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Avid Technology, Inc.
ANNUAL REPORT 2004

Table of contents

  • Page 1
    ANNUAL REPORT 2004 Avid Technology, Inc.

  • Page 2
    ... footage acquisition to final playout. Game developers and visual effects artists are demanding integrated pipelines that encompass 3D animation, digital asset management, and nonlinear editing. The expanding scope of digital media has created a need for networking solutions that enable real-time...

  • Page 3
    ... financial performance, significant growth and diversification, continued technological innovation, and recognition at the highest echelons of the industries we serve. 2004 2003 Consolidated Statement of Operations Data (In thousands, except per share and employee data) Year ended December...

  • Page 4
    ... a business driver for Avid, since many of our customers have been upgrading their production pipelines to accommodate this technological shift. In 2004, we transitioned our Avid DNA™ product family to HD, with second-generation versions of our Media Composer® Adrenaline™ and Avid Xpress® Pro...

  • Page 5
    ..., editing, processing, and mixing of audio material for high-end customers. " At the other end of the audio business spectrum, we diversified our portfolio by acquiring M-Audio, a leading provider of digital audio and MIDI solutions for the home studio market. The addition of M-Audio to the Avid...

  • Page 6
    ... in HD using the Avid DS Nitris® system-nearly a 40% increase over shows finished in HD the previous year on Avid systems. recorded music ...All of the No. 1 hits on the Billboard Hot 100 and Hot R&B Singles charts in 2004 were made using Digidesign Pro Tools digital audio workstation technology...

  • Page 7
    ... infinite possibilities, where production tools afford users the freedom to go as far as their ideas can take them. This wholesale transformation in the way digital media professionals conceive, create, manage, store, and distribute their work is a tribute to Avid's history of innovation-which...

  • Page 8
    ... in HD using the Avid DS Nitris solution-nearly a 40% increment over shows finished in HD the previous year on Avid systems. This growth in HD production is reflected in the worldwide HDTV adoption rate, which is currently estimated at 10 million homes and expected to increase to 52 million homes by...

  • Page 9
    ...on Media Composer Adrenaline HD. -- Dave Ballard President and owner, LAB 601, Atlanta " The Avid Xpress Studio system offers integrated video editing, audio production, 3D animation, compositing and titling, and DVD authoring software products-plus professional video and audio production hardware...

  • Page 10
    ...connectivity and control. It features VTR-like local operation with front-panel monitoring, remote programmability, and interoperability with the Avid Unityâ„¢ for News family of shared-storage solutions. " Avid's intelligent end-to-end workflow facilitates content sharing between our radio and TV...

  • Page 11
    ... teams of game developers and visual effects artists. Whether working on video games, films, TV shows, live broadcasts, commercials, or music videos, these professionals can take advantage of a pipeline that features Avid's award-winning 3D, digital asset management, and nonlinear editing solutions...

  • Page 12
    ...-winning Pro Tools digital audio workstation has fueled interest in professional products that provide sophisticated control of the recording, editing, processing, and mixing functions of the core system. To meet this demand, Digidesign created the ICON integrated console environment, a system that...

  • Page 13
    ... Digidesign's home studio business. M-Audio markets a broad line of consumer and professional recording equipment, including computer peripherals, keyboards, microphones, To further leverage its strength in the low end of the audio business, Avid in 2004 acquired M-Audio-a leader in digital audio...

  • Page 14
    ..., price performance, and versatility, Avid is in a stronger position than ever to continue its success in the film, television, video, broadcast, audio, and animation industries. In our 17-year history, we have held fast to a tradition of excellence, innovation, and service to our customers-and...

  • Page 15
    ... 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to Commission File Number 0-21174 AVID TECHNOLOGY, INC. (Exact name of...

  • Page 16
    .... Our Audio segment offers 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...

  • Page 17
    ... and video game developers; and television facilities, film studios, and certain 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...

  • Page 18
    ..., 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...

  • Page 19
    .... The Avid Xpress Studio system can be augmented with both the Avid Mojo accelerator and the Digidesign 002 audio interface. These products are designed to meet the needs of media professionals, video/film educators, Internet video developers and others involved with video and multimedia production...

  • Page 20
    ... Studio, Avid's digital asset management software for entertainment and computer graphics professionals; and the Avid DS Nitris HD finishing and compositing solution. Storage & Workgroups Our shared media networks offer simultaneous, real-time collaboration workflows that support a wide range...

  • Page 21
    ..., 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...

  • Page 22
    ... located dealers, value-added resellers and authorized thirdparty service providers. Customers may choose from a variety of support offerings, including 24-hour telephone support, quick-response on-site assistance, hardware replacement and extended warranty and software upgrades. Customer training...

  • Page 23
    ... Windows platforms. We are committed to delivering bestin-class video, film, 3D animation, and audio editing systems to meet the needs of professionals in the television, film, music, broadcast news production, and industrial post-production markets, and of end-users in the educational and corporate...

  • Page 24
    ... of our products. We lease office space in Daly City, California for our Digidesign headquarters, including its administrative, sales and marketing, and research and development activities, and in Iver Heath, United Kingdom, for our European headquarters, including administrative, sales, and support...

  • Page 25
    ... President of Human Resources Vice President and Chief Operating Officer, Avid Video Vice President of Business Development, Chief Legal Officer and Corporate Secretary Vice President and General Manager, Audio Vice President and Chief Financial Officer Vice President and Corporate Controller Ethan...

  • Page 26
    Michael J. Rockwell 38 Vice President of Software Engineering and Chief Technology Officer Vice President and General Manager, Avid Video Charles L. Smith 44 DAVID A. KRALL. Mr. Krall has served as President since October 1999 and Chief Executive Officer since April 2000. Previously, he ...

  • Page 27
    ... 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...

  • Page 28
    ... 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...

  • Page 29
    ... thereto included elsewhere in this filing. CONSOLIDATED STATEMENTS OF OPERATIONS DATA: In thousands (except per share data) 2004 Net revenues Cost of revenues Gross profit Operating expenses: Research and development Marketing and selling General and administrative Restructuring and other costs...

  • Page 30
    ... OF OPERATIONS OVERVIEW 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 as digital values, as opposed...

  • Page 31
    ... sales channels, including authorized resellers and distributors. Within our 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...

  • Page 32
    ... 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...

  • Page 33
    ... 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. We completed our annual impairment tests as of the end of the fourth quarter of each year and concluded that no impairment...

  • Page 34
    ... 8.7% 0.7% Net Revenues Our net revenues are derived mainly from the sales of computer-based digital, nonlinear media editing systems and related peripherals, licensing of related software, and sales of related software maintenance contracts. This market has been, and we expect it to continue to be...

  • Page 35
    ...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. Our gross margin increased...

  • Page 36
    ... we made facilities-related payments of $1.4 million. As of December 31, 2004, we have an aggregate obligation under leases for which we have vacated the underlying facilities of approximately $18.6 million, including facilities in Daly City, California; Tewksbury, Massachusetts; London, England and...

  • Page 37
    ... of cash acquired, of $79.6 million and stock and stock options with a fair value of $96.5 million. As part of the purchase accounting allocation, we recorded $38.4 million of identifiable intangible assets, consisting of completed technologies, customer relationships, a trade name and a non-compete...

  • Page 38
    ...Factory Digital. We purchased $15.2 million of property and equipment during 2004, compared to $8.0 million during 2003, and $9.4 million in 2002. Purchases of property and equipment in both 2004 and 2003 were primarily of computer hardware and software to support research and development activities...

  • Page 39
    ... 31, 2004, our maximum exposure under this program was $17.2 million. 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 our lease the landlord would, as of December 31, 2004...

  • Page 40
    ... third-party and intercompany receivables, payables and cash balances. At December 31, 2004, there were no open forward exchange contracts in place. As part of the purchase agreements of both M-Audio and Avid Nordic AB, Avid may be required to make additional payments of up to $46.8 million...

  • Page 41
    ...on our Digital Nonlinear Accelerator architecture, including upgrades and enhancements to our Media Composer Adrenaline and NewsCutter Adrenaline systems, as well as Avid Xpress Pro with Avid Mojo and Avid DS Nitris hardware. We will need to continue to focus marketing and sales efforts on educating...

  • Page 42
    ..., 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. Delays or difficulties in product development and introduction may also harm our business...

  • Page 43
    ... 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...

  • Page 44
    ... of third-party hardware and software included in such products; product distribution channels; acceptance of our new product introductions; product offers and platform upgrades; price discounts and sales promotion programs; volume of sales of aftermarket hardware products; costs of swapping...

  • Page 45
    ...a significant portion of the revenue from sales of our audio products. The loss of one or more key distributors could reduce our revenues. The resellers and distributors of our video segment products typically purchase Avid software and Avid-specific hardware from us, and third-party components from...

  • Page 46
    ... 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, and this could adversely impact our revenues. Our stock price may continue to be volatile. The market price of our common stock...

  • Page 47
    ... shifts in the markets for our products; development and marketing of products by our competitors; changes in our relationships with suppliers, distributors, resellers, system integrators, or customers; a shift in financial markets; and global macroeconomic conditions. Further, the stock market has...

  • Page 48
    ... securities. Foreign Currency Exchange Risk We generally derive nearly 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...

  • Page 49
    AVID TECHNOLOGY, INC. ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 2004 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION 35

  • Page 50
    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 ...Report of Independent Registered Public Accounting Firm ...Consolidated ...

  • Page 51
    ...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...

  • Page 52
    ... 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...

  • Page 53
    ...in "Management's Report on Internal Control Over Financial Reporting," management has excluded M-Audio, Inc. and its subsidiaries from its assessment of internal control over financial reporting as of December 31, 2004 because the entity was acquired by the Company in a purchase business combination...

  • Page 54
    ... per share data) For the Year Ended December 31, 2004 2003 2002 Net revenues: Product Services Total net revenues Cost of revenues: Product Services Amortization of intangible assets Total cost of revenues Gross profit Operating expenses: Research and development Marketing and selling General and...

  • Page 55
    ...current assets Total current assets Property and equipment, net Intangible assets, net Goodwill Long-term deferred tax assets, net Other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable Accrued compensation and benefits Accrued expenses and other current...

  • Page 56
    ... pursuant to employee stock plans Issuance of common stock in connection with acquisition Issuance of restricted stock Amortization of and reversal of deferred compensation Tax benefits on stock options Comprehensive income: Net income Net change in unrealized gain (loss) on marketable securities...

  • Page 57
    ... FROM INVESTING ACTIVITIES: Purchases of property and equipment Payments for other long-term assets Dividend from non-consolidated company Proceeds from sale of business Payments for business acquisitions, net of cash acquired Purchases of marketable securities Proceeds from sales and maturities...

  • Page 58
    ... 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...

  • Page 59
    ...shorter of the useful life of the improvement or the remaining term of the lease. Property and equipment held under capital leases is stated at the lower of the fair market value of the related asset or the present value of the minimum lease payments at the inception of the lease and is amortized on...

  • Page 60
    .... Revenue Recognition and Allowance for Doubtful Accounts The Company recognizes revenue from sales of 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...

  • Page 61
    ... revenue is derived from indirect sales channels, including authorized resellers and distributors. Most of the Company's resellers and distributors of Video and Film Editing and Effects products are not granted rights to return products after purchase, and actual product returns from them have been...

  • Page 62
    ... 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...

  • Page 63
    ...Note K for additional disclosure. For the Year Ended December 31, 2004 2003 2002 Net income, as reported Add: Stock-based employee compensation expense included in reported net income, net of related tax effect Deduct: Total stock-based employee compensation expense determined under fair value-based...

  • Page 64
    ...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, 2004, 2003 and 2002. D. INVENTORIES Inventories consist of the following (in thousands): December 31...

  • Page 65
    ... MIDI (Music Industry Digital Interface) solutions for electronic musicians and audio professionals. Avid paid cash of $79.6 million, net of cash acquired, of which $0.5 million will be paid out over a two year period, and issued stock and options with a fair value of $96.5 million. The market price...

  • Page 66
    Accounts payable Other current liabilities Deferred compensation related to stock options issued Net assets acquired (4,626) (5,066) 5,500 $179,361 As part of the purchase agreement, Avid may be required to make additional payments to the former shareholders and option holders of M-Audio of up to ...

  • Page 67
    ...'s film and video post-production, broadcast, audio and 3D animation customers to leverage the workflow capabilities of the NXN Alienbrain® product line. NXN is reported within Avid's Video and Film Editing and Effects segment. The goodwill resulting from the purchase price allocation reflects the...

  • Page 68
    ... forma financial information presents the results of operations for the years ended December 31, 2004 and 2003 as if the acquisitions of both M-Audio and NXN had occurred at the beginning of 2003. The Company's pro forma results of operations giving effect to the Avid Nordic AB, Bomb Factory Digital...

  • Page 69
    ...benefit) Deferred tax expense (benefit): Federal State Foreign benefit of net operating losses Other Foreign Total deferred tax expense (benefit) Total provision for (benefit... for bad debts Difference in accounting for: Revenue Costs and expenses Inventories Acquired intangible assets Other ...

  • Page 70
    ...allowance Tax provision increase (decrease) in valuation allowance Effective tax rate (30) (2)% (25) 1% (7) 36% H. LONG-TERM DEBT AND OTHER LIABILITIES Subordinated Note In connection with the acquisition of Softimage from Microsoft Corporation ("Microsoft") in 1998, Avid issued a $5.0 million...

  • Page 71
    ... employees plus all unpaid accrued interest, was due on June 15, 2003. The Note bore interest at 9.5% per year, payable quarterly. Through December 31, 2001, the Note had been increased by approximately $16.0 million for forfeited Avid stock options. During 1999, Avid made a principal payment...

  • Page 72
    ... purchase commitments covered by these agreements are generally less than one year and aggregate approximately $25.0 million. Transactions with Recourse The Company, through a third party, provides lease financing options to its customers, including primarily end-users, and occasionally distributors...

  • Page 73
    ... the Audio business, Avid provides warranty 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...

  • Page 74
    ... of the awards. The awards under the Stock Option Exchange program vested annually over three years from the date of grant. 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. The...

  • Page 75
    ... below-fair-value options were granted in connection with the purchase of M-Audio (see Note F). The following table summarizes information about stock options outstanding at December 31, 2004: Options Outstanding Weighted Average Number Remaining Outstanding Contractual Life 290,600 663,742 75,735...

  • Page 76
    ... 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 unutilized space in Santa Monica that included a write...

  • Page 77
    ...and Film Editing and Effects, and Audio. The Video and Film Editing and Effects 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 moving pictures and sound in a faster, easier, more creative, and...

  • Page 78
    ...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, 2004 2003 2002 Revenues: United States Other countries Total revenues $287,182 302,423 $589,605 $238,340 233,572 $471,912 $210,599 208...

  • Page 79
    ..., and forward-exchange contracts were included in results of operations for the years ended December 31, 2004, 2003 and 2002, respectively. P. 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...

  • Page 80
    ...325 The following table reflects supplemental cash flow investing activities related to the acquisitions of NXN Software GmbH, M-Audio, and Avid Nordic AB in 2004, Rocket Network, Inc. and Bomb Factory Digital, Inc. in 2003, and iKnowledge in 2002 (in thousands): Year Ended December 31, 2003 $3,866...

  • Page 81
    ... High common stock price Low common stock price $22,514...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...

  • Page 82
    ... 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...

  • Page 83
    ... the years ended December 31, 2004, 2003 and 2002 - 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...

  • Page 84
    ... 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 15, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report...

  • Page 85
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  • Page 87
    ... Business Development and Chief Legal Officer David M. Lebolt Vice President and General Manager, Digidesign Carol L. Reid Vice President and Corporate Controller Michael J. Rockwell Vice President and Chief Technology Officer Charles L. Smith Vice President and General Manager, Avid Video Transfer...

  • Page 88
    ... European Headquarters Avid Technology Europe Ltd. United Kingdom tel +44 1753 655999 Asian Headquarters Avid Technology (S.E. Asia) Pte. Ltd. Republic of Singapore tel +65 6476 7666 Worldwide Offices Daly City Irwindale Montreal Beijing Berlin Chicago Dublin Edmonton Hong Kong Iver Heath London...