Avid 2005 Annual Report Download - page 81

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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 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.