2005 Annual Report Avid Technology, Inc. make manage move | media™ To our shareholders In 2005, Avid delivered another record year, solidifying our leadership W in the video postproduction, broadcast, and digital audio industries while expanding our business into new areas. Through a combination of organic growth and strategic acquisitions, our revenues for the year rose by more than 30% to $775.4 million, resulting in GAAP net income of $34 million, or $0.86 per diluted share. GAAP net income in 2005 was reduced by various non-cash charges primarily associated with our acquisition of Pinnacle Systems, Inc. – including a non-recurring in-process research and development charge of $32.4 million. The Pinnacle acquisition was the pivotal event for Avid in 2005. Pinnacle’s professional products complemented our portfolio of video postproduction and broadcast solutions, and the company’s leadership in consumer video editing – with the world-leading Pinnacle Studio™ line – gave Avid an opportunity to expand into this industry in a position of strength. As we head into 2006, we are now organized as three divisions: Video, which represents a little more than half of our business; Audio, which makes up slightly more than one-third; and Consumer, accounting for the balance. VIDEO In our postproduction business, the increased demand for high-definition content continued to spur interest in our editing, finishing, and shared-storage solutions. In 2005, Avid addressed this by introducing the Symphony™ Nitris® system – an HD finishing solution that leverages our time-tested Symphony software platform with our powerful Nitris hardware accelerator. We also refined our existing HD toolset with new, enhanced versions of all of our editing systems. As we reinforced our leadership among the postproduction professionals who serve the feature film, primetime television, and commercial production industries, we also targeted new areas of postproduction, such as the individual videographer market. The Pinnacle acquisition gave us a launch pad into this segment with the award-winning Liquid family of editing systems, which we updated and re-launched under the Avid® brand. With Avid Liquid™ – as well as a range of other products that cater to this customer base – we are focused on increasing our presence among the growing pool of professionals who work in areas such as wedding and event videography, corporate video, and government training. Avid’s broadcast business had a strong year in 2005, with revenues growing by more than 20% organically. The Pinnacle acquisition added several key new products to this business, further strengthening the end-to-end solutions we offer our customers who are transitioning from tape-based to all-digital newsrooms. Avid also broke ground Front Cover Photography: in broadcast with the introduction of Avid iNEWS® Instinct™, a revolutionary system that allows journalists, newsroom News Van: courtesy of WFTV Concert Photo: courtesy of the Black Eyed Peas staff, and producers to create news stories without the need to learn a complex editing application. King Kong: © King Kong image courtesy of Big Primate and Universal Pictures Lost: © Touchstone Television Back Cover Photography: Band Photo: courtesy of Steriogram on tour 2005 “ With another record year behind us, Avid is in a strong position to continue on a trajectory of growth.” – David Krall, president and CEO, Avid Technology, Inc. While we continued to mine our strengths in postproduction and broadcast, we took major strides in our growing storage and networking business by significantly expanding our Avid Unity™ family. In October 2005, we unveiled Avid Unity ISIS™, a revolutionary shared-storage system that leverages a distributed intelligence architecture to deliver unprecedented scalability and fault tolerance. As more and more of our enterprise-level customers deploy IT-based media networks in their facilities, Avid Unity ISIS is in the forefront of a new class of solutions that are designed to meet the challenges of complex, networked production in deadline-intensive environments. In our 3D animation and computer graphics group, we delivered a new version of our flagship SOFTIMAGE®|XSI® 3D animation solution, and previewed Face Robot™ – a revolutionary technology that sets new standards in facial animation for the film, postproduction, and games industries. The overwhelmingly positive response to these products suggests that they will make a significant impact in the marketplace and further energize our 3D business. AUDIO Avid’s Audio division, Digidesign, had another solid year in 2005 as the trend toward computer-based mixing in both the studio and live sound industries created increasing demand for our ICON and VENUE families of products. In the home studio sector, quality, portability, and cost-consciousness continued to drive buying decisions, and this trend benefited our Pro Tools LE™ and M-Audio® product lines, which cater to aspiring musicians and recording enthusiasts. We also launched a line of virtual software instruments, which work within our digital audio workstations to expand creative possibilities for composers, musicians, audio engineers, and other professionals. CONSUMER In the consumer video industry, Avid’s new Pinnacle division is pursuing two primary opportunities: the global video editing market and the European and Asian TV tuner markets. The main growth driver in the video editing market has been the increase in the use of video capture devices such as camcorders, digital still cameras with video capture capabilities, and cell phones – a trend that is expected to continue in the foreseeable future. The TV tuner market also presents a significant growth opportunity for Avid, as computer and TV-based consumer technologies continue to converge. With another record year behind us and positive momentum in all of our business segments, Avid is in a strong position to continue on a trajectory of growth, expansion, and innovation in the professional and consumer digital content industries. David Krall President and CEO 2005 Of the many ways in which technology has impacted everyday life in the past two decades, one of the most far-reaching has been the wholesale shift from analog to digital media. This trend has had a profound effect on the production, distribution, and consumption of content in every industry – from photography, architecture, and publishing to film, television, broadcast, music, and animation. In the expansive climate created by these vast technological changes, new companies have flourished – and entire industries have grown around them. One of the companies that most clearly embodies this enterprising spirit is Avid Technology, Inc. In the 18 years since we went into business as a small startup, we have grown into a global leader in digital content creation solutions. Along the way, our trail-blazing success in innovating new products has transformed the way professionals create films, TV shows, broadcasts, music, and 3D animation. None of this would have been possible in an analog world. Avid Executive Team back row: Paul J. Milbury Vice President and Chief Financial Officer Jeffrey S. Hastings Vice President and General Manager, Pinnacle Systems Joseph Bentivegna Vice President and Chief Operating Officer, Avid Video Michael J. Rockwell Vice President and Chief Technology Officer Sharad Rastogi Vice President of Corporate Development Timothy D. Ryan Vice President and General Manager, M-Audio front row: David A. Krall President and Chief Executive Officer David M. Lebolt Vice President and General Manager, Digidesign Patricia A. Baker Vice President of Human Resources Joel E. Legon Vice President and Corporate Controller Charles L. Smith Vice President and General Manager, Avid Video If the digitization of media gave Avid its raison d’etre in the late ‘80s, our ongoing success in the 21st century depends on the next logical steps in this digital revolution: • the move toward high-definition content; 2 0 • the shift from self-contained, content-creation stations 0 to networked collaboration; 5 • the conversion from analog to digital broadcast production; • the explosion of digital content at the consumer level – and the demand it creates for low-cost, mass-market editing tools; • the opportunities created by the mobility of media on devices like PDAs and cell phones and; • the rise of new generations of digital content professionals who aspire to learn their craft on industry-leading tools. These and other trends form the basis for Avid’s business 2 0 opportunities in all of our target industries. 0 4 Consolidated Statement of Operations (In thousands, except per share and employee data) Year ended December 31, 2 2005 2004 2003 0 0 3 Net revenues 2 $775,443 $589,605 $471,912 0 2 0 0 1 Net income 0 2 $33,980 $71,701 $40,889 Net income per share – diluted $0.86 $2.05 $1.25 Consolidated Balance Sheet Data As of December 31, 2005 2004 2003 Cash and marketable securities $238,430 $155,419 $196,309 Total assets $1,062,046 $576,234 $348,119 Total stockholders’ equity $839,597 $424,621 $227,105 Employees 2,613 2,014 1,582 $ $ $ $ $ 7 5 4 4 4 7 8 3 7 1 5 9 4 1 8 . 4 6 6 9 7 Avid’s impressive revenue growth over the past five years has resulted from organic development and strategic acquisitions. “ Avid has revolutionized the art form. We do more things than ever as a result.” – Dylan Tichenor, editor, Brokeback Mountain © Focus Features VIDEO “ By the end of 2005, 87% In our Video division, the migration from standard-def