage. We sell our products primarily through a network of more than
2,500 independent distributors, value-added resellers and dealers. We supplement
these channels with a team of internal sales representatives directly serving
select customers and markets, as well as selling products on the Internet.
We have significant international operations and currently have offices in
23 countries around the world. We believe this geographic diversity allows us to
draw on business and technical expertise from a global workforce and provides
stability to our operations and revenue streams to offset geography-specific
economic trends. Revenues from our international operations accounted for 57%,
51% and 49% of our total net revenues for 2005, 2004 and 2003, respectively.
We generally ship our products shortly after the receipt of an order,
which is typical for our industry. Historically, a high percentage of our
revenue has been generated in the third month of each fiscal quarter and is
concentrated in the latter part of that month. Accordingly, orders may exist at
the end of the quarter that have not been shipped and have not been recognized
as revenue. The level of backlog that may exist at the end of any quarter is not
a reliable indicator of future sales levels.
We provide customer service and support directly through regional
telephone support centers, major-market field service representatives and
indirectly through strategically located dealers, value-added resellers and
authorized third-party service providers. Customers may choose from a variety of
support offerings, including telephone support, quick-response on-site
assistance, hardware replacement and extended warranty and software upgrades.
Customer training is available directly from us or through certified third-party
Avid training centers around the world. Total service offerings represented 11%,
10% and 10% of our consolidated net revenues in 2005, 2004 and 2003,
respectively.
MANUFACTURING AND SUPPLIERS
Our manufacturing operations consist primarily of the testing of
subassemblies and components purchased from third parties, the duplication of
software and the configuration, assembly and testing of board sets, software,
related hardware components and complete systems. We also rely on independent
contractors to manufacture components and subassemblies to our specifications
both in the U.S. and overseas. Our products undergo testing and quality
assurance at the final assembly stage. We are dependent on a number of sole
source vendors for certain key hardware components of our products. For the
risks associated with our reliance upon certain vendors, see Item 1A "Risk
Factors".
Our manufacturing facilities are located in: Tewksbury, Massachusetts;
Dublin, Ireland; Menlo Park, California; and Irwindale, California. We also
contract with third-party manufacturing facilities in the United States and
overseas for boxed retail consumer products and for certain component parts.
In order to comply with environmental directives recently adopted in the
European Union (EU), the Directive on Waste Electrical and Electronic Equipment,
or WEEE, and the Directive on the Restriction of Hazardous Substances, or RoHS,
we are obligated with respect to sales in the EU to provide for the recycling of
our products and removal of specific toxic substances that may be found in our
products. The expense of complying with the EU's WEEE and RoHS Directives in
2005 was not material to our financial statements. We will incur additional
costs in 2006 to modify our products to comply with RoHS. Our planned
expenditures in 2006 to modify our products to comply with the directives is
approximately $3.4 million. However, because the WEEE and RoHS Directives are
new and EU member states are still establishing their implementation rules, it
is difficult to predict the exact cost of compliance for 2006 and beyond, and
this amount is subject to change. Any amounts spent for compliance will result
in decreased earnings but are required in order to allow us to continue selling
our products in Europe.
INTELLECTUAL PROPERTY
We regard our software and hardware as proprietary and protect it under
the laws of patents, copyrights, trademarks and trade secrets and through
contractual provisions.
We have obtained patents and have registered copyrights, trademarks and
service marks in the U.S. and foreign countries. In particular, as of December
31, 2005, we held 226 U.S. patents and had 100 patent applications pending with
the U.S. Patent and Trademark Office with expiration dates through 2024. We have
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also registered or applied to register various trademarks and service marks in
the U.S. and a number of foreign countries, including Avid(R), Media
Composer(R), NewsCutter(R), Digidesign(R), Pro Tools(R), M-Audio(R),
Softimage(R), XSI(R), Alienbrain(R) and Pinnacle Systems(R). Although we believe
ownership of our patents, copyrights, trademarks and service marks, and trade
secrets is an important factor in our business, our success relies primarily on
the innovative skills, technical competence and marketing abilities of our
personnel.
Our software is licensed to end-users pursuant to either shrink-wrap,
embedded or on-line licenses, or signed license agreements. Our products
generally contain copy protection and/or copy-detection features to guard
against unauthorized use. Policing unauthorized use of computer software is
difficult and software piracy is a persistent problem for us, as well as the
software industry in general. This problem is particularly acute in
international markets. We participate in an anti-piracy program through the
Business Software Alliance, or BSA, an external association of business software
vendors.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on the development of
digital media content-creation tools and workgroup solutions that operate
primarily on the Macintosh and Windows platforms. We are committed to delivering
best-in-class video, film, 3D animation and audio editing systems to meet the
needs of professionals in the television, film, music, broadcast production and
industrial post-production markets, and of end-users in the educational,
consumer and corporate markets. Our research and development efforts also
include networking and storage initiatives to deliver standards-based media
transfer and media asset management tools, as well as stand-alone and
network-attached media storage systems for workgroups. Our systems are designed
to be Internet-enabled with technology for encoding and streaming media over the
Internet. Our research and development expenditures for 2005, 2004 and 2003 were
$111.3 million, $94.9 million and $85.6 million, respectively.
Our research and development operations are primarily located in:
Tewksbury, Massachusetts; Daly City, California; Mountain View, California;
Irwindale, California; Madison, Wisconsin; Rochelle Park, New Jersey;
Braunschweig, Germany; Munich, Germany; and Montreal, Canada. We also employ
independent contractors in the United States and abroad for some of our research
and development activities.
COMPETITION
The markets for our products are highly competitive and subject to rapid
change. Our competition is fragmented, with a large number of suppliers
providing different types of products to different markets.
Video Post-production and 3D
In the TV, video and film post-production markets, we compete primarily
with vendors that offer similar digital editing and effects products based on
standard computer platforms. These competitors include AJA Video Systems
Inc., Adobe Systems Incorporated, Apple Computer, Inc., Blackmagic Design
Pty. Ltd., Autodesk, Inc.'s Media and Entertainment Solutions division,
Quantel Inc. and Sony Corporation. In the 3D/animation sector, we compete
with other manufacturers of content creation solutions for the video game,
feature film and related markets, including Discreet and Alias Systems Corp.
(both of which are divisions of Autodesk, Inc.) and NewTek, Inc.
Broadcast
In the broadcast production area, we compete with vendors of video servers
and traditional broadcast equipment that now offer nonlinear editing and shared
storage systems for news, sports and special programming for television, such as
Apple Computer, Inc., Harris Corporation, Thomson Grass Valley, Quantel Inc. and
Sony Corporation. Other vendors of competitive products targeting these markets
include 360 Systems and Bit Central, Inc. Primary competitors to the Avid iNEWS
newsroom computer are The Associated Press (ENPS) and Dalet. In on-air graphics,
principal competitors are Chyron Corporation, Harris Corporation and Vizrt Ltd.
Competition in play-to-air servers is primarily from Thomson Grass Valley,
Harris Corporation, Omneon Video Networks and SeaChange International, Inc. We
expect continued competition from these vendors as they develop and introduce
digital media products.
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Data Storage and Digital Asset Management
We compete in the data storage market with companies such as Advanced
Digital Information Corporation (ADIC), Apple Computer, Inc., Ciprico Inc., EMC
Corporation, Hewlett-Packard Development Company L.P., International Business
Machines Corporation (IBM), Rorke Data (a subsidiary of Bell Microproducts,
Inc.) and Silicon Graphics, Inc. (SGI). In digital asset management, the
Alienbrain product family - which Avid acquired in January 2004 from NXN
Software GmbH - is focused primarily on animation, electronic graphics and video
gaming markets where it competes primarily with Perforce Software, Inc. and also
with offerings from Microsoft Corporation (Visual SourceSafe) and Borland
Software Corporation (StarTeam).
Audio
In the Audio segment, we compete primarily with suppliers of disk-based
digital audio workstation software and hardware products, such as Emagic (a
subsidiary of Apple Computer, Inc.), MOTU, Inc. (Mark of the Unicorn),
Merging Technologies and Steinberg Media Technologies GmbH (a subsidiary of
Yamaha Corporation). We also compete with manufacturers of professional
analog and digital mixing consoles for studio production and live sound
mixing, including AMS Neve Ltd., DiGiCo Limited, Euphonix, Inc., Midas (a
division of Telex Communications, Inc.), Solid State Logic Ltd. and Yamaha
Corporation. Digidesign and M-Audio compete with manufacturers of low-cost
computer-connected audio I/O hardware, such as Creative Technology Ltd., Ego
Systems Inc., Loud Technologies, Inc., Roland Corporation, Tascam (a division
of TEAC Corporation) and Yamaha Corporation. In addition, M-Audio also
competes in the categories of MIDI keyboard/controllers, MIDI interfaces,
speakers, pre-amplifiers and microphones with many of these companies.
Consumer Video
In the Consumer Video segment we compete primarily with video software
providers Adobe Systems, Incorporated, Ulead Systems, Inc., Sony Corporation
and Sonic Solutions. We also compete with manufacturers of TV tuners,
including ADS Technologies, Inc., Hauppauge Computer Works, Inc., ATI
Technologies, Inc. and Adaptec, Inc. in the market for TV tuners.
EMPLOYEES
We employed 2,613 people as of December 31, 2005.
WEB SITE ACCESS
We make available free of charge on our Web site, www.avid.com, copies of
our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports, as soon as reasonably
practicable after such material is filed with the Securities and Exchange
Commission, and in any event on the same day. Additionally, we will provide
paper copies of all such filings free of charge upon request. Alternatively,
these reports can be accessed at the SEC's internet website: www.sec.gov.
ITEM 1A. RISK FACTORS
Some of the statements in this Form 10-K relating to our future performance
constitute forward-looking statements. Such forward-looking statements are based
upon management's current expectations and involve known and unknown risks.
Realization of any of these risks may cause actual results to differ materially
from the results described in the forward-looking statements. Certain of these
risks are as follows:
We may not be able to realize the expected benefits of our acquisition of
Pinnacle Systems
As a result of our recent acquisition of Pinnacle, we face challenges in
several areas that could have an adverse effect on our business. In addition,
some of the assumptions that we have relied upon, such as the achievement of
operating synergies and revenue growth, may not be realized. As a result of
these and other factors, the acquisition may not result in a financial condition
superior to that which we would have achieved on a stand-alone basis.
If our integration of Pinnacle is not successful, our results of
operations could be harmed, employee morale could decline, key employees could
leave and customers could cancel existing orders or choose not to place new
ones. With the completion of the integration, the combined company must operate
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as a unified organization utilizing common information and communication
systems, operating procedures, financial controls and human resources practices.
We may encounter difficulties, unforeseen costs and delays involved in
integrating the Pinnacle business, including:
o failure to successfully manage relationships with customers and with
important third parties;
o failure of customers to continue using the products and services of the
combined company;
o failure to properly integrate the professional film, video and
broadcast businesses of Avid and Pinnacle;
o challenges encountered in managing larger, more geographically
dispersed operations;
o difficulties in successfully integrating the management teams and
employees of Avid and Pinnacle;
o diversion of the attention of management from other ongoing business
concerns;
o potential incompatibility of technologies and systems;
o potential impairment charges to write-down the carrying amount of
goodwill and other intangible assets; and
o potential incompatibility of business cultures.
We will also face challenges inherent in efficiently managing an increased
number of employees over large geographic distances, including the need to
develop appropriate systems, policies, benefits and compliance programs. The
inability to manage the organization of the combined company effectively could
have a material adverse effect on our business.
Our performance will depend in part on continued customer acceptance of our
products.
We regularly introduce new products, as well as upgrades and enhancements
to existing products. We will need to continue to focus marketing and sales
efforts on educating potential customers, as well as our resellers and
distributors, about the uses and benefits of these products. The future success
of certain of our video products, such as Avid DS Nitris, which enable
high-definition production, will also depend on demand for high definition
content and appliances, such as television sets and monitors, that utilize the
high definition standard. Other risks involved with offering new products in
general include, without limitation, the possibility of defects or errors,
failure to meet customer expectations, delays in shipping new products and the
introduction of similar products by our competitors. In addition, we
occasionally introduce products in new markets, where we have little experience
and may not overcome any barriers to entry. The introduction and transition to
new products could also have a negative impact on the market for our existing
products, which could adversely affect our revenues and business.
The digital broadcast business is large, geographically dispersed and highly
competitive, and we may not be successful in growing our customer base or
predicting customer demand in this business.
We are continuing to enhance our status in the digital broadcast business
and have augmented our NewsCutter product offering with the Avid Unity for News
products and other server, newsroom and browser products. In this business, in
addition to or in lieu of discrete point products, customers often seek complex
solutions involving highly integrated components (including the configuration of
unique workflows) from a single or multiple vendors. Success in this business
will require, among other things, creating and implementing compelling solutions
and developing a strong, loyal customer base.
In addition, large, complex broadcast orders often require us to devote
significant sales, engineering, manufacturing, installation and support
resources to ensure their successful and timely fulfillment. As the broadcast
business converts from analog to digital, our strategy has been to build our
broadcast solutions team in response to customer demand. To the extent that
customer demand for our broadcast solutions exceeds our expectations, we may
encounter difficulties in the short term meeting our customers' needs.
Meanwhile, our competitors may devote greater resources to the broadcast
business than we do, or may be able to leverage their presence more effectively.
If we are unsuccessful in expanding within the digital broadcast business or in
predicting and satisfying customer demand, our business and revenues could be
adversely affected.
We have a significant presence in the audio business, and therefore, the growth
of our audio business will depend in part on our ability to successfully
introduce new products.
Our Digidesign division has a significant presence in the audio business,
due in large part to a series of successful product introductions. Our future
success will depend in part upon our ability to offer, on a timely and
cost-effective basis, new audio products and enhancements of our existing audio
products. This can be a complex and uncertain process and we could experience
design, manufacturing, marketing, or other difficulties that delay or prevent
the introduction of new or enhanced products, or the integration of acquired
products, which, in turn, could harm our business.
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We will face challenges associated with sales of video and audio products to the
consumer market.
As a result of our recent acquisition of Pinnacle, we expect a material
portion of our future revenue to come from sales to consumers of home video
editing and viewing products. In addition, M-Audio is expanding its sales
channel to include sales of its audio products through the consumer channel. The
market for these consumer video and audio products is highly competitive and we
expect to face price-based competition from competitors selling similar
products. Although we acquired experienced personnel through our acquisitions of
M-Audio and Pinnacle, Avid's prior experience in the consumer market is limited.
If we are not successful marketing to this base of customers, our operating
results could suffer. Furthermore, sales of consumer electronics and software
typically increase in the second half of the year, reaching their peak during
the year-end holiday season. As a result, to the extent we increase sales of our
video and audio products through consumer channels, we expect to experience
greater seasonality in our revenues.
Another challenge that is particularly acute with respect to the sale of
consumer software is software piracy. The unauthorized use of our proprietary
technology is costly and efforts to restrict such unauthorized use are
time-consuming. We are unable to accurately measure the extent to which piracy
of our software exists, but we expect it to be a persistent problem.
A portion of our revenue is dependent on sales of large, complex solutions.
We expect sales of large, complex solutions to continue to constitute a
material portion of our net revenue, particularly as news stations convert from
analog, or tape-based, processes to digital formats. Our quarterly and annual
revenues could fluctuate if:
o sales to one or more of our customers are delayed or are not completed
within a given quarter;
o the contract terms preclude us from recognizing revenues relating to
one or more significant contracts during a particular quarter;
o news stations' migrations to networked digital infrastructure slows
down;
o we are unable to complete complex customer installations on schedule;
o our customers reduce their capital investments in our products in
response to slowing economic growth; or
o any of our large customers terminates its relationship with us or
significantly reduces the amount of business it does with us.
We compete with many other enterprises and we expect competition to intensify in
the future.
The business segments in which we operate are highly competitive, with
limited barriers to entry, and are characterized by pressure to reduce prices,
incorporate new features and accelerate the release of new products. Some of our
current and potential competitors have substantially greater financial,
technical, distribution, support and marketing resources than we do. Such
competitors may use these resources to lower their product costs, allowing them
to reduce prices to levels at which we could not operate profitably. In addition
to competing based on price, our products must also compete favorably with our
competitors' products in terms of reliability, performance, ease of use, range
of features, product enhancements, reputation and training. Delays or
difficulties in product development and introduction may also harm our business.
If we are unable to compete for our target customers effectively, our business
and results of operations could suffer.
New product announcements by our competitors and by us also could have the
effect of reducing customer demand for our existing products. New product
introductions require us to devote time and resources to training our sales
channels in product features and target customers, with the temporary result
that the sales channels may have less time to devote to selling our products. In
addition, our introduction of new products and expansion of existing product
offerings can put us into competition with companies with whom we formerly
collaborated. In the event such companies discontinue their alliances with us,
we could experience a negative impact on our business.
Potential future acquisitions could be difficult to integrate, divert the
attention of key personnel, disrupt our business, dilute stockholder value and
impair our financial results.
As part of our business strategy, we periodically acquire companies,
technologies and products that we believe can improve our ability to compete in
our core markets or allow us to enter new markets. For example, in August 2005,
we acquired Pinnacle and in August 2004, we acquired M-Audio. The risks
associated with such acquisitions include, among others:
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o the difficulty of assimilating the operations, policies and personnel
of the target companies;
o the failure to realize anticipated returns on investment, cost savings
and synergies;
o the diversion of management's time and attention;
o the potential dilution to existing stockholders, if we issue common
stock or other equity rights in the acquisition;
o the potential loss of key employees of the target company;
o the difficulty in complying with a variety of foreign laws and
regulations, if so required;
o the impairment of relationships with customers or suppliers;
o the risks associated with contingent payments and earn-outs;
o the possibility of incurring debt and amortization expenses, as well as
impairment charges, related to goodwill and other intangible assets; and
o unidentified issues not discovered in due diligence, which may include
product quality issues and legal contingencies.
Such acquisitions often involve significant transaction-related costs and
could cause disruption to normal operations. In the future, we may also make
debt or equity investments. If so, we may fail to realize anticipated returns on
such investments. If we are unable to overcome or mitigate these risks, they
could adversely affect our business and lower revenues.
Our products are complex and may contain errors or defects resulting from such
complexity.
As we continue to enhance and expand our product offerings, our products
have grown increasingly complex and, despite extensive testing and quality
control, may contain errors or defects. Such errors or defects could cause us to
issue corrective releases and could result in loss of revenues, delay of revenue
recognition, increased product returns, lack of market acceptance and damage to
our reputation.
Poor global economic conditions could adversely affect demand for our products
and the financial condition of our suppliers, distributors and resellers.
The revenue growth and profitability of our business depends primarily on
the overall demand for our products. If global economic conditions worsen,
demand for our products may weaken, as could the financial health of our
suppliers, distributors and resellers, which could adversely affect our revenues
and business.
Our use of independent firms and contractors to perform some of our product
development and manufacturing activities could expose us to risks that could
adversely impact our revenues.
Independent firms and contractors, some of whom are located in other
countries, perform some of our product development activities. We generally own
the software developed by these contractors. We also rely on subcontractors for
most of our manufacturing activities. Our strategy to rely on independent firms
and contractors involves a number of significant risks, including loss of
control over the manufacturing process, potential absence of adequate
manufacturing capacity, potential delays in lead times and reduced control over
delivery schedules, manufacturing yields, quality and cost. Furthermore, the use
of independent firms and contractors, especially those located abroad, could
expose us to risks related to governmental regulation, foreign taxation,
intellectual property ownership and rights, exchange rate fluctuation, political
instability and unrest, natural disasters and other risks, which could adversely
impact our revenues.
An interruption of our supply of certain products or key components from our
sole source suppliers, or a price increase in such products or components, could
hurt our business.
We are dependent on a number of specific suppliers for certain products
and key components of our products. We purchase these sole source products and
components pursuant to purchase orders placed from time to time. We generally do
not carry significant inventories of these sole source products and components
and have no guaranteed supply arrangements. If any of our sole source vendors
should fail to produce these products or components, our supply and our ability
to continue selling and servicing products that use these components could be
imperiled. Similarly, if any of our sole source vendors should encounter
technical, operating or financial difficulties, our supply of these products or
components would be threatened. While we believe that alternative sources for
these products and components could be developed, or our products could be
redesigned to permit the use of alternative components, an interruption of our
supply could damage our business and negatively affect our operating results.
14
Our gross profit margin varies from product to product depending primarily
on the proportion and cost of third-party hardware and software included in each
product. From time to time, we add functionality and features to our products.
If we effect such additions through the use of more, or more costly, third-party
hardware or software and are not able to increase the price of our products to
offset the increased costs, our gross profit margin on these products could
decrease and our operating results could be adversely affected.
We rely on third party software for some of our products and if we are unable to
use or integrate such software, our product and service development may be
delayed.
We rely on certain software that we license from third parties, including
software that is bundled with our products and sold to end users and software
that is integrated with internally developed software and used in our products
to perform key functions. These third-party software licenses may not continue
to be available on commercially reasonable terms and the software may not be
appropriately supported, maintained or enhanced by the licensors. The loss of
licenses to, or inability to support, maintain and enhance, any such software,
could result in increased costs, or in delays or reductions in product shipments
until equivalent software could be developed, identified, licensed and
integrated, which could adversely affect our business.
Qualifying and supporting our products on multiple computer platforms is time
consuming and expensive.
Our software engineers devote significant time and effort to qualify and
support our products on various computer platforms, including Microsoft and
Apple platforms. Computer platform modifications and upgrades require additional
time to be spent to ensure that our products function properly. To the extent
that the current configuration of qualified and supported platforms changes, or
we need to qualify and support new platforms, we could be required to expend
valuable engineering resources, which could adversely affect our operating
results.
Our revenues and gross profit are dependent on several unpredictable factors.
The revenue and gross profit from our products depend on many factors,
including:
o mix of products sold;
o cost and proportion of third-party hardware and software included in
such products;
o product distribution channels;
o acceptance of our new product introductions;
o product offers and platform upgrades;
o price discounts and sales promotion programs;
o volume of sales of aftermarket hardware products;
o costs of swapping or fixing products released to the market with
defects;
o provisions for inventory obsolescence;
o competitive pressure on product prices;
o costs incurred in connection with our broadcast and some of our audio
solution sales, which typically have longer selling and implementation
cycles;
o timing of delivery of solutions to customers; and
o foreign currency exchange impact on our revenues.
Changes in any of these factors could adversely affect our operating results.
Our international operations expose us to significant exchange rate fluctuations
and regulatory, intellectual property and other risks which could harm our
operating results.
We generally derive approximately half of our revenues from customers
outside of the United States. This business is, for the most part, transacted
through international subsidiaries and generally in the currency of the end-user
customers. Therefore, we are exposed to the risks that changes in foreign
currency could adversely impact our revenues, net income (loss) and cash flow.
To hedge against the foreign exchange exposure of certain forecasted
receivables, payables and cash balances of our foreign subsidiaries, we enter
into foreign currency forward-exchange contracts. The success of our hedging
program depends on forecasts of transaction activity in the various currencies.
To the extent that these forecasts are over- or under-stated during periods of
currency volatility, we could experience currency gains or losses.
15
Other risks inherent in our international operations include changes in
regulatory practices, environmental laws, tax laws, trade restrictions and
tariffs, longer collection cycles for accounts receivable and greater
difficulties in protecting our intellectual property.
New environmental regulations could negatively impact our future operating
results.
The European Union, or EU, has finalized the Waste Electrical and
Electronic Equipment, or WEEE, Directive, which makes producers, importers
and/or distributors of specified electronic products, including some of our
products, responsible for the collection, recycling, treatment and disposal of
covered products. The WEEE Directive became effective in August 2005, although
to date not all EU countries have adopted rules implementing the WEEE Directive.
The EU has also passed the Restriction of Hazardous Substances, or RoHS,
Directive, which places restrictions on lead and certain other substances
contained in specified electronic products, including some of our products, sold
in the EU after June 2006. While the cost of compliance with these directives
cannot be determined before the member states issue their final implementation
guidance, the potential costs could be significant and could adversely affect
our future operating results. Furthermore, failure to comply with the directives
could result in substantial penalties and fines.
Our operating costs are tied to projections of future revenues, which may differ
from actual results.
Our operating expense levels are based, in part, on our expectations of
future revenues. Such future revenues are difficult to predict, especially as a
result of our recent acquisition of Pinnacle. A significant portion of our
business occurs near the end of each quarter, which can impact our ability to
forecast revenues on a quarterly basis. Further, we are generally unable to
reduce quarterly operating expense levels rapidly in the event that quarterly
revenue levels fail to meet internal expectations. Therefore, if quarterly
revenue levels fail to meet internal expectations upon which expense levels are
based, our results of operations could be adversely affected.
Terrorism, acts of war and other catastrophic events may seriously harm our
business.
Terrorism, acts of war, or other catastrophic events may disrupt our
business and harm our employees, facilities, suppliers, distributors, resellers
or customers, which could significantly impact our revenue and operating
results. The increasing presence of these threats has created many economic and
political uncertainties that could adversely affect our business and stock price
in ways that cannot be predicted. We are predominantly uninsured for losses and
interruptions caused by terrorism, acts of war and other catastrophic events.
If we fail to maintain strong relationships with our resellers, distributors and
suppliers, our ability to successfully deploy and sell our products may be
harmed.
We sell many of our Professional Video products and services and
substantially all of our Audio and Consumer Video products and services,
indirectly through resellers and distributors. In our Audio and Consumer Video
segments, a few distributors account for a significant portion of the revenue in
that segment. The loss of one or more key distributors could reduce our
revenues. The resellers and distributors of our Professional Video segment
products typically purchase Avid software and Avid-specific hardware from us and
third-party components from various other vendors, in order to produce complete
systems for resale. Any disruption to our resellers and distributors, or their
third-party suppliers, could reduce our revenues. Increasingly, we are
distributing our broadcast products directly, which could put us in competition
with our resellers and distributors and could adversely affect our revenues. In
addition, our resellers could diversify the manufacturers from whom they
purchase products to sell to end-users, which could lead to a weakening of our
relationships with our resellers and could adversely affect our revenues.
Most of the resellers and distributors of our Professional Video products
are not granted rights to return products after purchase and actual product
returns from such resellers and distributors have been insignificant to date.
Our revenue from sales of Audio and Consumer Video products is generally
derived, however, from transactions with distributors and authorized resellers
that typically allow limited rights of return, inventory stock rotation and
price protection. Accordingly, reserves for estimated returns, exchanges and
credits for price protection are recorded as a reduction of revenues upon
shipment of the related products to such distributors and resellers, based upon
our historical experience. To date, actual returns have not differed materially
from management's estimates. However, if returns of our Audio or Consumer Video
segment products were to exceed estimated levels, our revenues and operating
results could be adversely impacted.
With respect to our Consumer Video segment, we have expanded our
distribution network to include several consumer channels, including large
distributors of products to computer software and hardware retailers, which in
16
turn sell products to end users. We also sell our Consumer Video products
directly to certain retailers. Our Consumer Video product distribution network
exposes us to the following risks, some of which are out of our control:
o we are obligated to provide price protection to our retailers and
distributors and, while the agreements limit the conditions under which
products can be returned to us, we may be faced with product returns or
price protection obligations;
o retailers or distributors may not continue to stock and sell our
consumer products; and
o retailers and distributors often carry competing products.
Changes in accounting rules could adversely affect our future operating results.
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. These principles
are subject to interpretation by various governing bodies, including the
Financial Accounting Standards Board and the Securities and Exchange Commission,
which promulgate and interpret appropriate accounting regulations. Changes from
current accounting regulations may have a significant effect on our reported
financial results. Furthermore, changes in the rules regarding accounting for
stock-based compensation, which took effect on January 1, 2006, will result in
higher operating expenses and lower earnings per share compared to prior
periods.
Our future growth could be harmed if we lose the services of certain employees.
Our success depends upon the services of a talented and dedicated
workforce, including members of our executive team and employees in technical
positions. The loss of the services of one or more key employees could harm our
business. Our success also depends upon our ability to attract and retain highly
skilled new employees. Competition for such employees is intense in the
industries and geographic areas in which we operate. In the past, we have relied
on our ability to grant stock options as one mechanism for recruiting and
retaining highly skilled talent. However, changes in the accounting rules that
will require us to expense stock options will impair our ability to provide
these incentives without incurring compensation costs. If we are unable to
compete successfully for talented employees, our business could suffer.
If we fail to manage our growth effectively, our business could be harmed.
Our success depends on our ability to manage the growth of our operations
effectively. As a result of our acquisitions and increasing demand for our
products and services, the scope of our operations has grown both domestically
and internationally. Our management team will face challenges inherent in
efficiently managing an increased number of employees over larger geographic
distances. These challenges include implementing effective operational systems,
procedures and controls, as well as training new personnel. Inability to
successfully respond to these challenges could have a material adverse effect on
the growth of our business.
Our websites could subject us to legal claims that could harm our business.
Some of our websites provide interactive information and services to our
customers. To the extent that materials may be posted on or downloaded from
these websites and distributed to others, we may be subject to claims for
defamation, negligence, copyright or trademark infringement, personal injury, or
other theories of liability based on the nature, content, publication or
distribution of such materials. In addition, although we have attempted to limit
our exposure by contract, we may also be subject to claims for indemnification
by end users in the event that the security of our websites is compromised. As
these websites are available on a worldwide basis, they could potentially be
subject to a wide variety of international laws.
We could incur substantial costs protecting our intellectual property or
defending against a claim of infringement.
Our ability to compete successfully and achieve future revenue growth
depends, in part, on our ability to protect our proprietary technology and
operate without infringing upon the intellectual property rights of others. We
rely upon a combination of patent, copyright, trademark and trade secret laws,
confidentiality procedures and contractual provisions, as well as required
hardware components and security keys, to protect our proprietary technology.
However, our means of protecting our proprietary rights may not be adequate. In
addition, the laws of certain countries do not protect our proprietary
technology to the same extent as do the laws of the United States. From time to
time unauthorized parties have obtained, copied and used information that we
consider proprietary. Policing the unauthorized use of our proprietary
technology is costly and time-consuming and we are unable to measure the extent
to which such unauthorized use, including piracy, of our software exists. We
expect software piracy to continue to be a persistent problem.
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We occasionally receive communications suggesting that our products may
infringe the intellectual property rights of others. It is our practice to
investigate the factual basis of such communications and negotiate licenses
where appropriate. While it may be necessary or desirable in the future to
obtain licenses relating to one or more products or relating to current or
future technologies, we may be unable to do so on commercially reasonable terms.
If we are unable to protect our proprietary technology or unable to negotiate
licenses for the use of others' intellectual property, our business could be
impaired.
We also may be liable to some of our customers for damages that they may
incur in connection with intellectual property claims. Although we attempt to
limit our exposure to liability arising from infringement of third-party
intellectual property rights in our agreements with customers, we may not always
be successful. If we are required to pay damages to our customers, or indemnify
our customers for damages they incur, our business could be harmed. Moreover,
even if a particular claim falls outside of our indemnity or warranty
obligations to our customers, our customers may be entitled to additional
contractual remedies against us.
Regulations could be enacted that restrict our Internet initiatives.
Federal, state and international authorities may adopt new laws or
regulations governing the Internet, including laws or regulations covering
issues such as privacy, distribution and content. For example, the EU has issued
several directives regarding privacy and data protection, including the
Directive on Data Protection and the Directive on Privacy and Electronic
Communications. The enactment of legislation implementing such directives by EU
member countries is ongoing. The enactment of this and similar legislation or
regulations could curb our Internet sales and other initiatives, require changes
in our sales and marketing practices and place additional financial burdens on
our business.
Our association with industry organizations could subject us to litigation.
We are members of several industry organizations, trade associations and
standards consortia. Membership in these and similar groups could subject us to
litigation as a result of the activities of such groups. For example, in
connection with our anti-piracy program, designed to enforce copyright
protection of our software, we are a member of the Business Software Alliance,
or BSA. From time to time the BSA undertakes litigation against suspected
copyright infringers. These lawsuits could lead to counterclaims alleging
improper use of litigation or a violation of other local laws. To date, none of
these lawsuits or counterclaims have adversely affected our results of
operations, but, should we become involved in material litigation, our cash
flows or financial position could be adversely affected.
Compliance with rules and regulations concerning corporate governance has caused
our operating expenses to increase and has put additional demands on our
management.
The Sarbanes-Oxley Act of 2002 and various rules and regulations
promulgated by the SEC and the National Association of Securities Dealers in
recent years have increased the scope, complexity and cost of our corporate
governance, reporting and disclosure practices. These laws, rules and
regulations also divert attention from business operations, increase the cost of
obtaining director and officer liability insurance and may make it more
difficult for us to attract and retain qualified executive officers, key
personnel and members of our board of directors.
If we experience problems with our third-party leasing program, our revenues
could be adversely impacted.
We have an established leasing program with a third party that allows
certain of our customers to finance their purchases of our products. If this
program ended abruptly or unexpectedly, some of our customers might be unable to
purchase our products unless or until they were able to arrange for alternative
financing, which could adversely impact our revenues.
Our stock price may continue to be volatile.
The market price of our common stock has experienced volatility in the
past and could continue to fluctuate substantially in the future based upon a
number of factors, many of which are beyond our control. These factors include:
o changes in our quarterly operating results;
o shortfalls in our revenues or earnings compared to securities analysts'
expectations;
o changes in analysts' recommendations or projections;
o fluctuations in investors' perceptions of us or our competitors;
18
o shifts in the markets for our products;
o development and marketing of products by our competitors;
o changes in our relationships with suppliers, distributors, resellers,
system integrators or customers;
o announcements of major acquisitions;
o a shift in financial markets; and
o global macroeconomic conditions.
Furthermore, the market prices of equity securities of high technology
companies have generally demonstrated volatility in recent years and this
volatility has, at times, appeared to be unrelated to or disproportionate to any
of the factors above.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal corporate and administrative offices, as well as our
Professional Video segment headquarters are located in three adjacent buildings
in an office park located in Tewksbury, Massachusetts. Our leases on these
buildings expire in June 2010. In September 2000, we subleased a portion of this
space to an unrelated company. This sublease has been extended and expires in
2007.
We lease office space in Daly City, California for our Audio segment
headquarters, including its administrative, sales and marketing, and research
and development activities, and in Mountain View, California, for our Consumer
Video segment headquarters including its administrative, sales and marketing,
and research and development activities. In Europe, we lease facilities in Iver
Heath, United Kingdom for our European headquarters, including administrative,
sales and support functions and in Braunschweig, Germany to house our European
Consumer Video products engineering operations. We also lease facilities in
Dublin, Ireland and Menlo Park, California for the manufacture and distribution
of our products.
ITEM 3. LEGAL PROCEEDINGS
In April 2005, we were notified by the Korean Federal Trade Commission
("KFTC") that a former reseller, Neat Information Telecommunication, Inc.
("Neat"), had filed a petition against our subsidiary, Avid Technology
Worldwide, Inc., alleging unfair trade practices. On August 11, 2005, the KFTC
issued a decision in favor of Avid regarding the complaint filed by Neat.
However, Neat filed a second petition with the KFTC on October 17, 2005 alleging
the same unfair trade practices as those set forth in the former KFTC petition.
On January 13, 2006, we filed our response to the second KFTC petition denying
Neat's allegations. On February 16, 2006, the KFTC reaffirmed its earlier
decision in favor of Avid and concluded its review of the case. In addition, on
October 14, 2005, Neat filed a civil lawsuit in Seoul Central District Court
against Avid Technology Worldwide, Inc. alleging unfair trade practices. In the
civil action, Neat is seeking approximately $1.7 million in damages, plus
interest and attorneys' fees. On November 30, 2005, we filed our answer to the
complaint denying Neat's allegations. We believe that Neat's claims are without
merit and we intend to defend ourselves vigorously in these actions. Because we
cannot predict the outcome of these actions at this time, no costs have been
accrued for any possible loss contingency.
In September 2003, Pinnacle Systems, Inc., which we recently acquired and
is now a wholly owned subsidiary, was named as a defendant in a civil lawsuit
filed in the Superior Court of California, Alameda County. The complaint was
filed by YouCre8, a/k/a DVDCre8, Inc., a software company whose software was
distributed by Dazzle Multimedia, Inc. ("Dazzle"). The complaint alleged that in
connection with Pinnacle's acquisition of certain assets of Dazzle, Pinnacle
tortiously interfered with DVDCre8's relationship with Dazzle and others,
engaged in acts to restrain competition in the DVD software market, and
distributed false and misleading statements which caused harm to DVDCre8. Dazzle
and its parent company, SCM Microsystems, Inc. ("SCM"), were also named as
defendants in this matter. On December 1, 2005, we entered into a settlement
agreement with DVDCre8 whereby each party issued a general release of all claims
relating to the allegations made in this lawsuit. In consideration of the
settlement, we agreed to make a payment to DVDCre8 of $570,000, which was paid
on December 8, 2005. On December 5, 2005, Pinnacle filed an application for
determination of a good faith settlement with the Superior Court and the Court
granted this application on December 9, 2005. On December 16, 2005, DVDCre8
filed notice with the Superior Court dismissing all claims alleged against
Pinnacle in this proceeding. Also on December 9, 2005, DVDCre8, SCM and Dazzle
entered into a settlement agreement regarding claims made against SCM and Dazzle
19
in this lawsuit and Pinnacle, SCM and Dazzle each agreed to waive any indemnity
claims that it may have against any of the other defendants in the lawsuit. All
amounts paid to settle this litigation are included as part of the purchase
price for the Pinnacle acquisition which took place on August 9, 2005.
We receive inquiries from time to time with regard to possible patent
infringement claims. If any infringement is determined to exist, we may seek
licenses or settlements. In addition, as a normal incidence of the nature of our
business, various claims, charges and litigation have been asserted or commenced
against the Company arising from or related to contractual or employee
relations, intellectual property rights or product performance. We do not
believe these claims will have a material adverse effect on our financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is (i) the name and age of each of our executive officers; (ii)
the position(s) presently held by each person; and (iii) the principal
occupation held by each person for at least the past five years.
EXECUTIVE OFFICER AGE POSITION(S)
David A. Krall 45 President and Chief Executive Officer
Patricia A. Baker 58 Vice President of Human Resources
Joseph Bentivegna 45 Vice President and Chief Operating Officer,
Avid Video
Jeffrey Hastings 41 Vice President and General Manager, Consumer
Ethan E. Jacks 52 Vice President, Chief Legal Officer and
Corporate Secretary
David M. Lebolt 49 Vice President and General Manager, Audio
Paul J. Milbury 57 Vice President and Chief Financial Officer
Sharad Rastogi 38 Vice President of Corporate Development
Michael J. Rockwell 38 Vice President and Chief Technology Officer
Charles L. Smith 45 Vice President and General Manager, Avid Video
DAVID A. KRALL. Mr. Krall has served as President since October 1999 and
Chief Executive Officer since April 2000. Previously, he served as Avid's
Chief Operating Officer from October 1999 to April 2000. Prior to that, Mr.
Krall served in various capacities at Digidesign: Chief Operating Officer of
Digidesign from July 1998 to October 1999, Vice President of Engineering
from June 1996 to July 1998 and Director of Program Management from May 1995
to June 1996.
PATRICIA A. BAKER. Ms. Baker has served as Vice President of Human Resources
since November 2002. From May 1996 to November 2002, Ms. Baker was
responsible for human resource matters at Digidesign. Prior to joining Avid,
Ms. Baker held senior human resources positions at major firms specializing
in the medical, pharmaceutical, and industrial and specialty chemical
industries. Ms. Baker was also President of The Baker Group, an independent
consulting firm that focused on both strategic organizational planning and
executive team building.
JOSEPH BENTIVEGNA. Mr. Bentivegna has served as Vice President and Chief
Operating Officer, Avid Video since November 2004. Previously, he served as Vice
President of Video Development and Operations from August 2001 to November 2004.
Prior to that, he held a variety of other positions at Avid, including Vice
President and General Manager of Avid Media Solutions from June 2000 to August
2001, Vice President of Worldwide Operations from January 1999 to June 2000,
Vice President and General Manager of Asia Operations from September 1998 to
20
January 1999 and Vice President of Worldwide Manufacturing from June 1996 to
September 1998. From November 1991 to June 1996 Mr. Bentivegna held various
other positions at Avid. Prior to that he held various positions in operations
for Access Technology, Inc., a developer of application software.
JEFFREY HASTINGS. Mr. Hastings has served as Vice President and General Manager,
Consumer since August 2005. Previously, he served as Chief Operating Officer for
M-Audio, a company we acquired in 2004 and now a business division of our Audio
division. Prior to joining, M-Audio Mr. Hastings served as President of Rio,
part of Digital Networks North America, Inc. (DNNA); he was appointed to that
position following DNNA's acquisition of SONICblue, Inc. where he had served as
Vice President of Engineering since December 2001. Mr. Hastings joined SONICblue
after it acquired ReplayTV in 2001. At ReplayTV Mr. Hastings held a variety of
senior executive positions, including Executive Vice President of Products
responsible for engineering, sales, marketing and operations.
ETHAN E. JACKS. Mr. Jacks has served as Vice President and Chief Legal Officer
since June 2000 and as Corporate Secretary since March 1999. From June 2000 to
August 2005 he also served as Vice President of Business Development. From May
2000 to December 2000, Mr. Jacks also served as Acting Chief Financial Officer
and from March 1999 to June 2000 as General Counsel. Prior to joining Avid,
Mr. Jacks was Vice President and General Counsel for Molten Metal Technology,
Inc. from November 1991 to October 1998. Mr. Jacks was also engaged in the
private practice of law for eleven years, including as a partner at McDermott,
Will & Emery.
DAVID M. LEBOLT. Mr. Lebolt has served as Vice President and General Manager of
Audio since July 2002. Previously, Mr. Lebolt held a variety of positions at
Digidesign, including Vice President of Product Strategy from November 1999 to
July 2002, Director of Product Strategy from November 1998 to November 1999 and
Pro Tools Product Line Manager from February 1994 to November 1998. Before
joining Digidesign in 1994, Mr. Lebolt was a professional keyboardist, producer,
arranger and composer. He also has experience in music advertising and music
production and has received both Clio and Emmy(R) awards for his production
work.
PAUL J. MILBURY. Mr. Milbury has served as Vice President and Chief Financial
Officer since December 2000. Prior to joining Avid, Mr. Milbury was Chief
Financial Officer of iBelong.com, Inc. from April 2000 to December 2000 and
Chief Financial Officer of JuniorNet Corporation from October 1998 to April
2000. Prior to that, Mr. Milbury spent 19 years at Digital Equipment Corporation
(now part of Hewlett-Packard Computer Corporation), where in 1995 he became Vice
President and Treasurer.
SHARAD RASTOGI. Mr. Rastogi has served as Vice President of Corporate
Development since August 2005. From January 2004 until August 2005 he was Vice
President of Strategic Planning and New Business Development. Prior to joining
Avid, Mr. Rastogi was a Vice President and Partner at the management consulting
firm Bain & Company, Inc. from September 1996 until December 2003. Prior to
that, Mr. Rastogi was senior automation engineer at hard-disk manufacturer
Komag, Inc.
MICHAEL J. ROCKWELL. Mr. Rockwell has served as Chief Technology Officer since
August 2001. From December 2003 to March 2005 he also served as Vice President
of Software Engineering and since March 2005 has served as Vice President.
Previously, Mr. Rockwell served as Vice President and General Manager of Avid
Internet Solutions from June 2000 to August 2001 and Chief Architect for
Software Engineering of Digidesign from January 1997 to November 1999. Mr.
Rockwell's prior positions with Digidesign also included Director of Application
Development from March 1995 to January 1997 and Director of Multi-Media Products
from April 1994 to March 1995.
CHARLES L. SMITH. Mr. Smith has served as Vice President and General Manager,
Avid Video since November 2004. Previously, he served as Vice President of
Worldwide Sales, Marketing and Services from November 1999 to November 2004.
Prior to that, Mr. Smith served in various capacities at Digidesign: Vice
President of Sales and Marketing from October 1996 to November 1999, Vice
President of International Sales from August 1995 to October 1996 and Managing
Director Digidesign UK from May 1993 to August 1995.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the Nasdaq National Market under the symbol
AVID. The table below shows the high and low sales prices of the common stock
for each calendar quarter of the fiscal years ended December 31, 2005 and 2004.
2005 High Low
---- ---- ---
First Quarter $68.35 $52.06
Second Quarter $61.39 $47.64
Third Quarter $56.90 $35.78
Fourth Quarter $55.00 $37.30
2004 High Low
---- ---- ---
First Quarter $55.42 $38.43
Second Quarter $61.68 $44.11
Third Quarter $54.66 $40.90
Fourth Quarter $62.57 $46.48
On February 14, 2006, the last reported sale price of the Nasdaq National
Market for our common stock was $47.77 per share. The approximate number of
holders of record of our common stock at February 14, 2006 was 471. This number
does not include shareholders for whom shares were held in a "nominee" or
"street" name.
We have never declared or paid cash dividends on our capital stock and
currently intend to retain all available funds for use in the operation of our
business. We do not anticipate paying any cash dividends in the foreseeable
future.
22
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected condensed consolidated
financial data. The selected consolidated financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this filing.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
In thousands (except per share data)
For the Year Ended December 31,
-------------------------------------------------
2005 2004 2003 2002 2001
-------------------------------------------------
Net revenues $775,443 $589,605 $471,912 $418,719 $434,638
Cost of revenues 364,687 255,496 209,373 207,236 213,572
--------- --------- --------- --------- ---------
Gross profit 410,756 334,109 262,539 211,483 221,066
--------- --------- --------- --------- ---------
Operating expenses:
Research and development 111,334 94,940 85,552 82,346 86,140
Marketing and selling 170,787 130,123 105,735 97,459 108,945
General and administrative 47,147 35,468 27,177 23,121 27,421
In-process research and development 32,390 - - - -
Restructuring and other costs, net 3,155 - 3,194 2,923 8,268
Amortization of intangible assets 9,194 3,641 1,316 1,153 31,168
Impairment of intangible assets - 1,187 - - -
--------- --------- --------- --------- ---------
Total operating expenses 374,007 265,359 222,974 207,002 261,942
--------- --------- --------- --------- ---------
Operating income (loss) 36,749 68,750 39,565 4,481 (40,876)
Interest and other income, net 5,586 1,339 1,874 218 5,529
--------- --------- --------- --------- ---------
Income (loss) before income taxes 42,335 70,089 41,439 4,699 (35,347)
Provision for (benefit from) income taxes 8,355 (1,612) 550 1,700 2,800
--------- --------- --------- --------- ---------
Net income (loss) $33,980 $71,701 $40,889 $2,999 ($38,147)
========= ========= ========= ========= =========
Net income (loss) per common share - basic $0.90 $2.21 $1.40 $0.11 ($1.49)
Net income (loss) per common share - diluted $0.86 $2.05 $1.25 $0.11 ($1.49)
Weighted-average common shares
outstanding - basic 37,762 32,485 29,192 26,306 25,609
Weighted-average common shares
outstanding - diluted 39,517 35,003 32,653 26,860 25,609
CONSOLIDATED BALANCE SHEET DATA:
In thousands
As of December 31,
-----------------------------------------------
2005 2004 2003 2002 2001
-----------------------------------------------
Cash, cash equivalents and marketable securities $238,430 $155,419 $196,309 $89,034 $72,961
Working capital 288,600 176,384 196,605 94,130 85,490
Total assets 1,062,046 576,234 348,119 235,803 215,806
Long-term debt and other liabilities 9,372 1,689 607 1,427 13,020
Total stockholders' equity 839,597 424,621 227,105 123,564 104,758
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
OUR MARKETS AND STRATEGY
Our mission is to serve the industries that "Make, Manage and Move Media."
We develop, market, sell and support 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 in digital values, as opposed to analog, or tape-based, signals. The four
key elements of our strategy are:
o Deliver Best-of-Breed Stand-alone Products to Content Creators;
o Deliver Integrated Workflow for Customers who Work with Multiple
Systems or Multiple Media Disciplines;
o Support Open Standards for Media, Metadata and Application Program
Interfaces (API); and
o Deliver Excellent Customer Service, Support and Training.
In order to effectively deliver our products and services to our target markets,
we have organized our business in three reporting segments: Professional Film,
Video and Broadcast, which we refer to as "Professional Video"; Audio; and
Consumer Video.
Our Professional Video products enable professionals and aspiring
professionals, in the post-production and broadcast markets to manipulate moving
pictures and sound in fast, easy, creative and cost-effective ways. Our Audio
product offerings include consumer and professional digital audio software
applications and hardware systems for music, film, television, video, broadcast,
live venues, streaming media and web development. Our Consumer Video segment
offers products for home video editing and TV viewing.
Over the past few years we have focused on expanding and enhancing our
product lines and increasing revenues through both the internal development of
products and acquisitions.
In August 2005, we acquired California-based Pinnacle Systems, a supplier
of digital video products to customers ranging from individuals to broadcasters.
The acquisition of Pinnacle has allowed us to expand our offerings within our
Professional Video segment through the integration of Pinnacle's broadcast and
professional offerings, including the Deko(R) on-air graphics system and the
MediaStream(TM) playout server, into that segment and has provided entry into a
new Consumer Video segment that will offer Pinnacle's consumer products,
including Pinnacle Studio(TM) and other products. In August 2005, we also
acquired Wizoo Sound Design GmbH, a Germany-based provider of virtual
instruments for music producers and sound designers. Wizoo's products have been
and will continue to be sold through our Audio segment and Wizoo technology is
also being integrated into other Avid Audio product offerings to expand their
features and functionality.
In 2004, we finalized acquisitions for Munich, Germany-based NXN Software
GmbH ("NXN"), a leading provider of asset and production management systems
specifically targeted for the entertainment and computer graphics industries;
California-based Midiman, Inc. (d/b/a M-Audio), a leading provider of digital
audio and MIDI solutions for electronic musicians and audio professionals; and
Avid Nordic AB, a Sweden-based distributor of Avid products. NXN has been
integrated into our Professional Video segment and expanded our offerings in
digital asset management by enabling our film and video post-production,
broadcast, audio and 3D animation customers to leverage the workflow
capabilities of NXN's Alienbrain(R) product line. M-Audio has been integrated
into our Audio segment and its line of audio products are marketed alongside
Digidesign's digital audio workstations for the professional and home hobbyist.
The acquisition of Avid Nordic AB provided us with ownership of an established
distribution channel in the Nordic and Benelux regions of Europe.
FINANCIAL SUMMARY
Total net revenues for 2005 were $775.4 million, an increase of $185.8
million, or 31.5%, compared to 2004. A large proportion of this revenue growth
is the direct result of our acquisitions, with the acquisition of Pinnacle
accounting for $97.5 million of our revenue growth for 2005 and the acquisition
24
of M-Audio, acquired in August 2004, accounting for $55.4 million. Net income
for 2005 was $34.0 million, a decrease of $37.7 million, or 52.6%, from 2004.
However, our net income for 2005 was reduced by in-process research and
development charges of $32.4 million primarily related to our acquisition of
Pinnacle. Our operating activities continue to generate positive cash flow with
cash of $49.8 million provided by operating activities in 2005.
The following table sets forth certain items from our consolidated
statements of operations as a percentage of net revenues for the periods
indicated:
For the Year Ended December 31,
----------------------------
2005 2004 2003
---------------------------
Product revenues 89.3% 89.6% 90.1%
Services revenues 10.7% 10.4% 9.9%
Cost of revenues (47.0%) (43.3%) (44.4%)
---------------------------
Gross profit 53.0% 56.7% 55.6%
---------------------------
Operating expenses:
Research and development 14.3% 16.1% 18.1%
Marketing and selling 22.0% 22.1% 22.4%
General and administrative 6.1% 6.0% 5.7%
In-process research and development 4.2% - -
Restructuring and other costs, net 0.4% - 0.7%
Amortization of intangible assets 1.2% 0.6% 0.3%
Impairment of intangible assets - 0.2% -
---------------------------
Total operating expenses 48.2% 45.0% 47.2%
---------------------------
Operating income 4.8% 11.7% 8.4%
Interest and other income (expense), net 0.7% 0.2% 0.4%
---------------------------
Income before income taxes 5.5% 11.9% 8.8%
Provision for (benefit from) income taxes 1.1% (0.3%) 0.1%
---------------------------
Net income 4.4% 12.2% 8.7%
===========================
We derive a significant percentage of our revenue from international sales
(i.e., sales to customers outside the United States). International sales
accounted for 57% of our 2005 net revenues, compared to 51% for 2004 and 49% for
2003. Our international business is, for the most part, transacted through
international subsidiaries and generally in the currency of the end-user
customers. Therefore, we are exposed to the risk that changes in foreign
currency could materially impact, either positively or adversely, our revenues,
net income and cash flow. To hedge against the foreign exchange exposure of
certain forecasted receivables, payables and cash balances of our foreign
subsidiaries, we enter into short term foreign currency forward-exchange
contracts. We record gains and losses associated with currency rate changes on
these contracts in results of operations, offsetting transaction and
remeasurement gains and losses on the related assets and liabilities. The
success of this hedging program depends on forecasts of transaction activity in
the various currencies. To the extent that these forecasts are overstated or
understated during the periods of currency volatility, we could experience
unanticipated currency gains or losses.
A significant portion of our operating expenses are fixed in the
short-term and we plan our expense run-rate based on our expectations of future
revenues. In addition, a significant percentage of our sales transactions are
completed during the final weeks or days of each quarter and, therefore, we
generally do not know whether revenues have met our expectations until after the
end of the quarter. If we have a shortfall in revenues in any given quarter,
there is an immediate effect on our overall earnings.
As described more fully in footnote B to our consolidated financial
statements, we adopted Statement of Financial Accounting Standards No. 123(R),
"Share Based Payment", on January 1, 2006. This statement requires that stock
compensation expense for awards of equity instruments to employees be recognized
in our financial statements based on the grant date fair value of those awards.
The adoption of this statement will cause a significant increase to our
operating expenses beginning in the first quarter of 2006. We estimate that
adoption will result in additional expense in 2006 of approximately $20 million,
but this amount could vary based on a number of factors including the volatility
of our stock, interest rate changes or changes to our equity compensation plans.
25
See Item 1A "Risk Factors" for additional risk factors that may cause our
future results to differ materially from our current expectations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. We regularly reevaluate our estimates and judgments, including
those related to revenue recognition; allowances for product returns and
exchanges; allowances for bad debts and reserves for recourse under financing
transactions; the valuation of inventories, goodwill and other intangible
assets; and income tax assets. We base our estimates and judgments on historical
experience and various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities and the amounts of revenue
and expenses that are not readily apparent from other sources. Actual results
may differ from these estimates.
We believe the following critical accounting policies most significantly
affect the portrayal of our financial condition and involve our most difficult
and subjective estimates and judgments.
Revenue Recognition and Allowances for Product Returns and Exchanges
We generally recognize revenue from sales of software and software-related
products upon receipt of a signed purchase order or contract and product
shipment to distributors or end users, provided that collection is reasonably
assured, the fee is fixed or determinable and all other revenue recognition
criteria of Statement of Position, or SOP, 97-2, "Software Revenue Recognition",
as amended, are met. In addition, for certain transactions where our services
are non-routine or essential to the delivered products, we record revenue upon
satisfying the criteria of SOP 97-2 and obtaining customer acceptance. Within
our Professional Video segment, much of our Audio segment and our Consumer Video
segment we follow the guidance of SOP 97-2 for revenue recognition because our
products and services are software or software-related. However, for certain
offerings in our Audio segment, software is incidental to the delivered products
and services. For these products, we record revenue based on satisfying the
criteria in Securities and Exchange Commission Staff Accounting Bulletin, or
SAB, No. 104, "Revenue Recognition".
In connection with many of our product sale transactions, customers may
purchase a maintenance and support agreement. We recognize revenue from
maintenance contracts on a ratable basis over their term. We recognize revenue
from training, installation or other services as the services are performed.
We use the residual method to recognize revenues when an order includes
one or more elements to be delivered at a future date and evidence of the fair
value of all undelivered elements exists. Under the residual method, the fair
value of the undelivered element, typically professional services or
maintenance, is deferred and the remaining portion of the total arrangement fee
is recognized as revenue related to the delivered element. If evidence of the
fair value of one or more undelivered elements does not exist, we defer all
revenues and only recognize them when delivery of those elements occurs or when
fair value can be established. Fair value is typically based on the price
charged when the same element is sold separately to customers. However, in
certain transactions, fair value is based on the renewal price of the
undelivered element that is granted as a contractual right to the customer. Our
current pricing practices are influenced primarily by product type, purchase
volume, term and customer location. We review services revenues sold separately
and corresponding renewal rates on a periodic basis and update, when
appropriate, our fair value for such services used for revenue recognition
purposes to ensure that it reflects our recent pricing experience.
In most cases, our products do not require significant production,
modification or customization of software. Installation of the products is
generally routine, requires minimal effort and is not typically performed by us.
However, certain transactions, typically those involving orders from end-users
for a significant number of products for a single customer site, such as news
broadcasters, require that we perform an installation effort that we deem to be
complex and non-routine. In these situations, we do not recognize revenue for
either the products shipped or the installation services until the installation
is complete. In addition, if such orders include a customer acceptance
provision, no revenue is recognized until the customer's acceptance of the
products and services has been received or the acceptance period has lapsed.
26
Telephone support, enhancements and unspecified upgrades typically are
provided at no additional charge during the product's initial warranty period
(generally between 30 days and twelve months), which precedes commencement of
the maintenance contracts. We defer the fair value of this support period and
recognize the related revenue ratably over the initial warranty period. We also
from time to time offer certain customers free upgrades or specified future
products or enhancements. For each of these elements that is undelivered at the
time of product shipment, we defer the fair value of the specified upgrade,
product or enhancement and recognize that revenue only upon later delivery or at
the time at which the remaining contractual terms relating to the upgrade have
been satisfied.
In 2005, approximately 70% of our revenue was derived from indirect sales
channels, including authorized resellers and distributors. Within our
Professional Video segment, our resellers and distributors are generally not
granted rights to return products to us after purchase and actual product
returns from them have been insignificant to date. However, distributors of our
Avid Xpress DV, Avid Xpress Pro, Avid Mojo and Avid Liquid product lines have a
contractual right to return a percentage of prior quarter purchases. The return
provision for these distributors has not had a material impact on our results of
operations. In contrast, some channel partners, particularly our Audio and
certain of our Consumer Video channel partners, are offered limited rights of
return, stock rotation, rebates and price protection. In accordance with
Statement of Financial Accounting Standards, or SFAS, No. 48, "Revenue
Recognition When Right of Return Exists", we record a provision for estimated
returns and other allowances, as a reduction of revenues, in the same period
that related revenues are recorded. Management estimates must be made and used
in connection with establishing and maintaining a sales allowance for expected
returns and other credits. In making such estimates, we analyze historical
returns and credits and the amounts of products held by major resellers and
consider the impact of new product introductions, changes in customer demand,
current economic conditions and other known factors. We maintain a rolling
history of returns on a product-by-product basis and analyze returns and credits
by product category. The amount and timing of our revenue for any period may be
impacted if actual product returns or other reseller credits prove to be
materially different from our estimates.
A portion of our revenue from sales of Consumer Video products is derived
from transactions with channel partners who have unlimited return rights and
from whom payment is contingent upon the product being sold through to their
customers. Accordingly, revenue for these channel partners is recognized when
the products are sold through to the customer instead of being recognized at the
time products are shipped to the channel partners.
The Company from time to time offers rebates on purchases of certain
products or rebates based on purchasing volume, which are accounted for as
reductions to revenue upon shipment of related products or expected achievement
of purchasing volumes. In accordance with Emerging Issues Task Force, or EITF,
Issue 01-09, "Accounting for Consideration Given by a Vendor to a Customer
(including a Reseller of the Vendor's Products)", consideration given to
customers or resellers under the rebate program is recorded as a reduction to
revenue because the Company does not receive an identifiable benefit that is
sufficiently separable from the sale of the Company's products.
At the time of a sales transaction, we make an assessment of the
collectibility of the amount due from the customer. Revenue is recognized only
if we are reasonably assured that collection will occur. In making this
assessment, we consider customer credit-worthiness and historical payment
experience. If it is determined from the outset of the arrangement that
collection is not reasonably assured based upon our credit review process,
revenue is recognized on a cash-collected basis to the extent that the other
criteria of SOP 97-2 and SAB No. 104 are satisfied. At the outset of the
arrangement, we assess whether the fee associated with the order is fixed or
determinable and free of contingencies or significant uncertainties. In
assessing whether the fee is fixed or determinable, we consider the payment
terms of the transaction, our collection experience in similar transactions
without making concessions, and our involvement, if any, in third-party
financing transactions, among other factors. If the fee is not fixed or
determinable, revenue is recognized only as payments become due from the
customer, provided that all other revenue recognition criteria are met. If a
significant portion of the fee is due after our normal payment terms, which are
generally 30 days, but can be up to 90 days, after the invoice date, we evaluate
whether we have sufficient history of successfully collecting past transactions
with similar terms. If that collection history is successful, then revenue is
recognized upon delivery of the products, assuming all other revenue recognition
criteria are satisfied.
We record as revenue all amounts billed to customers for shipping and
handling costs and record the actual shipping costs as a component of cost of
revenues. We record reimbursements received from customers for out-of-pocket
expenses as revenue, with related costs recorded as cost of revenues.
27
Allowance for Bad Debts and Reserves for Recourse under Financing Transactions
We maintain allowances for estimated bad debt losses resulting from the
inability of our customers to make required payments for products or services.
When evaluating the adequacy of the allowances, we analyze accounts receivable
balances, historical bad debt experience, customer concentrations, customer
credit-worthiness and current economic trends. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances could be required.
We provide third-party lease financing options to many of our customers.
We are not generally a party to the leases; however, during the terms of these
leases, which are generally three years, we remain liable for any unpaid
principal balance upon default by the end-user, but such liability is limited in
the aggregate. See Footnote H to our Consolidated Financial Statements in Item
8. We record revenue from these transactions upon the shipment of our products
because we believe that our collection experience with similar transactions
supports our assessment that the fee is fixed or determinable. We have operated
these programs for over ten years and to date defaults under the program have
consistently ranged between 2% and 4%. We maintain reserves for estimated
recourse losses under this financing program based on these historical default
rates. While we have experienced insignificant losses from defaults to date
under this program, deterioration in the financial condition of our customers
who participate in the program could require additional reserves.
Inventories
Inventory in the digital media market, including our inventory, is subject
to rapid technological change or obsolescence. We regularly review inventory
quantities on hand and write down inventory to its realizable value to reflect
estimated obsolescence or unmarketability based upon assumptions about future
inventory demand (generally for the following twelve months) and market
conditions. If actual future demand or market conditions are less favorable than
we estimate, additional inventory write-downs may be required.
Business Combinations
When we acquire new businesses, we use the purchase method of accounting
as required by SFAS No. 141, "Business Combinations". We allocate the purchase
price of businesses acquired to the assets, including intangible assets,
acquired and the liabilities assumed based on their estimated fair values, with
any amount in excess of such allocations designated as goodwill. Significant
management judgments and assumptions are required in determining the fair value
of acquired assets and liabilities, particularly acquired intangible assets. For
example, it is necessary to estimate the portion of development efforts that are
associated with technology that is in process and has no alternative future use.
The valuation of purchased intangible assets is based upon estimates of the
future performance and cash flows from the acquired business. If different
assumptions are used, it could materially impact the purchase price allocation
and our financial position and results of operations.
Goodwill and Intangible Assets
We assess the impairment of goodwill and identifiable intangible
assets on at least an annual basis and whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recoverable. Factors we consider important that could trigger an impairment
review include significant negative industry or economic trends, unanticipated
competition, loss of key personnel, a more-likely-than-not expectation that a
reporting unit or component thereof will be sold or otherwise disposed of,
significant underperformance relative to the historical or projected future
operating results, significant changes in the manner of use of the acquired
assets or the strategy for our overall business, a significant decline in our
stock price for a sustained period, a reduction of our market capitalization
relative to our net book value and other such circumstances.
In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets", we do not amortize goodwill and certain intangible assets. The
goodwill impairment test prescribed by SFAS No. 142 requires us to identify
reporting units and to determine estimates of the fair values of our reporting
units as of the date we test for impairment. Our organizational structure is
based on strategic business units that offer various products to the principal
markets in which our products are sold. These strategic business units equate to
our reporting units which are currently the same as our operating segments:
Professional Video, Audio and Consumer Video. All three of the reporting units
include goodwill.
In the goodwill impairment analysis, the fair value of each
reporting unit is compared to its carrying value, including goodwill. We use a
discounted cash flow valuation model to determine the fair values of our
28
reporting units. This model focuses primarily on estimates of future revenues
and profits for each reporting unit. We estimate these amounts by evaluating
historical trends, current budgets, operating plans and industry data. If the
reporting unit's carrying value exceeds its fair value, we would record an
impairment loss equal to the difference between the carrying value of the
goodwill and its implied fair value. We complete our annual impairment tests as
of the end of the fourth quarter of each year and to date have concluded that no
impairment charge was required. If future events cause the reporting units' fair
value to decline below its carrying value, an impairment charge may be required.
In the identifiable intangibles impairment analysis, if events or
circumstances exist that indicate that the carrying value of an asset may not be
recoverable, the fair value of each asset is compared to its carrying value. If
the asset's carrying value is not recoverable and exceeds its fair value, we
would record an impairment loss equal to the difference between the carrying
value of the asset and its fair value. The carrying value of an asset is not
recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset.
Income Tax Assets
We record deferred tax assets and liabilities based on the net tax effects
of tax credits and operating loss carryforwards and temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
We regularly review deferred tax assets for recoverability taking into
consideration such factors as historical losses after deductions for stock
compensation, projected future taxable income and the expected timing of the
reversals of existing temporary differences. SFAS No. 109, "Accounting for
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 the level of deferred tax assets as of December 31, 2005, the
level of historical U.S. losses after deductions for stock compensation and the
level of outstanding stock options, which we anticipate will generate
significant U.S. tax deductions in the future, we have determined that the
uncertainty regarding the realization of these assets is sufficient to warrant
the continued establishment of a full valuation allowance against the U.S. net
deferred tax assets. In 2004, we removed the valuation allowance related to
deferred tax assets in our Irish manufacturing operations. This resulted in a
non-cash $2.1 million tax benefit recorded through our 2004 provision for income
taxes. The decision to remove the valuation allowance was based on the
conclusion that it was more likely than not that the deferred tax asset in
Ireland would be realized.
Our assessment of the valuation allowance on the U.S. deferred tax assets
could change in the future based upon our levels of pre-tax income and other tax
related adjustments. Removal of the valuation allowance in whole or in part
would result in a non-cash reduction in the provision for income taxes during
the period of removal. In addition, because a portion of the valuation allowance
as of December 31, 2005 was established to reserve certain deferred tax assets
resulting from the exercise of employee stock options, in accordance with SFAS
No. 109 and SFAS 123(R), removal of the valuation allowance related to these
assets would occur upon utilization of these deferred tax assets to reduce taxes
payable and would result in a credit to additional paid-in capital within
stockholders' equity rather than the provision for income taxes. If the
valuation allowance of $182.1 million as of December 31, 2005 were to be removed
in its entirety, a $66.8 million non-cash reduction in income tax expense,
a $49.2 million credit to goodwill related to Pinnacle net operating loss and
tax credit carryforwards and temporary differences, and a $66.1 million credit
to additional paid-in capital would be recorded in the period of removal subject
to, in the latter case, actual utilization as described above. To the extent no
valuation allowance is established for our deferred tax assets in future
periods, future financial statements would reflect a non-cash increase in our
provision for income taxes.
RESULTS OF OPERATIONS
Prior to the third quarter of 2005, we had classified
administrative expenses incurred in Europe both internally and externally as
marketing and selling expense because these costs were incurred primarily to
support our sales function in Europe. With the Pinnacle acquisition as well as
with the acquisitions of M-Audio, NXN and Avid Nordic over the past two years,
we have increased the overall scope of our operations in Europe to include not
only sales but also research and development, manufacturing, customer service
and other functions, and our general and administrative infrastructure has
increased accordingly. For this reason, we have decided to classify the
administrative expenses being incurred in Europe to the general and
administrative expense caption in our income statement, as opposed to the
marketing and selling expense caption. All comparative periods have been
reclassified to conform to the current year presentation. The amounts
reclassified were $5.7 million and $4.0 million for 2004 and 2003, respectively.
29
Net Revenues
We develop, market, sell and support a wide range of software and hardware
for digital media production, management and distribution. Our net revenues are
derived mainly from the sales of computer-based digital, nonlinear media editing
systems and related peripherals, licensing of software and sales of related
software maintenance contracts. We are organized into strategic business units
that reflect the principal markets in which our products are sold: Professional
Video, Audio and Consumer Video. Discrete financial information is available for
each business unit and the operating results of these business units are
evaluated regularly to make decisions regarding the allocation of resources and
to assess performance. As such, these business units represent our reportable
segments under SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information".
Our Professional Video segment produces non-linear video and film editing
systems to improve the productivity of video and film editors and broadcasters
by enabling them to edit video, film and sound in a faster, easier, more
creative and more cost-effective manner than by use of traditional analog
tape-based systems. The products in this operating segment are designed to
provide capabilities for editing and finishing feature films, television shows,
broadcast news programs, commercials, music videos and corporate and consumer
videos. Our Audio segment produces digital audio systems for the audio market.
This operating segment includes products developed to provide audio recording,
editing, signal processing and automated mixing. This segment also includes our
M-Audio product family acquired in August 2004. Our Consumer Video segment
develops and markets products that are aimed primarily at the consumer market,
which allow users to create, edit, view and distribute rich media content
including video, photographs and audio using a personal computer and camcorder.
This segment is comprised of specific product lines acquired as part of the
August 2005 Pinnacle acquisition. (See Note F to our Consolidated Financial
Statements in Item 8.)
The following is a summary of our net revenues by segment for the years
ended December 31, 2005 and 2004:
Years Ended December 31, 2005 and 2004
----------------------------------------------------------------------
(dollars in thousands)
----------------------------------------------------------------------
% of % of
2005 Consolidated 2004 Consolidated % Change
Net Net Net Net in
Revenues revenues Revenues revenues Change Revenues
--------- ------------ --------- ------------- -------- --------
Professional Video
Product Revenues: $365,829 47.2% $330,001 55.9% $35,828 10.9%
Service Revenues: 82,459 10.6% 61,142 10.4% 21,317 34.9%
--------- ------------ --------- ------------- --------
Total 448,288 57.8% 391,143 66.3% 57,145 14.6%
--------- ------------ --------- ------------- --------
Audio
Product Revenues: 267,861 34.6% 198,462 33.7% 69,399 35.0%
Service Revenues: 197 0.0% - - 197 -
--------- ------------ --------- ------------- --------
Total 268,058 34.6% 198,462 33.7% 69,596 35.1%
--------- ------------ --------- ------------- --------
Consumer Video
Product Revenues: 59,097 7.6% - - 59,097 -
--------- ------------ --------- ------------- --------
Total 59,097 7.6% - - 59,097 -
--------- ------------ --------- ------------- --------
Total Net Revenues: $775,443 100.0% $589,605 100.0% $185,838 31.5%
========= ============ ========= ============= ========
The acquisition of Pinnacle accounted for $31.6 million of Professional
Video product revenues for 2005, all of which was recognized during the period
from August 9, 2005 through December 31, 2005. The remaining $4.2 million
increase in product revenues in this segment, as compared to 2004, was related
to increased unit sales volume of certain key products, especially our Avid
Unity MediaNetwork, Newscutter and Workgroups products, offset in part by
declines in other product families including the Media Composer product family.
This increase in net product revenues was also offset in part by lower average
selling prices of certain of our products. Average selling prices include the
mix of products (high or low-end) sold, impact of changes in foreign currency
exchange rates and the impact of price changes and discounting.
For the Audio segment, $55.4 million of the increase in net revenues for
2005 was due to the acquisition of M-Audio, which occurred in August 2004. We
also saw increases in our core Digidesign Pro Tools products for the
professional and home markets in 2005 as compared to 2004.
30
The Consumer Video segment was formed in the third quarter of 2005 with
the acquisition of Pinnacle; therefore, there are no comparative revenues for
2004. All of the revenues for 2005 represent revenue from the Pinnacle consumer
business from the acquisition date of August 9, 2005 through December 31, 2005.
Service revenues consist primarily of maintenance contracts, installation
services and training. Professional Video services revenues resulting from the
Pinnacle acquisition were $6.8 million from the acquisition date of August 9,
2005 through December 31, 2005. The remaining 2005 increase in Professional
Video service revenues comes primarily from increases in maintenance contracts
sold on our products. Professional services, such as installation services
provided in connection with large broadcast news deals, also increased.
The following is a summary of our net revenues by segment for the years
ended December 31, 2004 and 2003:
Years Ended December 31, 2004 and 2003
----------------------------------------------------------------------
(dollars in thousands)
----------------------------------------------------------------------
% of % of
2004 Consolidated 2003 Consolidated % Change
Net Net Net Net in
Revenues revenues Revenues revenues Change Revenues
--------- ------------ --------- ------------- -------- --------
Professional Video
Product Revenues: $330,001 55.9% $284,350 60.2% $45,651 16.1%
Service Revenues: 61,142 10.4% 46,509 9.9% 14,633 31.5%
--------- ------------ --------- ------------- --------
Total 391,143 66.3% 330,859 70.1% 60,284 18.2%
--------- ------------ --------- ------------- --------
Audio
Product Revenues: 198,462 33.7% 141,053 29.9% 57,409 40.7%
Service Revenues: - - - - - -
--------- ------------ --------- ------------- --------
Total 198,462 33.7% 141,053 29.9% 57,409 40.7%
--------- ------------ --------- ------------- --------
Total Net Revenues: $589,605 100.0% $471,912 100.0% $117,693 24.9%
========= ============ ========= ============= ========
The $60.3 million increase in Professional Video revenues for 2004, as
compared to 2003, relates to increased sales volume of our products and
services, including a full year of sales of the Avid DNA family of products
released during the second and third quarters of 2003 which resulted in a $71.0
million increase in revenues, partially offset by a $10.7 million decrease
resulting from lower average selling prices of our various products despite
favorable foreign currency exchange rates, especially with respect to the euro.
Average selling prices also include the impact of price changes, discounting and
mix (higher or lower-end) of products sold. For the Audio segment, the revenue
growth in 2004 is attributable to the increased sales volume of Digidesign's
core products as well as the acquisition of M-Audio in August of 2004, which
accounted for $26.2 million of the Audio revenue growth.
Net revenues derived through indirect channels were approximately 70% for
2005 compared to 72% for 2004 and 75% for 2003. The increase in direct selling
in 2004 and 2005, as compared to 2003, was due primarily to the growth in sales
to our broadcast news customers, which generally require a longer selling cycle
with more direct support and the acquisition of Avid Nordic in September 2004.
We expect sales to broadcast customers will be an area of continued revenue
growth in the future.
International sales (i.e., sales to customers outside the United States)
accounted for 57% of our 2005 net revenues, compared to 51% for 2004 and 49% for
2003. International sales increased by $140.5 million or 46.5% in 2005 compared
to 2004 and increased by $68.9 million or 29.5% in 2004 compared to 2003. The
increase in international sales in 2005 occurred in all regions including
Europe, Asia, Canada and Latin America, and was due to the impact of the
acquisitions of Pinnacle and M-Audio and an increased number of large broadcast
deals in these regions. The increase in international sales in 2004 occurred in
Europe and Asia, with the impact of currency translation and the acquisition of
M-Audio being factors.
Gross Profit
Cost of revenues consists primarily of costs associated with the
procurement of components; the assembly, testing and distribution of finished
products; warehousing; post-sales customer support costs related to maintenance
contract revenue and other services; and royalties for third-party software and
hardware included in our products. It also includes the amortization of
developed technology assets resulting from our acquisitions. The resulting gross
31
margin fluctuates based on factors such as the mix of products sold, the cost
and proportion of third-party hardware and software included in the systems
sold, the offering of product upgrades, price discounts and other sales
promotion programs, the distribution channels through which products are sold,
the timing of new product introductions, sales of aftermarket hardware products
such as disk drives and currency exchange rate fluctuations, and the timing and
specific technology acquired through our acquisitions.
The following is a summary of our cost of revenues and gross margin
percentages comparing the years ended December 31, 2005 and 2004:
Years Ended December 31, 2005 and 2004
------------------------------------------------------------------------------------
(dollars in thousands)
------------------------------------------------------------------------------------
% of Net % of Net
Related Gross Related Gross Gross margin
2005 Revenues Margin % 2004 Revenues Margin % % Change
--------- ----------- ---------- --------- ----------- ---------- ------------
Product Cost of Revenues $308,386 44.5% 55.5% $220,246 41.7% 58.3% (2.8%)
Service Cost of Revenues 45,274 54.8% 45.2% 34,842 57.0% 43.0% 2.2%
Amortization of Technology 11,027 - - 408 - - -
--------- ---------
Total $364,687 47.0% 53.0% $255,496 43.3% 56.7% (3.7%)
========= =========
The decrease in product gross margin percentage for 2005, as compared to
2004, reflects primarily the change in product mix due to the acquisitions of
Pinnacle and M-Audio, as well as increased price reductions and promotions,
which were partially offset by increased volumes. The services gross margin
increase for 2005, as compared to 2004, primarily reflects the impact of
increased revenue from maintenance contracts without a commensurate increase in
our costs. Amortization of technology included in costs of sales represents the
amortization of developed technology assets resulting from the Pinnacle
acquisition (on August 9, 2005) and, to a lesser extent, the M-Audio and Wizoo
acquisitions, which are discussed below under the caption "Amortization of and
Impairment of Intangible Assets". As discussed below, we would expect the
amortization of acquisition-related intangibles in 2006 to be higher than in
2005, as it will include the full year impact of the Pinnacle and Wizoo
acquisitions.
The following is a summary of our cost of revenues and gross margin
percentages comparing the years ended December 31, 2004 and 2003:
Years Ended December 31, 2004 and 2003
-------------------------------------------------------------------------------------
(dollars in thousands)
-------------------------------------------------------------------------------------
% of Net % of Net
Related Gross Related Gross Gross margin
2004 Revenues Margin % 2003 Revenues Margin % % Change
--------- ----------- ---------- --------- ----------- ---------- ------------
Product Cost of Revenues $220,246 41.7% 58.3% $183,304 43.1% 56.9% 1.4%
Service Cost of Revenues 34,842 57.0% 43.0% 26,069 56.1% 43.9% (0.9%)
Amortization of Technology 408 - - - - - -
--------- ---------
Total $255,496 43.3% 56.7% $209,373 44.4% 55.6% 1.1%
========= =========
The gross margin increase in 2004 reflects primarily a favorable impact of
foreign currency exchange rates on revenue, especially with respect to the euro.
We also achieved reduced material and manufacturing overhead costs in the
Professional Video segment in 2004 as compared to 2003.
Research and Development
Research and development expenses include costs associated with the
development of new products and enhancement of existing products and consist
primarily of employee salaries and benefits, facilities costs, depreciation,
consulting and temporary help and prototype and development expenses.
32
Years Ended December 31, 2005 and 2004
----------------------------------------------
(dollars in thousands)
----------------------------------------------
2005 2004
Expenses Expenses Change %Change
---------- ---------- ---------- ----------
Research and Development: $111,334 $94,940 $16,394 17.3%
Percentage of Net Revenues: 14.4% 16.1% (1.7%)
The increase in research and development expenditures in 2005, as compared
to 2004, was primarily the result of higher personnel-related costs as well as
higher facility costs, all in large part due to the acquisitions of Pinnacle
during 2005 and M-Audio during the third quarter of 2004. These costs were
somewhat offset by decreased expenses under our employee bonus plan in 2005 as
compared to 2004. The decrease in research and development expenses as a
percentage of revenues relates primarily to the acquisitions of M-Audio and
Pinnacle, in particular the Consumer Video portion, whose research and
development costs are proportionately lower than the other businesses within
Avid.
Years Ended December 31, 2004 and 2003
----------------------------------------------
(dollars in thousands)
----------------------------------------------
2004 2003
Expenses Expenses Change % Change
---------- ---------- ---------- ----------
Research and Development: $94,940 $85,552 $9,388 11.0%
Percentage of Net Revenues: 16.1% 18.1% (2.0%)
The increase in research and development expenditures in 2004, as compared
to 2003, was primarily the result of higher personnel-related costs partly due
to the acquisitions of NXN and M-Audio during 2004 as well as to our 2004 bonus
plan. These costs were somewhat offset by reduced consulting fees. The decrease
in research and development expenses as a percentage of revenues is primarily a
result of the higher revenue base in 2004.
Marketing and Selling
Marketing and selling expenses consist primarily of employee salaries and
benefits for sales, marketing and pre-sales customer support personnel,
commissions, travel expenses, advertising and promotional expenses and
facilities costs.
Years Ended December 31, 2005 and 2004
----------------------------------------------
(dollars in thousands)
----------------------------------------------
2005 2004
Expenses Expenses Change % Change
---------- ---------- ---------- ----------
Marketing and Selling: $170,787 $130,123 $40,664 31.3%
Percentage of Net Revenues: 22.0% 22.1% (0.1%)
The increase in marketing and selling expenditures during 2005, as
compared to 2004, was primarily due to higher personnel-related costs, including
salaries and related taxes, benefits and commissions, as well as higher
facilities costs, all in large part due to the acquisitions of Pinnacle in
August 2005 and M-Audio and Avid Nordic in the third quarter of 2004. We also
spent more on advertising, trade shows and other marketing programs during 2005
than in 2004.
Years Ended December 31, 2004 and 2003
----------------------------------------------
(dollars in thousands)
----------------------------------------------
2004 2003
Expenses Expenses Change % Change
---------- ---------- ---------- ----------
Marketing and Selling: $130,123 $105,735 $24,388 23.1%
Percentage of Net Revenues: 22.1% 22.4% (0.3%)
33
The increase in marketing and selling expenditures during 2004, as
compared to 2003, was primarily due to higher personnel-related costs, including
salaries and related taxes and benefits, partly due to the acquisitions of NXN,
M-Audio and Avid Nordic during 2004, expenses associated with our 2004 bonus
plan and commissions expense (due to higher revenues). Various marketing
programs and increased advertising also contributed to the increase.
General and Administrative
General and administrative expenses consist primarily of employee salaries
and benefits for administrative, executive, finance and legal personnel, audit
and legal fees, insurance and facilities costs.
Years Ended December 31, 2005 and 2004
----------------------------------------------
(dollars in thousands)
----------------------------------------------
2005 2004
Expenses Expenses Change % Change
---------- ---------- ---------- ----------
General and Administrative: $47,147 $35,468 $11,679 32.9%
Percentage of Net Revenues: 6.1% 6.0% 0.1%
The increase in general and administrative expenditures in 2005, as
compared to 2004, was primarily due to higher personnel-related costs related to
our acquisitions of Pinnacle in August 2005 and M-Audio in August 2004. We also
incurred higher consulting and temporary help expenses, as well as increased
audit and external legal fees in 2005, as compared to 2004, in part related to
the acquisitions over the past year.
Years Ended December 31, 2004 and 2003
----------------------------------------------
(dollars in thousands)
----------------------------------------------
2004 2003
Expenses Expenses Change % Change
---------- ---------- ---------- ----------
General and Administrative: $35,468 $27,177 $8,291 30.5%
Percentage of Net Revenues: 6.0% 5.7% 0.3%
The increase in general and administrative expenditures in 2004, as
compared to 2003, was primarily due to higher audit and legal fees as a result
of complying with the Sarbanes-Oxley Act of 2002 and personnel-related costs, in
particular expenses associated with our 2004 bonus plan.
In-process Research and Development
During 2005, we recorded in-process research and development, or R&D,
charges of $32.3 million and $0.1 million related to the acquisitions of
Pinnacle and Wizoo, respectively. The allocations of the purchase price to
in-process R&D were determined through management's consideration of valuations
prepared by independent valuation specialists and represent product development
efforts that were underway at Pinnacle or Wizoo at the time of acquisition for
which technological feasibility had not yet been established. Technological
feasibility is established when either of the following criteria is met: (1) the
detail program design has been completed, documented and traced to product
specifications and its high-risk development issues have been resolved; or (2) a
working model of the product has been finished and determined to be complete and
consistent with the product design. At the time of acquisition, neither Pinnacle
nor Wizoo had a completed product design or working model for the in-process
technology, and we believe that there is no future alternative use for such
technology beyond the stated purpose of the specific R&D project. Accordingly,
the in-process R&D of $32.4 million was expensed during 2005.
The key assumptions within the valuation process consisted of the expected
completion dates for the in-process projects, estimated costs to complete the
projects, revenue and expense projections assuming future release, and a
risk-adjusted discount rate. The discount rate considers risks such as delays to
bring the products to market and competitive pressures. The valuations of
Pinnacle and Wizoo in-process R&D used discount rates of 17% and 22%,
respectively.
The in-process R&D charge for the Pinnacle acquisition related primarily
to Pinnacle's on-air and home-editing software products. Future versions of Deko
and Thunder, Pinnacle's on-air products, accounted for approximately $15.9
million of the charge. These products had an estimated cost to complete of $1.4
34
million at the acquisition date and are scheduled for release in 2006. Studio,
Pinnacle's home-editing software, represented approximately $10.7 million of the
charge and carried an estimated cost to complete of $2.1 million at the
acquisition date. Studio 10 was released in the third quarter of 2005 and a
subsequent release is planned for 2006.
Restructuring and Other Costs
In December 2005, we implemented a restructuring program under which 20
employees worldwide were terminated and a portion of a leased facility in
Montreal, Canada was vacated. In connection with these actions, we recorded
charges of $0.8 million for employment terminations and $0.5 million for
abandoned space. The estimated annual cost savings expected to result from these
restructuring activities total $2.0 million. We plan to reinvest a portion of
these savings to hire new employees to fill other product development and
marketing needs. The remaining 2005 restructuring charge of $1.9 million
primarily resulted from a revised estimate of the lease obligation associated
with a facility that was vacated as part of a restructuring plan in 1999. The
revision became necessary when one of the subtenants in the facility gave notice
of their intention to discontinue their sublease.
Restructuring activity in 2004 was primarily related to paying down
existing obligations on vacated facilities. Additionally, in September 2004, we
recorded a charge of $0.2 million to reflect the decrease in rent to be received
from one of our subtenants and reversed a charge of $0.2 million associated with
abandoned space in Tewksbury, Massachusetts. Our restructuring actions during
2003 consisted of severance and facility charges made to increase efficiencies
and reduce expenses and a revision to a previous restructuring charge recorded
on abandoned space. In the first quarter of 2003, we recorded a charge of $1.2
million for employee terminations and $0.6 million for abandoned space in Santa
Monica, California that included a write-off of leasehold improvements of $0.4
million. Also during 2003, we recorded charges of $1.5 million related to a
revision of our estimate of the timing and amount of future sublease income
associated with our Daly City, California facility based on working with a real
estate broker during the year to attempt to sublease the space.
Amortization of and Impairment of Intangible Assets
Acquisition-related intangible assets result from acquisitions accounted
for under the purchase method of accounting and include customer-related
intangibles, developed technology, trade names and other identifiable intangible
assets with finite lives. These intangible assets are being amortized using the
straight-line method, with the exception of developed technology acquired from
Pinnacle. The developed technology acquired from Pinnacle is being amortized on
a product-by-product basis over the greater of the amount calculated using the
ratio of current quarter revenues to the total of current quarter and
anticipated future revenues over the estimated useful lives of two to three
years, or the straight-line method over each product's remaining respective
useful lives.
Years Ended December 31, 2005 and 2004
--------------------------------------
(dollars in thousands)
--------------------------------------
2005 2004 Change
----------- ---------- -----------
Amortization of Intangible Assets: $20,221 $4,049 $16,172
Percentage of Net Revenues: 2.6% 0.7% 1.9%
Years Ended December 31, 2004 and 2003
--------------------------------------
(dollars in thousands)
--------------------------------------
2004 2003 Change
----------- ---------- -----------
Amortization of Intangible Assets: $4,049 1,316 $2,733
Percentage of Net Revenues: 0.7% 0.3% 0.4%
Included in amortization of intangible assets for 2005 and 2004 above is
$11.0 million and $0.4 million, respectively, that is recorded within cost of
revenues and $9.2 million and $3.6 million, respectively, that is recorded
within operating expenses. The increase in amortization expense for 2005, as
compared to 2004 reflects acquisitions that occurred late in 2004 and during
2005 as discussed below. The increase in amortization expense for 2004, as
compared to 2003, reflects acquisitions that occurred late in 2004 as discussed
below. We would expect amortization of acquisition-related intangibles in 2006
to be higher than 2005, as it will include the impact of the Pinnacle and Wizoo
acquisitions for the full year.
35
We have performed an allocation of the total Pinnacle purchase price of
$441.4 million to the net tangible and intangible assets of Pinnacle based on
their fair values as of the consummation of the acquisition. The determination
of these fair values included management's consideration of a valuation of
Pinnacle's intangible assets prepared by an independent valuation specialist. As
part of the purchase accounting allocation, we recorded $90.8 million of
identifiable intangible assets, consisting of completed technologies, customer
relationships and trade names. The unamortized balance of the identifiable
intangible assets relating to this acquisition was $78.2 million at December 31,
2005.
As part of the purchase accounting allocation for our August 2005
acquisition of Wizoo, we recorded $1.2 million to identifiable intangible
assets, including developed technology and license agreements. The unamortized
balance of the identifiable intangible assets relating to this acquisition was
$1.1 million at December 31, 2005.
As part of the purchase accounting allocation for our January 2004
acquisition of NXN, we recorded $7.2 million of identifiable intangible assets,
consisting of completed technologies, customer relationships and a trade name.
In December 2004, the customer relationships and the trade name were analyzed in
accordance with SFAS No. 144 and were determined to be impaired. See Note F to
our Consolidated Financial Statements in Item 8. We recorded an impairment
charge of $1.2 million for the quarter ended December 31, 2004. The remaining
unamortized balance of the identifiable intangible assets relating to this
acquisition was $3.7 million at December 31, 2005.
As part of the purchase accounting allocation for our August 2004
acquisition of M-Audio, we recorded $38.4 million of identifiable intangible
assets, consisting of completed technologies, customer relationships, a trade
name and a non-compete covenant. The unamortized balance of the identifiable
intangible assets relating to this acquisition was $31.8 million at December 31,
2005.
As part of the purchase price allocation for our September 2004
acquisition of Avid Nordic, we recorded $4.7 million of identifiable intangible
assets consisting solely of customer relationships. The unamortized balance was
$3.5 million at December 31, 2005.
We also recorded intangible assets associated with acquiring the following
businesses: Bomb Factory Digital, Inc. in 2003; Rocket Network, Inc. in 2003;
iKnowledge, Inc. in 2002; iNews LLC in 2001; and The Motion Factory, Inc. in
2000. In connection with these acquisitions, we allocated $5.8 million to
identifiable intangible assets consisting of completed technologies. The
unamortized balance of the identifiable intangible assets relating to these
acquisitions was $0.4 million at December 31, 2005.
The unamortized balance of the identifiable intangible assets relating to
all acquisitions was $118.7 million at December 31, 2005. We expect amortization
of these intangible assets to be approximately $29 million in 2006, $26 million
in 2007 and $19 million in 2008.
Interest and Other Income, Net
Interest and other income, net, generally consists of interest income,
interest expense and equity in income of a non-consolidated company.
Years Ended December 31, 2005 and 2004
--------------------------------------
(dollars in thousands)
--------------------------------------
2005 2004 Change
----------- ----------- ----------
Interest and Other Income, Net: $5,586 $1,339 $4,247
Percentage of Net Revenues: 0.7% 0.2% 0.5%
Years Ended December 31, 2004 and 2003
--------------------------------------
(dollars in thousands)
--------------------------------------
2004 2003 Change
----------- ----------- ----------
Interest and Other Income, Net: $1,339 $1,874 ($535)
Percentage of Net Revenues: 0.2% 0.4% (0.2%)
36
The increase in interest and other income, net, for 2005, as compared to
2004, was due to increased interest income earned on higher average cash and
investment balances and a 2004 charge of $1.1 million related to the settlement
of a lawsuit for which there was no corresponding charge in 2005. The decrease
in interest and other income, net, for 2004, as compared to 2003, was due to the
charge for the $1.1 million lawsuit settlement in 2004, partially offset by
increased interest income earned on higher average cash and investment balances.
Provision for (Benefit from) Income Taxes
We account for income taxes under SFAS No. 109, "Accounting for Income
Taxes." SFAS No. 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in our financial statements or
tax returns.
Years Ended December 31, 2005 and 2004
--------------------------------------
(dollars in thousands)
--------------------------------------
2005 2004 Change
----------- ---------- -----------
Provision for (benefit from)income taxes $8,355 ($1,612) $9,967
As a percentage of net revenues 1.1% (0.3%) 1.4%
Years Ended December 31, 2004 and 2003
--------------------------------------
(dollars in thousands)
--------------------------------------
2004 2003 Change
----------- ---------- -----------
Provision for (benefit from)income taxes ($1,612) $550 ($2,162)
As a percentage of net revenues (0.3%) 0.1% (0.4%)
Our effective tax rate was 20%, (2)% and 1%, respectively, for 2005, 2004
and 2003. Excluding the impact of acquired net operating loss carryforwards,
in-process research and development and the decrease in the valuation allowance,
our effective tax rate would have been 32% for 2005, 28% for 2004 and 26% for
2003. These rates differ from the Federal statutory rate of 35% primarily due to
income in foreign jurisdictions which have lower tax rates. The tax rate in each
year is significantly affected by net changes in the valuation allowance against
our deferred tax assets. The net tax provision of $8.4 million for 2005
reflected a current tax provision of $8.6 million and a non-cash deferred tax
charge of $1.8 million related to utilization of acquired net operating loss
carryforwards, offset by a $1.2 million tax benefit related to the amortization
of non-deductible acquisition-related intangible assets and other benefits
totaling $0.8 million. The net tax benefit for 2004 reflected tax resulting from
the removal of a valuation allowance of $2.1 million on net operating loss
carryforwards in Ireland that were previously unbenefited, the reversal of a
$1.2 million tax reserve resulting from the expiration of the statute of
limitations on that reserve item, an adjustment for refunds of approximately
$0.3 million of taxes previously paid in Canada and other benefits totaling
$0.2 million, partially offset by a tax provision of $2.2 million. The net tax
provision for 2003 reflected a tax provision of $1.0 million, partially offset
by recognition of deferred tax benefits totaling $0.3 million related to fixed
assets and the reversal of tax reserves totaling $0.1 million. The tax
provisions noted above for 2005, 2004 and 2003 were substantially comprised of
taxes payable by our foreign subsidiaries with only alternative minimum tax
provided on anticipated U.S. taxable profits.
The tax provision in each year is significantly affected by net changes in
the valuation allowance against our deferred tax assets. We regularly review our
deferred tax assets for recoverability taking into consideration such factors as
historical losses after deductions for stock compensation, projected future
taxable income and the expected timing of the reversals of existing temporary
differences. SFAS No. 109 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 the level of deferred tax assets as of December 31,
2005, the level of historical U.S. losses after deductions for stock
compensation and the level of outstanding stock options which we anticipate will
generate significant U.S. tax deductions in the future, we have determined that
the uncertainty regarding the realization of these assets is sufficient to
warrant the continued establishment of a full valuation allowance against the
U.S. net deferred tax assets. In the quarter ended December 31, 2004, we removed
the valuation allowance related to deferred tax assets of our Irish
manufacturing operations. The decision to remove the valuation allowance was
37
based on the conclusion that it was more likely than not that the deferred tax
asset in Ireland would be realized. Due to the removal of the valuation
allowance, we now have a non-cash provision for income taxes related to our
Irish operations.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations in recent years through cash flows from
operations as well as through stock option exercises from our employee stock
plans. As of December 31, 2005, our principal sources of liquidity included
cash, cash equivalents and marketable securities totaling $238.4 million.
Net cash provided by operating activities was $49.8 million in 2005
compared to $81.4 million in 2004 and $58.6 million in 2003. The decrease from
2004 to 2005 relates primarily to greater uses of cash for working capital
purposes during 2005, particularly increased accounts receivable and
inventories. In 2005, cash provided by operating activities primarily reflects
net income adjusted for depreciation and amortization and the write-off of
in-process research and development, partially offset by increases in accounts
receivable and inventories and a decrease in accrued expenses, all net of the
impact of acquisitions. In 2004, cash provided by operating activities primarily
reflects net income adjusted for depreciation and amortization and increases in
accounts payable and accrued expenses, partially offset by increases in accounts
receivable and prepaid expenses and other current assets. In 2003, cash provided
by operating activities primarily reflects net income adjusted for depreciation
and amortization and increases in deferred revenues and accrued expenses,
partially offset by a decrease in accounts payable.
At December 31, 2005 and 2004, we held inventory in the amounts of $96.8
million and $53.9 million, respectively. These balances include stockroom,
spares and demonstration equipment inventories at various locations and
inventory at customer sites related to shipments for which we have not yet
recognized revenue. We review these balances regularly for excess quantities or
potential obsolescence and make appropriate adjustments to write down the
inventories to reflect their estimated realizable value. Of the $42.9 million
increase in inventories from December 31, 2004 to 2005, approximately $27.3
million relates to the acquisition of Pinnacle. The balance of the increase is
primarily the result of a $13.0 million increase in inventories held by our
Audio segment.
Accounts receivable increased by $43.2 million to $140.7 million at
December 31, 2005 from $97.5 million at December 31, 2004, driven primarily by
the year-over-year increase in net revenues including the impact of the
acquisition of Pinnacle. These balances are net of allowances for sales returns,
bad debts and customer rebates, all of which we estimate and record based on
historical experience. Days sales outstanding in accounts receivable increased
from 50 days at December 31, 2004 to 52 days at December 31, 2005. The increase
in days sales outstanding is primarily attributable to the relative proportion
of solution sales in each period, which were higher in the fourth quarter of
2004 than in the fourth quarter of 2005. These sales are typically paid for
prior to recognition and therefore lower our days sales outstanding in the
period when revenue is recognized.
Net cash flow used in investing activities was $11.0 million in 2005,
compared to $107.1 million and $73.9 million used by investing activities in
2004 and 2003, respectively. In 2005, we had net purchases of marketable
securities of $10.1 million, compared to net sales of $44.2 million in 2004 and
net purchases of $63.6 million in 2003. The marketable securities in which we
invest our excess cash typically include corporate obligations, asset backed
securities, commercial paper, taxable municipal obligations and U.S. Treasuries
and other governmental obligations. During 2005 we acquired Pinnacle for stock
valued at $362.9 million plus cash of $72.1 million and paid related transaction
fees of $6.5 million. As Pinnacle's cash balance at the acquisition date was
$103.0 million, this transaction resulted in a net cash increase of $24.9
million. Also during 2005, we paid cash of euro 4 million ($4.9 million) plus
transaction costs of $0.2 million for Wizoo. We purchased $17.8 million of
property and equipment during 2005, compared to $15.2 million during 2004 and
$8.0 million in 2003. Purchases of property and equipment in both 2005 and 2004
were primarily of computer hardware and software to support research and
development activities and our information systems. Our capital spending program
for 2006 is currently expected to be approximately $22.3 million, including
purchases of hardware and software to support activities in the research and
development, information systems and manufacturing areas, as well as for
facilities renovations. However, this amount could increase in the event we
enter into strategic business acquisitions or for other reasons.
As part of the agreement to acquire Avid Nordic, we were required to make
additional payments to the former shareholders of Avid Nordic of up to euro
1.3 million contingent upon the operating results of Avid Nordic AB through
August 31, 2005, with the payments to be recorded as additional purchase
consideration, allocated to goodwill. During 2005, we paid euro 1.1 million
($1.4 million) of additional purchase consideration and recorded an increase to
goodwill.
38
Net cash provided by financing activities during 2005, 2004 and 2003, was
$18.0 million, $27.6 million and $54.1 million, respectively, which is primarily
attributable to cash received of $18.1 million, $29.4 million and $54.7 million,
respectively, from the issuance of common stock related to the exercise of stock
options and our employee stock purchase plan.
In connection with restructuring efforts during 2005 and prior periods, as
well as with the identification in 2003 and 2002 of excess space in various
locations, as of December 31, 2005, we have future cash obligations of
approximately $17.6 million under leases for which we have vacated the
underlying facilities. We have an associated restructuring accrual of $4.5
million at December 31, 2005 representing the excess of our lease commitments on
space no longer used by us over expected payments to be received on subleases of
such facilities. This restructuring accrual requires significant estimates and
assumptions, including sub-lease income assumptions. These estimates and
assumptions are monitored on a quarterly basis for changes in circumstances and
any corresponding adjustments to the accrual are recorded in the period when
such changes are known. The lease payments will be made over the remaining terms
of the leases, which have varying expiration dates through 2011, unless we are
able to negotiate an earlier termination. In connection with the Pinnacle
acquisition in August 2005, we recorded restructuring accruals totaling $14.4
million related to severance ($10.0 million) and lease or other contract
terminations ($4.4 million). As of December 31, 2005, we have restructuring
accruals of $3.0 million and $2.8 million related to Pinnacle acquisition
related severance and lease obligations, respectively. The severance payments
will be made over the next twelve months and the lease payments will be made
over the remaining terms of the leases, which have varying expiration dates
through 2010. All payments related to restructuring will be funded through
working capital. See Note L of the Consolidated Financial Statements in Item 8
for the activity in the restructuring and other costs accrual for the years
ended December 31, 2005, 2004 and 2003.
Our cash requirements vary depending upon factors such as our planned
growth, capital expenditures, the possible acquisitions of businesses or
technologies complementary to our business and obligations under past
restructuring programs. We believe that our existing cash, cash equivalents,
marketable securities and funds generated from operations will be sufficient to
meet our operating cash requirements for at least the next twelve months. In the
event that we require additional financing, we believe that we will be able to
obtain such financing; however, there can be no assurance that we would be
successful in doing so, or that we could do so on favorable terms.
CONTRACTUAL AND COMMERCIAL OBLIGATIONS INCLUDING OFF-BALANCE SHEET
ARRANGEMENTS
The following table sets forth future payments that we are obligated to
make, as of December 31, 2005, under existing debt agreements, leases and other
arrangements (in thousands):
Less
than 1 - 3 3 - 5 After
Total 1 Year Years Years 5 Years
--------- --------- --------- --------- ---------
Operating leases $92,096 $25,547 $39,612 $20,915 $6,022
Unconditional purchase
obligations 46,542 46,542 - - -
--------- --------- --------- --------- ---------
$138,638 $72,089 $39,612 $20,915 $6,022
========= ========= ========= ========= =========
Other contractual arrangements that may result in cash payments consist of
the following (in thousands):
Less than 1 - 3
Total 1 Year Years
----------- ------------- -----------
Transactions with recourse $12,990 $12,990 $ -
Stand-by letter of credit 3,500 - 3,500
Contingent consideration for
acquisitions 1,200 - 1,200
----------- ------------- -----------
$17,690 $12,990 $4,700
=========== ============= ===========
Through a third party, we offer lease financing options to our customers.
During the terms of these financing arrangements, which are generally for three
years, we remain liable for a portion of the unpaid principal balance in the
event of a default on the lease by the end-user, but our liability is limited in
the aggregate based on a percentage of initial amounts funded or, in certain
cases, amounts of unpaid balances. As of December 31, 2005, our maximum exposure
under this program was $13.0 million.
39
We have a stand-by letter of credit at a bank that is used as a security
deposit in connection with our Daly City, California office space lease. In the
event of a default on this lease, the landlord would be eligible to draw against
this letter of credit to a maximum, as of December 31, 2005, of $3.5 million,
subject to an annual reduction of approximately $0.8 million but not below $2.0
million. The letter of credit will remain in effect at $2.0 million throughout
the remaining lease period, which runs through September 2009. As of December
31, 2005, we were not in default of this lease.
As part of the purchase agreement of Wizoo, we may be required to make
additional payments of up to euro 1.0 million ($1.2 million) contingent upon
the achievement of certain engineering milestones through January 2008. See Note
F to our Consolidated Financial Statements in Item 8.
We conduct our business globally and, consequently, our results from
operations are exposed to movements in foreign currency exchange rates. We enter
into forward exchange contracts, which generally have one-month maturities, to
reduce exposures associated with the foreign exchange exposures of certain
forecasted third-party and intercompany receivables, payables and cash balances.
As of December 31, 2005, we had $49.4 million of forward-exchange contracts
outstanding, denominated in the euro, British pound, Swedish krona, Danish
kroner, Norwegian krone, Canadian dollar, Singapore dollar and Korean won, as a
hedge against forecasted foreign currency-denominated receivables, payables and
cash balances.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board, or FASB,
issued SFAS No. 151, "Inventory Costs", an amendment of Accounting Research
Bulletin No. 43, which is the result of the FASB's efforts to converge U.S.
accounting standards for inventories with International Accounting Standards.
SFAS No. 151 requires idle facility expenses, freight, handling costs and wasted
material (spoilage) costs to be recognized as current-period charges. It also
requires that the allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
No. 151 will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005 (i.e., for us, beginning January 1, 2006). We are
currently evaluating the impact of SFAS No. 151 on our consolidated financial
statements. The adoption of this standard is not expected to have a material
impact on our financial position or results of operations.
On December 16, 2004, the FASB released SFAS No. 123(R). This new
accounting standard requires all forms of stock compensation, including stock
options issued to employees, to be reflected as an expense in our financial
statements. On April 14, 2005, the SEC approved a rule that delayed the
effective date of SFAS No. 123(R) for public companies to annual, rather than
interim, periods that begin after June 15, 2005. SFAS No. 123(R) allows three
alternative methods of transitioning to the standard: modified prospective
application, or MPA; modified retrospective application, or MRA, to all prior
periods; or MRA to only interim periods of the year of adoption. We intend to
use the MPA without restatement alternative and to apply the revised standard
beginning January 1, 2006. Under the modified prospective application, all
unvested awards that were previously included as part of the pro forma net
income disclosure and are outstanding on the effective date would be charged to
expense over the remaining vesting period, without any changes in measurement.
All new awards that are granted or modified after the effective date will be
expensed using the SFAS No. 123(R) measurement model. The adoption of the
revised standard will result in higher recorded operating expenses and lower
earnings per share. We estimate that adoption will result in additional expense
in 2006 of approximately $20 million, but this amount could vary based on a
number of factors including the volatility of our stock, interest rate changes
or changes to our equity compensation plans. See Footnote B to our Consolidated
Financial Statements for the pro forma impact on net income and net income per
common share as if we had historically applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee awards.
On June 7, 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections", a replacement of APB Opinion No. 20, "Accounting Changes"
and Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements". SFAS No. 154 changes the requirements for the accounting for and
reporting of a change in accounting principle. Previously, most voluntary
changes in accounting principles required recognition in a cumulative effect
adjustment within net income of the period of the change. SFAS No. 154 requires
retrospective application to prior periods' financial statements, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS No. 154 is effective for accounting changes made in
fiscal years beginning after December 15, 2005; however, this standard does not
change the transition provisions of any existing accounting pronouncements. We
will determine the impact of this standard on our consolidated financial
statements when an accounting change or error correction occurs.
40
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets", an amendment of APB Opinion No. 29, "Accounting for Nonmonetary
Transactions". Previously, APB Opinion No. 29 had required that the accounting
for an exchange of a productive asset for a similar productive asset or an
equivalent interest in the same or similar productive asset should be based on
the recorded amount of the asset relinquished. The amendments made by SFAS No.
153 are based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. Further, the
amendments eliminate the narrow exception for nonmonetary exchanges of similar
productive assets and replace it with a broader exception for exchanges of
nonmonetary assets that do not have commercial substance, in essence increasing
the number of exchanges that will be fair valued in the future. SFAS No. 153 was
effective in the third quarter of 2005. The provisions of SFAS No. 153 are
applied prospectively. The adoption of this standard did not have a material
impact on our financial position or results of operations.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Retirement Obligations--an interpretation of SFAS No. 143", or FIN
No. 47. This interpretation clarifies the timing of when a liability should be
recognized for legal obligations associated with the retirement of a tangible
long-lived asset. In addition, the interpretation clarifies the treatment when
there is insufficient information to reasonably estimate the fair value of an
asset retirement obligation. FIN No. 47 is effective no later than the end of
fiscal years ending after December 31, 2005. Retrospective application for
interim financial information is permitted but is not required and early
adoption is encouraged. The adoption of this standard is not expected to have a
material impact on our financial position or results of operations.
In June 2005, the FASB issued Staff Position No. FAS 143-1, "Accounting
for Electronic Equipment Waste Obligations", or FSP 143-1, which provides
guidance on the accounting for obligations associated with the European Union,
or EU, Directive on Waste Electrical and Electronic Equipment, or the WEEE
Directive. FSP 143-1 provides guidance on how to account for the effects of the
WEEE Directive with respect to historical waste associated with products in the
market on or before August 13, 2005. FSP 143-1 is required to be applied to the
later of the first reporting period ending after June 8, 2005 or the date of the
adoption of the WEEE Directive into law by the applicable EU member country. We
are in the process of registering with the member countries, as appropriate, and
are still awaiting guidance from these countries with respect to the compliance
costs and obligations for historical waste. We will continue to work with each
country to obtain guidance and will accrue for compliance costs when they are
probable and reasonably estimable. The accruals for these compliance costs may
have a material impact on our financial position or results of operations when
guidance is issued by each member country.
On October 22, 2004, the President signed the American Jobs Creation Act
of 2004, or the Act. The Act creates a temporary incentive for U.S. corporations
to repatriate accumulated income earned abroad by providing an 85 percent
dividends-received deduction for certain dividends from controlled foreign
corporations. The Act also creates a deduction on a percentage of the lesser of
qualified production activities income or taxable income. Although these
deductions are subject to a number of limitations and significant uncertainty
remains as to how to interpret numerous provisions in the Act, we believe that
we have the information necessary to make an informed decision on the impact of
the Act. Based on the information available, we have determined that our cash
position in the U.S. is sufficient to fund anticipated needs. We also believe
that the repatriation of income earned abroad would result in significant
foreign withholding taxes that otherwise would not have been incurred, as well
as additional U.S. tax liabilities that may not be sufficiently offset by
foreign tax credits. Therefore, we do not currently plan to repatriate any
income earned abroad. The qualified production activities deduction was not
available to us in 2005 due to the fact that we incurred a loss for U.S. tax
purposes. The qualified production activities deduction is not available to
companies that incur a loss for the taxable year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign Currency Exchange Risk
We derive more than half of our revenues from customers outside the United
States. This business is, for the most part, transacted through international
subsidiaries and generally in the currency of the end-user customers. Therefore,
we are exposed to the risks that changes in foreign currency could adversely
impact our revenues, net income and cash flow. To hedge against the foreign
exchange exposure of certain forecasted receivables, payables and cash balances
of our foreign subsidiaries, we enter into short-term foreign currency
forward-exchange contracts. There are two objectives of our foreign currency
forward-exchange contract program: (1) to offset any foreign exchange currency
risk associated with cash receipts expected to be received from our customers
over the next 30 day period and (2) to offset the impact of foreign currency
exchange on our net monetary assets denominated in currencies other than the
U.S. dollar. These forward-exchange contracts typically mature within 30 days of
purchase. We record gains and losses associated with currency rate changes on
these contracts in results of operations, offsetting gains and losses on the
related assets and liabilities. The success of this hedging program depends on
41
forecasts of transaction activity in the various currencies and contract rates
versus financial statement rates. To the extent that these forecasts are
overstated or understated during the periods of currency volatility, we could
experience unanticipated currency gains or losses.
At December 31, 2005, we had $49.4 million of forward-exchange contracts
outstanding, denominated in the euro, British pound, Swedish krona, Danish
kroner, Norwegian krone, Canadian dollar, Singapore dollar and Korean won, as a
hedge against forecasted foreign currency-denominated receivables, payables and
cash balances. For the year ended December 31, 2005, net gains resulting from
forward-exchange contracts of $5.0 million were included in results of
operations, offset by net transaction and remeasurement losses on the related
assets and liabilities of $6.6 million. A hypothetical 10% change in foreign
currency rates would not have a material impact on our results of operations,
assuming the above-mentioned forecast of foreign currency exposure is accurate,
because the impact on the forward contracts as a result of a 10% change would at
least partially offset the impact on the asset and liability positions of our
foreign subsidiaries.
Interest Rate Risk
At December 31, 2005, we held $238.4 million in cash, cash equivalents and
marketable securities, including short-term corporate obligations, asset-backed
securities, commercial paper and U.S. and Canadian government and government
agency obligations. Marketable securities are classified as "available for sale"
and are recorded on the balance sheet at market value, with any unrealized gain
or loss recorded in other comprehensive income (loss). A hypothetical 10%
increase or decrease in interest rates would not have a material impact on the
fair market value of these instruments due to their short maturity.
42
AVID TECHNOLOGY, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2005
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION
43
AVID TECHNOLOGY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITEM 8:
Management's Report on Internal Control Over Financial Reporting....... 45
Report of Independent Registered Public Accounting Firm................ 46
Consolidated Statements of Operations for the years ended
December 31, 2005, 2004 and 2003...................................... 48
Consolidated Balance Sheets as of December 31, 2005 and 2004........... 49
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2005, 2004 and 2003..................................... 50
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003...................................... 51
Notes to Consolidated Financial Statements............................. 52
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE INCLUDED IN ITEM 15(d):
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 2005, 2004 and 2003 F-1
Schedules other than that listed above have been omitted since the required
information is not present, or not present in amounts sufficient to require
submission of the schedule, or because the information required is included
in the consolidated financial statements or the notes thereto.
44
Management's Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated
under the Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the Company's principal executive and principal financial
officers and effected by the Company's board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
o Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and directors of the Company; and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005. In making
this assessment, the Company's management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Management's assessment of internal
control over financial reporting excluded Pinnacle Systems Inc. (Pinnacle) and
its subsidiaries because Pinnacle was acquired by the Company in a purchase
business combination during 2005. Pinnacle and its subsidiaries represented 38%
and 12% of the Company's total assets and total revenues, respectively, as of
and for the year ended December 31, 2005. Excluding identifiable intangible
assets and goodwill recorded in the business combination, Pinnacle and its
subsidiaries represented 10% of the Company's total assets as of December 31,
2005.
Based on our assessment, management has concluded that, as of December 31,
2005, the Company's internal control over financial reporting is effective based
on the criteria set forth by the COSO.
Our management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears on page 46 of this Annual Report on Form
10-K.
45
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
To the Board of Directors and Stockholders of Avid Technology, Inc.:
We have completed integrated audits of Avid Technology, Inc.'s 2005 and 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2005 and an audit of its 2003 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements and financial statement schedule
- ------------------------------------------------------------------
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Avid
Technology, Inc. and its subsidiaries at December 31, 2005 and 2004 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Internal control over financial reporting
- -----------------------------------------
Also, in our opinion, management's assessment, included in "Management's Report
on Internal Control Over Financial Reporting" appearing under Item 8, that the
Company maintained effective internal control over financial reporting as of
December 31, 2005 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
company's assets that could have a material effect on the financial statements.
46
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As described in "Management's Report on Internal Control Over Financial
Reporting," management has excluded Pinnacle Systems, Inc. and its subsidiaries
from its assessment of internal control over financial reporting as of December
31, 2005 because the entity was acquired by the Company in a purchase business
combination during 2005. We have also excluded Pinnacle Systems, Inc. and its
subsidiaries from our audit of internal control over financial reporting.
Pinnacle Systems, Inc. and its subsidiaries are wholly-owned subsidiaries whose
total assets and total revenues represent 38% and 12%, respectively, of the
related consolidated financial statement amounts of Avid Technology, Inc. as of
and for the year ended December 31, 2005.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 7, 2006
47
AVID TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Year Ended December 31,
-------------------------------
2005 2004 2003
--------- --------- ---------
Net revenues:
Product $692,787 $528,463 $425,403
Services 82,656 61,142 46,509
--------- --------- ---------
Total net revenues 775,443 589,605 471,912
--------- --------- ---------
Cost of revenues:
Product 308,386 220,246 183,304
Services 45,274 34,842 26,069
Amortization of intangible assets 11,027 408 -
--------- --------- ---------
Total cost of revenues 364,687 255,496 209,373
--------- --------- ---------
Gross profit 410,756 334,109 262,539
--------- --------- ---------
Operating expenses:
Research and development 111,334 94,940 85,552
Marketing and selling 170,787 130,123 105,735
General and administrative 47,147 35,468 27,177
In-process research and development 32,390 - -
Restructuring costs, net 3,155 - 3,194
Amortization of intangible assets 9,194 3,641 1,316
Impairment of intangible assets - 1,187 -
--------- --------- ---------
Total operating expenses 374,007 265,359 222,974
--------- --------- ---------
Operating income 36,749 68,750 39,565
Interest income 5,244 2,501 2,011
Interest expense (367) (342) (318)
Other income (expense), net 709 (820) 181
--------- --------- ---------
Income before income taxes 42,335 70,089 41,439
Provision for (benefit from) income taxes 8,355 (1,612) 550
--------- --------- ---------
Net income $33,980 $71,701 $40,889
========= ========= =========
Net income per common share - basic $0.90 $2.21 $1.40
Net income per common share - diluted $0.86 $2.05 $1.25
Weighted-average common shares outstanding
- basic 37,762 32,485 29,192
Weighted-average common shares outstanding
- diluted 39,517 35,003 32,653
The accompanying notes are an integral part of the consolidated financial
statements.
48
AVID TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
December 31,
----------------------------
2005 2004
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $133,954 $79,058
Marketable securities 104,476 76,361
Accounts receivable, net of allowances of
$22,233 and $9,334 at December 31, 2005
and 2004, respectively 140,669 97,536
Inventories 96,845 53,946
Current deferred tax assets, net 528 653
Prepaid expenses 8,548 7,550
Other current assets 16,657 11,204
------------ -------------
Total current assets 501,677 326,308
Property and equipment, net 38,563 29,092
Intangible assets, net 118,676 46,884
Goodwill 396,902 165,803
Long-term deferred tax assets, net - 4,184
Other assets 6,228 3,963
------------ -------------
Total assets $1,062,046 $576,234
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $43,227 $26,517
Accrued compensation and benefits 27,841 30,468
Accrued expenses and other current liabilities 62,948 34,902
Income taxes payable 13,027 9,357
Deferred revenues and deposits 66,034 48,680
------------ -------------
Total current liabilities 213,077 149,924
Deferred tax liabilities, net 9,372 1,540
Long-term debt and other liabilities - 149
------------ -------------
Total liabilities 222,449 151,613
------------ -------------
Commitments and contingencies (Notes F and H)
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000
shares authorized; no shares issued
or outstanding - -
Common stock, $0.01 par value, 100,000 and
50,000 shares authorized; 42,095 and 34,837
shares issued and outstanding; at December 31,
2005 and 2004, respectively 421 348
Additional paid-in capital 928,703 546,849
Accumulated deficit (88,795) (122,775)
Deferred compensation (1,830) (4,392)
Accumulated other comprehensive income 1,098 4,591
------------ -------------
Total stockholders' equity 839,597 424,621
------------ -------------
Total liabilities and stockholders' equity $1,062,046 $576,234
============ =============
The accompanying notes are an integral part of the consolidated financial
statements.
49
AVID TECHNOLOGY, INC.
Consolidated Statements of
Stockholders' Equity
(in thousands)
Accumulated
Common Stock Additional Other Total
------------ Paid-in Accumulated Deferred Comprehensive Stockholders'
Shares Amount Capital Deficit Compensation Income(Loss) Equity
-----------------------------------------------------------------------------------------------
Balances at December 31, 2002 27,268 $273 $364,481 ($235,365) ($216) ($5,609) $123,564
Stock issued pursuant to employee
stock plans 3,802 38 54,680 54,718
Restricted stock grants canceled
and compensation expense (7) (5) 186 181
Tax benefits on stock options 825 825
Comprehensive income:
Net income 40,889 40,889
Net change in unrealized gain
(loss) on marketable securities 44 44
Translation adjustment 6,884 6,884
-------
Other comprehensive income 6,928
-------
Comprehensive income 47,817
-----------------------------------------------------------------------------------------------
Balances at December 31, 2003 31,063 311 419,981 (194,476) (30) 1,319 227,105
Stock issued pursuant to employee
stock plans 1,780 17 29,359 29,376
Issuance of common stock in
connection with acquisition 1,974 20 96,459 (5,500) 90,979
Issuance of restricted stock 20 1,134 (1,134) -
Amortization of and reversal of
deferred compensation (824) 2,272 1,448
Tax benefits on stock options 740 740
Comprehensive income:
Net income 71,701 71,701
Net change in unrealized gain
(loss) on marketable securities (197) (197)
Translation adjustment 3,469 3,469
-------
Other comprehensive income 3,272
-------
Comprehensive income 74,973
-----------------------------------------------------------------------------------------------
Balances at December 31, 2004 34,837 348 546,849 (122,775) (4,392) 4,591 424,621
Stock issued pursuant to employee
stock plans 1,010 10 18,104 18,114
Issuance of common stock in
connection with acquisition 6,250 63 362,799 362,862
Amortization of and reversal of
deferred compensation (2) (195) 2,562 2,367
Tax benefits on stock options 1,146 1,146
Comprehensive income:
Net income 33,980 33,980
Net change in unrealized gain
(loss) on marketable securities 92 92
Translation adjustment (3,585) (3,585)
-------
Other comprehensive income (3,493)
-------
Comprehensive income 30,487
-----------------------------------------------------------------------------------------------
Balances at December 31, 2005 42,095 $421 $928,703 ($88,795) ($1,830) $1,098 $839,597
================================================================================================
The accompanying notes are an integral part of the consolidated financial statements
50
AVID TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Year Ended December 31,
--------------------------------
2005 2004 2003
--------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $33,980 $71,701 $40,889
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 37,488 16,292 12,391
Write-off of in-process research and development 32,390 - -
Impairment of intangible assets - 1,187 -
Provision for (recovery of) doubtful accounts 753 (201) 624
and recourse obligations
Loss on disposal of fixed assets 21 - -
Compensation expense from stock grants and options 2,447 1,448 181
Deferred tax provision (benefit) (226) (1,286) (280)
Tax benefit of stock option exercises 1,146 740 603
Equity in income of non-consolidated company (291) (221) (192)
Changes in operating assets and liabilities, net
of effects of acquisitions:
Accounts receivable (38,081) (15,450) (668)
Inventories (22,649) 620 (209)
Prepaid expenses and other current assets 26 (4,804) (358)
Accounts payable 6,625 3,300 (8,574)
Income taxes payable 5,153 141 (207)
Accrued expenses, compensation and benefits (14,867) 8,634 5,016
Deferred revenues and deposits 5,910 (732) 9,429
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 49,825 81,369 58,645
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (17,766) (15,177) (7,951)
Payments for other long-term assets (1,624) (656) (300)
Dividend from non-consolidated company - - 196
Payments for business acquisitions, net of cash acquired (6,419) (135,515) (2,282)
Cash received in business acquisitions, net of cash paid 24,942 - -
Purchases of marketable securities (94,545) (61,407) (121,038)
Proceeds from sales and maturities of marketable securities 84,437 105,644 57,461
- -------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (10,975) (107,111) (73,914)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (85) (610) (619)
Payments on debt - (1,203) -
Proceeds from issuance of common stock under employee
stock plans 18,114 29,376 54,718
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,029 27,563 54,099
- -------------------------------------------------------------------------------------------------
Effects of exchange rate changes on cash and cash equivalents (1,983) 113 1,545
- -------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 54,896 1,934 40,375
Cash and cash equivalents at beginning of year 79,058 77,124 36,749
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $133,954 $79,058 $77,124
=================================================================================================
See Notes G and P for supplemental disclosures.
The accompanying notes are an integral part of the consolidated financial
statements.
51
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 post-production 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,
52
Swedish krona, Danish kroner, Norwegian krone, Canadian dollar, Singapore
dollar, Australian dollar and Korean won. These assets and liabilities are
remeasured into the U.S. dollar at the current exchange rate in effect at the
balance sheet date. Foreign currency transaction and remeasurement gains and
losses are included within marketing and selling expenses in the results of
operations.
The U.S. parent company and various other wholly owned subsidiaries have
long-term intercompany loan balances denominated in foreign currencies, which
are remeasured into the U.S. dollar at the current exchange rate in effect at
the balance sheet date. Any gains and losses relating to these loans are
included in the cumulative translation adjustment account in the balance sheet.
Cash, Cash Equivalents and Marketable Securities
Cash equivalents consist primarily of government and government agency
obligations. The Company considers all debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Marketable
securities consist of U.S. and Canadian government and government agency
obligations, corporate obligations, municipal obligations and asset-backed
securities (see Note C). The Company generally invests in securities that mature
within one year from the date of purchase. The Company classifies its cash
equivalents and marketable securities as "available for sale" and reports them
at fair value, with unrealized gains and losses excluded from earnings and
reported as an adjustment to other comprehensive income (loss), which is
reflected as a separate component of stockholders' equity. Amortization or
accretion of premium or discount is included in interest income (expense) in the
results of operations.
Concentration of Credit Risk and Fair Value of Financial Instruments
Financial instruments which potentially subject the Company to concentrations of
credit risk consist of cash investments and trade receivables. The Company
places its excess cash in marketable investment grade securities. There are no
significant concentrations in any one issuer of debt securities. The Company
places its cash, cash equivalents and investments with financial institutions
with high credit standing. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base and their dispersion across different regions. No
individual customer comprised more than 10% of the Company's net accounts
receivable as of December 31, 2005 or 2004. The Company also maintains reserves
for potential credit losses and such losses have been within management's
expectations.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market value. Management regularly reviews inventory quantities on
hand and writes down inventory to its realizable value to reflect estimated
obsolescence or unmarketability based upon assumptions about future inventory
demand (generally for the following twelve months) and market conditions.
Inventory in the digital media market, including the Company's inventory, is
subject to rapid technological change or obsolescence; therefore, utilization of
existing inventory may differ from the Company's estimates.
Property and Equipment
Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful life of the asset. Leasehold
improvements are amortized over the shorter of the useful life of the
improvement or the remaining term of the lease. Expenditures for maintenance and
repairs are expensed as incurred. Upon retirement or other disposition of
assets, the cost and related accumulated depreciation are eliminated from the
accounts and the resulting gain or loss is reflected in other income (expense)
in the results of operations. A significant portion of the property and
equipment is subject to rapid technological obsolescence; as a result, the
depreciation and amortization periods could ultimately be shortened to reflect
changes in future technology.
Acquisition-related Intangible Assets and Goodwill
Acquisition-related intangible assets, which consists primarily of customer
relationships and completed technology, result from the Company's acquisitions
of the following companies or their assets: Pinnacle, Wizoo, M-Audio, NXN
Software, Avid Nordic AB, iKnowledge, Rocket Network, Inc. and Bomb Factory
Digital, Inc. (see Note F), which were accounted for under the purchase method.
Acquisition-related intangible assets are reported at fair value, net of
accumulated amortization. Identifiable intangible assets, with the exception of
developed technology acquired from Pinnacle, are amortized on a straight-line
basis over their estimated useful lives of two to twelve years. Straight-line
amortization is used because no other pattern over which the economic benefits
will be consumed can be reliably determined. The developed technology acquired
from Pinnacle is being amortized on a product-by-product basis over the greater
of the amount calculated using the ratio of current quarter revenues to the
53
total of current quarter and anticipated future revenues over the estimated
useful lives of two to three years, or the straight-line method over each
product's remaining respective useful lives.
Goodwill is the amount by which the cost of acquired net assets exceeded the
fair value of those net assets on the date of acquisition. The Company assesses
goodwill for impairment on a reporting unit basis annually during the fourth
quarter of each year, or more frequently when events and circumstances occur
indicating that the recorded goodwill may be impaired. If the book value of a
reporting unit exceeds its fair value, which is estimated for each reporting
unit using a discounted cash flow valuation model, the implied fair value of
goodwill is then compared with the carrying amount of goodwill. If the carrying
amount of goodwill exceeds the implied fair value, an impairment loss is
recorded in an amount equal to that excess.
Long-Lived Assets
The Company periodically evaluates its long-lived assets, other than goodwill,
for events and circumstances that indicate a potential impairment. A long-lived
asset is assessed for impairment when the undiscounted expected future cash
flows derived from that asset are less than its carrying value. The cash flows
used for this analysis take into consideration a number of factors including
past operating results, budgets and economic projections, market trends and
product development cycles. The amount of any impairment would be equal to the
difference between the estimated fair value of the asset, based on a discounted
cash flow analysis, and its carrying value.
Revenue Recognition and Allowance for Doubtful Accounts
The Company generally recognizes revenue from sales of software and
software-related products upon receipt of a signed purchase order or contract
and product shipment to distributors or end users, provided that collection is
reasonably assured, the fee is fixed or determinable and all other revenue
recognition criteria of Statement of Position ("SOP") 97-2, "Software Revenue
Recognition", as amended, are met. In addition, for certain transactions where
our services are non-routine or essential to the delivered products, we record
revenue upon satisfying the criteria of SOP 97-2 and obtaining customer
acceptance. Within the Professional Film, Video and Broadcast ("Professional
Video") segment, much of the Audio segment and the Consumer Video segment, the
Company follows the guidance of SOP 97-2 for revenue recognition on most of its
products and services since they are software or software-related. However, for
certain offerings in the Company's Audio segment, software is incidental to the
delivered products and services. For these products, the Company records revenue
based on satisfying the criteria in Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition".
In connection with many of the Company's product sale transactions, customers
may purchase a maintenance and support agreement. The Company recognizes revenue
from maintenance contracts on a ratable basis over their term. The Company
recognizes revenue from training, installation or other services as the services
are performed.
The Company uses the residual method to recognize revenues when an order
includes one or more elements to be delivered at a future date and evidence of
the fair value of all undelivered elements exists. Under the residual method,
the fair value of the undelivered element, typically professional services or
maintenance, is deferred and the remaining portion of the total arrangement fee
is recognized as revenues related to the delivered elements. If evidence of the
fair value of one or more undelivered elements does not exist, revenues are
deferred and recognized when delivery of those elements occurs or when fair
value can be established. Fair value is typically based on the price charged
when the same element is sold separately to customers. However, in certain
transactions, fair value is based on the renewal price of the undelivered
element that is granted as a contractual right to the customer. The Company's
current pricing practices are influenced primarily by product type, purchase
volume, term and customer location. Management reviews services revenues sold
separately and corresponding renewal rates on a periodic basis and updates, when
appropriate, the fair value for such services used for revenue recognition
purposes to ensure that it reflects the Company's recent pricing experience.
In most cases the Company's products do not require significant production,
modification or customization of software. Installation of the products is
generally routine, requires minimal effort and is not typically performed by the
Company. However, certain transactions, typically those involving orders from
end-users for a significant number of products for a single customer site, such
as news broadcasters, may require that the Company perform an installation
effort that is deemed to be non-routine and complex. In these situations, the
Company does not recognize revenue for either the products shipped or the
installation services until the installation is complete. In addition, if such
orders include a customer acceptance provision, no revenue is recognized until
the customer's acceptance of the products and services has been received or the
acceptance period has lapsed.
54
Telephone support, enhancements and unspecified upgrades typically are provided
at no additional charge during the product's initial warranty period (generally
between 30 days and twelve months), which precedes commencement of the
maintenance contracts. The Company defers the fair value of this support period
and recognizes the related revenue ratably over the initial warranty period. The
Company also from time to time offers certain customers free upgrades or
specified future products or enhancements. For each of these elements that are
undelivered at the time of product shipment, the Company defers the fair value
of the specified upgrade, product or enhancement and recognizes that revenue
only upon later delivery or at the time at which the remaining contractual terms
relating to the upgrade have been satisfied.
A significant portion of the Company's revenue is derived from indirect sales
channels, including authorized resellers and distributors. Within the Company's
Professional Video segment, resellers and distributors are generally not granted
rights to return products to us after purchase and actual product returns from
them have been insignificant to date. However, distributors of the Avid Xpress
DV, Avid Xpress Pro, Avid Mojo and Avid Liquid product lines have a contractual
right to return a percentage of prior quarter purchases. The return provision
for these distributors has not had a material impact on the Company's results of
operations. In contrast, some channel partners, particularly the Company's Audio
and certain Consumer Video channel partners, are offered limited rights of
return, stock rotation, rebates and price protection. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue
Recognition When Right of Return Exists", the Company records a provision for
estimated returns and other allowances, as a reduction of revenues, in the same
period that related revenues are recorded. Management estimates must be made and
used in connection with establishing and maintaining a sales allowance for
expected returns and other credits. In making such estimates, the Company
analyzes historical returns and credits and the amounts of products held by
major resellers and considers the impact of new product introductions, changes
in customer demand, current economic conditions and other known factors. The
Company maintains a rolling history of returns on a product-by-product basis and
analyzes returns and credits by product category. The amount and timing of the
Company's revenue for any period may be impacted if actual product returns or
other reseller credits prove to be materially different from the Company's
estimates.
A portion of the Company's revenue from sales of Consumer Video products is
derived from transactions with channel partners who have unlimited return rights
and from whom payment is contingent upon the product being sold through to their
customers. Accordingly, revenue for these channel partners is recognized when
the products are sold through to the customer instead of being recognized at the
time products are shipped to the channel partners.
The Company from time to time offers rebates on purchases of certain products or
rebates based on purchasing volume, which are accounted for as reductions to
revenue upon shipment of related products or expected achievement of purchasing
volumes. In accordance with Emerging Issues Task Force ("EITF") Issue 01-09,
"Accounting for Consideration Given by a Vendor to a Customer (including a
Reseller of the Vendor's Products)", consideration given to customers or
resellers under the rebate program is recorded as a reduction to revenue because
the Company does not receive an identifiable benefit that is sufficiently
separable from the sale of the Company's products.
At the time of a sale transaction, the Company makes an assessment of the
collectibility of the amount due from the customer. Revenue is recognized only
if the Company is reasonably assured that collection will occur. In making this
assessment, the Company considers customer credit-worthiness and historical
payment experience. If it is determined from the outset of the arrangement that
collection is not reasonably assured based upon the Company's credit review
process, revenue is recognized on a cash-collected basis to the extent that the
other criteria of SOP 97-2 and SAB No. 104 are satisfied. At the outset of the
arrangement, the Company assesses whether the fee associated with the order is
fixed or determinable and free of contingencies or significant uncertainties. In
assessing whether the fee is fixed or determinable, the Company considers the
payment terms of the transaction, collection experience in similar transactions
without making concessions and the Company's involvement, if any, in third-party
financing transactions, among other factors. If the fee is not fixed or
determinable, revenue is recognized only as payments become due from the
customer, provided that all other revenue recognition criteria are met. If a
significant portion of the fee is due after the Company's normal payment terms,
which are generally 30 days, but can be up to 90 days, after the invoice date,
the Company evaluates whether there is sufficient history of successfully
collecting past transactions with similar terms. If that collection history is
successful, then revenue is recognized upon delivery of the products, assuming
all other revenue recognition criteria are satisfied.
The Company maintains allowances for estimated bad debt losses resulting from
the inability of its customers to make required payments for products or
services. When evaluating the adequacy of the allowances, the Company analyzes
accounts receivable balances, historical bad debt experience, customer
concentrations, customer credit-worthiness and current economic trends. If the
financial condition of certain customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances could be
required.
55
The Company records as revenue all amounts billed to customers for shipping and
handling cost and records its actual shipping costs as a component of cost of
revenues. The Company records reimbursements received from customers for
out-of-pocket expenses as revenue, with related costs recorded as cost of
revenues.
Advertising Expenses
All advertising costs are expensed as incurred and are classified as selling and
marketing expenses. Advertising expenses during 2005, 2004 and 2003 were $12.6
million, $8.1 million and $6.0 million, respectively.
As part of its advertising initiatives, the Company maintains a cooperative
marketing program for certain resellers in the Professional Video segment. Under
this program, participating resellers can earn reimbursement credits of up to 1%
of qualified purchases from Avid. Consideration given to these resellers is
included in selling and marketing expense in accordance with EITF Issue 01-09,
as the Company receives an identifiable benefit that is sufficiently separable
from the sale of the Company's products and can reasonably estimate the fair
value of that benefit. The Company records the cooperative marketing credit
earned by the reseller at the date the related revenue is recognized based on an
estimate of claims to be made. To date, actual claims have not differed
materially from management's estimates.
Research and Development Costs
Research and development costs are expensed as incurred, except for costs of
internally developed or externally purchased software that qualify for
capitalization. Development costs for software to be sold that are incurred
subsequent to the establishment of technological feasibility, but prior to the
general release of the product, are capitalized. Upon general release, these
costs are amortized using the straight-line method over the expected life of the
related products, generally 12 to 36 months. The straight-line method generally
results in approximately the same amount of expense as that calculated using the
ratio that current period gross product revenues bear to total anticipated gross
product revenues. The Company evaluates the net realizable value of capitalized
software at each balance sheet date, considering a number of business and
economic factors. Unamortized capitalized software development costs were $2.0
million, $0.8 million and $0.1 million at December 31, 2005, 2004 and 2003,
respectively.
Income taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No. 109 is an
asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Computation of Net Income (Loss) Per Common Share
Net income (loss) per common share is presented for both basic earnings per
share ("Basic EPS") and diluted earnings per share ("Diluted EPS"). Basic EPS is
based upon the weighted-average number of common shares outstanding during the
period, excluding unvested restricted stock held by employees. Diluted EPS is
based upon the weighted-average number of common and potential common shares
outstanding during the period. Potential common shares result from the assumed
exercise of outstanding stock options and warrants as well as unvested
restricted stock, the proceeds of which are then assumed to have been used to
repurchase outstanding common stock using the treasury stock method. For periods
that the Company reports a net loss, all potential common shares are considered
anti-dilutive and are excluded from calculations of diluted net loss per common
share. For periods when the Company reports net income, only potential common
shares with purchase prices in excess of the Company's average common stock fair
value for the related period are considered anti-dilutive and are excluded from
calculations of diluted net income per common share (see Note O).
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income
(loss), which includes foreign currency translation adjustments and unrealized
gains and losses on certain investments. For the purposes of comprehensive
income disclosures, the Company does not record tax provisions or benefits for
the net changes in the foreign currency translation adjustment, as the Company
intends to permanently reinvest undistributed earnings in its foreign
subsidiaries. Accumulated other comprehensive income at December 31, 2005 and
2004 is comprised of cumulative translation adjustments of $1.2 million and $4.8
million, respectively and net unrealized gains (losses) on debt securities of
($0.1) million and ($0.2) million, respectively.
56
Accounting for Stock-Based Compensation
The Company has several stock-based employee compensation plans, which are
described more fully in Note J. The Company accounts for stock-based awards to
employees using the intrinsic value method as prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no compensation expense is
recorded for options issued to employees in fixed amounts and with fixed
exercise prices at least equal to the fair market value of the Company's common
stock at the date of grant. When the exercise price of stock options granted to
employees is less than the fair market value of common stock at the date of
grant, the Company records that difference multiplied by the number of shares
under option as deferred compensation, which is then amortized over the vesting
period of the options. Additionally, deferred compensation is recorded for
restricted stock granted to employees based on the fair market value of the
Company's stock at date of grant and is amortized over the period in which the
restrictions lapse. The Company reverses deferred compensation associated with
unvested options issued at below fair market value as well as unvested
restricted stock upon the cancellation of such options or shares for terminated
employees. The Company provides the disclosures required by SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure". All
stock-based awards to non-employees are accounted for at their fair value in
accordance with SFAS No. 123.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee awards. See Note J for additional disclosure.
For the Year Ended December 31,
-------------------------------------
(in thousands, except per share data)
-------------------------------------
2005 2004 2003
---------- --------- ---------
Net income, as reported $33,980 $71,701 $40,889
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effect 2,447 1,448 181
Deduct: Total stock-based employee
compensation expense determined under
the fair value-based method for all
awards, net of related tax effect (27,219) (15,881) (11,876)
---------- --------- ---------
Pro forma net income $9,208 $57,268 $29,194
========== ========= =========
Net income per common share:
Basic-as reported $0.90 $2.21 $1.40
Basic-pro forma $0.24 $1.76 $1.00
Diluted-as reported $0.86 $2.05 $1.25
Diluted-pro forma $0.23 $1.65 $0.89
On December 16, 2004, the Financial Standards Accounting Board ("FASB") issued
SFAS No. 123(Revised), Share-Based Payment ("SFAS No. 123(R)"). The Statement
requires that stock compensation expense for awards of equity instruments to
employees be recognized in financial statements based on the grant-date fair
value of those awards (with limited exceptions). The Company will be required to
adopt SFAS No. 123(R) beginning January 1, 2006. See the Recent Accounting
Pronouncements below for further disclosure on the Company's adoption of SFAS
No. 123(R).
In anticipation of the adoption of SFAS No. 123(R), on October 26, 2005, the
Company's Board of Directors approved a partial acceleration of the vesting of
all outstanding options to purchase the Company's common stock that were granted
on February 17, 2005. Vesting was accelerated for options to purchase 371,587
shares of the Company's common stock, par value $0.01 per share, with an
exercise price of $65.81 per share, including options to purchase 157,624 shares
of the Company's common stock held by the Company's executive officers. The
decision to accelerate vesting of these options was made primarily to reduce the
compensation cost related to these out-of-the money options in the Company's
future statements of operations upon the effectiveness of SFAS No. 123(R). It is
57
estimated that the maximum future compensation expense that would have been
recorded in the Company's statements of operations had the vesting of these
options not been accelerated is approximately $4.4 million. Excluding the cost
related to the acceleration of these options, the total impact on net income
from stock-based employee compensation expense determined under fair value-based
method for all awards, net of related tax effect, for the year ended
December 31, 2005 would be approximately $20.4 million.
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs", an amendment
of Accounting Research Bulletin No. 43, which is the result of the FASB's
efforts to converge U.S. accounting standards for inventories with International
Accounting Standards. SFAS No. 151 requires idle facility expenses, freight,
handling costs and wasted material (spoilage) costs to be recognized as
current-period charges. It also requires that the allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 will be effective for inventory costs
incurred during fiscal years beginning after June 15, 2005 (i.e., for Avid,
beginning January 1, 2006). The Company is currently evaluating the impact of
SFAS No. 151 on the Company's consolidated financial statements. The adoption of
this standard is not expected to have a material impact on the Company's
financial position or results of operations.
On December 16, 2004, the FASB released SFAS No. 123(R). This new accounting
standard requires all forms of stock compensation, including stock options
issued to employees, to be reflected as an expense in the Company's financial
statements. On April 14, 2005, the SEC approved a rule that delayed the
effective date of SFAS No. 123(R) for public companies to annual, rather than
interim, periods that begin after June 15, 2005. SFAS No. 123(R) allows three
alternative methods of transitioning to the standard: modified prospective
application ("MPA"); modified retrospective application ("MRA") to all prior
periods; or MRA to only interim periods of the year of adoption. The Company
intends to use the MPA without restatement alternative and to apply the revised
standard beginning January 1, 2006. Under the modified prospective application,
all unvested awards that were previously included as part of the pro forma net
income disclosure and are outstanding on the effective date would be charged to
expense over the remaining vesting period, without any changes in measurement.
All new awards that are granted or modified after the effective date will be
expensed using the SFAS No. 123(R) measurement model. The adoption of the
revised standard will result in higher operating expenses and lower earnings
per share. We estimate that adoption will result in additional expense in 2006
of approximately $20 million, but this amount could vary based on a number of
factors including the volatility of our stock, interest rate changes or changes
to our equity compensation plans. See the above paragraph, Accounting for
Stock-Based Compensation, for the pro forma impact on net income and net income
per common share as if the Company had historically applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee awards.
On June 7, 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", a replacement of APB Opinion No. 20, "Accounting Changes" and
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements".
SFAS No. 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. Previously, most voluntary changes in accounting
principles required recognition in a cumulative effect adjustment within net
income of the period of the change. SFAS No. 154 requires retrospective
application to prior periods' financial statements, unless it is impracticable
to determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005; however, this standard does not change the
transition provisions of any existing accounting pronouncements. The Company
will determine the impact of this standard on its consolidated financial
statements when an accounting change or error correction occurs.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets", an amendment of APB Opinion No. 29, "Accounting for Nonmonetary
Transactions". Previously, APB Opinion No. 29 had required that the accounting
for an exchange of a productive asset for a similar productive asset or an
equivalent interest in the same or similar productive asset should be based on
the recorded amount of the asset relinquished. The amendments made by SFAS No.
153 are based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. Further, the
amendments eliminate the narrow exception for nonmonetary exchanges of similar
productive assets and replace it with a broader exception for exchanges of
nonmonetary assets that do not have commercial substance, in essence increasing
the number of exchanges that will be fair valued in the future. SFAS No. 153 was
effective in the third quarter of 2005. The provisions of SFAS No. 153 are
applied prospectively. The adoption of this standard did not have a material
impact on the Company's financial position or results of operations.
In March 2005, the FASB issued FASB Interpretation No. 47 ("FIN No. 47"),
"Accounting for Conditional Retirement Obligations--an interpretation of SFAS
No. 143". This interpretation clarifies the timing of when a liability should be
recognized for legal obligations associated with the retirement of a tangible
long-lived asset. In addition, the interpretation clarifies the treatment when
there is insufficient information to reasonably estimate the fair value of an
58
asset retirement obligation. FIN No. 47 is effective no later than the end of
fiscal years ending after December 31, 2005. Retrospective application for
interim financial information is permitted but is not required. Early adoption
is encouraged. The adoption of this standard is not expected to have a material
impact on the Company's financial position or results of operations.
In June 2005, the FASB issued Staff Position No. FAS 143-1, "Accounting for
Electronic Equipment Waste Obligations" ("FSP 143-1"), which provides guidance
on the accounting for obligations associated with the European Union ("EU")
Directive on Waste Electrical and Electronic Equipment (the "WEEE Directive").
FSP 143-1 provides guidance on how to account for the effects of the WEEE
Directive with respect to historical waste associated with products in the
market on or before August 13, 2005. FSP 143-1 is required to be applied to the
later of the first reporting period ending after June 8, 2005 or the date of the
adoption of the WEEE Directive into law by the applicable EU member country. The
Company is in the process of registering with the member countries, as
appropriate, and is still awaiting guidance from these countries with respect to
the compliance costs and obligations for historical waste. The Company will
continue to work with each country to obtain guidance and will accrue for
compliance costs when they are probable and reasonably estimable. The accruals
for these compliance costs may have a material impact on the Company's financial
position or results of operations when guidance is issued by each member
country.
On October 22, 2004, the President signed the American Jobs Creation Act of 2004
("the Act"). The Act creates a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85 percent
dividends-received deduction for certain dividends from controlled foreign
corporations. The Act also creates a deduction on a percentage of the lesser of
qualified production activities income or taxable income. Although these
deductions are subject to a number of limitations and significant uncertainty
remains as to how to interpret numerous provisions in the Act, the Company
believes that it has the information necessary to make an informed decision on
the impact of the Act. Based on the information available, the Company has
determined that its cash position in the U.S. is sufficient to fund anticipated
needs. The Company also believes that the repatriation of income earned abroad
would result in significant foreign withholding taxes that otherwise would not
have been incurred, as well as additional U.S. tax liabilities that may not be
sufficiently offset by foreign tax credits. Therefore, the Company does not
currently plan to repatriate any income earned abroad. The qualified production
activities deduction was not available to Avid in 2005 due to the fact that the
Company incurred a loss for U.S. tax purposes. The qualified production
activities deduction is not available to companies that incur a loss for the
taxable year.
C. MARKETABLE SECURITIES
The cost (amortized cost of debt instruments) and fair value of marketable
securities as of December 31, 2005 and 2004 are as follows (in thousands):
Gross
Unrealized
Gains Fair
Cost (Losses) Value
---------- ------------- ----------
2005
----
Government and government agency
obligations $22,134 $ - $22,134
Commercial Paper 7,540 - 7,540
Corporate obligations 10,312 (15) 10,297
Municipal obligations 19,634 - 19,634
Asset-backed securities 44,948 (77) 44,871
---------- ------------- ----------
$104,568 ($92) $104,476
========== ============= ==========
2004
----
Government and government agency
obligations $22,964 ($2) $22,962
Corporate obligations 31,906 (146) 31,760
Municipal obligations 16,403 (14) 16,389
Asset-backed securities 5,272 (22) 5,250
---------- ------------- ----------
$76,545 ($184) $76,361
========== ============= ==========
All federal, state and municipal obligations held at December 31, 2005 and 2004
mature within one year, with the exception of auction rate securities. As of
December 31, 2005 and 2004, municipal obligations include auction rate
securities of $19.6 million and $12.0 million, respectively. The Company's
investments in auction rate securities are recorded at cost, which approximates
fair value due to their variable interest rates. The interest rates generally
reset every 28 days. Despite the long-term nature of their stated contractual
maturities, the Company has the ability to quickly liquidate investments in
59
auction rate securities. All income generated from these investments has been
recorded as interest income. The Company calculates realized gains and losses on
a specific identification basis. Realized gains and losses from the sale of
marketable securities were immaterial for the years ended December 31, 2005,
2004 and 2003.
D. INVENTORIES
Inventories consist of the following (in thousands):
December 31,
------------------------
2005 2004
--------- ---------
Raw materials $26,878 $14,925
Work in process 13,040 3,622
Finished goods 56,927 35,399
--------- ---------
$96,845 $53,946
========= =========
Of the $42.9 million increase in inventory since December 31, 2004,
approximately $27.3 million relates to acquired Pinnacle inventory, of which
$4.8 million, $6.8 million and $15.7 million represents raw material, work in
process, and finish goods as of December 31, 2005, respectively. As of December
31, 2005 and 2004, the finished goods inventory also included inventory at
customer locations of $8.9 million and $9.0 million, respectively, associated
with product shipped to customers for which revenue had not yet been recognized.
E. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
December 31,
Depreciable ---------------------
Life 2005 2004
----------- -------- --------
Computer and video equipment and software 2 to 5 years $111,207 $92,862
Office equipment 3 years 3,850 6,872
Furniture and fixtures 3 years 12,209 7,101
Leasehold improvements 3 to 10 years 23,493 20,865
-------- --------
150,759 127,700
Less accumulated depreciation and amortization 112,196 98,608
-------- --------
$38,563 $29,092
======== ========
Depreciation and amortization expense related to property and equipment was
$16.8 million, $12.0 million and $10.9 million for the years ended December 31,
2005, 2004 and 2003, respectively. The Company wrote off fully depreciated
assets with gross values of $2.3 million, $6.2 million and $2.1 million in 2005,
2004 and 2003, respectively.
F. ACQUISITIONS
Pinnacle
On August 9, 2005, Avid completed the acquisition of California-based Pinnacle
Systems, Inc., 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. The
price used to value the Avid shares issued as partial consideration for Pinnacle
was $58.09 per share of Avid common stock, which represents the five-day average
closing price of the stock during the period beginning two days before and
ending two days after the merger announcement date of March 21, 2005. Avid also
incurred $6.5 million of transaction costs.
The acquisition of Pinnacle was made to allow Avid to expand its offerings
within the Professional Video market segment through the integration of
Pinnacle's broadcast and professional offerings, including the Deko(R) on-air
graphics system and the MediaStream(TM) playout server, into that segment and to
provide entry into a new Consumer Video segment by offering Pinnacle's consumer
products, including Pinnacle Studio(TM) and other products. The Company has
performed an allocation of the total purchase price of $441.4 million to the net
tangible and intangible assets of Pinnacle based on their fair values as of the
consummation of the acquisition. The determination of these fair values included
60
Avid management's consideration of a valuation of Pinnacle's intangible assets
prepared by an independent valuation specialist. The valuation method used to
determine the intangible asset values was the income approach.
The income approach presumes that the value of an asset can be estimated by the
net economic benefit, usually the cash flows discounted to present value, to be
received over the life of the asset. The income approach typically uses a
projection of revenues and expenses specifically attributed to the intangible
assets to calculate a potential income stream which is then discounted using a
rate of return that accounts for both the time value of money and risk factors.
This approach was used to value Pinnacle's developed technology, in-process
research and development ("R&D") and customer relationships.
A variation of the income approach, the relief-from-royalty method, was used to
value Pinnacle's trade names. The relief-from-royalty method uses a projection
of revenues specifically attributed to the intangible assets to calculate an
estimated royalty savings that would accrue to an owner of the intangible assets
that would otherwise have to be paid as royalty to a third party. The resulting
royalty savings stream is then discounted using a rate of return that accounts
for the time value of money and risk factors. In the valuation of Pinnacle's
trade names, a royalty rate of 1.0% - 1.5% was used to determine the royalty
savings directly attributable to the trade names.
The weighed-average discount rate (or rate of return) used to determine the
value of Pinnacle's intangible assets was 16% and the effective tax rate used
was 35%.
The following table summarizes the allocation of the purchase price to the
estimated fair value of the assets acquired and liabilities assumed at the date
of acquisition. This allocation was originally done on a preliminary basis in
the third quarter of 2005 (the quarter in which Pinnacle was acquired). During
the fourth quarter of 2005, the Company continued its analysis of the fair
values of certain assets and liabilities, in particular inventories, deferred
tax assets and liabilities, pre-acquisition commitments made to customers and
accruals for facilities closures and employees terminations, and recorded
adjustments to these estimates with a corresponding increase in goodwill of $1.3
million.
(in thousands)
Cash and marketable securities $120,164
Accounts receivable, net 9,312
Inventories 18,699
Other current assets 7,859
Property and equipment and other long-term assets 12,925
Identifiable intangible assets:
Customer relationships 34,400
Trade names 15,200
Developed technology 41,200
In-process research and development 32,300
Goodwill 226,480
-------------
Total assets acquired 518,539
Accounts payable (11,069)
Accrued expenses and other current liabilities (46,052)
Deferred revenue and deposits (11,493)
Long-term deferred tax liabilities, net (8,542)
-------------
Total liabilities assumed (77,156)
-------------
Net assets acquired $441,383
=============
The identifiable intangible assets, with the exception of the in-process
research and development ("R&D"), are being amortized over their estimated
useful lives of six and one-half years for customer relationships, seven years
for the trade names and two to three years for the developed technology. The
weighted average amortization period for these intangible assets in total is
approximately five years. These intangible assets are being amortized using the
straight-line method, with the exception of developed technology. Developed
technology is being amortized on a product-by-product basis over the greater of
the amount calculated using the ratio of current quarter revenues to the total
of current quarter and anticipated future revenues over the estimated useful
lives of two to three years, or the straight-line method over each product's
remaining respective useful life. Amortization expense for these intangibles
totaled $12.6 million for the year ended December 31, 2005 and accumulated
amortization was $12.6 million at December 31, 2005.
61
The allocation of $32.3 million to in-process R&D was determined through
management's consideration of a valuation prepared by an independent valuation
specialist. This in-process R&D represents product development efforts that were
underway at Pinnacle at the time of acquisition, for which technological
feasibility had not yet been established. Technological feasibility is
established when either of the following criteria is met: 1) the detail program
design has been completed, documented and traced to product specifications and
its high-risk development issues have been resolved; or 2) a working model of
the product has been finished and determined to be complete and consistent with
the product design. Upon the acquisition, Pinnacle did not have a completed
product design or working model for the in-process technology, and the Company
believes that there is no future alternative use for such technology beyond the
stated purpose of the specific R&D project; therefore the in-process R&D of
$32.3 million was expensed during the year ended December 31, 2005.
The key assumptions within the valuation process consisted of the expected
completion dates for the in-process projects, estimated costs to complete the
projects, revenue and expense projections assuming future release, and a
risk-adjusted discount rate. The discount rate considers risks such as delays to
bring the products to market and competitive pressures. A discount rate of 17%
for in-process R&D was used in the Pinnacle valuation.
The in-process R&D charge for the Pinnacle acquisition related primarily to the
Pinnacle's on-air and home-editing software products. Future versions of Deko
and Thunder, Pinnacle's on-air products, accounted for approximately $15.9
million of the charge. These products had an estimated cost to complete of $1.4
million at the acquisition date and are scheduled for release in 2006. Studio,
Pinnacle's home-editing software, represented approximately $10.7 million of the
charge and carried an estimated cost to complete of $2.1 million at the
acquisition date. Studio 10 was released in the third quarter of 2005 and a
subsequent release is planned for 2006.
The goodwill of $226.5 million resulting from the purchase price allocation
reflects the value of the underlying enterprise, as well as planned synergies
that Avid expects to realize, including incremental sales of legacy Avid
Professional Video products. Of the total $226.5 million of goodwill, $90.6
million has been assigned to the Company's Professional Video segment and $135.9
million has been assigned to the newly formed Consumer Video segment. This
goodwill will not be amortized, in accordance with the requirements of SFAS No.
142, "Goodwill and Other Intangible Assets". This goodwill is not deductible for
tax purposes.
Wizoo
In August 2005, Avid acquired all the outstanding shares of Wizoo Sound Design
GmbH ("Wizoo"), a Germany-based provider of virtual instruments for music
producers and sound designers, for cash of euro 4 million ($4.9 million) plus
transaction costs of $0.2 million. The purchase price was allocated as follows:
($0.6 million) to net liabilities assumed, $1.2 million to identifiable
intangible assets, $0.1 million to in-process R&D, and the remaining $4.4
million to goodwill. The identifiable intangible assets, which include developed
technology of $0.6 million and license agreements of $0.6 million, are being
amortized on a straight-line basis over their estimated useful lives of two to
four years and three to four years, respectively. Amortization expense for these
intangibles totaled $0.2 million for the year ended December 31, 2005 and
accumulated amortization was $0.2 million at December 31, 2005. The goodwill of
$4.4 million, which reflects the value of the assembled workforce and the
synergies the Company hopes to realize by integrating the Wizoo technology with
its other products, is reported within the Company's Audio segment and is not
deductible for tax purposes.
As part of the purchase agreement, Avid may be required to make additional
payments to the former shareholders of Wizoo of up to euro 1.0 million ($1.2
million), contingent upon Wizoo achieving certain engineering milestones through
January 2008. These payments, if required, will be recorded as additional
purchase consideration, allocated to goodwill. As of December 31, 2005, none of
the engineering milestones have been met; therefore, no amount has been recorded
as additional purchase price.
M-Audio
In August 2004, Avid completed the acquisition of Midiman, Inc. d/b/a M-Audio
("M-Audio"), a leading provider of digital audio and MIDI (Musical Instrument
Digital Interface) solutions for musicians and audio professionals. Avid paid
cash of $79.6 million, net of cash acquired, and issued stock and options with a
fair value of $96.5 million. Avid also incurred $3.3 million of transaction
costs. The total purchase price was allocated as follows: $13.5 million to net
assets acquired, $5.5 million to deferred compensation, $38.4 million to
identifiable intangible assets and the remaining $122.0 million to goodwill.
As part of the purchase agreement, Avid agreed to make additional payments to
the former shareholders and option holders of M-Audio of up to $45.0 million
through the issuance of additional Avid shares or options, contingent upon the
operating results of M-Audio through December 31, 2005. Any such payments would
have been recorded as additional purchase price allocated to goodwill. Based of
62
M-Audio's operating results through December 31, 2005, the Company determined
that no such additional shares or options were due and, thus, no amount has been
recorded as additional purchase price.
The identifiable intangible assets are being amortized over their estimated
useful lives of twelve years for customer relationships, six years for the trade
name, four years for the developed technology and two years for the non-compete
covenant. The twelve year life for customer relationships, although longer than
that used for similar intangible assets for other acquisitions by Avid, is
considered reasonable due to the similarities in their business to Avid's
Digidesign division, which has enjoyed long-term relationships with its
customers. Amortization expense totaled $4.8 million and $1.8 million for the
years ended December 31, 2005 and 2004, respectively, and accumulated
amortization of these intangible assets was $6.6 million at December 31, 2005.
Also during the year ended December 31, 2005, the $122.0 million of goodwill was
reduced by $1.2 million to $120.8 million due to the resolution of tax
contingencies.
Avid Nordic AB
In September 2004, the Company acquired Avid Nordic AB, a Sweden-based exclusive
reseller of Avid products operating in the Nordic and Benelux regions of Europe,
for cash, net of cash acquired, of euro 6.1 million ($7.4 million) plus
transaction costs of $0.3 million. The purchase price was allocated as follows:
$1.0 million to net assets acquired, $4.7 million to an identifiable intangible
asset and the remaining $2.0 million to goodwill.
The identifiable intangible asset represents customer relationships developed in
the region by Avid Nordic AB. This asset will be amortized over its estimated
useful life of five years. Amortization expense totaled $0.9 million and $0.3
million for the years ended December 31, 2005 and 2004, respectively, and
accumulated amortization of these intangible assets was $1.2 million at December
31, 2005. During the year ended December 31, 2004, the goodwill was increased by
$0.4 million to $2.4 million due to a reduction in the estimated fair value of
inventory and other current assets acquired from Avid Nordic AB.
As part of the purchase agreement, Avid was required to make additional payments
to the former shareholders of Avid Nordic AB of up to euro 1.3 million
contingent upon the operating results of Avid Nordic AB through August 31, 2005,
with the payments to be recorded as additional purchase consideration, allocated
to goodwill. During 2005, the Company paid approximately euro 1.1 million
($1.4 million) of additional purchase consideration and recorded a corresponding
increase to goodwill.
NXN Software GmbH
In January 2004, Avid acquired Munich, Germany-based NXN Software GmbH ("NXN"),
a leading provider of asset and production management systems specifically
targeted for the entertainment and computer graphics industries, for cash of
euro 35 million ($43.7 million) less cash acquired of $0.8 million. The total
purchase price was allocated as follows: ($1.0 million) to net liabilities
assumed, $7.2 million to identifiable intangible assets and the remaining $38.8
million to goodwill.
The identifiable intangible assets included completed technology valued at $4.3
million, customer relationships valued at $2.1 million and a trade name valued
at $0.8 million, which are being amortized over their estimated useful lives of
four to six years, three to six years and six years, respectively. In December
2004, the Company reviewed the identifiable intangible assets acquired in the
NXN transaction and found the customer relationships intangible assets and the
trade name to be impaired. The Company recalculated the fair values of these
intangible assets based on revised expected future cash flows, reflecting
primarily contract renegotiations, and recorded a charge of $1.2 million in
December 2004 to write them down to their revised fair values. Amortization
expense relating to these intangibles was $1.0 million and $1.2 million for the
years December 31, 2005 and 2004, respectively, and accumulated amortization of
these assets was $2.0 million at December 31, 2005.
During the year ended December 31, 2004, the $38.8 million of goodwill was
reduced by $0.7 million to $38.1 million due to finalizing the estimated fair
value of deferred revenue acquired from NXN.
Other Acquisitions
The Company also recorded intangible assets associated with acquiring the
following businesses: Bomb Factory Digital, Inc. in 2003; Rocket Network, Inc.
in 2003; iKnowledge, Inc. in 2002; iNews LLC in 2001; and The Motion Factory,
Inc. in 2000. In connection with these acquisitions, the Company allocated $5.8
million to identifiable intangible assets for completed technologies, which have
been or are being amortized over periods of three to five years. Included in the
operating results for 2005, 2004 and 2003 is amortization of these intangible
assets of $0.7 million, $0.8 million and $1.3 million, respectively. In
connection with the Bomb Factory Digital acquisition, the Company also recorded
goodwill of $2.2 million which was allocated to the Company's Audio segment.
63
Pro Forma Financial Information for Acquisitions (Unaudited)
The results of operations of Pinnacle, M-Audio, Avid Nordic AB and NXN have been
included in the results of operations of the Company since the respective date
of each acquisition. The following unaudited pro forma financial information
presents the results of operations for the years ended December 31, 2005 and
2004 as if the acquisitions of Pinnacle, M-Audio and NXN had occurred as of
January 1, 2004. The effect on the Company's pro forma results of operations
assuming the Wizoo and Avid Nordic AB acquisitions had occurred at the beginning
of 2004 is not included as it would not differ materially from reported results.
The pro forma financial information for the combined entities has been prepared
for comparative purposes only and is not indicative of what actual results would
have been if the acquisitions had taken place at the beginning of fiscal 2004,
or of future results.
Years Ended
December 31,
--------------------
2005 2004
--------- ---------
(In thousands, except per share data)
Net revenues $903,453 $936,211
Net income (loss) $19,098 ($15,894)
Net income (loss) per share:
Basic $0.46 ($0.39)
Diluted $0.44 ($0.39)
Included in the pro forma net income reported above for the year ended December
31, 2004 is a charge of $32.3 million for in-process research and development
related to the Pinnacle acquisition.
Amortizing Identifiable Intangible Assets
As a result of all of the acquisitions described above, amortizing identifiable
intangible assets consisted of the following (in thousands) at December 31:
2005 2004
------------------------------ ----------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
------------------------------ ----------------------------
Completed technologies $52,698 ($14,606) $38,092 $12,113 ($3,405) $8,708
Customer relationships 68,200 (6,755) 61,445 33,800 (1,315) 32,485
Trade name 20,245 (1,993) 18,252 5,046 (337) 4,709
Non-compete covenant 1,200 (818) 382 1,200 (218) 982
License agreements 560 (55) 505 - - -
------------------------------ ----------------------------
$142,903 ($24,227) $118,676 $52,159 ($5,275) $46,884
============================== ============================
Amortization expense related to all intangible assets in the aggregate was $20.2
million, $4.0 million and $1.3 million for the years ended December 31, 2005,
2004 and 2003, respectively. The Company expects amortization of these
intangible assets to be approximately $29 million in 2006, $26 million in 2007,
$19 million in 2008, $12 million in 2009 and $10 million in 2010.
G. INCOME TAXES
Income before income taxes and the components of the income tax provision
(benefit) for the years ended December 31, 2005, 2004 and 2003 are as follows
(in thousands):
2005 2004 2003
--------- --------- ---------
Income before income taxes:
United States $36,019 $55,811 $27,105
Foreign 6,316 14,278 14,334
--------- --------- ---------
Total income before income taxes $42,335 $70,089 $41,439
========= ========= =========
64
Provision for (benefit from) income taxes:
Current tax expense (benefit):
Federal $705 $630 $250
State 225 125 200
Foreign benefit of net operating losses (2,979) (1,541) -
Other foreign 10,630 488 381
--------- --------- ---------
Total current tax expense (benefit) 8,581 (298) 831
--------- --------- ---------
Deferred tax expense (benefit):
Federal 1,820 - -
State - - -
Foreign benefit of net operating losses - (2,269) -
Other foreign (2,046) 955 (281)
--------- --------- ---------
Total deferred tax benefit (226) (1,314) (281)
--------- --------- ---------
Total provision for (benefit from) income taxes $8,355 ($1,612) $550
========= ========= =========
Net cash payments for (refunds of) income taxes in 2005, 2004 and 2003 were
approximately $3.1 million, ($1.3 million) and $0.2 million, respectively.
The cumulative amount of undistributed earnings of subsidiaries, which is
intended to be permanently reinvested and for which U.S. income taxes have not
been provided, totaled approximately $76.8 million at December 31, 2005.
Net deferred tax assets (liabilities) are comprised of the following (in
thousands):
December 31,
------------------------
2005 2004
----------- ----------
Deferred tax assets:
Tax credit and net operating loss carryforwards $129,248 $86,918
Allowances for bad debts 781 614
Difference in accounting for:
Revenue 7,208 6,186
Costs and expenses 33,183 17,793
Inventories 5,179 3,701
Acquired intangible assets 43,610 49,355
Other 630 74
----------- ----------
Gross deferred tax assets 219,839 164,641
Valuation allowance (182,121) (140,785)
----------- ----------
Deferred tax assets after valuation allowance 37,718 23,856
----------- ----------
Deferred tax liabilities:
Difference in accounting for:
Revenue (589) (414)
Costs and expenses (4,078) (2,673)
Inventories (246) (340)
Acquired intangible assets (38,557) (14,508)
Other (3,092) (2,624)
----------- ----------
Gross deferred tax liabilities (46,562) (20,559)
----------- ----------
Net deferred tax assets (liabilities) ($8,844) $3,297
=========== ==========
Deferred tax assets and liabilities reflect the net tax effects of the tax
credit and net operating loss carryforwards and the temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and for income tax purposes. The ultimate realization of the net
deferred tax assets is dependent upon the generation of sufficient future
taxable income in the applicable tax jurisdictions.
For U.S. federal income tax purposes at December 31, 2005, the Company has tax
credit carryforwards of approximately $32.1 million, which will expire between
2006 and 2025, and net operating loss carryforwards of approximately $246.1
65
million, which will expire between 2006 and 2025. These amounts include $3.9
million in Pinnacle tax credit carryforwards and $100.4 million in Pinnacle net
operating loss carryforwards, both of which are subject to limitation under
Section 382 change of ownership rules of the U.S. Internal Revenue Code of 1986,
as amended. Based on the level of the deferred tax assets as of December 31,
2005, the level of historical U.S. taxable losses after deductions for stock
compensation and the future tax deductions anticipated related to outstanding
stock options, management has determined that the uncertainty regarding the
realization of these assets warrants a full valuation allowance at December 31,
2005.
The Company's assessment of the valuation allowance on the U.S. deferred tax
assets could change in the future based upon its levels of pre-tax income and
other tax related adjustments. Removal of the valuation allowance in whole or in
part would result in a non-cash reduction in income tax expense during the
period of removal. In addition, because a portion of the valuation allowance as
of December 31, 2005 was established to reserve against certain deferred tax
assets resulting from the exercise of employee stock options, in accordance with
SFAS No. 109 and SFAS No. 123(R), removal of the valuation allowance related to
these assets would occur upon utilization of these deferred tax assets to reduce
taxes payable and would result in a credit to additional paid-in capital within
stockholders' equity rather than the provision for income taxes. If the
valuation allowance of $182.1 million as of December 31, 2005 were to be removed
in its entirety, a $66.8 million non-cash reduction in income tax expense,
a $49.2 million credit to goodwill related to Pinnacle net operating loss and
tax credit carryforwards and temporary differences, and a $66.1 million credit
to additional paid-in capital would be recorded in the period of removal subject
to, in the latter case, actual utilization as described above.
The Company had net operating loss carryforwards relating to the Irish
manufacturing branch of approximately $18.8 million, which it utilized in 2005.
Until 2004, due to the uncertainty regarding the realization of this asset, the
Company had established a valuation allowance related to the entire
carryforwards amount. At December 31, 2004, since the Irish operations had
generated sufficient profits in recent years and future profitability was
anticipated, the Company determined that it was more likely than not that it
would realize the benefit related to the net operating loss carryforward.
Accordingly, at December 31, 2004, the Company removed the $2.1 million
valuation allowance against this deferred tax asset.
A reconciliation of the Company's income tax provision (benefit) to the
statutory U.S. federal tax rate follows:
2005 2004 2003
-------- -------- --------
Statutory rate 35% 35% 35%
Tax credits (2) (3) (3)
Foreign operations (5) (6) (8)
State taxes, net of federal benefit 3 2 2
Other 1 - -
-------- -------- --------
Effective tax rate before valuation allowance
and other items 32 28 26
Acquired net operating loss carryforwards 4 - -
In process research and development 27 - -
Increase (decrease) in valuation
allowance (43) (30) (25)
-------- -------- --------
Effective tax rate 20% (2)% 1%
======== ======== ========
66
H. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases its office space and certain equipment under non-cancelable
operating leases. The future minimum lease commitments under these
non-cancelable leases at December 31, 2005 are as follows (in thousands):
Year
---------
2006 $25,547
2007 20,989
2008 18,623
2009 15,025
2010 5,890
Thereafter 6,022
--------
Total $92,096
========
The total of future minimum rentals to be received by the Company under
non-cancelable subleases related to the above leases is $7.6 million as of
December 31, 2005. Such sublease income amounts are not reflected in the
schedule of minimum lease payments above. Included in the operating lease
commitments above are obligations under leases for which the Company has vacated
the underlying facilities as part of various restructuring plans. These leases
expire at various dates through 2011 and represent an aggregate obligation of
$17.6 million through 2011. The Company has a restructuring accrual of $7.3
million at December 31, 2005 which represents the difference between this
aggregate future obligation and expected future sublease income under actual or
estimated potential sublease agreements, on a net present value basis. See
Note L.
The Company's two leases for corporate office space in Tewksbury, Massachusetts,
expiring in June 2010, contain renewal options to extend the respective terms of
each lease for an additional 60 months. The Company has other leases for office
space that have termination options, which if exercised by the Company, would
result in a penalty of approximately $0.3 million in the aggregate. The future
minimum lease commitments above include the Company's obligations through the
original lease terms and do not include these penalties.
The Company 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, as of December
31, 2005, be eligible to draw against this letter of credit to a maximum of $3.5
million, subject to an annual reduction of approximately $0.8 million but not
below $2.0 million. The letter of credit will remain in effect at $2.0 million
throughout the remaining lease period, which extends to September 2009. As of
December 31, 2005, the Company was not in default of this lease.
The accompanying consolidated results of operations reflect rent expense on a
straight-line basis over the term of the leases. Total rent expense under
operating leases, net of operating subleases, was approximately $19.6 million,
$16.7 million and $14.2 million for the years ended December 31, 2005, 2004 and
2003, respectively. Total rent received from the Company's operating subleases
was approximately $3.5 million, $3.6 million and $3.2 million for the years
ended December 31, 2005, 2004 and 2003, respectively.
Purchase Commitments
As of December 31, 2005, the Company has entered into non-cancelable purchase
commitments for certain inventory components used in its normal operations. The
purchase commitments covered by these agreements are generally less than one
year and aggregate approximately $46.5 million.
Transactions with Recourse
The Company, through a third party, provides lease financing options to its
customers, including primarily end-users and occasionally distributors. During
the terms of these leases, which are generally three years, the Company remains
liable for any unpaid principal balance upon default by the end-user, but such
liability is limited in the aggregate based on a percentage of initial amounts
funded or, in certain cases, amounts of unpaid balances. At December 31, 2005
and 2004, Avid's maximum recourse exposure totaled approximately $13.0 million
and $17.2 million, respectively. The Company records revenue from these
transactions upon the shipment of products, provided that all other revenue
recognition criteria are met. Because the Company has been providing these
financing options to its customers for many years, the Company has a substantial
history of collecting under these arrangements without providing refunds or
concessions to the end user or financing party. To date, the payment default
rate has consistently been between 2% and 4% per year of the original funded
67
amount. This low default rate results from the diligence of the third party
leasing company in screening applicants and in collecting amounts due, and also
because Avid actively monitors its exposures under the financing program and
participates in the approval process for any lessees outside of agreed-upon
credit-worthiness metrics. The Company maintains a reserve for estimated losses
under this recourse lease program based on these historical default rates.
Contingencies
In April 2005, the Company was notified by the Korean Federal Trade Commission
("KFTC") that a former reseller, Neat Information Telecommunication, Inc.
("Neat"), had filed a petition against a subsidiary, Avid Technology Worldwide,
Inc., alleging unfair trade practices. On August 11, 2005, the KFTC issued a
decision in favor of Avid regarding the complaint filed by Neat. However, Neat
filed a second petition with the KFTC on October 17, 2005 alleging the same
unfair trade practices as those set forth in the former KFTC petition. On
January 13, 2006, Avid filed its response to the second KFTC petition denying
Neat's allegations. On February 16, 2006, the KFTC reaffirmed its earlier
decision in favor of Avid and concluded its review of the case. In addition, on
October 14, 2005, Neat filed a civil lawsuit in Seoul Central District Court
against Avid Technology Worldwide, Inc. alleging unfair trade practices. In the
civil action, Neat is seeking approximately $1.7 million in damages, plus
interest and attorneys fees. On November 30, 2005, the Company filed its answer
to the complaint denying Neat's allegations. Avid believes that Neat's claims
are without merit and intends to vigorously defend the claim in these actions.
Avid cannot predict the outcome of these actions at this time and, accordingly,
no costs have been accrued for any possible loss contingency.
In September 2003, Pinnacle Systems, Inc., which Avid recently acquired and is
now a wholly-owned subsidiary, was named as a defendant in a civil lawsuit filed
in the Superior Court of California, Alameda County. The complaint was filed by
YouCre8, a/k/a DVDCre8, Inc., a software company whose software was distributed
by Dazzle Multimedia, Inc. ("Dazzle"). The complaint alleged that in connection
with Pinnacle's acquisition of certain assets of Dazzle, Pinnacle tortiously
interfered with DVDCre8's relationship with Dazzle and others, engaged in acts
to restrain competition in the DVD software market and distributed false and
misleading statements which caused harm to DVDCre8. Dazzle and its parent
company, SCM Microsystems, Inc. ("SCM"), were also named as defendants in this
matter. On December 1, 2005, Pinnacle entered into a settlement agreement with
DVDCre8 whereby each party issued a general release of all claims relating to
the allegations made in this lawsuit. In consideration of the settlement, the
Company agreed to make a payment to DVDCre8 of $570,000, which was paid on
December 8, 2005. On December 5, Pinnacle filed an application for determination
of a good faith settlement with the Superior Court and the Court granted this
application on December 9, 2005. On December 16, 2005, DVDCre8 filed notice with
the Superior Court dismissing all claims alleged against Pinnacle Systems in
this proceeding. Also on December 9, 2005, DVDCre8, SCM and Dazzle entered into
a settlement agreement regarding claims made against SCM and Dazzle in this
lawsuit and Pinnacle, SCM and Dazzle each agreed to waive any indemnity claims
that it may have against any of the other defendants in the lawsuit. Avid
considers this matter settled and, accordingly, no amounts are accrued as of
December 31, 2005 which are related to this matter. All amounts paid to settle
this litigation are included as part of the purchase price allocation for the
Pinnacle acquisition which took place on August 9, 2005.
Avid receives inquiries from time to time with regard to possible patent
infringement claims. If any infringement is determined to exist, the Company may
seek licenses or settlements. In addition, as a normal incidence of the nature
of the Company's business, various claims, charges and litigation have been
asserted or commenced against the Company arising from or related to contractual
or employee relations, intellectual property rights or product performance.
Management does not believe these claims will have a material adverse effect on
the financial position or results of operations of the Company.
From time to time, the Company provides indemnification provisions in agreements
with customers covering potential claims by third parties that Avid products
infringe their intellectual property rights. Pursuant to these indemnification
provisions, the Company agrees to indemnify customers for losses that they
suffer or incur in connection with any valid U.S. patent or copyright
infringement claim brought by a third party with respect to Avid products. These
indemnification provisions generally offer perpetual coverage for infringement
claims based upon the products covered by the agreement. The maximum potential
amount of future payments the Company could be required to make under these
indemnification provisions is theoretically unlimited; however, to date, the
Company has not received any claims under these indemnification provisions. As a
result, the Company believes the estimated fair value of these indemnification
provisions is minimal.
As permitted under Delaware law, Avid has agreements whereby the Company
indemnifies its officers and directors for certain events or occurrences while
the officer or director is or was serving at Avid's request in such capacity.
The term of the indemnification period is for the officer's or director's
lifetime. The maximum potential amount of future payments the Company could be
required to make under these indemnification agreements is unlimited; however,
Avid 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
68
this insurance policy coverage and Avid's related payment experience to date,
the Company believes the estimated fair value of these indemnification
agreements is minimal.
Avid provides warranty on hardware sold through its Professional Video segment
which generally mirrors the manufacturers' warranties. The Company charges the
related material, labor and freight expense to cost of revenues in the period
incurred. With respect to the Audio and Consumer Video segments, Avid provides
warranties on externally sourced and internally developed hardware and records
an accrual for the related liability based on historical trends and actual
material and labor costs. 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 product warranty accrual
account for the years ended December 31, 2005 and 2004 (in thousands):
Accrual balance at December 31, 2003 $1,355
Accruals for product warranties 3,605
Cost of warranty claims (2,699)
---------
Accrual balance at December 31, 2004 2,261
Acquired product warranty liability 3,510
Accruals for product warranties 4,906
Cost of warranty claims (4,487)
---------
Accrual balance at December 31, 2005 $6,190
=========
I. CAPITAL STOCK
Authorized Capital Stock
In July 2005, the stockholders of Avid approved an amendment to the Third
Amended and Restated Certificate of Incorporation of the Company to increase the
total number of authorized shares of the Company's capital stock from 51,000,000
shares to 101,000,000 shares and increasing the number of authorized shares of
the Company's common stock from 50,000,000 shares to 100,000,000 shares.
Preferred Stock
The Company has authorized up to one million shares of preferred stock, $0.01
par value per share for issuance. Each series of preferred stock shall have such
rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights, redemption privileges and liquidation
preferences, as shall be determined by the Board of Directors.
Shareholder Rights Plan
In February 1996, the Board of Directors approved a Shareholder Rights Plan. The
rights were distributed in March 1996 as a dividend at the rate of one right for
each share of common stock outstanding. No value was assigned to these rights.
The rights were exercisable for the purchase of shares of a new series of $0.01
par value, junior participating preferred stock or to purchase a number of
shares of the Company's common stock which equaled the exercise price of the
right, $115, divided by one-half of the then-current market price, upon
occurrence of certain events, including the purchase of 20% or more of the
Company's common stock by a person or group of affiliated or associated persons.
The rights were redeemable by the Company for $0.01 each at any time prior to
the tenth day following a change in control and in certain other circumstances.
These rights expired on February 28, 2006.
Common Stock
In 2004, the Company granted 20,000 shares of restricted common stock to certain
employees under Company stock option and award plans. The shares vest annually
in 25% increments over a period of four years. Unvested restricted shares may
not be sold, transferred or assigned and are subject to forfeiture in the event
that an employee ceases to be employed by the Company.
69
The Company initially recorded, as a separate component of stockholders' equity,
deferred compensation of $1.1 million in 2004 with respect to the restricted
stock under this program. The deferred compensation amounts for the restricted
stock awards represent the fair value of the Company's common stock at the date
of the award less par value, which represents the purchase price paid by the
holders, and are recorded as compensation expense ratably as the shares vest.
For the years ended December 31, 2005, 2004 and 2003, $0.3 million, $0.1 million
and $0.2 million, respectively, was recorded as compensation expense related to
the 2004 and certain 2000 restricted stock arrangements.
The Company generally allows employees to satisfy any withholding tax obligation
under certain award plans by tendering to the Company a portion of the common
stock received under the award. During the year ended December 31, 2005, the
Company received approximately 1,588 shares of its common stock in exchange for
$0.1 million of employee withholding liabilities paid by the Company. During the
year ended December 31, 2004, the Company did not receive any shares to satisfy
tax withholding obligations. During the year ended December 31, 2003, the
Company received approximately 6,332 shares of its common stock in exchange for
$0.2 million in connection with these non-cash transactions.
Warrant
In connection with the acquisition of Softimage Inc., the Company issued to
Microsoft a ten-year warrant to purchase 1,155,235 shares of the Company's
common stock, valued at $26.2 million. The warrant became exercisable on August
3, 2000, at a price of $47.65 per share, and expires on August 3, 2008.
J. STOCK PLANS
Employee Stock Purchase Plans
The Company's 1996 Employee Stock Purchase Plan, as amended through May 25,
2003, authorizes the issuance of a maximum of 1,700,000 shares of common stock
in quarterly offerings to employees at a price equal to 95% of the closing price
on the applicable offering termination date. As of December 31, 2005, 327,750
shares remain available for issuance under this plan.
Stock Option and Award Plans
The Company has several stock-based compensation plans under which employees,
officers, directors and consultants may be granted stock awards or options to
purchase the Company's common stock generally at the fair market value on the
date of grant. Certain plans allow for options to be granted at below fair
market value under certain circumstances. Options become exercisable over
various periods, typically two to four years for employees and immediately to
four years for officers and directors. The options have a maximum term of ten
years. As of December 31, 2005, a maximum of 18,218,612 shares of common stock
have been authorized for issuance under the Company's stock-based compensation
plans, of which 2,853,058 shares remain available for future grants. Shares
available for future grants at December 31, 2005 include 2,694,858 shares that
can be issued as grants of restricted stock.
Information with respect to options granted under all stock option plans is as
follows:
2005 2004 2003
--------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Price Price Price
Per Per Per
Shares Share Shares Share Shares Share
---------- --------- ----------- --------- ----------- ---------
Options outstanding at January 1, 3,584,189 $24.19 4,233,477 $17.58 6,842,557 $14.46
Granted, at fair value 1,792,968 $51.47 869,786 $45.31 1,263,413 $25.43
Granted, below fair value - - 345,202 $9.21 - -
Exercised (984,114) $17.18 (1,749,768) $16.04 (3,614,122) $14.41
Canceled (172,869) $43.06 (114,508) $19.55 (258,371) $16.27
---------- ----------- -----------
Options outstanding at December 31, 4,220,174 $36.65 3,584,189 $24.19 4,233,477 $17.58
========== =========== ===========
Options exercisable at December 31, 2,084,975 $33.08 1,592,944 $18.74 1,943,057 $16.27
Options available for future grant
at December 31, 2,853,058 1,474,151 2,188,769
The below-fair-value options were granted in connection with the purchase of
M-Audio (see Note F).
70
The following table summarizes information about stock options outstanding at
December 31, 2005:
Options Outstanding Options Exercisable
- ------------------------------------------------------------ -----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ----------------- ------------ -------------- ------------ ----------- ------------
$0.01 to $14.13 861,003 5.77 $11.68 701,100 $12.04
$14.50 to $22.01 691,451 6.25 $21.11 442,928 $20.62
$23.01 to $40.95 1,004,226 8.95 $38.69 111,654 $30.37
$41.14 to $46.42 604,464 7.91 $42.82 211,550 $42.94
$46.96 to $65.42 348,767 8.22 $53.10 129,182 $52.32
$65.81 to $65.81 693,050 9.13 $65.81 486,141 $65.81
$66.07 to $66.75 17,213 6.82 $66.47 2,420 $66.07
------------ -----------
$0.01 to $66.75 4,220,174 7.67 $36.65 2,084,975 $33.08
============ ===========
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for the awards under these
plans consistent with the methodology prescribed under SFAS No. 123, the
Company's net income (loss) and earnings (loss) per share would have been
adjusted to the pro forma amounts shown in Note B - "Summary of Significant
Accounting Policies," as required under SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure."
Under SFAS No. 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions and results:
Stock Options Stock Purchase Plan
-------------------------- ------------------------
2005 2004 2003 2005(a) 2004 2003
-------------------------- ------------------------
Expected dividend yield 0.0% 0.0% 0.0% - 0.0% 0.0%
Risk-free interest rate 4.0% 2.2% 2.0% - 1.9% 1.1%
Expected volatility 51% 61% 69% - 38% 71%
Expected life (in years) 4.24 3.40 3.51 - 0.25 0.43
Fair value of options
granted at fair value $22.57 $19.66 $12.30 - $5.89 $7.97
Fair value of options
granted below fair value - $35.14 - - - -
(a) Based on the plan design, the Company is not required to assign fair value
to shares issued from the Stock Purchase Plan.
K. EMPLOYEE BENEFIT PLANS
Employee Benefit Plans
The Company has a defined contribution employee benefit plan under section
401(k) of the Internal Revenue Code covering substantially all U.S. employees.
The 401(k) plan allows employees to make contributions up to a specified
percentage of their compensation. The Company may, upon resolution by the Board
of Directors, make discretionary contributions to the plan. The Company's
contribution to the plan is 50% of up to the first 6% of an employee's salary
contributed to the plan by the employee. The Company's contributions to this
plan totaled $2.8 million, $2.4 million and $2.1 million in 2005, 2004 and 2003,
respectively.
71
In addition, the Company has various retirement and post-employment plans
covering certain international employees. Certain of the plans require the
Company to match employee contributions up to a specified percentage as defined
by the plans. The Company made related contributions of $1.6 million, $1.5
million and $1.1 million in 2005, 2004 and 2003, respectively.
Nonqualified Deferred Compensation Plan
The Board of Directors has approved a nonqualified deferred compensation plan
(the "Deferred Plan"). The Deferred Plan covers senior management and members of
the Board of Directors as approved by the Company's Compensation Committee. The
plan provides for a trust to which participants can contribute varying
percentages or amounts of eligible compensation for deferred payment. Payouts
are generally made upon termination of employment with the Company. The benefit
payable under the Deferred Plan represents an unfunded and unsecured contractual
obligation of the Company to pay the value of the deferred compensation in the
future, adjusted to reflect the trust's investment performance. The assets of
the trust, as well as the corresponding obligations, were approximately $1.4
million and $1.0 million as of December 31, 2005 and 2004, respectively, and
were recorded in other current assets and accrued compensation and benefits at
those dates.
L. RESTRUCTURING AND OTHER COSTS, NET
In December 2005, the Company implemented a restructuring program under which 20
employees worldwide were terminated and a portion of a leased facility in
Montreal, Canada was vacated. In connection with these actions, the Company
recorded charges of $0.8 million for employee terminations and $0.5 million for
continuing rent obligations on excess space vacated, net of potential sublease
income.
In September 2005, the Company recorded a restructuring charge of $2.0 million
in connection with a revised estimate for the lease obligation associated with a
facility that was vacated as part of a restructuring plan in 1999. The revision
was necessary due to one of the subtenants in the facility giving notice of
their intention to discontinue their sublease. The lease extends through
September 2010. This accrual was reduced by $0.2 million in the fourth quarter
of 2005 based on further analysis.
In connection with the August 2005 Pinnacle acquisition, the Company recorded
accruals of $14.4 million related to severance agreements and lease or other
contract terminations in accordance with EITF Issue No. 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination". Such amounts
recorded in connection with the Pinnacle acquisition are reflected in the
purchase price allocation for the acquisition and any adjustments for the
accruals will be recorded as adjustments to goodwill (see Note F).
The Company's restructuring charges during 2004 consisted of $0.2 million to
reflect the decrease in rent to be received from one of the Company's
subtenants, offset by a reversal of $0.2 million associated with abandoned space
in Tewksbury, Massachusetts.
In December 2002, the Company recorded a charge of $3.3 million in connection
with vacating excess space in its Tewksbury, Massachusetts; Daly City,
California; and Montreal, Canada facilities. The portion of the charge related
to Tewksbury ($0.5 million) resulted from a revision of the Company's estimate
of the timing and amount of future sublease income associated with that facility
for which a charge had previously been included in the 2001 restructuring. The
remaining portion of the charge for Daly City and Montreal was a result of the
Company's ceasing to use a portion of each facility in December 2002 and hiring
real estate brokers to assist in finding subtenants.
In March 2003, the Company implemented a restructuring program under which 48
employees worldwide were terminated, and a leased facility in California was
vacated. In connection with these actions, the Company recorded a charge of $1.2
million for employee terminations and $0.6 million for abandoned space in Santa
Monica that included a write-off of leasehold improvements of $0.4 million. Also
during 2003, the Company recorded charges of $1.5 million related to a revision
of the Company's estimate of the timing and amount of future sublease income
associated with the Daly City facility discussed above.
The Company recorded these restructuring charges in accordance with the guidance
of SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". SFAS No. 146 requires that a liability be recognized for an
operating lease that is not terminated based on the remaining lease rental
costs, measured at its fair value on a discounted cash flow basis, when the
entity ceases using the rights conveyed by the operating lease. That amount is
reduced by any estimated sublease rentals, regardless of whether the entity
intends to enter into a sublease. Future changes in the fair value of the
Company's obligations are recorded through operating expenses.
72
The following table sets forth the activity in the restructuring and other costs
accrual, which is included in accrued expenses and other current liabilities, in
2003, 2004 and 2005 (in thousands):
2005 and Prior Pinnacle Acquisition
-------------- --------------------
Restructurings Restructuring Liabilities
-------------- -------------------------
Employee Facilities Employee Facilities
Related Related Related Related Total
---------------------------------------------------------
Accrual balance at December 31, 2002
$433 $4,934 $ - $ - $5,367
Restructuring charge 1,177 641 - - 1,818
Cash payments made (1,483) (1,773) - - (3,256)
Non-cash disposals - (412) - - (412)
Revisions of estimated liabilities (77) 1,453 - - 1,376
---------------------------------------------------------
Accrual balance at December 31, 2003 50 4,843 - - 4,893
Restructuring charge - 241 - - 241
Cash payments made - (1,359) - - (1,359)
Revisions of estimated liabilities (50) (191) - - (241)
---------------------------------------------------------
Accrual balance at December 31, 2004 - 3,534 - - 3,534
Restructuring charge 822 501 - - 1,323
Pinnacle acquisition-related liabilities - - 10,013 4,428 14,441
Revisions of estimated liabilities - 1,778 - - 1,778
Cash payments for employees-related charges (693) - (7,037) - (7,730)
Cash payments for facilities, net of
sublease income - (1,346) - (1,643) (2,989)
---------------------------------------------------------
Accrual balance at December 31, 2005 $129 $4,467 $2,976 $2,785 $10,357
=========================================================
The employee-related accrual amounts at December 31, 2005 represent cash
payments to be made to former employees in 2006 and are the result of
restructuring actions taken in 2005.
The facilities-related accrual amounts at December 31, 2005 represent estimated
losses on subleases of space vacated as part of the Company's restructuring
actions. The leases, and payments against the amount accrued, extend through
2011 unless the Company is able to negotiate an earlier termination. The 2003
non-cash disposal of $0.4 million related to the write-off of certain leasehold
improvements on property included in the 2003 restructuring program which were
abandoned in the first quarter of 2003.
M. SEGMENT INFORMATION
The Company's organizational structure is based on strategic business units that
offer various products to the principal markets in which the Company's products
are sold. In SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision-making
group, in deciding how to allocate resources and in assessing performance. The
Company evaluated the discrete financial information that is regularly reviewed
by the chief operating decision-makers and determined that these business units
equate to three reportable segments: Professional Film, Video and Broadcast
("Professional Video"); Audio; and Consumer Video.
The Professional Video segment produces non-linear video and film editing
systems to improve the productivity of video and film editors and broadcasters
by enabling them to edit video, film and sound in a faster, easier, more
creative and more cost-effective manner than by use of traditional analog
tape-based systems. The products in this operating segment are designed to
provide capabilities for editing and finishing feature films, television shows,
broadcast news programs, commercials, music videos, and corporate and government
videos. This segment includes the Media Composer family of products, which
accounted for approximately 12%, 17% and 16% of the Company's consolidated net
revenues in 2005, 2004 and 2003, respectively. Also within this segment are
Shared Storage products that provide complete network, storage and database
solutions based on the Company's Avid Unity MediaNetwork technology, and enable
users to simultaneously share and manage media assets throughout a project or
organization. This product family accounted for 10%, 12% and 12% of the
Company's consolidated net revenues in 2005, 2004 and 2003, respectively. The
Audio segment produces digital audio systems for the audio market. This
operating segment includes products developed to provide audio recording,
editing, signal processing and automated mixing. This segment includes the Pro
Tools product family, which accounted for approximately 18%, 24% and 25% of the
Company's consolidated net revenues in 2005, 2004 and 2003, respectively. The
Consumer Video segment develops and markets products that are aimed primarily at
the consumer market, which allow users to create, edit, view and distribute rich
73
media content including video, photographs and audio using a personal computer.
This segment was formed in August 2005 and is comprised of certain product lines
acquired in the Pinnacle acquisition (see Note F).
The accounting policies of each of the segments are the same as those described
in the summary of significant accounting policies (see Note B). The Company
evaluates performance based on profit and loss from operations before income
taxes, interest income, interest expenses and other income, excluding the
effects of restructuring and other costs, amortization or impairment of
intangible assets associated with acquisitions and stock-based compensation.
Common costs not directly attributable to a particular segment are allocated
between segments based on management's best estimates.
The following is a summary of the Company's operations by reportable segment (in
thousands):
For the Year Ended December 31,
----------------------------------
2005 2004 2003
--------- --------- ---------
Professional Film, Video and Broadcast:
Net revenues $448,288 $391,143 $330,859
Depreciation 13,473 9,529 8,419
Operating income 52,735 46,153 28,357
Assets at December 31, 179,027 142,105 111,682
Capital expenditures 14,740 12,477 7,195
Audio:
Net revenues $268,058 $198,462 $141,053
Depreciation 2,860 2,502 2,484
Operating income 38,599 29,251 15,718
Assets at December 31, 88,437 66,023 34,978
Capital expenditures 2,786 2,700 756
Consumer Video:
Net revenues $59,097 - -
Depreciation 465 - -
Operating income 3,344 - -
Assets at December 31, 40,574 - -
Capital expenditures 240 - -
Combined Segments:
Net revenues $775,443 $589,605 $471,912
Depreciation 16,798 12,031 10,903
Operating income 94,678 75,404 44,075
Assets at December 31, 308,038 208,128 146,660
Capital expenditures 17,766 15,177 7,951
Certain expenses related to restructurings and acquisitions are not included in
the operating results of the reportable segments because management does not
consider them in evaluating operating results of the segments. The following
table reconciles operating income for reportable segments to total consolidated
amounts for the years ended December 31, 2005, 2004 and 2003 (in thousands):
74
2005 2004 2003
--------- --------- ---------
Total operating income for reportable segments $94,678 $75,404 $44,075
Unallocated amounts:
Restructuring and other costs, net (3,155) - (3,194)
Stock-based compensation (2,163) (1,418) -
In-process research and development (32,390) - -
Amortization of acquisition-related
intangible assets (20,221) (4,049) (1,316)
Impairment of intangible assets - (1,187) -
--------- --------- ---------
Consolidated operating income $36,749 $68,750 $39,565
========= ========= =========
Certain assets including cash and marketable securities and acquisition-related
intangible assets are not included in the assets of the reportable segment
because management does not consider them in evaluating operating results of the
segments. The following table reconciles assets for reportable segments to total
consolidated amounts as of December 31, 2005, 2004 and 2003 (in thousands):
2005 2004 2003
---------- --------- ---------
Total assets for reportable segments $308,038 $208,128 $146,660
Unallocated amounts:
Cash, cash equivalents and marketable securities 238,430 155,419 196,309
Acquisition-related intangible assets 515,578 212,687 5,150
---------- --------- ---------
Total assets $1,062,046 $576,234 $348,119
========== ========= =========
The following table summarizes the Company's revenues by country (in thousands).
The categorization of revenue is based on the country in which the sales
originate:
For the Year Ended December 31,
-------------------------------
2005 2004 2003
--------- --------- ---------
Revenues:
United States $332,520 $287,182 $238,340
Other countries 442,923 302,423 233,572
--------- --------- ---------
Total revenues $775,443 $589,605 $471,912
========= ========= =========
The following table summarizes the Company's long-lived assets, by country (in
thousands):
December 31,
-----------------------
2005 2004
---------- ---------
Long-lived assets:
United States $33,176 $25,025
Other countries 11,615 8,030
---------- ---------
Total long-lived assets $44,791 $33,055
========== =========
N. FINANCIAL INSTRUMENTS
Forward-Exchange Contracts
As of December 31, 2005, the Company had $49.4 million of forward-exchange
contracts outstanding, denominated in the euro, British pound, Swedish krona,
Danish kroner, Norwegian krone, Canadian dollar, Singapore dollar and Korean
won, as hedges against forecasted foreign currency-denominated receivables,
payables and cash balances. As of December 31, 2004, there were no
forward-exchange contracts outstanding.
There are two objectives of the Company's foreign currency forward-exchange
contract program: (1) to offset any foreign exchange currency risk associated
with cash receipts expected to be received from the Company's customers over the
75
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 U.S.
dollar. These forward-exchange contracts typically mature within 30 days of
purchase.
The changes in fair value of the forward-exchange contracts intended to offset
foreign currency exchange risk on forecasted cash flows are recorded as gains or
losses in the Company's statement of operations in the period of change, because
they do not meet the criterion of SFAS No.133, "Accounting for Derivative
Instruments and Hedging Activities", to be treated as hedges for accounting
purposes.
The forward-exchange contracts associated with offsetting the impact of foreign
currency exchange risk on the Company's net monetary assets are accounted for as
fair value hedges under SFAS No. 133. Specifically, the forward-exchange
contracts are recorded at fair value at the origination date, and gains or
losses on the contracts are recognized in earnings; the changes in fair value of
the net monetary assets attributable to changes in foreign currency are an
adjustment to the carrying amount and are recognized in earnings in the period
of change.
Net realized and unrealized gains (losses) of ($1.6) million, ($1.7) million and
($0.6) million resulting from foreign currency transactions, remeasurement and
forward-exchange contracts were included in results of operations for the years
ended December 31, 2005, 2004 and 2003, respectively.
O. NET INCOME PER COMMON SHARE
Basic and diluted net income per share were as follows (in thousands, except per
share data):
For the Year Ended December 31,
-------------------------------
2005 2004 2003
---------- -------- ----------
Net income $33,980 $71,701 $40,889
========== ======== ==========
Weighted-average common shares
outstanding - basic 37,762 32,485 29,192
Weighted-average potential common stock:
Options 1,663 2,483 3,461
Warrant 92 35 -
---------- -------- ----------
Weighted-average common shares
outstanding - diluted 39,517 35,003 32,653
========== ======== ==========
Net income per common share - basic $0.90 $2.21 $1.40
Net income per common share - diluted $0.86 $2.05 $1.25
Common stock options, restricted shares and a warrant that were considered
anti-dilutive securities and excluded from the diluted net income per share
calculations were as follows, on a weighted-average basis:
For the Year Ended December 31,
-------------------------------
2005 2004 2003
--------- -------- ----------
Options 860 137 32
Warrant - - 1,155
Restricted shares 15 20 -
--------- -------- ----------
Total anti-dilutive securities 875 157 1,187
========= ======== ==========
P. SUPPLEMENTAL CASH FLOW INFORMATION
The following table reflects supplemental cash flow investing activities
related to the acquisitions of Pinnacle and Wizoo in 2005, NXN, M-Audio and
Avid Nordic AB in 2004, and Rocket Network, Inc. and Bomb Factory Digital,
Inc. in 2003 (in thousands):
76
Year Ended December 31,
-----------------------------------
2005 2004 2003
----------- ---------- ----------
Fair value of:
Assets acquired and goodwill $492,472 $249,924 $3,866
Acquired incomplete technology 32,390 - -
Accrual for contingent payments - - (1,369)
Payment for contingency 1,370 1,310 -
Liabilities assumed (78,424) (22,337) (215)
Deferred compensation for stock options issued - 5,500 -
----------- ---------- ----------
Total consideration 447,808 234,397 2,282
Less: cash acquired (102,983) (1,875) -
Less: equity consideration and accrued payments (363,348) (97,007) -
----------- ---------- ----------
Net cash (received from) paid for acquisitions ($18,523) $135,515 $2,282
=========== ========== ==========
As part of the purchase agreement for Avid Nordic AB, Avid was required to make
additional payments of up to euro 1.3 million contingent upon the operating
results of Avid Nordic AB through August 31, 2005. During 2005, the Company paid
approximately euro 1.1 million ($1.4 million) of additional purchase
consideration and recorded an increase to goodwill.
During 2004, the Company paid $1.3 million of the contingent payments related to
Bomb Factory, after resolution of the contingencies as specified in the purchase
agreement.
Cash paid for interest was $0.4 million, $0.3 million and $0.3 million for the
years ended December 31, 2005, 2004 and 2003, respectively.
Q. QUARTERLY RESULTS (UNAUDITED)
The following information has been derived from unaudited consolidated financial
statements that, in the opinion of management, include all normal recurring
adjustments necessary for a fair presentation of such information.
(In thousands, except per share data)
Quarters Ended
------------------------------------------------------------------------------
2005 2004
-------------------------------------- --------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
-------------------------------------- --------------------------------------
Net revenues $244,971 $204,420 $160,051 $166,001 $174,971 $147,374 $139,886 $127,374
Cost of revenues 117,702 93,720 71,271 70,967 77,145 62,845 60,995 54,103
Amortization of intangible assets 6,610 3,854 282 281 281 127 - -
-------------------------------------- --------------------------------------
Gross profit 120,659 106,846 88,498 94,753 97,545 84,402 78,891 73,271
-------------------------------------- --------------------------------------
Operating expenses:
Research & development 32,109 29,636 24,910 24,679 25,845 23,879 22,924 22,292
Marketing & selling 49,892 44,601 38,452 37,842 36,768 32,009 32,413 28,933
General & administrative 14,186 12,188 10,471 10,302 11,968 9,266 7,427 6,807
In-process research and development - 32,390 - - - - - -
Restructuring and other costs, net 1,158 1,997 - - - - - -
Amortization of intangible assets 3,465 2,544 1,593 1,592 1,665 988 549 439
Impairment of intangible assets - - - - 1,187 - - -
-------------------------------------- --------------------------------------
Total operating expenses 100,810 123,356 75,426 74,415 77,433 66,142 63,313 58,471
-------------------------------------- --------------------------------------
Operating income (loss) 19,849 (16,510) 13,072 20,338 20,112 18,260 15,578 14,800
Other income (expense), net 1,851 1,719 1,179 837 653 651 595 (560)
-------------------------------------- --------------------------------------
Income (loss) before income taxes 21,700 (14,791) 14,251 21,175 20,765 18,911 16,173 14,240
Provision (benefit) for income taxes 3,275 2,966 685 1,429 (1,749) (63) 700 (500)
-------------------------------------- --------------------------------------
Net income (loss) $18,425 ($17,757) $13,566 $19,746 $22,514 $18,974 $15,473 $14,740
====================================== ======================================
Net income (loss) per share - basic $0.44 ($0.46) $0.39 $0.56 $0.66 $0.58 $0.49 $0.47
Net income (loss) per share - diluted $0.43 ($0.46) $0.37 $0.53 $0.61 $0.54 $0.45 $0.44
Weighted-average common
shares outstanding - basic 41,859 38,935 35,177 34,987 34,355 32,737 31,623 31,202
Weighted-average common
shares outstanding - diluted 43,309 38,935 37,024 37,263 36,751 35,033 34,134 33,740
High common stock price $55.00 $56.90 $61.39 $68.35 $62.57 $54.66 $61.68 $55.42
Low common stock price $37.30 $35.78 $47.64 $52.06 $46.48 $40.90 $44.11 $38.43
77
The Company's quarterly operating results fluctuate as a result of a number of
factors including, without limitation, the timing of new product introductions,
the timing of, and costs incurred in association with, the recognition of
"solutions" sales to customers, marketing expenditures, promotional programs and
periodic discounting due to competitive factors. The Company's operating results
may fluctuate in the future as a result of these and other factors, including
the Company's success in developing and introducing new products, its products
and customer mix and the level of competition which it experiences. Quarterly
sales and operating results generally depend on the volume and timing of orders
received and recognized as revenue during the quarter. The Company's expense
levels are based in part on its forecasts of future revenues. If revenues are
below expectations, the Company's operating results may be adversely affected.
Accordingly, there can be no assurance that the Company will be profitable in
any particular quarter.
78
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2005. The term "disclosure controls and
procedures", as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
means controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company's management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of December 31, 2005, our chief executive officer and
chief financial officer concluded that, as of such date, the Company's
disclosure controls and procedures were effective at the reasonable assurance
level.
Management's report on our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) and the independent
registered public accounting firm's related audit report are included in Item 8
of this Form 10-K and are incorporated herein by reference.
Changes in Internal Control over Financial Reporting
Management considers the acquisition of Pinnacle Systems, Inc. on August 9, 2005
to be material to the results of operations, financial position and cash flows
of the Company from the date of acquisition through December 31, 2005 and
considers the internal controls and procedures of Pinnacle to have a material
effect on our internal control over financial reporting. We are currently
executing an extension of our Sarbanes-Oxley Act Section 404 compliance program
to include Pinnacle's operations in fiscal 2006.
ITEM 9B. OTHER INFORMATION
None.
79
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We have adopted a Code of Business Conduct and Ethics applicable to all our
employees, including our principal executive officer, principal financial
officer and principal accounting officer. We will provide any person, without
charge, with a copy of our Code of Business Conduct and Ethics upon written
request to Avid Technology, Inc., Avid Technology Park, One Park West,
Tewksbury, MA 01876, Attention: Corporate Secretary.
The remainder of the response to this item is contained under the caption
"EXECUTIVE OFFICERS OF THE COMPANY" in Part I hereof, and in our Proxy Statement
for our 2006 Annual Meeting of Stockholders (the "2006 Proxy Statement") under
the captions "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" all of which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is contained in the 2006 Proxy Statement under the
captions "Directors' Compensation" and "Executive Compensation" and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The response to this item is contained in the 2006 Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners and Management" and is
incorporated herein by reference.
The disclosures required for securities authorized for issuance under equity
compensation plans are contained in the 2006 Proxy Statement under the caption
"Equity Compensation Plan Information" and are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The response to this item is contained in the Company's 2006 Proxy Statement
under the caption "Independent Registered Public Accounting Firm Fees" and is
incorporated herein by reference.
80
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements are included in Item 8:
- Management's Report on Internal Control Over Financial Reporting
- Report of Independent Registered Public Accounting Firm
- Consolidated Statements of Operations for the years ended December
31, 2005, 2004 and 2003
- Consolidated Balance Sheets as of December 31, 2005 and 2004
- Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2005, 2004 and 2003
- Consolidated Statements of Cash Flows for the years ended December 31,
2005, 2004 and 2003
- Notes to Consolidated Financial Statements
(a) 2. FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statement schedule is included in
Item 15(d):
Schedule II - Valuation and Qualifying Accounts
Schedules other than that listed above have been omitted since the required
information is not present, or not present in amounts sufficient to require
submission of the schedule, or because the information required is included
in the consolidated financial statements or the notes thereto.
(a) 3. LISTING OF EXHIBITS
Exhibit No. Description
- ----------- -----------
2.1 Stock and Asset Purchase Agreement among Microsoft Corporation,
Softimage Inc. and Avid Technology, Inc. dated as of June 15, 1998
together with all material exhibits thereto (incorporated by reference
to our Quarterly Report on Form 10-Q as filed with the Commission on
August 12, 1998).
3.1 Certificate of Amendment of the Third Amended and Restated Certificate of
Incorporation of the Registrant (incorporated by reference to our Current
Report on Form 8-K as filed with the Commission on July 27, 2005).
3.2 Third Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to our Registration Statement on Form 10-Q as
filed with the Commission on November 14, 2005).
3.3 Amended and Restated By-Laws of the Registrant (incorporated by reference
to our Registration Statement on Form S-1 as declared effective by the
Commission on March 11, 1993).
4.1 Specimen Certificate representing our Common Stock (incorporated by
reference to our Registration Statement on Form S-1 as declared effective
by the Commission on March 11, 1993).
4.2 Common Stock Purchase Warrant dated August 3, 1998 by and between Avid
Technology, Inc. and Microsoft Corporation (incorporated by reference to
our Quarterly Report on Form 10-Q as filed with the Commission on
November 13, 1998).
10.1 Lease dated September 29, 1995 between Allied Dunbar Insurance PLC and
Avid Technology Limited (incorporated by reference to our Quarterly
Report on Form 10-Q as filed with the Commission on November 14, 1995).
10.2 Lease between MGI Andover Street, Inc. and Avid Technology, Inc. dated
March 21, 1995 (incorporated by reference to our Quarterly Report on
Form 10-Q as filed with the Commission on May 15, 1995).
10.3 Amended and Restated lease dated as of June 7, 1996 between MGI One
Park West, Inc. and Avid Technology, Inc. (incorporated by reference to
our Quarterly Report on Form 10-Q as filed with the Commission on
August 14, 1996).
81
#10.4 1993 Stock Incentive Plan (incorporated by reference to our Registration
Statement on Form S-1 as declared effective by the Commission on
March 11, 1993).
#10.5 1993 Director Stock Option Plan, as amended (incorporated by reference to
our Proxy Statement as filed with the Commission on April 27, 1995).
#10.6 1994 Stock Option Plan, as amended (incorporated by reference to our
Registration Statement on Form S-8 as filed with the Commission on
October 27, 1995).
#10.7 Amended and Restated 1996 Employee Stock Purchase Plan (incorporated by
reference to our Quarterly Report on Form 10-Q as filed with the
Commission on November 13, 2003).
#10.8 1997 Stock Option Plan (incorporated by reference to our Annual Report on
Form 10-K as filed with the Commission on March 27, 1998).
#10.9 1997 Stock Incentive Plan, as amended (incorporated by reference to our
Quarterly Report on Form 10-Q as filed with the Commission on May 14,
1997).
#10.10 Amended and Restated Avid Technology, Inc. Non-Qualified Deferred
Compensation Plan, as amended (incorporated by reference to our Annual
Report on Form 10-K as filed with the Commission on March 11, 2004).
#10.11 1998 Stock Option Plan (incorporated by reference to our Annual Report on
Form 10-K as filed with the Commission on March 16, 2005).
#10.12 1998 Avid-Softimage Stock Option Plan (incorporated by reference to our
Annual Report on Form 10-K as filed with the Commission on March 16,
2005).
#10.13 Amended and Restated 1999 Stock Option Plan (incorporated by reference to
our Annual Report on Form 10-K as filed with the Commission on March 16,
2005).
#10.14 Midiman, Inc. Stock Option/Stock Issuance Plan (incorporated by reference
to our Quarterly Report on Form 10-Q as filed with the Commission on
November 9, 2004).
#10.15 Avid Technology, Inc. 2005 Stock Incentive Plan (incorporated by
reference to our Registration Statement on Form S-4 as filed with the
Commission on April 29, 2005).
#10.16 Avid Technology, Inc. 2006 Bonus Plan. (incorporated by reference
to our Current Report on Form 8-K as filed with the Commission on
December 13, 2005).
#10.17 Executive Employment Agreement between the Company and David A.
Krall, dated as of July 24, 2002. (incorporated by reference to our
Quarterly Report on Form 10-Q as filed with the Commission on November
13, 2002).
#10.18 Executive Employment Agreement between the Company and David Lebolt,
dated as of July 24, 2002 (incorporated by reference to our Quarterly
Report on Form 10-Q as filed with the Commission on November 13, 2002).
#10.21 Executive Employment Agreement between the Company and Paul Milbury,
dated as of July 24, 2002 (incorporated by reference to our Quarterly
Report on Form 10-Q as filed with the Commission on November 13, 2002).
#10.22 Executive Employment Agreement between the Company and Michael Rockwell,
dated as of July 24, 2002 (incorporated by reference to our Quarterly
Report on Form 10-Q as filed with the Commission on November 13, 2002).
#10.23 Executive Employment Agreement between the Company and Charles L. Smith,
dated as of July 24, 2002 (incorporated by reference to our Quarterly
Report on Form 10-Q as filed with the Commission on November 13, 2002).
#10.24 Change-in-Control Agreement between the Company and David A. Krall, dated
as of July 24, 2002 (incorporated by reference to our Quarterly Report on
Form 10-Q as filed with the Commission on November 13, 2002).
82
#10.27 Change-in-Control Agreement between the Company and David Lebolt, dated
as of July 24, 2002 (incorporated by reference to our Quarterly Report on
Form 10-Q as filed with the Commission on November 13, 2002).
#10.28 Change-in-Control Agreement between the Company and Paul Milbury, dated
as of July 24, 2002 (incorporated by reference to our Quarterly Report on
Form 10-Q as filed with the Commission on November 13, 2002).
#10.29 Change-in-Control Agreement between the Company and Michael Rockwell,
dated as of July 24, 2002 (incorporated by reference to our Quarterly
Report on Form 10-Q as filed with the Commission on November 13, 2002).
#10.30 Change-in-Control Agreement between the Company and Charles L. Smith,
dated as of July 24, 2002 (incorporated by reference to our Quarterly
Report on Form 10-Q as filed with the Commission on November 13, 2002).
#10.31 Form of Nonstatutory Stock Option Grant Terms and Conditions
(incorporated by reference to our Current Report on Form 8-K as filed
with the Commission on August 18, 2005).
#10.32 Form of Incentive Stock Option Grant Terms and Conditions (incorporated
by reference to our Current Report on Form 8-K as filed with the
Commission on August 18, 2005).
#10.33 Form of Restricted Stock Unit Award Terms and Conditions (incorporated
by reference to our Current Report on Form 8-K as filed with the
Commission on March 1, 2006).
#10.34 Form of Restricted Stock Award Terms and Conditions (incorporated by
reference to our Current Report on Form 8-K as filed with the Commission
on March 1, 2006).
*21 Subsidiaries of the Registrant.
*23.1 Consent of PricewaterhouseCoopers LLP.
*31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14 and
15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14 and
15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------------
*documents filed herewith
#Management contract or compensatory plan identified pursuant to Item 15(a)3.
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AVID TECHNOLOGY, INC.
(Registrant)
By: /s/ David A. Krall
-------------------------------------
David A. Krall
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 7, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ David A. Krall By: /s/ Paul J. Milbury
----------------------------- -------------------------------
David A. Krall Paul J. Milbury
President and Chief Executive Officer Chief Financial Officer
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
Date: March 7, 2006 Date: March 7, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ David A. Krall Director March 7, 2006
- ----------------------
David A. Krall
/s/ George Billings Director March 7, 2006
- ----------------------
George Billings
/s/ Elizabeth M. Daley Director March 7, 2006
- ----------------------
Elizabeth M. Daley
/s/ John Guttag Director March 7, 2006
- ---------------------
John Guttag
/s/ Nancy Hawthorne Director March 7, 2006
- ---------------------
Nancy Hawthorne
/s/ Pamela F. Lenehan Director March 7, 2006
- ---------------------
Pamela F. Lenehan
/s/ Youngme Moon Director March 7, 2006
- ----------------------
Youngme Moon
84
AVID TECHNOLOGY, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2005
ITEM 15(d)
FINANCIAL STATEMENT SCHEDULE
AVID TECHNOLOGY, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2005, 2004 and 2003
(in thousands)
Additions
----------------------
Balance at
beginning Charged to Charged to Balance at
of costs and other end of
Description period expenses accounts Deductions period
- ----------------------------------------------------------------------------------------
Allowance for doubtful accounts
December 31, 2005 $4,132 $513 $2,361(a) ($2,159)(b) $4,847
December 31, 2004 4,713 436 451(a) (1,468)(b) 4,132
December 31, 2003 6,237 10 - (1,534)(b) 4,713
Sales returns and allowances
December 31, 2005 $5,202 - $17,517(c) ($5,333)(e) $17,386
December 31, 2004 4,448 - 7,630(d) (6,876)(e) 5,202
December 31, 2003 4,377 - 6,669(d) (6,598)(e) 4,448
Allowance for transactions with recourse
December 31, 2005 $2,199 $240 $162(f) ($759)(g) $1,842
December 31, 2004 3,270 (291) (166)(f) (614)(g) 2,199
December 31, 2003 3,304 614 810(f) (1,458)(g) 3,270
Deferred tax asset valuation allowance
December 31, 2005 $140,785 ($9,180) $50,516(h) - $182,121
December 31, 2004 153,220 1,005 - (13,440)(h) 140,785
December 31, 2003 126,490 26,730 - - 153,220
(a) Amount represents allowance recorded in purchase accounting for accounts
receivable acquired in business combinations and foreign exchange gains
(losses).
(b) Amount represents write-offs, net of recoveries.
(c) Includes approximately $12.0 million recorded in purchase accounting for
accounts receivable acquired in business combinations. The remaining
portion is for provisions for sales returns and volume rebates charged
directly against revenue.
(d) Provisions for sales returns and volume rebates are charged directly
against revenue.
(e) Amount represents credits for returns, volume rebates and promotions.
(f) A portion of the provision for transactions with recourse are charged
directly against revenue.
(g) Amount represents defaults, net of recoveries.
(h) Amount represents an adjustment to the valuation allowance recorded in
purchase accounting related to acquired deferred tax assets and
liabilities.
F-1
Index to Exhibits
Exhibit No. Description
- ---------- -----------
2.1 Stock and Asset Purchase Agreement among Microsoft Corporation,
Softimage Inc. and Avid Technology, Inc. dated as of June 15, 1998
together with all material exhibits thereto (incorporated by reference
to our Quarterly Report on Form 10-Q as filed with the Commission on
August 12, 1998).
3.1 Certificate of Amendment of the Third Amended and Restated Certificate of
Incorporation of the Registrant (incorporated by reference to our Current
Report on Form 8-K as filed with the Commission on November 14, 2005).
3.2 Third Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to our Registration Statement on Form 10-Q as
filed with the Commission on November 14, 2005).
3.3 Amended and Restated By-Laws of the Registrant (incorporated by reference
to our Registration Statement on Form S-1 as declared effective by the
Commission on March 11, 1993).
4.1 Specimen Certificate representing our Common Stock (incorporated by
reference to our Registration Statement on Form S-1 as declared effective
by the Commission on March 11, 1993).
4.2 Common Stock Purchase Warrant dated August 3, 1998 by and between Avid
Technology, Inc. and Microsoft Corporation (incorporated by reference to
our Quarterly Report on Form 10-Q as filed with the Commission on
November 13, 1998).
10.1 Lease dated September 29, 1995 between Allied Dunbar Insurance PLC and
Avid Technology Limited (incorporated by reference to our Quarterly
Report on Form 10-Q as filed with the Commission on November 14, 1995).
10.2 Lease between MGI Andover Street, Inc. and Avid Technology, Inc. dated
March 21, 1995 (incorporated by reference to our Quarterly Report on
Form 10-Q as filed with the Commission on May 15, 1995).
10.3 Amended and Restated lease dated as of June 7, 1996 between MGI One
Park West, Inc. and Avid Technology, Inc. (incorporated by reference to
our Quarterly Report on Form 10-Q as filed with the Commission on
August 14, 1996).
#10.4 1993 Stock Incentive Plan (incorporated by reference to our Registration
Statement on Form S-1 as declared effective by the Commission on
March 11, 1993).
#10.5 1993 Director Stock Option Plan, as amended (incorporated by reference to
our Proxy Statement as filed with the Commission on April 27, 1995).
#10.6 1994 Stock Option Plan, as amended (incorporated by reference to our
Registration Statement on Form S-8 as filed with the Commission on
October 27, 1995).
#10.7 Amended and Restated 1996 Employee Stock Purchase Plan (incorporated by
reference to our Quarterly Report on Form 10-Q as filed with the
Commission on November 13, 2003).
#10.8 1997 Stock Option Plan (incorporated by reference to our Annual Report on
Form 10-K as filed with the Commission on March 27, 1998).
#10.9 1997 Stock Incentive Plan, as amended (incorporated by reference to our
Quarterly Report on Form 10-Q as filed with the Commission on May 14,
1997).
#10.10 Amended and Restated Avid Technology, Inc. Non-Qualified Deferred
Compensation Plan, as amended (incorporated by reference to our Annual
Report on Form 10-K as filed with the Commission on March 11, 2004).
#10.11 1998 Stock Option Plan (incorporated by reference to our Annual Report on
Form 10-K as filed with the Commission on March 16, 2005).
#10.12 1998 Avid-Softimage Stock Option Plan (incorporated by reference to our
Annual Report on Form 10-K as filed with the Commission on March 16,
2005).
#10.13 Amended and Restated 1999 Stock Option Plan (incorporated by reference to
our Annual Report on Form 10-K as filed with the Commission on March 16,
2005).
#10.14 Midiman, Inc. Stock Option/Stock Issuance Plan (incorporated by reference
to our Quarterly Report on Form 10-Q as filed with the Commission on
November 9, 2004).
#10.15 Avid Technology, Inc. 2005 Stock Incentive Plan (incorporated by
reference to our Registration Statement on Form S-4 as filed with the
Commission on April 29, 2005).
#10.16 Avid Technology, Inc. 2006 Bonus Plan. (incorporated by reference
to our Current Report on Form 8-K as filed with the Commission on
December 13, 2005).
#10.17 Executive Employment Agreement between the Company and David A.
Krall, dated as of July 24, 2002. (incorporated by reference to our
Quarterly Report on Form 10-Q as filed with the Commission on November
13, 2002).
#10.18 Executive Employment Agreement between the Company and David Lebolt,
dated as of July 24, 2002 (incorporated by reference to our Quarterly
Report on Form 10-Q as filed with the Commission on November 13, 2002).
#10.21 Executive Employment Agreement between the Company and Paul Milbury,
dated as of July 24, 2002 (incorporated by reference to our Quarterly
Report on Form 10-Q as filed with the Commission on November 13, 2002).
#10.22 Executive Employment Agreement between the Company and Michael Rockwell,
dated as of July 24, 2002 (incorporated by reference to our Quarterly
Report on Form 10-Q as filed with the Commission on November 13, 2002).
#10.23 Executive Employment Agreement between the Company and Charles L. Smith,
dated as of July 24, 2002 (incorporated by reference to our Quarterly
Report on Form 10-Q as filed with the Commission on November 13, 2002).
#10.24 Change-in-Control Agreement between the Company and David A. Krall, dated
as of July 24, 2002 (incorporated by reference to our Quarterly Report on
Form 10-Q as filed with the Commission on November 13, 2002).
#10.27 Change-in-Control Agreement between the Company and David Lebolt, dated
as of July 24, 2002 (incorporated by reference to our Quarterly Report on
Form 10-Q as filed with the Commission on November 13, 2002).
#10.28 Change-in-Control Agreement between the Company and Paul Milbury, dated
as of July 24, 2002 (incorporated by reference to our Quarterly Report on
Form 10-Q as filed with the Commission on November 13, 2002).
#10.29 Change-in-Control Agreement between the Company and Michael Rockwell,
dated as of July 24, 2002 (incorporated by reference to our Quarterly
Report on Form 10-Q as filed with the Commission on November 13, 2002).
#10.30 Change-in-Control Agreement between the Company and Charles L. Smith,
dated as of July 24, 2002 (incorporated by reference to our Quarterly
Report on Form 10-Q as filed with the Commission on November 13, 2002).
#10.31 Form of Nonstatutory Stock Option Grant Terms and Conditions
(incorporated by reference to our Current Report on Form 8-K as filed
with the Commission on August 18, 2005).
#10.32 Form of Incentive Stock Option Grant Terms and Conditions (incorporated
by reference to our Current Report on Form 8-K as filed with the
Commission on August 18, 2005).
#10.33 Form of Restricted Stock Unit Award Terms and Conditions (incorporated
by reference to our Current Report on Form 8-K as filed with the
Commission on March 1, 2006).
#10.34 Form of Restricted Stock Award Terms and Conditions (incorporated by
reference to our Current Report on Form 8-K as filed with the Commission
on March 1, 2006).
*21 Subsidiaries of the Registrant.
*23.1 Consent of PricewaterhouseCoopers LLP.
*31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14 and
15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------------
*documents filed herewith
#Management contract or compensatory plan identified pursuant to Item 15(a)3.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT AS OF DECEMBER 31, 2005
------------------------------------------------------
PINNACLE DOMESTIC INTERNATIONAL SALES CORPORATION (California)
PINNACLE SYSTEMS, INC. (California)
1117 ACQUISITION CORPORATION (Delaware)
AVID C.V. LLC (Delaware)
AVID INTERNET MEDIA GROUP, INC. (Delaware)
AVID TECHNOLOGY WORLDWIDE, INC. (Delaware)
INEWS, LLC (Delaware)
M-AUDIO LLC (Delaware)
PS MIRO HOLDINGS, INC. (Delaware)
TRUEVISION, INC. (Delaware)
AVID TECHNOLOGY SECURITIES CORPORATION (Massachusetts)
AVID TECHNOLOGY (AUSTRALIA) PTY LTD (Australia)
SOFTIMAGE CO. (Canada)
AVID TECHNOLOGY EUROPE LIMITED (England)
AVID TECHNOLOGY IBERIA LTD (England)
EVOLUTION ELECTRONICS LTD (England)
INEWS LTD. (England)
MIDIMAN LTD (England)
PINNACLE SYSTEMS LTD (England)
AVID TECHNOLOGY S.A.R.L. (France)
NXN SOFTWARE S.A.R.L. (France)
PINNACLE SYSTEMS S.A.R.L. (France)
AVID TECHNOLOGY GmbH (Germany)
AVID TECHNOLOGY HOLDINGS GmbH (Germany)
INEWS GmbH (Germany)
NXN SOFTWARE GmbH (Germany)
PINNACLE SYSTEMS GmbH (Germany)
PS MIRO HOLDINGS, INC. & CO., KG (Germany)
WIZOO SOUND DESIGN GmbH (Germany)
AVID NORTH ASIA LIMITED (Hong Kong)
DIGIDESIGN ITALY S.R.L. (Italy)
AVID TECHNOLOGY K.K. (Japan)
PINNACLE SYSTEMS, KK JAPAN (Japan)
AVID BENELUX B.V. (Netherlands)
AVID GENERAL PARTNER B.V. (Netherlands)
AVID TECHNOLOGY C.V. (Netherlands)
AVID TECHNOLOGY HOLDING B.V. (Netherlands)
AVID TECHNOLOGY INTERNATIONAL B.V. (Netherlands)
PINNACLE SYSTEMS B.V. (Netherlands)
AVID TECHNOLOGY (S.E. ASIA) PTE LTD (Singapore)
AVID TECHNOLOGY S.L. (Spain)
AVID NORDIC AB (Sweden)
D-DESIGN NORDIC AB (Sweden)
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (File No. 333-118734) and Form S-8 (File Nos. 33-88318,
33-64126, 33-64128, 33-82478, 33-98692, 333-08821, 333-08823, 333-08825,
333-30367, 333-42569, 333-56631, 333-60181, 333-60183, 333-60191, 333-73321,
333-87539, 333-94167, 333-33674, 333-37952, 333-41750, 333-48338, 333-48340,
333-64016, 333-75470, 333-102772, 333-118704, 33-128320, 33-64130, 33-64124,
333-42571) of Avid Technology, Inc. of our report dated March 7, 2006 relating
to the financial statements, financial statement schedule, management's
assessment of the effectiveness of internal control over financial reporting and
the effectiveness of internal control over financial reporting, which appears in
this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 7, 2006
CERTIFICATION
-------------
I, David A. Krall, certify that:
1. I have reviewed this Annual Report on Form 10-K of Avid Technology,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 7, 2006 /s/ David A. Krall
------------------------------
David A. Krall
President and Chief Executive Officer
(principal executive officer)
CERTIFICATION
-------------
I, Paul J. Milbury, certify that:
1. I have reviewed this Annual Report on Form 10-K of Avid Technology,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 7, 2006 /s/ Paul J. Milbury
------------------------------
Paul J. Milbury
Chief Financial Officer
(principal financial officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Avid Technologies, Inc.
(the "Company") for the period ended December 31, 2005 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, David A. Krall, President and Chief Executive Officer of the
Company, and Paul J. Milbury, Chief Financial Officer of the Company, each
hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: March 7, 2006 /s/ David A. Krall
-----------------------
David A. Krall
President and Chief Executive Officer
Dated: March 7, 2006 /s/ Paul J. Milbury
-----------------------
Paul J. Milbury
Chief Financial Officer