Avid 2005 Annual Report Download - page 30

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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 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:
•฀ 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;
•฀ retailers or distributors may not continue to stock and sell our consumer products; and
•฀ 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.