Avid
Annual Report 2015

Plain-text annual report

AVID 2015 ANNUAL REPORT Louis Hernandez, Jr. Chairman, President and Chief Executive Officer To our shareholders: 2015 was a momentous year for our customers in the media industry and our company. The media industry landscape continued to face significant changes as participants are still adjusting to the explosion of content choices, new distribution channels, increases in consumption and the economic allocation of all participants. Technology continues to be a major enabler for the industry and our strategy is aimed at playing a more significant role in this transition for our clients. During the year, we continued executing on our transformation strategy to solve some of the biggest challenges in the industry and dramatically improve Avid’s financial profile, a process we began nearly three years ago. The strategy and vision that we formulated has already begun to shape the future of the media technology industry and we’re beginning to see the results in our financial performance and operating metrics. Furthermore, we remain firmly on track to complete our transformation, as planned, by 2017 and envision a meaningfully improved financial profile once completed. Avid Everywhere is our strategic vision for connecting creative professionals and media organizations with their audiences in a more powerful, efficient, collaborative, and profitable way by leveraging a common platform to streamline and simplify workflows across the value chain. This vision is designed to achieve a better return on our extensive distribution network, drive higher cross-sell activity with top tier customers and access the relatively untapped market of independent professionals, through flexible pricing and deployment models, while allowing Avid to share in more of the overall ecosystem. When I joined in 2013, we developed a three-phase transformational strategy to capitalize on our strengths, recapture our leadership position in the media tech industry and dramatically alter the financial profile of the Company. During 2015, we took a big step forward with strong bookings growth and wide market acceptance of our platform based solutions as we continue to shift to more of a recurring revenue model. Also, as the MediaCentral platform became more mature, we were able to execute on the next phase of our efficiency gain programs to create a leaner, more directed cost structure and direct our capital to the investments that provide the greatest return. We believe our 2015 financial performance validates our strategy and the growth in MediaCentral platform adoption demonstrates it’s already making a meaningful impact for our customers. By the end of 2015, we had more than 32,000 licensed platform users, representing a 54% increase in one year and over 25,000 paid subscribers for our industry leading creative solutions, a more than 400% annual increase. Bookings have not only stabilized, but grew 4% annually and 26% in the fourth quarter of 2015, reversing historical declines. As we focus on selling higher margin, strategic products, we are seeing more of those bookings translate to sustainable EBITDA growth in the long run. We believe 2016 will be the last full year of Avid’s dramatic transformation as we expect to be complete by mid-2017. There is still much to do, including aligning our people and resources to drive profitable growth, improving operating and cost efficiencies and elevating our engagement with the media community. The team at Avid is fully committed to completing the transformation and delivering a more attractive and sustainable financial profile for our shareholders. I would like to thank the investment community for their patience and continued support of Avid – especially as we continue to make the changes necessary today to transform Avid into the leader and innovator to helping all media organizations globally to create and distribute their creative content for the enjoyment of the world. We look forward to continued success in 2016 as we continue to expand the solid foundation we have established over the last three years. Sincerely, Louis Hernandez, Jr. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________________ FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015 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: 1-36254 _______________________ Avid Technology, Inc. (Exact Name of Registrant as Specified in Its Charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 04-2977748 (I.R.S. Employer Identification No.) 75 Network Drive Burlington, Massachusetts 01803 (Address of Principal Executive Offices, Including Zip Code) (978) 640-6789 (Registrant’s Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, $.01 Par Value Name of each exchange on which registered NASDAQ Global Select Market Securities Registered Pursuant to Section 12(g) of the Act: None _______________________ Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes 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 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 for 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 No Indicate by check mark whether the registrant has submitted and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer Non-accelerated Filer (Do not check if smaller reporting company) Accelerated Filer Smaller Reporting Company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $510,363,334 based on the closing price of the Common Stock on the NASDAQ Global Select Market on June 30, 2015. The number of shares outstanding of the registrant’s Common Stock as of March 10, 2016 was 39,629,593. DOCUMENTS INCORPORATED BY REFERENCE Document Description Portions of the Registrant’s Proxy Statement for the 2016 Annual Meeting of Stockholders 10-K Part III AVID TECHNOLOGY, INC. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015 TABLE OF CONTENTS Cautionary Note on Forward-Looking Statements PART I. ITEM 1. Business ITEM 1A. Risk Factors ITEM 1B. Unresolved Staff Comments ITEM 2. ITEM 3. ITEM 4. PART II. ITEM 5. ITEM 6. ITEM 7. Properties Legal Proceedings Mine Safety Disclosures Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk ITEM 8. Financial Statements and Supplementary Financial Information Report of Independent Registered Public Accounting Firm ITEM 9. ITEM 9A. ITEM 9B. PART III. ITEM 10. ITEM 11. ITEM 12. ITEM 13. ITEM 14. PART IV. ITEM 15. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Exhibits and Financial Statement Schedules SIGNATURES INDEX TO EXHIBITS Page iii 1 10 25 26 26 27 28 30 32 54 56 57 94 94 98 99 99 99 99 99 100 101 ii CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K, or Form 10-K, filed by Avid Technology, Inc. together with its consolidated subsidiaries, “Avid” or the “Company”, or “we”, “us” or “our” unless the context indicates otherwise includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained in this Form 10-K that relate to future results or events are forward-looking statements. Forward-looking statements may be identified by use of forward-looking words, such as “anticipate,” “believe,” “confidence,” “could,” “estimate,” “expect,” “feel,” “intend,” “may,” “plan,” “should,” “seek,” “will” and “would,” or similar expressions. Forward-looking statements may involve subjects relating to the following: • • • • • • • • • • • • • • • • • • • • • • our ability to successfully implement our Avid Everywhere strategic plan and other strategic initiatives, including our cost saving strategies; our ability to develop, market and sell new products and services; anticipated trends relating to our sales, financial condition or results of operations, including our shift to a recurring revenue model and complex enterprise sales with elongated sales cycles; our ability to achieve our goal of expanding our market positions; the anticipated performance of our products; our business strategies and market positioning; our ability to successfully consummate acquisitions or investment transactions and successfully integrate acquired businesses including the acquisition of Orad Hi-Tech Ltd (“Orad”), into our operations; our anticipated benefits and synergies from and the anticipated financial impact of any acquired business (including Orad); the anticipated trends and developments in our markets and the success of our products in these markets; our ability to mitigate and remediate effectively the material weaknesses in our internal control over financial reporting, and the expected timing thereof; our capital resources and the adequacy thereof; our ability to service our debt and meet the obligations thereunder, including our ability to satisfy our conversion and repurchase obligations under our convertible senior notes due 2020; the outcome, impact, costs and expenses of any litigation or government inquiries to which we are or become subject; the effect of the continuing worldwide macroeconomic uncertainty on our business and results of operation; the expected timing of recognition of revenue backlog as revenue, and the timing of recognition of revenues from subscription offerings; estimated asset and liability values and amortization of our intangible assets; our compliance with covenants contained in the agreements governing our indebtedness; changes in inventory levels; seasonal factors; plans regarding repatriation of foreign earnings; fluctuations in foreign exchange and interest rates; and the risk of restatement of our financial statements. Actual results and events in future periods may differ materially from those expressed or implied by the forward-looking statements in this Form 10-K. There are a number of factors that could cause actual events or results to differ materially from those indicated or implied by forward-looking statements, many of which are beyond our control, including the risk factors discussed in Item 1A of this Form 10-K. In addition, the forward-looking statements contained in this Form 10-K represent our estimates only as of the date of this filing and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements or otherwise. iii The information included under the heading “Stock Performance Graph” in Item 5 of this Form 10-K is “furnished” and not “filed” and shall not be deemed to be “soliciting material” or subject to Regulation 14A, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Exchange Act or the Securities Act of 1933, as amended, or the Securities Act, except to the extent that we specifically incorporate it by reference. We own or have rights to trademarks and service marks that we use in connection with the operation of our business. Avid is a trademark of Avid Technology, Inc. Other trademarks, logos, and slogans registered or used by us and our subsidiaries in the United States and other countries include, but are not limited to, the following: Avid Everywhere, Avid Motion Graphics, AirSpeed, EUCON, iNEWS, Interplay, ISIS, Avid MediaCentral Platform, Mbox, Media Composer, NewsCutter, Nitris, Pro Tools, Sibelius and Symphony. Other trademarks appearing in this Form 10-K are the property of their respective owners. iv ITEM 1. BUSINESS OVERVIEW PART I We provide an open, integrated, and comprehensive technology platform, along with applications and services that enable the creation, distribution, and monetization of audio and video content. Specifically, we develop, market, sell, and support software and hardware for digital media content 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. Our products are used 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 independent video and audio creative professionals, as well as aspiring professionals. Projects produced using our products include feature films, television programming, live events, news broadcasts, commercials, music, video and other digital media content. Our mission is to create the most powerful and collaborative media network that enables the creation, distribution and monetization of the most inspiring content in the world. Guided by our Avid Everywhere strategic vision, we strive to deliver the industry’s most open, innovative and comprehensive media platform connecting content creation with collaboration, asset protection, distribution and consumption for the media in the world – from the most prestigious and award-winning feature films, music recordings, and television shows, to live concerts and news broadcasts. We have been honored over time for our technological innovation with 14 Emmy Awards, one Grammy Award, two Oscars and the first ever America Cinema Editors Technical Excellence Award. Our solutions were used in all 2016 Oscar nominated films for Best Picture, Best Film Editing, Best Sound Editing, Best Sound Mixing and Best Original Score. Our audio solutions were also used in all 2016 Grammy nominated recordings for Best Album of The Year, Best Record of the Year and Best Song of the Year. RECENT EVENTS Restructuring Plan In the first quarter of 2016, we commenced restructuring actions that are part of a broad restructuring plan encompassing a series of measures intended to allow us to more efficiently operate in a leaner, and more directed cost structure. These include reductions in our workforce, facilities consolidation, transferring certain business processes to lower cost regions, and reducing other third- party services costs. In connection with this restructuring plan, we expect to incur incremental cash expenditures of approximately $25 million relating to termination benefits, facility costs, employee overlap expenses and related actions. We anticipate that the restructuring plan will be substantially complete by the end of the second quarter of 2017 and will result in annualized costs savings of appropriately $68 million. Financing Agreement with Cerberus Business Finance, LLC In connection with the cost efficiency program, on February 26, 2016 (the “Closing Date”), we entered into a Financing Agreement (the “Financing Agreement”) with Cerberus Business Finance, LLC, as collateral and administrative agent, and the lenders party thereto (the “Lenders”). Pursuant to the Financing Agreement, the Lenders agreed to provide us with (a) a term loan in the aggregate principal amount of $100 million (the “Term Loan”) and (b) a revolving credit facility (the “Credit Facility”) of up to a maximum of $5 million in borrowings outstanding at any time. All outstanding loans under the Financing Agreement will become due and payable, on the earlier of February 26, 2021 and the date that is 30 days prior to June 15, 2020, the scheduled maturity date of our outstanding 2.00% convertible senior notes due 2020. We borrowed the full amount of the Term Loan, or $100 million, as of the Closing Date, but did not borrow any amount under the Credit Facility as of the Closing Date. Proceeds from the term loan will be used to replace our existing $35 million revolving credit facility, finance the Company’s efficiency program and other initiatives, and provide operating flexibility throughout the remainder of the transformation in this period of heightened market volatility. We estimate that after paying for both debt issuance costs and the efficiency program, the new financing will provide approximately $70 million of available liquidity, about half of which replaces the existing revolving credit facility with the remainder providing incremental liquidity to strengthen the Company’s balance sheet. 1 Concurrently with the entry into the Financing Agreement, on February 26, 2016, we terminated our existing Credit Agreement, dated June 22, 2015, with KeyBank National Association, as Administrative Agent and the other lender parties thereto, and repaid all outstanding borrowings under such agreement. There were no penalties paid by us in connection with this termination. For a more detailed description of the restructuring plan and the Financing Agreement, see Note P, Restructuring Costs and Accruals, and Note R, Long Term Debt and Credit Agreement, to our Condensed Consolidated Financial Statements in Item 8 of this Form 10-K. CORPORATE STRATEGY Technology has enabled almost every aspect of how we live to become increasingly digitized, and acceleration of digitization is having a tremendous impact on the media industry and altering the industry value chain. Today’s consumers are empowered to create and consume content on-demand-anywhere, anytime. Organizations are under pressure to connect and automate the entire creation-to-consumption workflow. This consumerization has increased the cost and complexity of monetizing assets, which in turn leads to demand for new platforms for distribution and consumption. Organizations need to rely on partners with the strategic understanding and technological expertise to help navigate the challenges they are facing. We believe we are uniquely positioned as a proven and trusted leader to effectively help our customers in the media industry navigate through this period of unprecedented changes. Our strategy is built on three pillars, Avid Everywhere, The Avid Advantage and the Avid Customer Association (“ACA”). Avid Everywhere is our strategic vision for connecting creative professionals and media organizations with their audiences in a more powerful, efficient, collaborative, and profitable way. Central to the Avid Everywhere vision is the Avid MediaCentral Platform, an open, extensible, and customizable foundation that streamlines and simplifies workflows by tightly integrating all Avid or third party products and services that run on top of it. The platform provides secure and protected access, which enables the creation and delivery of content faster and easier through a set of modular application suites that together represent an open, integrated, and flexible media production and distribution environment for the media industry. The Avid Advantage complements Avid Everywhere by offering a new standard in service, support and education to enable our customers to derive more efficiency from their Avid investment. Finally, the ACA is an association of dedicated media community visionaries, thought leaders and users designed to provide essential strategic leadership to the media industry, facilitate collaboration between Avid and key industry leaders and visionaries, and deepen relationships between our customers and us. Another key element of our strategy is our transition to a subscription or recurring revenue based model. In 2014 we began offering subscription based licensing options for some of our products and solutions. These licensing options offer choice in pricing and deployment to suit our customers’ needs and are expected to increase recurring revenue on a longer term basis. However, during our transition to a recurring revenue model, we expect that our revenue, deferred revenue, and cash flow from operations will be adversely affected as an increasing portion of our total revenue is recognized ratably rather than up front, and as new product offerings are sold at a wider variety of price points. As a complement to our core strategy, we continue to review and implement programs throughout the Company to reduce costs, increase operational efficiencies, align talent and enhance our business, including in connection with the restructuring plan announced in February 2016, as described in more detail in “Recent Events” as part of which we are realigning our employee base to better serve our customers’ needs. We expect these initiatives will be complete in mid-2017. We have organized our existing hardware and software products and introduced new solutions in four suites, all built upon the MediaCentral Platform. These four suites encompass both audio and video products and solutions and are summarized below: • Artist Suite encompasses all of our products and tools used to create content, including video editing solutions, digital audio workstations (DAW), music notation software, control surfaces and live sound systems. Products and tools in the Artist Suite can be deployed on premise, cloud-enabled, or through a hybrid approach. Users can collaborate to access, edit, and share the same media; and collaborate with others as if they were all in the same facility. • Media Suite includes all of our tools and services used to manage, protect, distribute, and monetize media, including solutions for newsroom management, asset management, and multiplatform distribution. We are also expanding the Media Suite to include metadata tagging, protection and encryption, and analytics. Studio Suite comprises of in-studio tools for on-air program and viewership enhancement, including 3D real-time graphics, replay servers and sports enhancements. • 2 • Storage Suite refers to all of our products and tools used to capture, store, and deliver media, including online storage, nearline storage, and ingest/playout servers. These products and tools work in close concert with the Media Suite’s tagging and asset management. CUSTOMER MARKETS We provide digital media content-creation, management and distribution products and solutions to customers in the following markets: • Broadcast and Media. This market consists of broadcast, government, sports and other organizations that acquire, create, process, and/or distribute audio and video content to a large audience for communication, entertainment, analysis, and/or forensic purposes. Customers in this industry rely on workflows that span content acquisition, creation, editing, distribution, sales and redistribution and utilize all content distribution platforms, including web, mobile, internet protocol television, cable, satellite, on-air and various other proprietary platforms. For this market, we offer a range of open products and solutions including hardware- and software-based video- and audio-editing tools, collaborative workflow and asset management solutions, and automation tools, as well as scalable media storage options. Our domain expertise also allows us to provide customers in this market with a range of professional and consulting services. We sell into this market through our direct sales force and resellers. • Video and Audio Post and Professional. This market is made up of individual artists and entities that create audio and video media as a paid service, but do not currently distribute media to end consumers on a large scale. This industry spans a wide-ranging target audience that includes: independent video editors, facilities and filmmakers that produce video media as a business but are not broadcasters; professional sound designers, editors and mixers and facilities that specialize in the creation of audio for picture; songwriters, musicians, producers, film composers and engineers who compose and record music professionally; technicians, engineers, rental companies and facilities that present, record and broadcast audio and video for live performances; and students and teachers in career technical education programs in high schools, colleges and universities, as well as in post-secondary vocational schools, that prepare students for professional media production careers in the digital workplace. For this market, we offer a range of products and solutions based on the Avid MediaCentral Platform, including hardware- and software-based creative production tools, scalable media storage options and collaborative workflows. Our domain expertise also allows us to provide customers in this market with a broad range of professional services. We sell into this market through storefront and on-line retailers, as well as through our direct sales force and resellers. PRODUCTS AND SERVICES Overview Our MediaCentral Platform is comprised of a set of modular application suites and new private and public marketplaces that together represent an open, integrated and flexible media production and distribution environment in the industry. With on- premises and cloud-enabled deployment options, as well as subscription, floating and perpetual licensing options, customers have multiple choices over how they use Avid solutions. The following table presents our net revenues, which includes the amortization of deferred revenues, for the periods indicated (in thousands): Video products and solutions Audio products and solutions Total products and solutions Services Total net revenues Year Ended December 31, 2014 2013 2015 $ $ 201,559 134,812 336,371 169,224 505,595 $ $ 233,464 145,163 378,627 151,624 530,251 $ $ 243,173 152,358 395,531 167,881 563,412 3 The following table presents our net revenues, which includes the amortization of deferred revenues, as a percentage of total net revenues for the periods indicated: Video products and solutions Audio products and solutions Total products and solutions Services Total net revenues Video Products and Solutions Professional Video Creative Tools Year Ended December 31, 2014 2013 2015 40% 27% 67% 33% 100% 44% 27% 71% 29% 100% 43% 27% 70% 30% 100% We offer a range of software and hardware video-editing tools for the professional. Our award-winning Media Composer product line is used to edit video content, including television programming, commercials and films, while our NewsCutter option and iNews systems are designed for the fast-paced world of news production. Our Avid Symphony option is used during the “online” or “finishing” stage of post-production, during which the final program is assembled in high resolution with finished graphics, visual effects, color grading and audio tracks. Our Media Composer | Cloud solution enables broadcast news professionals to acquire, access, edit and finish stories anytime, from everywhere. Leveraging a cloud-based architecture, this solution gives contributors the ability to craft stories where they are happening and speed them to air while maintaining connectivity with the newsroom operation. In 2014, we released Media Composer version 8 with subscription offerings and updates, and with resolution flexibility and independence, which allows users to manage and edit high-resolution media content with ease. These new versions are designed to extend the production capabilities of these solutions and demonstrates our continuing commitment to provide tools that allow for improved creativity and productivity of the professional editor, delivered in a way most attractive to the user. In April 2015, we introduced the Avid Artist | DNxIO, a hardware interface designed to accelerate high-resolution video production. When combined with the industry’s preeminent Media Composer video editing software, the Avid Artist | DNxIO delivers best-in-class high-res video ingest, editing, monitoring, and output, giving video professionals the flexible, open, and integrated creative tools they need to efficiently create the highest-quality media. Further, because it is built on the Avid MediaCentral Platform, Avid Artist | DNxIO is compatible with any Avid Artist Suite solutions and many third-party creative tools. Revenues from our professional video creative tools accounted for 10%, 8% and 10% of our net revenues for 2015, 2014 and 2013, respectively. Media Management Solutions Our Avid MediaCentral | UX web and mobile-based apps extend the capability of our Avid Interplay | MAM and Avid Interplay | Production asset management solutions by providing real-time access to media assets for the on-the-go media professional. Avid Interplay | MAM allows users to focus on managing content and workflows by giving them the tools to connect their media operations and business intelligence, control movement of media between various storage systems, configure metadata, and leverage a service-oriented architecture structure to integrate in-house and third-party applications. In April 2015, we introduced Interplay | MAM 5, enabling organizations both large and small to manage the entire content lifecycle and reduce media operation costs. This release completes the integration of all Media Suite modules into the MediaCentral Platform. Avid Interplay | Production enhances production team collaboration by coordinating the collaborative editorial workflow of team members at each site, many of whom may be working on the same projects at the same time. Avid Interplay | Production also manages the detailed composition of a project and provides the ability to track media, production file formats, and a project’s history. In June 2015, we acquired Orad Hi-Tech Systems Ltd. (“Orad”) and integrated its 3D real-time graphics, video servers and related asset management solutions. The acquisition adds the applications to our Studio Suite which we intend to connect to the Avid MediaCentral Platform. Revenues from media management solutions accounted for 7%, 9% and 8% of our net revenues in 2015, 2014 and 2013, respectively. 4 Video Storage and Server Solutions Our Avid ISIS 5500 and ISIS 7500 shared storage systems are real-time, open solutions that bring the power of shared storage to local, regional, national and multinational broadcasters and post-production facilities at competitive prices. Customers can improve allocation of creative resources and support changing project needs with an open shared storage platform that includes the ISIS file system technology on lower cost hardware, support for third-party applications and streamlined administration to create more content more affordably. In April 2014, we introduced ISIS | 2500 as a near-line storage solution with common off- the-shelf storage with an application layer that provides secure storage and allows customers to extend their library of accessible media assets. In April 2015, we introduced ISIS | 1000 shared storage, bringing small production teams the same collaborative power used on larger-scale productions and news broadcasts-customized for their needs, at a price they can afford. Our on-air server solutions include AirSpeed 5000 and AirSpeed 5500, which enable broadcasters to automate the ingest and playout of television and news programming. The AirSpeed 5000 and 5500 video servers work with a wide range of applications to improve workflow and provide cost-efficient ingest and play to air capabilities for broadcasters of any size. Revenues from video storage and server solutions accounted for 22%, 25% and 24% of our net revenues in 2015, 2014 and 2013, respectively. Audio Products and Solutions Digital Audio Software and Workstation Solutions Our Pro Tools digital audio software and workstation solutions facilitate the audio production process, including music and sound creation, recording, editing, signal processing, integrated surround mixing and mastering, and reference video playback. The Pro Tools platform supports a wide variety of internally developed and third-party software plug-ins and integrated hardware. Pro Tools solutions are offered at a range of price points and are used by professionals and aspiring professionals in music, film, television, radio, game, Internet and other media production environments. In January 2015, we announced Pro Tools version 12 with subscription offerings and new features and updates, including the ability to collaborate over the cloud, as well as Pro Tools | First, which allows beginners to access the same music creation tools used by professionals. In January 2016, we introduced Pro Tools version 12.5, offering select customers early access to the highly anticipated Avid Cloud Collaboration for Pro Tools. Avid Cloud Collaboration makes it easy for artists and audio professionals to compose, record, edit, and mix projects from any location worldwide. In support of this release, we also announced that the Artist Community, an online community designed to facilitate collaboration, is now open to everyone. Our Pro Tools HD family of digital audio workstations, designed to provide high performance, low latency, and great sound quality, provides music production professionals with two powerful solutions, the Pro Tools | HD Native system and the Pro Tools | HDX system. Our Pro Tools | HDX workstation represents a new generation of Pro Tools HD solutions by providing more power, higher audio quality, and easier ways to record, edit and mix demanding audio productions. The Pro Tools | HD Native Thunderbolt, uses a high-speed Thunderbolt interface to connect to a laptop or desktop computer to eliminate monitor latency while recording. Our audio recording interfaces are designed to deliver high audio quality plus hands-on controls giving musicians the tools to produce quality recordings in less time. Avid partnered with US based Apogee Electronics Corp. and introduced two new audio recording interfaces: The Pro Tools | Duet and Pro Tools | Quartet, comprised of Apogee audio interfaces and Pro Tools software to provide fully EUCON integrated solutions for musicians and audio engineers. Revenues from digital audio software and workstation solutions accounted for 14%, 16% and 16% of our net revenues in 2015, 2014 and 2013, respectively. Control Surfaces, Consoles and Live-Sound Systems We offer a range of complementary control surfaces and consoles, leveraging the open industry standard protocol EUCON (Extended User Control) to provide open solutions that meet the needs of customers ranging from the independent professional to the high-end broadcaster. Our System 5 digital audio console is a large-format, scalable console with power on demand to mix large feature films or album projects. The addition of our EUCON Hybrid option extends the control capabilities of a System 5 console, enabling the user to bring audio tracks from multiple digital audio workstations onto the console surface for mixing. Our Pro Tools | S6 control surface for sound recording, mixing and editing was designed as a state-of-the-art modular solution that 5 scales to meet both current and future customer requirements. S6 is designed for audio professionals in demanding production environments, delivering the performance needed to complete projects faster while producing high quality mixes. Our Artist Series control surfaces offer integrated, hands-on control for price-sensitive applications. Compact and portable, all control surfaces in the Artist line feature EUCON, allowing hands-on control of the user’s applications. Our VENUE product family includes console systems for mixing audio for live sound reinforcement for concerts, theater performances and other public address events. We offer a range of VENUE systems designed for large performance settings, such as stadium concerts, as well as medium-sized theaters and houses of worship. VENUE systems allow the direct integration of Pro Tools solutions to create and playback live recordings. The VENUE | SC48 Remote System features the VENUE | SC48 digital console paired with the VENUE Stage 48 remote box, enabling the user to place input/output devices away from the console and closer to the sources, eliminating cable clutter. In April 2015, we introduced Avid VENUE| S6L live sound mixing system, featuring a modern, intuitive touch-based interface that enable audio professionals to easily handle the largest, most complex tours and events. VENUE | S6L is a fully modular, scalable live sound mixing system that delivers best-in-class functionality for a range of live sound mixing applications, including front-of-house, monitor, broadcast, theater, and more. Featuring VENUE | E6L, the industry’s most advanced live sound engine, VENUE | S6L offers unprecedented power to handle huge channel and plug-in counts at the lowest possible latency. VENUE | S6L ensures the highest sound quality, with all processing at 96 Hz, and support for higher sample rates is possible given the significant processing power available. Furthermore, VENUE | S6L is a networked system and can be customized to meet the needs and budget of essentially any professional production. Revenues from control surfaces and live systems accounted for 10%, 10% and 9% of our net revenues in 2015, 2014 and 2013, respectively. Notation Software Our Sibelius-branded software allows users to create, edit and publish musical scores. Sibelius software is used by composers, arrangers and other music professionals. Student versions are also available to assist in the teaching of music composition and score writing. In 2015 we introduced Sibelius | Cloud Publishing, which allows users to view, play, transpose, print and purchase scores using current web browsers and mobile devices. The newest version of our musical notation software, Sibelius 8.1, helps composers to create beautiful, accurate and easy-to-read scores. As part of a series of regular updates delivered through Avid All Access Plans, Sibelius 8.1 introduces several of the customer community’s top requests, demonstrating Avid’s commitment to listening to the needs of customers, a key tenet of Avid Everywhere. Sibelius music notation software offers sophisticated, yet easy-to-use tools that are proven and trusted by composers, arrangers, publishers, educators, and students alike. We also offer Avid Scorch, an application for the Apple iPad mobile device that turns an iPad into an interactive score library with access to sheet music through an in-app store with more than 150,000 premium titles. Professional Services and Customer Care Our Professional Services team delivers workflow design and consulting; program and project management; system installation and commissioning; custom development and role-based product level training. The Professional Services team facilitates the engagement with our customers to maximize their investment in technology; increase their operational efficiency; and enable them to reduce deployment risk and implement our solutions. Our Education team delivers public and private training to our customers and alliance partners to ensure that they have the necessary skills and technical competencies to deploy, use, administer and create Avid solutions. The Education team develops and licenses curriculum content for use by third party Avid Learning partners to deliver training to customers, users and alliance partners. The Education team includes the Avid Certification program which validates the skills and competency of Avid users, administrators, instructors, support representatives and developers. Our Customer Care team provides customers with a partner committed to giving them help and support when they need it. We offer a variety of services contracts and support plans, allowing each customer to select the level of technical and operational support that they need to maintain their operational effectiveness. Our global Customer Care team of more than 300 in-house and third-party industry professionals offers a blend of technology expertise and real-world experience from throughout the audio, visual, and entertainment industries. The team’s mission is to provide timely, informed responses to our customers’ issues and proactive maintenance for our solutions to help our customers maintain high standards of operational effectiveness. 6 COMPETITION Our customer markets are highly competitive and subject to rapid change and declining average selling prices. The competitive landscape is fragmented with a large number of companies providing various types of products and services in different markets and geographic areas. We provide integrated solutions that compete based on total value workflow, features, quality, service and price. Companies with which we compete in some contexts may also act as our partners in other contexts, such as large enterprise customer environments. Certain companies that compete with us across some of our products and solutions are listed below by the market in which they compete: • Broadcast and Media: The Associated Press Inc., Belden Inc., Bitcentral Inc., Dalet S.A., EVS Corporation, Harmonic Inc., Imagine Communications Corp, Ross Video Limited and Vizrt Ltd., among others. • Audio and Video Post and Professional: Ableton AG, Autodesk Inc., Blackmagic Design Pty Ltd, Harman International Industries Inc., Universal Audio Inc. and Yamaha Corporation, among others. In addition, we compete across both previously mentioned markets with companies such as Adobe Systems Incorporated, Apple Inc., Editshare LLC, Snell Advanced Media, Sony Corporation and EMC Corporation. Some of our principal competitors are substantially larger than we are and have greater financial, technical, marketing and other resources than we have. For a discussion of these and other risks associated with our competitors, see “Risk Factors” in Item 1A of this Form 10-K. OPERATIONS Sales and Services Channels We market and sell our products and solutions through a combination of direct, indirect and digital sales channels. Our direct sales channel consists of internal sales representatives serving select customers and markets. Our indirect sales channels include global networks of independent distributors, value-added resellers, dealers and retailers. Our digital sales channel is represented by the online Avid Marketplace. We have significant international operations with offices in 24 countries and the ability to reach over 130 countries through a combination of our direct sales force and resellers. Sales to customers outside the United States accounted for 63%, 64% and 61%, respectively, of our net revenues in 2015, 2014 and 2013. Additional information about the geographic breakdown of our revenues and long-lived assets can be found in Note Q to our Consolidated Financial Statements in Item 8 of this Form 10-K. For additional information about risks associated with our international operations, see “Risk Factors” in Item 1A of this Form 10-K. We generally ship our products shortly after the receipt of an order. However, a high percentage of our revenues has historically been generated in the third month of each fiscal quarter and concentrated in the latter part of that month. Orders that may exist at the end of a quarter and have not been shipped are not recognized as revenues and are included in revenue backlog. Certain orders included in revenue backlog may be reduced, canceled or deferred by our customers. Our revenue backlog, as we define it, consists of firm orders received and includes both (i) orders where the customer has paid in advance of our performance obligations being fulfilled, and (ii) orders for future product deliveries or services that have not yet been invoiced by us. The expected timing of the recognition of revenue backlog into revenue is based on current estimates and could change based on a number of factors, including (i) the timing of delivery of products and services, (ii) customer cancellations or change orders, (iii) changes in the estimated period of time Implied Maintenance Release PCS is provided to customers or (iv) changes in accounting standards or policies. Implied Maintenance Release PCS, as we define it, is the implicit obligation to make such software updates available to customers over a period of time which represents implied post-contract customer support and is deemed to be a deliverable in each arrangement and accounted for as a separate element. As there is no industry standard definition of revenue backlog, our reported revenue backlog may not be comparable with other companies. Additional information on our revenue backlog can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operation.” We provide customer care services directly through regional in-house and contracted support centers and major-market field service representatives and indirectly through dealers, value-added resellers and authorized third-party service providers. Depending on the solution, customers may choose from a variety of support offerings, including telephone and online technical 7 support, on-site assistance, hardware replacement and extended warranty, and software upgrades. In addition to customer care services, we offer a broad array of professional services, including installation, integration, planning and consulting services, and customer training. Manufacturing and Suppliers Our internal manufacturing operations consist primarily of the testing of subassemblies and components purchased from third parties, the duplication of software, and the configuration, final assembly and testing of board sets, software, related hardware components and complete systems. In addition to our internal manufacturing operations, we rely on a network of contractors around the globe to manufacture many of our products, components and subassemblies. Our products undergo testing and quality assurance at the final assembly stage. We depend on sole-source suppliers for certain key hardware product components and finished goods, including some critical items. Although we have procedures in place to mitigate the risks associated with our sole-sourced suppliers, we cannot be certain that we will be able to obtain sole-sourced components or finished goods from alternative suppliers or that we will be able to do so on commercially reasonable terms without a material impact on our results of operations or financial position. For the risks associated with our use of contractors and sole-source vendors, see “Risk Factors” in Item 1A of this Form 10-K. Our company-operated manufacturing facilities, primarily for final assembly and testing of certain products, are located in: Kfar Saba, Israel, Dublin, Ireland and Mountain View, California. Our Dublin facility is ISO 14001, Environmental Management System, certified. We and our contract manufacturers manufacture our products at a relatively limited number of different facilities located throughout the world, and, in most cases, the manufacturing of each of our products is concentrated in one or a few locations. An interruption in manufacturing capabilities at any of these facilities, as a result of equipment failure or other reasons, could reduce, delay or prevent the production of our products. Because some of our manufacturing or our contract manufacturer’s operations are located outside of the United States, including in Ireland, China and Thailand, those manufacturing operations are also subject to additional challenges and risks associated with international operations. For these and other risks associated with our manufacturing operations, see “Risk Factors” in Item 1A of this Form 10-K. Research and Development We are committed to delivering best-in-class digital media content-creation solutions that are designed for the unique needs, skills and sophistication levels of our target customer markets. Having helped establish the digital media technology industry, we are building on a 25+ year heritage of innovation and leadership in developing content-creation solutions. We have research and development, or R&D, operations around the globe. Our R&D efforts are focused on the development of digital media content- creation, distribution, and monetization tools that operate primarily on the Mac, Windows and Linux platforms. Our R&D efforts also include networking and storage initiatives intended to deliver standards-based media transfer and media asset management tools, as well as stand-alone and network-attached media storage systems for workgroups. In addition to our internal R&D efforts, we outsource a significant portion of certain R&D projects to internationally based partners in Kiev, Ukraine and, to a lesser extent, Thailand. Our R&D expenditures for 2015, 2014 and 2013 were $95.9 million, $90.4 million and $95.2 million, respectively, which represented 19%, 17% and 17%, respectively, of our net revenues. For the risks associated with our use of partners for R&D projects, see “Risk Factors” in Item 1A of this Form 10-K. Our company-operated R&D operations are located in: Burlington, Massachusetts; Mountain View, California; Berkeley, California; Santa Cruz, California; Munich, Germany; Kaiserslautern, Germany; Kfar Saba, Israel; Szczecin, Poland; and Montreal, Canada. We also partner with a vendor in Ukraine for outsourced R&D services and a vendor in Thailand for hardware R&D services. We also have been building our own development team in Taiwan. Intellectual Property We regard our software and hardware as proprietary and protect our proprietary interests under the laws of patents, copyrights, trademarks and trade secrets, as well as through contractual provisions. We have obtained patents and have registered copyrights, trademarks and service marks in the United States and in many foreign countries. At December 31, 2015, we held 172 U.S. patents, with expiration dates through 2033, and had 24 patent applications pending with the U.S. Patent and Trademark Office. We have also registered or applied to register various trademarks and service marks in the United States and a number of foreign countries, including Avid, Avid Everywhere, Media Composer, Pro Tools and 8 Sibelius. As a technology company, we regard our patents, copyrights, trademarks, service marks and trade secrets as being among our most valuable assets, together with the innovative skills, technical competence and marketing abilities of our personnel. Our software is licensed to end users pursuant to shrink-wrap, embedded, click-through or signed license agreements. Our products generally contain features to guard against unauthorized use. Policing unauthorized use of computer software is difficult, and software piracy is a persistent problem for us, as it is for the software industry in general. Although we attempt to protect our intellectual property rights through patents, trademarks, copyrights, licensing arrangements, maintaining certain technology as trade secrets and other measures, we cannot assure you that any patent, trademark, copyright or other intellectual property rights owned by us will not be invalidated, circumvented or challenged, that such intellectual property rights will provide competitive advantages to us, or that any of our pending or future patent applications will be issued with the claims, or the scope of the claims, sought by us, if at all. We cannot assure you that others will not develop technologies that are similar or superior to our technology, duplicate our technology or design around the patents that we own. In addition, effective patent, copyright and trade secret protection may be unavailable or limited in countries in which we do business or may do business in the future. For these and other risks associated with the protection of our intellectual property, see “Risk Factors” in Item 1A of this Form 10-K. HISTORY AND EMPLOYEES Avid was incorporated in Delaware in 1987. We are headquartered in Burlington, Massachusetts, with operations in North America, South America, Europe, Asia and Australia. At December 31, 2015, our worldwide workforce consisted of 1,522 employees and 420 external contractors. AVAILABLE INFORMATION We make available free of charge on our website, www.avid.com, copies of our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and all amendments to those reports as soon as practicable after filing with the Securities and Exchange Commission, or SEC. Additionally, we will provide paper copies of all of these filings free of charge upon request. Alternatively, these reports can be accessed at the SEC’s Internet website at www.sec.gov. The information contained on our web site shall not be deemed incorporated by reference in any filing under the Securities Act or the Exchange Act. 9 ITEM 1A. RISK FACTORS You should carefully consider the risks and uncertainties described below in addition to the other information included or incorporated by reference in this Form 10-K before making an investment decision regarding our common stock. If any of the following risks were to actually occur, our business, financial condition or operating results would likely suffer, possibly materially, the trading price of our common stock could decline, and you could lose part or all of your investment. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. Risks Related to Our Business and Industry If we are unable to successfully execute on our strategy, our business, financial condition, and results of operations could be adversely affected. We are in the process of transforming our business based on a strategy built on three pillars, Avid Everywhere, The Avid Advantage and the Avid Customer Association. As part of our corporate strategy we have organized our products in four suites, all built upon our MediaCentral Platform. The ongoing implementation of our strategy may require additional capital that we may not have access to on reasonable terms or at all. Additionally, our strategy is requiring us to develop expertise in new areas and establish new competencies either through talent acquisition or internal development, which we may not be able to successfully achieve. Moreover, the pace and scope of the transformation contemplated in our strategy increases the risk that not all of our strategic plans will deliver the expected benefits within the anticipated time frames, or at all. Furthermore, as a part of our strategy we are also identifying and executing on opportunities to reduce operating costs. If we are unable to successfully execute on our strategy, our business, financial condition, and results of operations could be adversely affected. We operate in highly competitive markets, and our competitors may be able to draw upon a greater depth and breadth of resources than those that are available to us. We operate in highly competitive markets characterized by pressure to innovate, expand feature sets and functionality, accelerate new product releases and reduce prices. Markets for certain of our products also have limited barriers to entry. There is an additional risk of consolidation among our competitors, which could result in fewer, more effective competitors. Customers consider many factors when evaluating our products relative to those of our competitors, including innovation, ease of use, price, feature sets, functionality, reliability, performance, reputation, and training and support, and we may not compare favorably against our competitors in all respects. Some of our current and potential competitors have longer operating histories, greater brand recognition and substantially greater financial, technical, marketing, distribution and support resources than we do. As a result, our competitors may be able to deliver greater innovation, respond more quickly to new or emerging technologies and changes in market demand, devote more resources to the development, marketing and sale of their products, successfully expand into emerging and other international markets, or price their products more aggressively than we can. If our competitors are more successful than we are in developing products or in attracting and retaining customers, our financial condition and operating results could be adversely affected. The rapid evolution of the media industry is changing our customers’ needs, businesses and revenue models, and if we cannot anticipate or adapt quickly, our business will be harmed. The media industry has rapidly and dramatically transformed over the past few years and is continuing to do so as free content, minimal entry costs for creation and distribution, and the expansion of mobile devices have become prevalent. As a result, our traditional customers’ needs, businesses and revenue models are changing, often in ways that deviate from our core strengths and traditional bases. If we cannot anticipate these changes or adapt to them quickly, our business will be harmed. For example, our customers have to address the increasing digitization of the media industry, which requires the creation of a more seamless value chain between content creation and monetization. Furthermore, because of the consumerization of the media industry, there is more pressure to create media that can be repurposed in a variety of ways in an efficient manner. As a result of these industry changes, traditional advertising channels are also facing competition from web and mobile platforms, and diminished revenues from traditional advertising could cause some customers’ budgets for the purchase of our solutions to decline; this may be particularly true among local television stations, which in the past have been an important customer industry for us. Additionally, 10 our customers may also seek to pool or share facilities and resources with others in their industry and engage with providers of software as a service. The ongoing rapid evolution of the media industry may reduce demand for some of our existing products and services. New or non-traditional competitors may arise or adapt in response to this evolution of the media industry, which could create downward price pressure on our products and solutions and reduce our market share and revenue opportunities. Our success depends in significant part on our ability to provide innovative products and solutions in response to dynamic and rapidly evolving market demand. To succeed in our market, we must deliver innovative products and solutions. Innovation requires both that we accurately predict future market trends and customer expectations and that we quickly adapt our development efforts in response. We also have the challenge of protecting our product roadmap and new product initiatives from leaks to competitors that might reduce or eliminate any innovative edge that we seek to gain. Predicting market trends is difficult, as our market is dynamic and rapidly evolving. Additionally, given the complex, sophisticated nature of our solutions and our typically lengthy product development cycles, we may not be able to rapidly change our product direction or strategic course. If we are unable to accurately predict market trends or adapt to evolving market conditions, our ability to capture customer demand will suffer and our market reputation and financial performance will be negatively affected. Even to the extent we make accurate predictions and possess the requisite flexibility to adapt, we may be able to pursue only a handful of possible innovations as a result of limited resources. Our success, therefore, further depends on our ability to identify and focus on the most promising innovations. When we do introduce new products, our success depends on our ability to manage a number of risks associated with new products including but not limited to timely and successful product launch, market acceptance, and the availability of products in appropriate locations, quantities and costs to meet demand. For example, we have focused a significant part of our development efforts on developing our Avid Everywhere Platform, discussed in the preceding risk factor. There can be no assurance that our efforts will be successful in the near future, or at all, or that our competitors will not take significant market share in similar efforts. If we fail to develop new products and to manage new product introductions and transitions properly, our financial condition and operating results could be harmed. We may not be able to achieve the efficiencies, savings and other benefits anticipated from our cost reduction, margin improvement and other business optimization initiatives. We are continually reviewing and implementing programs throughout the company to reduce costs, increase efficiencies and enhance our business. We have in the past undertaken and expect to continue to undertake various restructuring activities and cost reduction initiatives in an effort to better align our organizational structure and costs with our strategy. On February 26, 2016, we committed to a restructuring plan that encompasses a series of actions intended to more efficiently operate in a leaner, and more directed cost structure. The actions include reductions in our workforce, facility consolidation, transferring resources to lower cost regions and reducing other third-party services costs. In connection with this restructuring plan, we expect to incur incremental cash expenditures of approximately $25 million relating to termination benefits, facility costs, employee overlap expenses and related actions. We anticipate that the restructuring plan will be substantially complete by the end of the second quarter of 2017 and will result in annualized costs savings of appropriately $68 million. In connection with these activities, we may experience a disruption in our ability to perform functions important to our strategy. Unexpected delays, increased costs, challenges with adapting our internal control environment to a new organizational structure, inability to retain and motivate employees or other challenges arising from these initiatives could adversely affect our ability to realize the anticipated savings or other intended benefits of these activities and could have a material adverse impact on our financial condition and operating results. Certain of our enterprise offerings have long and complex sales cycles. With our transition to leveraging the Avid MediaCentral platform in our sales process, we have experienced an elongation of the sales process for some of our enterprise offerings. The longevity and complexity in these sales cycles is due to a number of factors, including: 11 • • • • • the need for our sales representatives to educate customers about the uses and benefits of our products and services, including technical capabilities, security features, potential cost savings and return on investment, which are made available in large-scale deployments,; the desire of large and medium size organizations to undertake significant evaluation processes to determine their technology requirements prior to making information technology expenditures; the negotiation of large, complex, enterprise-wide contracts, as often required by our and our customers' business and legal representatives; the need for our customers to obtain requisition approvals from various decision makers within their organizations; and customer budget constraints, economic conditions and unplanned administrative delays. We spend substantial time and money on our sales efforts without any assurance that potential customers will ultimately purchase our solutions. As we target our sales efforts at larger enterprise customers, these trends are expected to continue. Additionally, our enterprise sales pattern has historically been uneven, where a higher percentage of a quarter's total sales occur during the final weeks of each quarter, which is common in our industry. Our long sales cycle for these products makes it difficult to predict when a given sales cycle will close. Subscription offerings create risks related to the timing of revenue recognition. We sell an increasing portion of our products based on a subscription model. Although the subscription model is designed to increase the number of customers who purchase our products and services on a recurring basis and create a more predictable revenue stream, it creates certain risks and uncertainties related to the timing of revenue recognition and potential reductions in cash flows. A portion of the subscription-based revenue we report each quarter results from the recognition of deferred revenue relating to subscription agreements entered into during previous quarters. A decline in new or renewed subscriptions in any period may not be immediately reflected in our reported financial results for that period but may result in a decline in our revenue in future quarters. If we were to experience significant downturns in subscription sales and renewal rates, our reported financial results might not reflect such downturns until future periods. Our subscription model could also make it difficult for us to rapidly increase our revenues from subscription-based services through additional sales in any period, as revenue from new customers will be recognized over the applicable subscription term. Further, any increases in sales under our subscription sales model could result in decreased revenues over the short term if they are offset by a decline in sales from perpetual license customers. If any of our assumptions about revenue from our new businesses or our addition of a subscription-based model prove incorrect, our actual results may materially differ from those anticipated, estimated or projected. We may be unable to predict subscription renewal rates and the impact these rates may have on our future revenue and operating results. If our customers do not renew their subscriptions for our services or if they renew on terms that are less favorable to us, our revenues may decline We sell Pro Tools, Media Composer and Sibelius on a subscription basis pursuant to service agreements that are generally month- to-month or one year in length, and we intend to expand our subscription offerings to other products as well. Although many of our service and subscription agreements contain automatic renewal terms, our customers have no obligation to renew their subscriptions for our services after the expiration of their initial subscription period, and some customers elect not to renew. There is a risk that these subscriptions will not be renewed at the same or a higher level of service, for the same number of seats/licenses or for the same duration of time, or at all. Moreover, under certain circumstances, some of our customers have the right to cancel their service agreements prior to the expiration of the terms of their agreements. We may not be able to accurately predict future customer renewal rates. Our customers' renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our services, the reliability of our subscription services, the prices of our services, the perceived information security of our systems and services, the prices of services offered by our competitors, mergers and acquisitions affecting our customer base, reductions in our customers' spending levels, or declines in customer activity as a result of economic downturns or uncertainty in financial markets. If our customers do not renew their subscriptions for our services or if they renew on terms less favorable to us, our revenues may decline. Our future growth is also affected by our ability to sell additional features and services to our current customers, which depends on a number of factors, including customers' satisfaction with our products and services, the prices of our offerings and general economic conditions. If our efforts to cross-sell and upsell to our customers are unsuccessful, the rate at which our business grows may decline. 12 Failure of our information systems or breaches of data security could impact our business. Our systems and processes involve the storage and transmission of proprietary information and sensitive or confidential data, including personal information of employees, customers and others. In addition, we rely on information systems controlled by third parties. Information system failures, network disruptions and system and data security breaches, manipulation, destruction or leakage, whether intentional or accidental, could harm our ability to conduct our business, impede development, manufacture or shipment of products, interrupt or delay processing of transactions and reporting financial results or result in the unintentional disclosure of proprietary, personal, sensitive or confidential information. With our development of Avid Everywhere with its public and private marketplaces and cloud based offerings, our and our customer’s data and financial and proprietary information could become more susceptible to such failures and data breaches. Such data breaches could expose user data and materially damage business partner and customer relationships, adversely impact the attractiveness of Avid Everywhere for its users and subject us to possible litigation and adversely impact our operations. Additionally, significant or repeated reductions in the performance, reliability, security or availability of our information systems and network infrastructure could significantly harm our brand our reputation and ability to attract and retain existing and potential users, customers, advertisers and content providers. The Avid Everywhere cloud based offerings depend on the availability and proper functioning of certain third-party services. The failure or improper functioning of these third party services could lead to outages, security breaches and data losses, including loss of customer creative assets. If third-party services become unavailable, we may need to expend considerable resources identifying and integrating alternate providers and could face contractual liabilities, including penalties. Our security measures may be insufficient to protect our systems against unauthorized access. Data breaches could be caused by, external theft or attack, misconduct by our employees, contractors, or vendors, or many other causes such as power failures, earthquake, fire or other natural disasters or acts of God, which we may be unable to adequately protect against. Our failure to manage or mitigate any of these risks could have a material adverse impact on our financial condition and operating results. Our international operations expose us to legal, regulatory and other risks that we may not face in the United States. We derive more than half of our revenues from customers outside of the United States, and we rely on foreign contractors for the supply and manufacture of many of our products. We also conduct significant research and development activities overseas, including through third-party development vendors. For example, a portion of our research and development is outsourced to contractors operating in Thailand and we have expanded our own development activities to Taiwan, and the Philippines. Further, we expanded our operations into Poland and Israel with the acquisition of Orad. Our international operations are subject to a variety of risks that we may not face in the United States, including: • • • • • • • • • • • the financial and administrative burdens associated with compliance with a myriad of environmental, tax and export laws, as well as other business regulations in foreign jurisdictions, including high compliance costs, inconsistencies among jurisdictions, and a lack of administrative or judicial interpretative guidance; reduced or varied protection for intellectual property rights in some countries; regional economic downturns; economic, social and political instability abroad and international security concerns in general and the risk of war; fluctuations in foreign currency exchange rates; longer collection cycles for accounts receivable payment cycles and difficulties in enforcing contracts; difficulties in managing and staffing international implementations and operations, and executing our business strategy internationally; potentially adverse tax consequences, including the complexities of foreign value added or other tax systems and restrictions on the repatriation of earnings; increased financial accounting and reporting burdens and complexities; difficulties in maintaining effective internal controls over financial reporting and disclosure controls; costs and delays associated with developing products in multiple languages; and 13 • foreign exchange controls that may prevent or limit our ability to repatriate income earned in foreign markets. Our overall success in international markets depends, in part, on our ability to succeed in differing legal, regulatory, economic, social and political conditions. We may not be successful in developing, implementing or maintaining policies and strategies that will be effective in managing these risks in each country where we do business. Our failure to manage these risks successfully, including developing appropriate contingency plans for our outsourced research and development work, could harm our international operations, reduce our international sales and increase our costs, thus adversely affecting our business, operating results and financial condition. We operate in many different jurisdictions and we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar foreign anti-corruption laws. The FCPA, and similar foreign anti-corruption laws generally prohibit companies and their intermediaries from offering, promising, authorizing, or making payments to foreign officials for the purpose of influencing any act or decision of such official in his or her official capacity, inducing the official to do any act in violation of his or her lawful duty, or to secure any improper advantage in obtaining or retaining business. Recent years have seen a substantial increase in the global enforcement of anti- corruption laws, with more frequent voluntary self-disclosures by companies, aggressive investigations and enforcement proceedings by both the DOJ and the SEC resulting in record fines and penalties, increased enforcement activity by non-U.S. regulators, and increases in criminal and civil proceedings brought against companies and individuals. Our internal policies mandate compliance with these anti-corruption laws. We operate in many parts of the world that are recognized as having governmental corruption problems to some degree and where local customs and practices may not foster strict compliance with anti-corruption laws. Our continued operation and expansion outside the United States could increase the risk of such violations in the future. Despite our training and compliance programs, we cannot assure you that our internal control policies and procedures will protect us from unauthorized reckless or criminal acts committed by our employees or agents. In the event that we believe or have reason to believe that our employees or agents have or may have violated applicable anti-corruption laws, including the FCPA, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. Violations of these laws may result in severe criminal or civil sanctions, which could disrupt our business and result in a material adverse effect on our reputation, business, results of operations or financial condition. Failure of our information systems or breaches of data security could impact our business. Our systems and processes involve the storage and transmission of proprietary information and sensitive or confidential data, including personal information of employees, customers and others. In addition, we rely on information systems controlled by third parties. Information system failures, network disruptions and system and data security breaches, manipulation, destruction or leakage, whether intentional or accidental, could harm our ability to conduct our business, impede development, manufacture or shipment of products, interrupt or delay processing of transactions and reporting financial results or result in the unintentional disclosure of proprietary, sensitive or confidential information. With our development of Avid Everywhere with its public and private marketplaces and cloud based offerings, our and our customer’s data and financial and proprietary information could become more susceptible to such failures and data breaches. Additionally, significant or repeated reductions in the performance, reliability, security or availability of our information systems and network infrastructure could significantly harm our brand and reputation and ability to attract and retain existing and potential users, customers, advertisers and content providers. Such information system failures or unauthorized access could be caused by our failure to adequately maintain and enhance these systems and networks, external theft or attack, misconduct by our employees, contractors, or vendors, or many other causes such as power failures, earthquake, fire or other natural disasters. Such information system failures or unauthorized access could expose us, our customers or the individuals affected to a risk of loss or misuse of this information, resulting in litigation and potential liability for us. In addition, the cost and operational consequences of implementing further data protection measures could be significant. Additionally, the Avid Everywhere cloud based offerings depend on the availability and proper functioning of certain third-party services, including but not limited to cloud provider, database management, backup, monitoring and logging services. The failure or improper functioning of these third party services could lead to outages, security breaches and data losses, including loss of 14 customer creative assets. If third-party services become unavailable, we may need to expend considerable resources identifying and integrating alternate providers. We have a significant relationship with manufacturing and hardware development vendors with operations in China and Thailand. This may reduce our control over the manufacturing activities, provide uncertain cost savings and expose our proprietary assets to greater risk of misappropriation, and changes to those relationships may result in delays or disruptions that could harm our business. We rely on vendors for the development and manufacture of certain of our hardware products, primarily in China and Thailand. These relationships provide us with more flexible resource capabilities, access to global talent and cost savings, but also expose us to risks that may not exist or may be less pronounced with respect to our internal operations. We are able to exercise only limited oversight of our contractors, including with respect to their engineering and manufacturing processes, resource allocations, delivery schedules, security procedures and quality control. Language, cultural and time zone differences complicate effective management of contractors that are located abroad. Additionally, competition for talent in certain locations may lead to high turnover rates that disrupt development or manufacturing continuity. The manufacturers we use also manufacture products for other companies, including our competitors. Our contractors could choose to prioritize capacity for other users, increase the prices they charge us or reduce or eliminate deliveries to us, which could have a material adverse effect on our business. Pricing terms offered by contractors may be highly variable over time reflecting, among other things, order volume, local inflation and exchange rates. For example, during the past few years, including in 2015, most of our outsourced manufacturers have been in China, where the cost of manufacturing has been increasing and labor unrest and turn-over rates at manufacturers have been on the rise. Some of our contractor relationships are based on contract, while others operate on a purchase order basis, where we do not have the benefit of written protections with respect to pricing or other critical terms. Many of our contractors require access to our intellectual property and our confidential and proprietary information to perform their services. Protection of these assets in relevant offshore locations, may be less robust than in the United States. We must rely on policies and procedures we have instituted with our contractors and certain confidentiality and contractual provisions in our written agreements, to the extent they exist, for protection. These safeguards may be inadequate to prevent breaches. If a breach were to occur, available legal or other remedies may be limited or otherwise insufficient to compensate us for any resulting damages. Furthermore, if one of our international vendors were, for any reason, to cease or experience significant disruptions in its operations, among others as a result of political unrest, we might be unable to replace it on a timely basis with a comparably priced provider. We would also have to expend time and resources to train any new development or manufacturing vendor. If any of the vendors were to suffer an interruption in its business, or experience delays, disruptions or quality control problems in development or manufacturing operations, or if we had to change development or manufacturing vendors, our ability to provide services to our customers would be delayed and our business, operating results and financial condition would be adversely affected. Potential acquisitions could be difficult to consummate and integrate into our operations, and they and investment transactions could disrupt our business, dilute stockholder value or impair our financial results. As part of our business strategy, from time to time we may seek to grow our business through acquisitions of or investments in new or complementary businesses, technologies or products that we believe can improve our ability to compete in our existing customer markets or allow us to enter new markets. The potential risks associated with acquisitions and investment transactions include, but are not limited to: • • • • • • • • failure to realize anticipated returns on investment, cost savings and synergies; difficulty in assimilating the operations, policies and personnel of the acquired company; unanticipated costs associated with acquisitions; challenges in combining product offerings and entering into new markets in which we may not have experience; distraction of management’s attention from normal business operations; potential loss of key employees of the acquired company; difficulty implementing effective internal controls over financial reporting and disclosure controls and procedures; impairment of relationships with customers or suppliers; 15 • • possibility of incurring impairment losses related to goodwill and intangible assets; and unidentified issues not discovered in due diligence, which may include product quality issues or legal or other contingencies. In order to complete an acquisition or investment transaction, we may need to obtain financing, including through the incurrence of borrowings or the issuance of debt or equity securities. This could potentially dilute stockholder value for existing stockholders. We may borrow to finance an acquisition, and the amount and terms of any potential future acquisition-related borrowings, as well as other factors, could affect our liquidity and financial condition and potentially our credit ratings. We may not be able to consummate such financings on commercially reasonable terms, or at all, in which case our ability to complete desired acquisitions or investments and to implement our business strategy, and as a result our financial results, may be materially impaired. In addition, our effective tax rate on an ongoing basis is uncertain, and business combinations and investment transactions could impact our effective tax rate. We may experience risks relating to the challenges and costs of closing a business combination or investment transaction and the risk that an announced business combination or investment transaction may not close. As a result, any completed, pending or future transactions may contribute to financial results that differ from the investment community’s expectations in a given quarter. We may not realize the growth opportunities and cost synergies that are anticipated from our acquisition of Orad. The benefits we expect to achieve from our acquisition of Orad will depend, in part, on our ability to realize anticipated growth opportunities and cost synergies. Our success in realizing these growth opportunities and cost synergies, and the timing of this realization, depends on the successful integration of Orad's business, operations, products and personnel with ours. Even if we are able to integrate Orad's business with ours successfully, this integration may not result in the realization of the full benefits of the growth opportunities and cost synergies we currently expect within the anticipated time frame or at all because of costs incurred or delays in integrating the companies and other challenges and risks such as, among others those described in the above risk factor “Potential acquisitions could be difficult to consummate and integrate into our operations, and they and investment transactions could disrupt our business, dilute stockholder value or impair our financial results” If we are not successful in meeting these challenges, our business, financial and operational results could be materially adversely affected. We obtain hardware product components and finished goods under sole-source supply arrangements, and any disruptions to these arrangements could jeopardize the manufacturing or distribution of certain of our hardware products. Although we generally prefer to establish multi-source supply arrangements for our hardware product components and finished goods, multi-source arrangements are not always possible or cost-effective. We consequently depend on sole-source suppliers for certain hardware product components and finished goods, including some critical items. We do not generally carry significant inventories of, and may not in all cases have guaranteed supply arrangements for, these sole-sourced items. If any of our sole- source suppliers were to cease, suspend or otherwise limit production or shipment (due to, among other things, macroeconomic events, political crises or natural or environmental disasters or other occurrences), or adversely modify supply terms or pricing, our ability to manufacture, distribute and service our products may be impaired and our business could be harmed. We cannot be certain that we will be able to obtain sole-sourced components or finished goods, or acceptable substitutes, from alternative suppliers or that we will be able to do so on commercially reasonable terms. We may also be required to expend significant development resources to redesign our products to work around the exclusion of any sole-sourced component or accommodate the inclusion of any substitute component. We depend on the availability and proper functioning of certain third-party technology that we incorporate into or bundle with our products. Third-party technology may include defects or errors that could adversely affect the performance of our products. If third-party technology becomes unavailable, we may need to expend considerable resources integrating alternative third-party technology or developing our own substitute technology. We license third-party technology for incorporation into or bundling with our products. This technology may provide us with critical or strategic feature sets or functionality. The profit margin for each of our products depends in part on the royalty, license and purchase fees we pay in connection with third-party technology. To the extent we add additional third-party technology to our products and we are unable to offset associated costs, our profit margins may decline and our operating results may suffer. In addition to cost implications, third-party technology may include defects or errors that could adversely affect the performance of our products, which may harm our market reputation or adversely affect our product sales. Third-party technology may also include certain open source software code that if used in combination with our own software may jeopardize our intellectual 16 property rights or limit our ability to sell through certain sales channels. If any third-party technology license expires, is terminated or ceases to be available on commercially reasonable terms, we may be required to expend considerable resources integrating alternative third-party technology or developing our own substitute technology. In the interim, sales of our products may be delayed or suspended or we may be forced to distribute our products with reduced feature sets or functionality. Lengthy procurement lead times and unpredictable life cycles and customer demand for some of our products may result in significant inventory risks. With respect to many of our products, particularly our audio products, we must procure component parts and build finished inventory far in advance of product shipments. Certain of these products may have unpredictable life cycles and encounter rapid technological obsolescence as a result of dynamic market conditions. We procure product components and build inventory based upon our forecasts of product life cycle and customer demand. If we are unable to accurately forecast product life cycle and customer demand or unable to manage our inventory levels in response to shifts in customer demand, the result may be insufficient, excess or obsolete product inventory. Insufficient product inventory may impair our ability to fulfill product orders and negatively affect our revenues, while excess or obsolete inventory may require a write-down on products and components to their net realizable value, which would negatively affect our results of operations. Our revenues and operating results depend significantly on our third-party reseller and distribution channels. Our failure to adequately manage the delivery model for our products and services could adversely affect our revenues and gross margins and therefore our profitability. We distribute many of our products indirectly through third-party resellers and distributors. We also distribute products directly to end-user customers. Successfully managing the interaction of our direct and indirect channel efforts to reach various potential customer industries for our products and services is a complex process. For example, in response to our direct sales strategies or for other business reasons, our current resellers and distributors may from time to time choose to resell our competitors’ products in addition to, or in place of, ours. Moreover, since each distribution method has distinct risks and gross margins, our failure to identify and implement the most advantageous balance in the delivery model for our products and services could adversely affect our revenues and gross margins and therefore our profitability. In addition, some of our resellers and distributors have rights of return, as well as inventory stock rotation and price protection. Accordingly, reserves for estimated returns and exchanges, and credits for price protection, are recorded as a reduction of revenues upon applicable product shipment, and are based upon our historical experience. Our reliance upon indirect distribution methods may reduce visibility to demand and pricing issues, and therefore make forecasting more difficult and, to the extent that returns exceed estimates, our revenues and operating results may be adversely affected. Our products may experience quality issues that could negatively impact our customer relationships, our market reputation and our operating results. Our software products, as is typical of sophisticated, complex software, occasionally include coding defects or errors (commonly referred to as “bugs”), which in some cases may interfere with or impair a customer’s ability to operate or use the software. Similarly, our hardware products could include design or manufacturing defects that could cause them to malfunction. Although we employ quality control measures, those measures are not designed or intended to detect and remedy all defects. The time and resources available to devote to quality control measures are, in part, dependent on other business considerations, such as meeting customer expectations with respect to release schedules. Any product defects could result in loss of customers or revenues, delays in revenue recognition, increased product returns, damage to our market reputation and significant warranty or other expense and could have a material adverse impact on our financial condition and operating results. Our success depends in part on our ability to hire and retain competent and skilled management and technical, sales and other personnel. We are highly dependent on the continued service and performance of our management team and key technical, sales and other personnel and our success will depend in part on our ability to retain these employees in a competitive job market. If we fail to appropriately match the skill sets of our employees to our needs we may incur increased costs or experience challenges with execution of our strategic plan. We rely on cash bonuses and equity awards as significant compensation and retention tools for key personnel. In addition to compensation, we seek to foster an innovative work culture to retain employees. We also rely on 17 the attractiveness of developing technology for the film, television and music industries as a means of retention. We continue to take actions to transform strategically, operationally and culturally and to achieve cost savings, all with the intent to drive improved operating performance both in the U.S and internationally The uncertainty inherent in our transformational strategy and the resulting workload and stress may make it difficult to attract and retain key personnel and increase turnover of key officers and employees. Our competitors may in some instances be able to offer a more established or more dynamic work environment, higher compensation or more opportunities to work with cutting-edge technology than we can. If we are unable to retain our key personnel or appropriately match skill sets with our needs, we would be required to expend significant time and financial resources to identify and hire new qualified personnel and to transfer significant internal historical knowledge, which might significantly delay or prevent the achievement of our business objectives. Our intellectual property and trade secrets are valuable assets that may be subject to third-party infringement and misappropriation. As a technology company, our intellectual property and trade secrets are among our most valuable assets. Infringement or misappropriation of these assets can result in lost revenues to us and thereby ultimately reduce their value. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality procedures, contractual provisions and anti-piracy technology in certain of our products to protect our intellectual property and trade secrets. Most of these tools require vigilant monitoring of competitor and other third-party activities and of end-user usage of our products to be effective. These tools may not provide adequate protection in all instances, may be subject to circumvention, or may require a vigilance that in some cases exceeds our capabilities or resources. Additionally, our business model is increasingly focused on software products and as we offer more software products our revenues may be more vulnerable to loss through piracy, which could result in revenue losses for us. While we may seek to engage with those potentially infringing our intellectual property to negotiate a license for use, we also may seek legal recourse, which could be costly. The legal regimes of certain foreign jurisdictions in which we operate, may not protect our intellectual property or trade secrets to the same extent as do the laws of the United States. If our intellectual property or trade secrets are misappropriated in foreign jurisdictions, we may be without adequate remedies to address these issues. Regardless of jurisdiction, assuming legal protection exists and infringement or misappropriation is detected, any enforcement action that we may pursue could be costly and time-consuming, the outcome will be uncertain, and the alleged offender in some cases may seek to have our intellectual property rights invalidated. If we are unable to protect our intellectual property and trade secrets, our business could be harmed. Our results could be materially adversely affected if we are accused of, or found to be, infringing third parties’ intellectual property rights. Because of technological change in our industry, extensive and sometimes uncertain patent coverage, and the rapid issuance of new patents, it is possible that certain of our products or business methods may infringe the patents or other intellectual property rights of third parties. Companies in the technology industry own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. Our technologies may not be able to withstand any third-party claims or rights against their use. We have received claims and are subject to litigation alleging that we infringe patents owned by third parties and may in the future be the subject to such claims and litigation. Regardless of the scope or validity of such patents or the merits of any patent claims by potential or actual litigants, we could incur substantial costs in defending intellectual property claims and litigation, and such claims and litigation could distract management’s attention from normal business operations. In addition, we provide indemnification provisions in agreements with certain customers covering potential claims by third parties of intellectual property infringement. These agreements generally provide that we will indemnify customers for losses incurred in connection with an infringement claim brought by a third party with respect to our products, and we have received claims for such indemnification. The results of any intellectual property litigation to which we are, or may become, a party, or for which we are required to provide indemnification, may require us to: cease selling or using products or services that incorporate the challenged intellectual property; • • make substantial payments for legal fees, settlement payments or other costs or damages; • obtain a license, which may not be available on reasonable terms, to sell or use the relevant technology, which such license could require royalties that would significantly increase our cost of goods sold; or 18 • redesign products or services to avoid infringement, which such redesign could involve significant costs and result in delayed and/or reduced sales of the affected products. If we are unable to sell our professional products through retail sales channels, our operating results could be adversely affected. Following the divestiture of certain of our consumer product lines in July 2012, we continue to have a presence in retail because our professional-level products are offered through specialty retail stores. Our ability to continue to sell our professional products through certain retail sales channels may be impaired because we will sell fewer types of products and fewer units through those channels, impacting retailers’ willingness to carry our professional-level products. Unanticipated changes in our tax provisions, the adoption of new tax legislation or exposure to additional tax liabilities could affect our profitability. We are subject to income and other taxes in the United States and numerous foreign jurisdictions. Our tax liabilities are affected by the amounts we charge for inventory, services, licenses and other items in intercompany transactions. We are also subject to ongoing tax audits in various jurisdictions. Tax authorities may disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the amounts ultimately paid upon the resolution of an audit could be materially different from the amounts previously included in our income tax expense and therefore could have a material impact on our tax provision, net income and cash flows. In addition, our tax provision in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process. We may be subject to litigation, which, if adversely determined, could harm our business and operating results. We may be subject to legal claims arising in the normal course of business. The costs of defending any litigation, whether in cash expenses or in management time, could harm our business and materially and adversely affect our operating results and cash flows. An unfavorable outcome in any litigation matter could require that we pay substantial damages, or, in connection with any intellectual property infringement claims, could require that we pay ongoing royalty payments or prohibit us from selling certain of our products. In addition, we may decide to settle any litigation, which could cause us to incur significant settlement costs. A settlement or an unfavorable outcome on any litigation matter could have a material and adverse effect on our business, operating results, financial condition and cash flows. A natural disaster or catastrophic event may significantly limit our ability to conduct business as normal and harm our business. Our operations and the operations of our customers are vulnerable to interruptions by natural disasters or catastrophic events. For example, we operate a complex, geographically dispersed business, which includes significant personnel, customers and facilities in California near major earthquake fault lines. We may not be able to protect our company from such catastrophic events and we are predominantly uninsured for business continuity losses and disruptions caused by catastrophic events. Disruption or failure of our or our customers’ networks or systems, or injury or damage to either parties’ personnel or physical infrastructure, caused by a natural disaster, public health crisis, terrorism, cyber attack, act of war or other catastrophic event may significantly limit our or our customers’ ability to conduct business as normal, including our ability to communicate and transact with customers, suppliers, distributors and resellers, which may negatively affect our revenues and operating results. Additionally, a natural disaster or catastrophic event could cause us or our customers to suspend all or a portion of operations for a significant period of time, result in a permanent loss of resources, and require the relocation of personnel and material to alternate facilities that may not be available or adequate. Such an event could also cause an indirect economic impact on our customers, which could impact our customers’ purchasing decisions and reduce demand for our products and services. A prolonged disruption of our business could also damage our reputation, particularly among our global news organization customers who are likely to require our solutions and support during such time. Any of these factors could cause a material adverse impact on our financial condition and operating results. 19 Risks Related to Our Liquidity and Financial Performance If we are not able to generate and maintain adequate liquidity our ability to operate our business could be adversely affected. Generating and maintaining adequate liquidity is important to our business operations. We meet our liquidity needs primarily through cash generated by operations, proceeds from our issuance of 2.00% convertible senior notes due 2020, and borrowings represented by the Term Loan under the Financing Agreement. We also have the ability to borrow up to $5.0 million under the Credit Facility. We have also undertaken significant cost cutting measures, including pursuant to the restructuring plan we announced in February 2016, and we may take additional measures to further improve our liquidity. Significant fluctuations in our cash balances could harm our ability to meet our immediate liquidity needs, impair our capacity to react to sudden or unexpected contractions or growth in our business, reduce our ability to withstand a sustained period of economic crisis, and impair our ability to compete with competitors with greater financial resources. In addition, fluctuations in our cash balances could cause us to draw on our Credit Facility and therefore reduce available funds under the Credit Facility (see “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources” in Item 7 of this Form 10-K). If we are unable to generate sufficient cash flow or our borrowings are not sufficient, our liquidity may significantly decrease, which could have an adverse effect on our business. Restrictions in the Financing Agreement may limit our activities. The Financing Agreement contains restrictive covenants that limit our ability to engage in activities that could otherwise benefit us, including, among other things, limitations on our ability to make investments, incur additional indebtedness, issue equity, sell assets, pay dividends and make other restricted payments, and create liens. We are also required to comply on an ongoing basis with certain financial covenants, including a maximum leverage ratio and an annual limit on the amount of our capital expenditures. Failure to comply with any of these restrictions or covenants may result in an event of default under the Financing Agreement, which could permit acceleration of the outstanding indebtedness under the Financing Agreement and require us to repay such indebtedness before its scheduled due date. Certain events of default under the Financing Agreement may also give rise to a default under our convertible notes due 2020 or other future indebtedness. If an event of default were to occur, we might not have sufficient funds available to make the payments required. If we are unable to repay amounts owed, our lenders may be entitled to foreclose on and sell substantially all of our assets, which secure our borrowings under the Financing Agreement. Our debt levels increased significantly as a result of our entry into the Financing Agreement, our issuance of the 2.00% Convertible Senior Notes due 2020 (“Notes”) and our borrowings under the Term Loan, and our substantial indebtedness could adversely affect our business, cash flow and results of operations. Our indebtedness increased by $195 million as a result of our entry into the Financing Agreement in February 2016 and our issuance of the Notes in June 2015. We also borrowed $100.0 million under the Term Loan. This increased level of indebtedness may: • • • • require us to dedicate a greater percentage of our cash flow from operations to payments on our debt, thereby reducing the availability of cash flow to fund capital expenditures, pursue other acquisitions or investments and use for general corporate purposes; increase our vulnerability to general adverse economic conditions, including increases in interest rates with respect to borrowings under the Financing Agreement that bear interest at variable rates or when our indebtedness is being refinanced; limit our ability to obtain additional financing; and limit our flexibility in planning for, or reacting to, changes in or challenges relating to our business and industry, creating competitive disadvantages compared to other competitors with lower debt levels and borrowing costs. We cannot assure you that our cash flow from operations, combined with any additional borrowings available to us, will be sufficient to enable us to repay our indebtedness, or to fund other liquidity needs. We may incur additional indebtedness in the future, which could cause these risks to intensify. If we are unable to generate sufficient cash flows, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial 20 condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. We have deferred a significant portion of revenues from customer transactions occurring prior to 2011 to subsequent periods. The deferred revenues resulted in our reporting net income for the fiscal years 2012, 2013, 2014 and 2015. However, as deferred revenues from periods prior to 2011 are amortized, there are no assurances that we will be able to report net income in future periods. As a result of the restatement of our September 30, 2012 and prior financial statements, which was completed in 2014, we have deferred a significant portion of revenues from customer transactions occurring prior to 2011 to subsequent periods. The deferred revenue resulted in our reporting net income of approximately $2 million in 2015, $15 million in 2014, and $21 million in 2013 and also adversely affected our stockholders’ equity and working capital for those periods. As this deferred revenue is amortized, there are no assurances that we will be able to report net income in future periods. Our financial results and the impact of the deferred revenue are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K. Our revenues and operating results are difficult to predict and may fluctuate from period to period. Our results of operations have been and may continue to be subject to significant quarterly variation. Our results through 2016 will, in particular, be affected by the amortization of deferred revenues relating to periods prior to 2011. Our revenues and operating results for any particular quarter may also vary due to a number of factors, including, but not limited to, those enumerated under the section “Cautionary Note on Forward-Looking Statements,” appearing elsewhere in this Form 10-K and: • • • • • • • the timing of large or enterprise-wide sales and our ability to recognize revenues from such sales; demand planning and logistics; reliance on third-party reseller and distribution channels; changes in operating expenses; price protections and provisions for inventory obsolescence extended to resellers and distributors; seasonal factors, such as higher consumer demand at year-end; and complex accounting rules for revenue recognition. The occurrence and interaction of these variables may cause our revenues and operating results to fluctuate from period to period. As a result, period-to-period comparisons of our revenues and operating results may not provide a good indication of our future performance. We cannot be certain when, or if, our operations will be profitable in future periods. Our revenue backlog estimates are based on certain assumptions and are subject to unexpected adjustments and cancellations and backlog orders may not be timely converted to revenues in any particular fiscal period, if at all, or be indicative of our actual operating results for any future period. Our revenue backlog, as we define it, consists of firm orders received and includes both (i) orders where the customer has paid in advance of our performance obligations being fulfilled, which are reflected as deferred revenues on our balance sheet, and (ii) orders for future product deliveries or services that have not yet been invoiced by us. To the extent that our customers cancel their orders with us or reduce their requirements during a particular period for any reason, we will not realize revenue or profit from the associated revenue backlog. Even where a project proceeds as scheduled, it is possible that the customer may default and fail to pay amounts owed to us. Material delays, payment defaults or cancellations could reduce the amount of revenue backlog currently reported, and consequently, could inhibit the conversion of that backlog into revenues. Furthermore, orders included in our revenue backlog may not be profitable. We may experience variances in the realization of our revenue backlog because of project delays or cancellations resulting from external market factors and economic factors beyond our control. As a result, even if we realize all of the revenue from the projects in our revenue backlog, if our expenses associated with these projects are higher than expected, our results of operations and financial condition would be adversely affected. 21 Fluctuations in foreign exchange rates may result in short-term currency exchange losses and could adversely affect our revenues from foreign markets and our manufacturing costs in the long term. Our international sales are, for the most part, transacted through foreign subsidiaries and generally in the currency of the end-user customers. Consequently, we are exposed to short-term currency exchange risks that may adversely affect our revenues, operating results and cash flows. The majority of our international sales are transacted in euros. To hedge against the dollar/euro exchange exposure of the resulting forecasted payables, receivables and cash balances, we may enter into foreign currency contracts. The success of our hedging programs depends on the accuracy of our forecasts of transaction activity in foreign currency. To the extent that these forecasts are over- or understated during periods of currency volatility, we may experience currency gains or losses. Our hedging activities may only offset a portion of the adverse financial impact resulting from unfavorable movement in dollar/euro exchange rates, which could adversely affect our financial position or results of operations. Furthermore, the significance to our business of sales in Europe subjects us to risks associated with long-term changes in the dollar/euro exchange rate. A sustained strengthening of the U.S. dollar against the euro would decrease our expected future U.S. dollar revenues from European sales and could have a significant adverse effect on our overall profit margins. During the past few years, economic instability in Europe, including concern over sovereign debt in Greece, Italy, Ireland and certain other European Union countries, caused significant fluctuations in the value of the euro relative to those of other currencies, including the U.S. dollar. Continuing uncertainty regarding economic conditions, including the solvency of these countries and the stability of the Eurozone, could lead to significant long-term economic weakness and reduced economic growth in Europe, the occurrence of which, or the potential occurrence of which, could lead to a sustained strengthening of the U.S. dollar against the euro, adversely affecting the profitability of our European operations. In addition, we source and manufacture many of our products in China and our costs may increase should the renminbi not remain stable with the U.S. dollar. Although the renminbi is pegged against a basket of currencies determined by the People’s Bank of China, the renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the long term. In addition, if China were to permit the renminbi to float to a free market rate of exchange, it is widely anticipated that the renminbi would appreciate significantly in value against U.S. dollar. An increase in the value of the renminbi against the U.S. dollar would have the effect of increasing the labor and production costs of our Chinese manufacturers in U.S. dollar terms, which may result in their passing such costs to us in the form of increased pricing, which would adversely affect our profit margins if we could not pass those price increases along to our customers. Economic weakness and uncertainty could adversely affect our revenues, gross margins and expenses. Our business is impacted by global economic conditions, which have been in recent years and continue to be volatile. Specifically, our revenues and gross margins depend significantly on global economic conditions and the demand for our products and services in the markets in which we compete. Economic weakness and uncertainty have resulted, and may result in the future, in decreased revenue, gross margin, earnings or growth rates and difficulty managing inventory levels. Sustained uncertainty about global economic conditions may adversely affect demand for our products and services and could cause demand to differ materially from our expectations as customers curtail or delay spending on our products and services. Economic weakness and uncertainty also make it more difficult for us to make accurate forecasts of revenues, gross margins and expenses. The inability of our customers to obtain credit in the future may impair their ability to make timely payments to us. Tightening of credit by financial institutions could also lead customers to postpone spending or to cancel, decrease or delay their existing or future orders with us. Customer insolvencies could negatively impact our revenues and our ability to collect receivables. Financial difficulties experienced by our suppliers or distributors could result in product delays, increased accounts receivable defaults and inventory challenges. In the event we are impacted by global economic weakness, we may record additional charges relating to restructuring costs or the impairment of assets and our business and results of operations could be materially and adversely affected. Risks related to our restatement, accounting review and internal controls Our internal control over financial reporting and our disclosure controls and procedures were not effective as of December 31, 2015. We may not be able to properly remediate existing or future weaknesses or deficiencies in our internal controls, which could adversely affect our ability to produce accurate and timely financial statements, harm our reputation, negatively impact our stock price and damage our business. 22 In the second quarter of 2013, we determined that we needed to restate revenue for millions of customer transactions for interim and annual periods ended during the periods from January 1, 2005 to September 30, 2012 (the Restatement Periods) to correct errors in our historically issued financial statements. In addition, certain other adjustments arose in the Restatement Periods that were deemed material and were adjusted in the restated financial statements for the Restatement Periods. The errors in the misapplication of GAAP over revenue recognition and the other errors identified resulted from several control deficiencies that were in existence during the Restatement Periods, some of which remain. As described in Part II, Item 9A, “Controls and Procedures,” of this Form 10-K we have not had sufficient time to fully remediate the aforementioned deficiencies and/or there was insufficient passage of time to evidence that the controls that were implemented during 2014 and 2015 were effective. As a result, we concluded that our internal control over financial reporting and our disclosure controls and procedures were not effective as of December 31, 2015. While we continue with our efforts to remediate the identified weaknesses, we cannot assure you that our remediation efforts will be adequate to allow us to conclude that such controls will become effective during fiscal year 2016. We also cannot assure you that additional material weaknesses in our internal control over financial reporting will not arise or be identified in the future. We intend to continue our control remediation activities and also to continue to improve our operational, information technology, financial systems, and infrastructure, procedures and controls, as well as to continue to expand, train, retain, and manage our personnel who are essential to effective internal control. In doing so, we will continue to incur expenses and expend management time on compliance-related issues. If we fail to successfully remediate our material weaknesses and implement appropriate controls, we may not be able to prevent or detect a material misstatement in our financial statements on a timely basis or at all. Such misstatements could result in a future restatement of our financial statements, could cause us to fail to meet our reporting obligations, or could cause investors to lose confidence in our reported financial information, leading to a decline in our stock price or litigation. Furthermore, our reputation could be harmed and our customers’ and partners’ confidence in us may be impaired, all of which could damage our business. For a discussion of the material weaknesses, please see Part II, Item 9A, “Controls and Procedures,” of this Form 10-K. We cannot assure you that our financial statement preparation and reporting processes are or will be adequate or that future restatements will not be required. While we have, following the restatement, significantly changed and enhanced our regular financial statement preparation and reporting processes (as described in our periodic reports filed with the SEC), as of the filing date of this Form 10-K, previously identified material weaknesses in our internal control over financial reporting have not have been fully remediated and we continue to: • make changes to our finance organization; • • • • adopt new accounting and reporting processes and procedures; enhance our revenue recognition and other existing accounting policies and procedures; introduce new or enhanced accounting systems and processes; and improve our internal control over financial reporting. We cannot assure you that the changes and enhancements made to date, or those that are still in process, are adequate, will operate as expected, or will be completed in a timely fashion (if still in process). As a result, we cannot assure you that we will not discover additional errors, that future financial reports will not contain material misstatements or omissions, that future restatements will not be required, that we will be able to timely complete our remaining SEC filings for periods subsequent to this Form 10-K, or that we will be able to stay current with our reporting obligations in the future. We may not have sufficient insurance to cover our liability in any current or future litigation claims either due to coverage limits or as a result of insurance carriers seeking to deny coverage of such claims. We face a variety of litigation-related liability risks, including potential liability for indemnification of (and advancement of expenses to) current and former directors, officers, and employees under certain circumstances, pursuant to our certificate of incorporation, bylaws, other applicable agreements, and/or Delaware law. 23 Our insurance coverage under our policies may not be adequate to cover any indemnification or other claims against us. In addition, the underwriters of our present coverage may seek to avoid coverage in certain circumstances based upon the terms of the respective policies, in which case we would have to self-fund any indemnification amounts owed to our directors and officers and bear any other uninsured liabilities. If we do not have sufficient directors and officers insurance coverage under our present or historical insurance policies, or if our insurance underwriters are successful in avoiding coverage, our results of operations and financial condition could be materially adversely affected. Risks Related to Our Stock The market price of our common stock has been and may continue to be volatile. The market price of our common stock has historically experienced volatility. Our stock may continue to fluctuate substantially in the future in response to various factors, some of which are beyond our control. These factors include, but are not limited to: • • • period-to-period variations in our revenues or operating results; our failure to accurately forecast revenues or operating results or to report financial or operating results within the range of our previously issued guidance; our ability to produce accurate and timely financial statements; • whether our results meet analysts’ expectations; • market reaction to significant corporate initiatives or announcements; • • • • • • • our ability to innovate; our relative competitive position within our markets; shifts in markets or demand for our solutions; changes in our relationships with suppliers, resellers, distributors or customers; our commencement of, or involvement in, litigation; short sales, hedging or other derivative transactions involving shares of our common stock; and shifts in financial markets and fluctuations of exchange rates. Additionally, broader financial market and global economic trends may affect the market price of our common stock, regardless of our operating performance. Delaware law and our charter documents may impede or discourage a takeover, which could reduce the market price of our common stock. We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. In addition, our board of directors or a committee thereof has the power, without stockholder approval, to designate the terms of one or more series of preferred stock and issue shares of preferred stock. The ability of our board of directors or a committee thereof to create and issue a new series of preferred stock, our stockholders rights plan and certain provisions of Delaware law and our certificate of incorporation and bylaws could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the market price of our common stock. Risks related to our 2.00% convertible senior notes due 2020 The use of cash to satisfy our conversion obligation under the Notes may adversely affect our liquidity, and we may not have the ability to raise the funds necessary to settle conversions in cash or to repurchase the Notes upon a fundamental change. The agreements governing our other indebtedness may contain limitations on our ability to pay cash upon conversion or repurchase of the Notes. 24 On June 15, 2015, we completed an offering of $125.0 million aggregate principal amount of the Notes. The Notes may be converted into shares of our common stock, at the election of the holder, if certain conditions are met, including, among other things, the last reported sale price of the common stock being greater than or equal to 130% of the conversion price of the notes (initially $21.94 per share) for at least 20 trading days within a period of 30 consecutive trading days. In the event the conditional conversion feature of the Notes is triggered and one or more holders elect to convert their Notes, we may elect to satisfy our conversion obligation by paying cash or by delivering shares of our common stock. Further, holders of the Notes have the right to require us to repurchase their notes upon the occurrence of a fundamental change, which generally means a merger, sale of all or substantially all of our assets, or other similar change of control transaction. To the extent we do not elect to satisfy our conversion obligation by delivering solely shares of our common stock, we would be required to settle a portion or all of our conversion obligation through the payment of cash. The use of cash to settle our conversion obligation could adversely affect our liquidity. Further, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the Notes surrendered or to make cash payments in respect of Notes being converted. The Financing Agreement contains a restriction on our ability to settle conversions of the Notes with cash. The conditional conversion feature of the Notes, if triggered, may adversely affect our operating results. Even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital. Our failure to repurchase Notes or pay any cash upon conversion of the Notes would constitute a default under the indenture governing the Notes, and could cause defaults under our other or future indebtedness. Our failure to repurchase Notes or pay any cash upon conversion of the Notes as required by the indenture governing the Notes would constitute a default under the indenture. This kind of default under the indenture would also constitute a default under the Financing Agreement, and it could constitute a default under agreements governing our future indebtedness. If the repayment of the indebtedness under the Financing Agreement, or any other indebtedness, were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversions thereof. The capped call transaction may affect the trading price of our common stock. In connection with the offering of the Notes, we entered into the Capped Call. The primary purpose of the Capped Call was to reduce potential dilution to our common stock and/or offset any cash payments we may be required to make in excess of the principal amount, in each case, upon any conversion of Notes. In order to establish a hedge of the Capped Call, the Counterparty may have entered into various derivative transactions with respect to our common stock, and it may modify its hedge positions from time to time by entering into or unwinding various derivative transactions with respect to our common stock and/or purchasing or selling our common stock or other securities in secondary market transactions prior to the maturity of the Notes. The Counterparty is likely to undertake these activities during, and potentially prior to, any observation period related to a conversion of the Notes. These activities could cause or avoid an increase or a decrease in the market price of our common stock. ITEM 1B. UNRESOLVED STAFF COMMENTS None. 25 ITEM 2. PROPERTIES We lease approximately 173,000 square feet in two facilities in Burlington, Massachusetts for our principal corporate and administrative offices, as well as for significant R&D activities. The leases for these facilities expire in May 2020. We also lease 106,000 square feet in Mountain View, California, primarily for R&D, product management and manufacturing activities. We lease approximately 26,000 square feet of office space in Iver Heath, United Kingdom for our European headquarters, which includes administrative, sales and support functions, and 41,000 square feet in Dublin, Ireland for the final assembly and distribution of our products in Europe. We also lease approximately 8,000 square feet in Singapore for our Asian headquarters. We also lease office space for sales operations and research and development in several other domestic and international locations. ITEM 3. LEGAL PROCEEDINGS Securities Class Action Lawsuits In March 2013 and May 2013, two purported securities class action lawsuits were filed against us and certain of our former executive officers seeking unspecified damages in the U.S. District Court for the District of Massachusetts. In July 2013, the two cases were consolidated and the original plaintiffs agreed to act as co-plaintiffs in the consolidated case. In September 2013, the co-plaintiffs filed a consolidated amended complaint on behalf of those who purchased our common stock between October 23, 2008 and March 20, 2013. The consolidated amended complaint, which named us, certain of our current and former executive officers and our former independent accounting firm as defendants, purported to state a claim for violation of federal securities laws as a result of alleged violations of the federal securities laws pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder. In October 2013, we filed a motion to dismiss the consolidated amended complaint, resulting in the dismissal of some of the claims, and the dismissal of Mr. Hernandez and one of the two plaintiffs from the case. On December 31, 2014, the parties reached an agreement to settle the case. The agreement called for Avid to cause payment of $2.5 million in respect of the settlement. The settlement was approved and the case was dismissed on May 12, 2015. SEC and Department of Justice Inquiry In April and May 2013, we received a document preservation request and inquiry from the SEC Division of Enforcement and a federal grand jury subpoena from the Department of Justice requesting certain documents, including in particular documents related to our disclosures regarding our accounting review and revenue transactions. On August 13, 2015, we received a letter from the SEC Division of Enforcement stating that the investigation had been completed and that the Division of Enforcement did not intend to recommend any enforcement action against us by the SEC. On October 20, 2015, we were notified by the Department of Justice that the Department of Justice intends to close its inquiry. Other Litigation Our industry is characterized by the existence of a large number of patents and frequent claims and litigation regarding patent and other intellectual property rights. In addition to the legal proceedings described above, we are involved in legal proceedings from time to time arising from the normal course of business activities, including claims of alleged infringement of intellectual property rights and contractual, commercial, employee relations, product or service performance, or other matters. We do not believe these matters will have a material adverse effect on our financial statements. However, the outcome of legal proceedings and claims brought against us is subject to significant uncertainty. Therefore, our financial position or results of operations may be negatively affected by the unfavorable resolution of one or more of these proceedings for the period in which a matter is resolved. See Part I, Item 1A, “Risk Factors.” Our results could be materially adversely affected if we are accused of, or found to be, infringing third parties’ intellectual property rights. 26 ITEM 4. MINE SAFETY DISCLOSURES Not Applicable. 27 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Due to the restatement of our September 30, 2012 and prior financial statements, and the delay in filing our periodic reports with the SEC, we were unable to comply with the listing standards of NASDAQ and our common stock was suspended from trading effective February 25, 2014 and formally de-listed effective May 2, 2014. Following the suspension of trading, our common stock traded on the OTC Pink Tier under the symbol AVID. After we completed the restatement and became current in our SEC reporting obligations, our common stock resumed trading on the NASDAQ Global Select Market under the symbol AVID, effective December 8, 2014. The table below shows the high and low sales prices of our common stock for each calendar quarter of the fiscal years ended December 31, 2015 and 2014. First Quarter Second Quarter Third Quarter Fourth Quarter 2015 2014 High $15.74 $17.90 $13.68 $9.04 Low $12.66 $13.34 $7.62 $6.09 High $8.29 $7.64 $10.55 $14.48 Low $4.93 $6.10 $7.45 $9.25 On March 10, 2016, the last reported sale price of our common stock on the NASDAQ Global Select Market was $6.92 per share. The approximate number of holders of record of our common stock at March 10, 2016 was 301. This number does not include stockholders for whom shares were held in a “nominee” or “street” name. We have never declared or paid cash dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future. Our Financing Agreement prohibits us from declaring or paying any dividends in cash on our capital stock. Stock Performance Graph The following graph compares the cumulative stockholder return on our common stock during the period from December 31, 2010 through December 31, 2015 with the cumulative return during the period for: • • the NASDAQ Composite Index (all companies traded on NASDAQ Capital, Global or Global Select Markets), the Avid Peer Group Index (see details following the graph). This comparison assumes the investment of $100 on December 31, 2010 in our common stock, the NASDAQ Market Index and the Avid Peer Group Index, and assumes that dividends, if any, were reinvested. 28 COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN Among Avid Technology, Inc., the NASDAQ Composite Index, and the Avid Peer Group Because our products and services are diverse, we do not believe any single published industry index is appropriate for comparing stockholder return. As a result, we compare our common stock returns to a peer group index, which was composed of NASDAQ- traded companies selected by Avid to best represent its peers based on various criteria, including industry classification, number of employees and market capitalization. The composition of the Avid Peer Group Index is dictated by the peer group selected by the compensation committee of Avid’s board of directors for its reference in setting executive compensation. The compensation committee seeks generally to include companies with similar product and service offerings to those of Avid while also achieving a balance of smaller and larger sized peer companies in terms of market capitalizations and revenue. The Avid Peer Group Index for 2015 was composed of: Black Box Corporation, Cray Inc., Harmonic Inc., Imation Corp., Pegasystems Inc., Progress Software Corporation, QLogic Corporation, Quantum Corporation, RealD Inc., RealNetworks, Inc., Rovi Corporation, Silicon Graphics International Corp., Synaptics, Inc., and Verint Systems Inc. The Avid Peer Group Index is weighted based on market capitalization. 29 ITEM 6. SELECTED FINANCIAL DATA The selected condensed consolidated financial data below should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Financial Information,” included elsewhere in this Form 10-K. The selected condensed consolidated financial data as of December 31, 2015, 2014, 2013 and 2012 and for the years ended December 31, 2015, 2014, 2013, 2012 and 2011 has been derived from our audited consolidated financial statements. The selected condensed consolidated financial data as of December 31, 2011 has been derived from our unaudited consolidated financial statements, which were prepared on the same basis as our audited financial statements and reflect adjustments to our previously filed consolidated financial statements. CONSOLIDATED STATEMENTS OF OPERATIONS DATA: (in thousands, except per share data) Net revenues (1) Cost of revenues Gross profit Operating expenses: Research and development Marketing and selling General and administrative Amortization of intangible assets Restructuring costs (recoveries), net Total operating expenses Operating income from continuing operations Other expense, net Income from continuing operations before income taxes (Benefit from) provision for income taxes Income from continuing operations, net of tax Discontinued operations: (2) Gain on divestiture of consumer business Income from divested operations Income from discontinued operations Net income Income per share - basic: Income per share from continuing operations, net of tax – basic Income per share from discontinued operations – basic Net income per common share – basic Income per share - diluted: Income per share from continuing operations, net of tax – diluted Income per share from discontinued operations – diluted Net income per common share – diluted Weighted-average common shares outstanding – basic Weighted-average common shares outstanding – diluted For the Year Ended December 31, 2015 2014 2013 2012 2011 $ 505,595 $ 530,251 $ 563,412 $ 635,703 $ 766,885 197,445 308,150 95,898 122,511 74,109 2,354 6,305 204,471 325,780 90,390 133,049 81,181 1,626 (165) 301,177 306,081 6,973 (6,408) 565 (1,915) 2,480 — — — 2,480 0.06 — 0.06 0.06 — 0.06 $ $ $ $ $ 19,699 (2,783) 16,916 2,188 14,728 — — — 14,728 0.38 — 0.38 0.38 — 0.38 $ $ $ $ $ $ $ $ $ $ 223,909 339,503 95,249 133,890 77,578 2,648 5,370 314,735 24,768 (676) 24,092 2,939 21,153 — — — 249,008 386,695 98,879 153,481 52,066 4,254 24,838 333,518 53,177 (2,041) 51,136 4,049 47,087 37,972 7,832 45,804 261,718 505,167 111,129 163,204 50,732 8,528 6,534 340,127 165,040 (1,945) 163,095 635 162,460 — 63,907 63,907 21,153 $ 92,891 $ 226,367 0.54 — 0.54 $ 0.54 — 0.54 $ 1.21 1.18 2.39 1.21 1.18 2.39 $ $ 4.23 1.66 5.89 4.22 1.65 5.87 39,423 40,380 39,147 39,267 39,044 39,070 38,804 38,836 38,435 38,534 (1) Our revenues and operating results have been affected by the deferral of revenues from customer transactions occurring prior to 2011. On January 1, 2011, we adopted ASU No. 2009-14. Substantially all revenue arrangements prior to January 1, 2011 were generally recognized on a ratable basis over the service period of Implied Maintenance Release PCS. Subsequent to January 1, 2011, product revenues are generally recognized upon delivery and Implied Maintenance PCS and other service and support elements are recognized as services are rendered. See our policy on “Revenue Recognition” in Note B to our Consolidated Financial Statements in Item 8 of this Form 10-K for a further discussion of the effects of the changes to our revenue recognition policies on our financial results. (2) On July 2, 2012, we exited our consumer business through a sale of the assets of that business. The disposition of our consumer business qualified for presentation as discontinued operations. 30 CONSOLIDATED BALANCE SHEET DATA: (in thousands) As of December 31, 2015 2014 2013 2012 2011 Cash, cash equivalents and marketable securities $ 17,902 $ 25,056 $ 48,203 $ 70,390 $ 32,855 Working capital deficit (1) Total assets Deferred revenues (current and long-term amounts) Long-term liabilities (1) Total stockholders’ deficit (167,450) (157,492) (133,517) (96,380) (228,277) 247,926 348,382 272,599 191,599 414,840 222,641 235,142 466,832 270,594 294,361 558,485 347,074 340,590 697,124 346,913 (329,572) (341,070) (359,335) (385,592) (490,874) (1) The presentation of prior year working capital deficit and long-term liability amounts have been changed to reflect our retrospective adoption of ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The standard requires entities to present all deferred tax assets and deferred tax liabilities as non-current in a classified balance sheet. 31 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXECUTIVE OVERVIEW Our Company We provide an open, integrated, and comprehensive technology platform, along with applications and services that enable the creation, distribution, and monetization of audio and video content. Specifically, we develop, market, sell, and support software and hardware for digital media content 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. Our products are used 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 independent video and audio creative professionals, as well as aspiring professionals. Projects produced using our products include feature films, television programming, live events, news broadcasts, commercials, music, video and other digital media content. Our mission is to create the most powerful and collaborative media network that enables the creation, distribution and monetization of the most inspiring content in the world. Guided by our Avid Everywhere strategic vision, we strive to deliver the industry’s most open, innovative and comprehensive media platform connecting content creation with collaboration, asset protection, distribution and consumption for the media in the world – from the most prestigious and award-winning feature films, music recordings, and television shows, to live concerts and news broadcasts. We have been honored over time for our technological innovation with 14 Emmy Awards, one Grammy Award, two Oscars and the first ever America Cinema Editors Technical Excellence Award. Our solutions were used in all 2015 Oscar nominated films for Best Picture, Best Editing, Best Sound Editing and Best Sound Mixing. Our audio solutions were also used in all 2015 Grammy nominated recordings for Best Album of The Year, Best Record of the Year and Best Song of the Year. Our strategy is built on three pillars, Avid Everywhere, The Avid Advantage and the Avid Customer Association (“ACA”). Avid Everywhere is our strategic vision for connecting creative professionals and media organizations with their audiences in a more powerful, efficient, collaborative, and profitable way. Central to the Avid Everywhere vision is the Avid MediaCentral Platform, an open, extensible, and customizable foundation that streamlines and simplifies workflows by tightly integrating all Avid or third party products and services that run on top of it. The platform provides secure and protected access, which enables the creation and delivery of content faster and easier through a set of modular application suites that together represent an open, integrated, and flexible media production and distribution environment for the media industry. The Avid Advantage complements Avid Everywhere by offering a new standard in service, support and education to enable our customers to derive more efficiency from their Avid investment. Finally, the ACA is an association of dedicated media community visionaries, thought leaders and users designed to provide essential strategic leadership to the media industry, facilitate collaboration between Avid and key industry leaders and visionaries, and deepen relationships between our customers and us. Another key element of our strategy is our transition to a subscription or recurring revenue based model. In 2014 we began offering subscription based licensing options for some of our products and solutions. These licensing options offer choice in pricing and deployment to suit our customers’ needs and are expected to increase recurring revenue on a longer term basis. However, during our transition to a recurring revenue model, we expect that our revenue, deferred revenue, and cash flow from operations will be adversely affected as an increasing portion of our total revenue is recognized ratably rather than up front, and as new product offerings are sold at a wider variety of price points. As a complement to our core strategy, we continue to review and implement programs throughout the Company to reduce costs, increase operational efficiencies, align talent and enhance our business, including in connection with the restructuring plan announced in February 2016, as described in more detail in Item 1. Business - Recent Events as part of which we are realigning our employee base to better serve our customers’ needs. We expect these initiatives will be completed in mid-2017. 32 Financial Summary Revenues Net revenues were $505.6 million, $530.3 million and $563.4 million, respectively, for 2015, 2014 and 2013. The decreases in revenues were primarily the result of lower amortization of deferred revenues (that is, lower recognition of revenue backlog) attributable to transactions executed on or before December 31, 2010. As described further in “Critical Accounting Polices and Estimates,” our adoption of ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, an amendment to ASC Topic 605, or ASU No. 2009-13, and ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements, an amendment to ASC Subtopic 985-605, resulted in many of our product orders qualifying for upfront revenue recognition; whereas, prior to adoption the same orders required ratable recognition over periods of up to eight years. Revenue backlog associated with transactions executed prior to the adoption of ASU No. 2009-13 and ASU No. 2009-14 will continue to decline through 2016, before the balance is largely amortized, contributing less revenue each period. As a result of this change in accounting standards, even with consistent or increasing aggregate order values, we will experience significant declines in revenues, deferred revenues and revenue backlog in the coming year as revenue backlog associated with transactions occurring prior to January 1, 2011 decreases each year without being replaced by comparable revenue backlog from new transactions. After consideration of this change in accounting standards, there have been no other significant changes in our revenues. Gross Margin Percentage Our gross margin percentage decreased to 60.9% in 2015, compared to 61.4% for 2014. The decrease in gross margin was primarily due to the impact of the previously discussed lower amortization of deferred revenues attributable to transactions executed on or before December 31, 2010, which carry a 100% gross margin, partially offset by the revenue recognized as a result of our conclusion that Implied Maintenance Release PCS on Media Composer 8.0 has ended and improved product mix. Operating Expenses Our total operating expenses for 2015 decreased to $301.2 million, from $306.1 million for 2014. This decrease was primarily due to a decrease in restatement-related expense and marketing and selling expense in 2015, partially offset by an increase in our acquisition-related expense and R&D expense. Liquidity At December 31, 2015, our cash balance was $17.9 million, a decrease of $7.2 million from December 31, 2014. On February 26, 2016, we entered into a term loan with an aggregate principal amount of $100 million and up to a maximum of $5 million in revolving credit (collectively, the “Financing Agreement”). All outstanding loans under the Financing Agreement will become due and payable in February 2021 or in May 2020 if the $125.0 million in outstanding principal from the 2.00% convertible senior notes due June 15, 2020 have not been repaid or refinanced. The Financing Agreement requires us to comply with a financial statement covenant that stipulates a maximum leverage ratio commencing in June 30, 2016. Concurrent with entering into the Financing Agreement, we terminated our existing revolving credit agreement, and repaid all outstanding borrowings under the revolving credit agreement. There were no penalties paid by us in connection with the termination of the revolving credit agreement. 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 the following: revenue recognition and allowances for sales returns and exchanges; stock-based compensation; income tax assets and liabilities; and restructuring charges and accruals. We base our estimates and judgments on historical experience and various other factors we believe to be reasonable under the circumstances, the results of 33 which form the basis for judgments about the carrying values of assets and liabilities and the amounts of revenues 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 Allowance for Sales Returns and Exchanges General We commence revenue recognition when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is reasonably assured. Generally, the products we sell do not require significant production, modification or customization. Installation of our products is generally routine, consists of implementation and configuration and does not have to be performed by us. At the time of a sales transaction, we make an assessment of the collectability of the amount due from the customer. Revenues are recognized only if it is reasonably assured that collection will occur. When 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, revenues are recognized on a cash basis, provided that all other revenue recognition criteria are satisfied. At the outset of the arrangement, we also assess whether the fee associated with the order is fixed or determinable and free of contingencies or significant uncertainties. When 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, revenues are 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, we evaluate whether we have sufficient history of successfully collecting past transactions with similar terms without offering concessions. If that collection history is sufficient, revenue recognition commences, upon delivery of the products, assuming all other revenue recognition criteria are satisfied. If we were to make different judgments or assumptions about any of these matters, it could cause a material increase or decrease in the amount of revenues reported in a particular period. We often receive multiple purchase orders or contracts from a single customer or a group of related customers that are evaluated to determine if they are, in effect, part of a single arrangement. In situations when we have concluded that two or more orders with the same customer are so closely related that they are, in effect, parts of a single arrangement, we account for those orders as a single arrangement for revenue recognition purposes. In other circumstances, when we have concluded that two or more orders with the same customer are independent buying decisions, such as an earlier purchase of a product and a subsequent purchase of a software upgrade or maintenance contract, we account for those orders as separate arrangements for revenue recognition purposes. For many of our products, there has been an ongoing practice of Avid making available at no charge to customers minor feature and compatibility enhancements as well as bug fixes on a when-and-if-available basis (collectively “Software Updates”), for a period of time after initial sales to end users. The implicit obligation to make such Software Updates available to customers over a period of time represents implied post-contract customer support, which is deemed to be a deliverable in each arrangement and is accounted for as a separate element (“Implied Maintenance Release PCS”). Over the course of the last two years, in connection with a strategic initiative to increase support and other recurring revenue streams, we have taken a number of steps to eliminate the longstanding practice of providing Implied Maintenance Release PCS for the Media Composer, Pro Tools and Sibelius product lines. On Media Composer 8.0 in particular, which was released in May 2014, management has (i) clearly communicated a policy of no longer providing any Software Updates or other support to customers that are not covered under a paid support plan and (ii) implemented robust digital rights management tools to enforce the policy. With the new policy and technology for Media Composer 8.0 in place, combined with management’s intent to continue to adhere to the policy, management concluded in the third quarter of 2015 that Implied Maintenance Release PCS for Media Composer 8.0 transactions no longer exists. As a result of the conclusion that Implied Maintenance Release PCS on Media Composer 8.0 has ended, revenue and net income for the twelve months ended December 31, 2015 increased by approximately $13.0 million, reflecting the recognition of orders received after the launch of Media Composer 8.0 that would have qualified for earlier recognition using the residual method of accounting. In addition, as the elimination of Implied Maintenance Release PCS also resulted in the accelerated recognition of maintenance and product revenues that were previously being recognized over the 34 expected period of Implied Maintenance Release PCS rather than the contractual maintenance period, the change in the estimated amortization period of transactions being recognized on a ratable basis resulted in an additional $9.5 million of revenue during the twelve months ended December 31, 2015. Management also concluded in the fourth quarter of 2015 that Implied Maintenance Release PCS on Sibelius 8.0 had ended, which did not have a significant impact on revenue recognition for the twelve months ended December 31, 2015. Management will continue to evaluate the judgment of whether Implied Maintenance Release PCS exists on each product line and version. If and when management concludes Implied Maintenance Release PCS no longer exists for other product lines or versions in future quarters, software revenue related to orders affected will be accelerated and prospective revenue recognition on new product orders will be recognized upfront, assuming all other revenue recognition criteria are met and vendor specific objective evidence (“VSOE”) of fair value exists for all undelivered elements. We believe it is likely that the presumption of Implied Maintenance Release PCS for Pro Tools 12 will be overcome during the year ended December 31, 2016. We enter into certain contractual arrangements that have multiple elements, one or more of which may be delivered subsequent to the delivery of other elements. These multiple-deliverable arrangements may include products, support, training, professional services and Implied Maintenance Release PCS. For these multiple-element arrangements, we allocate revenue to each deliverable of the arrangement based on the relative selling prices of the deliverables. In such circumstances, we first determine the selling price of each deliverable based on (i) VSOE of fair value if that exists; (ii) third-party evidence of selling price, or TPE, when VSOE does not exist; or (iii) best estimate of the selling price, or BESP, when neither VSOE nor TPE exists. Revenue is then allocated to the non-software deliverables as a group and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the selling price hierarchy. Our process for determining BESP for deliverables for which VSOE or TPE does not exist involves significant management judgment. In determining BESP, we consider a number of data points, including: • • • • the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis; contractually stated prices for deliverables that are intended to be sold on a standalone basis; the pricing of standalone sales that may not qualify as VSOE of fair value due to limited volumes or variation in prices; and other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the customer size and type. In determining a BESP for Implied Maintenance Release PCS, which we do not sell separately, we consider (i) the service period for the Implied Maintenance Release PCS, (ii) the differential in value of the Implied Maintenance Release PCS deliverable compared to a full support contract, (iii) the likely list price that would have resulted from our established pricing practices had the deliverable been offered separately, and (iv) the prices a customer would likely be willing to pay. We estimate the service period of Implied Maintenance Release PCS based on the length of time the product version purchased by the customer is planned to be supported with Software Updates. If facts and circumstances indicate that the original service period of Implied Maintenance Release PCS for a product has changed significantly after original revenue recognition has commenced, we will modify the remaining estimated service period accordingly and recognize the then-remaining deferred revenue balance over the revised service period. We have established VSOE of fair value for all professional services and training and for some of our support offerings. Our policy for establishing VSOE of fair value consists of evaluating standalone sales, where available, to determine if a substantial portion of the transactions fall within a reasonable range. If a sufficient volume of standalone sales exist and the standalone pricing for a substantial portion of the transactions falls within a reasonable range, management concludes that VSOE of fair value exists. The following table sets forth our determination of the estimated range of BESP of Implied Maintenance Release PCS, stated as a percentage of the BESP of the underlying product being sold, and the estimated range of service periods of Implied Maintenance Release PCS by product group for all periods presented in the consolidated financial statements. 35 Product Group Professional video creative tools Video storage and workflow solutions Media management solutions Digital audio software and workstations solutions Control surfaces, consoles and live-sound systems Notation software BESP of Implied Maintenance Release PCS (as a % of Product BESP) Estimated Service Period 1% to 13% 18 to 72 months 1% to 2% 1% to 3% 1% to 8% 1% to 5% 4% to 8% 72 months 12 to 72 months 12 to 36 months 12 to 96 months 12 to 46 months In accordance with ASU No. 2009-14, we exclude from the scope of software revenue recognition requirements our sales of tangible products that contain both software and non-software components that function together to deliver the essential functionality of the tangible products. We adopted ASU No. 2009-13 and ASU No. 2009-14 prospectively on January 1, 2011 for new and materially modified arrangements originating after December 31, 2010. Prior to our adoption of ASU No. 2009-14, we primarily recognized revenues using the revenue recognition criteria of Accounting Standards Codification, or ASC, Subtopic 985-605, Software-Revenue Recognition. As a result of our adoption of ASU No. 2009-14 on January 1, 2011, a majority of our products are now considered non-software elements under GAAP, which excludes them from the scope of ASC Subtopic 985-605 and includes them within the scope of ASC Topic 605, Revenue Recognition. Because we had not been able to establish VSOE of fair value for Implied Maintenance Release PCS, as described further below, substantially all revenue arrangements prior to January 1, 2011 were recognized on a ratable basis over the service period of Implied Maintenance Release PCS. Subsequent to January 1, 2011 and the adoption of ASU No. 2009-14, we determine a relative selling price for all elements of the arrangement through the use of BESP, as VSOE and TPE are typically not available, resulting in revenue recognition upon delivery of arrangement consideration attributable to product revenue, provided all other criteria for revenue recognition are met, and revenue recognition of Implied Maintenance Release PCS and other service and support elements over time as services are rendered. The timing of revenue recognition of customer arrangements follows a number of different accounting models determined by the characteristics of the arrangement, and that timing can vary significantly from the timing of related cash payments due from customers. One significant factor affecting the timing of revenue recognition is the determination of whether each deliverable in the arrangement is considered to be a software deliverable or a non-software deliverable. For transactions occurring after January 1, 2011, our revenue recognition policies have generally resulted in the recognition of approximately 70% of billings as revenue in the year of billing, and prior to January 1, 2011, the previously applied revenue recognition policies resulted in the recognition of approximately 30% of billings as revenue in the year of billing. We expect this trend to continue in future periods. Revenue Recognition of Non-Software Deliverables Revenue from products that are considered non-software deliverables is recognized upon delivery of the product to the customer. Products are considered delivered to the customer once they have been shipped and title and risk of loss has been transferred. For most of our product sales, these criteria are met at the time the product is shipped. Revenue from support that is considered a non-software deliverable is initially deferred and is recognized ratably over the contractual period of the arrangement, which is generally twelve months. Professional services and training services are typically sold to customers on a time and materials basis. Revenue from professional services and training services that are considered non-software deliverables is recognized for these deliverables as services are provided to the customer. Revenue for Implied Maintenance Release PCS that is considered a non- software deliverable is recognized ratably over the service period of Implied Maintenance Release PCS, which ranges from 1 to 8 years. Revenue Recognition of Software Deliverables We recognize the following types of elements sold using software revenue recognition guidance: (i) software products and software upgrades, when the software sold in a customer arrangement is more than incidental to the arrangement as a whole and the product does not contain hardware that functions with the software to provide essential functionality, (ii) initial support contracts where the underlying product being supported is considered to be a software deliverable, (iii) support contract renewals, 36 and (iv) professional services and training that relate to deliverables considered to be software deliverables. Because we do not have VSOE of the fair value of our software products, we are permitted to account for our typical customer arrangements that include multiple elements using the residual method. Under the residual method, the VSOE of fair value of the undelivered elements (which could include support, professional services or training, or any combination thereof) is deferred and the remaining portion of the total arrangement fee is recognized as revenue for the delivered elements. If evidence of the VSOE of fair value of one or more undelivered elements does not exist, revenues are deferred and recognized when delivery of those elements occurs or when VSOE of fair value can be established. VSOE of fair value is typically based on the price charged when the element is sold separately to customers. We are unable to use the residual method to recognize revenues for most arrangements that include products that are software deliverables under GAAP since VSOE of fair value does not exist for Implied Maintenance Release PCS elements, which are included in many of our arrangements. For software products that include Implied Maintenance Release PCS, an element for which VSOE of fair value does not exist, revenue for the entire arrangement fee, which could include combinations of product, professional services, training and support, is recognized ratably as a group over the longest service period of any deliverable in the arrangement, with recognition commencing on the date delivery has occurred for all deliverables in the arrangement (or begins to occur in the case of professional services, training and support). Standalone sales of support contracts are recognized ratably over the service period of the product being supported. From time to time, we offer certain customers free upgrades or specified future products or enhancements. When a software deliverable arrangement contains an Implied Maintenance Release PCS deliverable, revenue recognition of the entire arrangement will only commence when any free upgrades or specified future products or enhancements have been delivered, assuming all other products in the arrangement have been delivered and all services, if any, have commenced. Other Revenue Recognition Policies In a limited number of arrangements, the professional services and training to be delivered are considered essential to the functionality of our software products. If services sold in an arrangement are deemed to be essential to the functionality of the software products, the arrangement is accounted for using contract accounting. As we have concluded that we cannot reliably estimate our contract costs, we use the completed contract method of contract accounting. The completed contract method of accounting defers all revenue and costs until the date that the products have been delivered and professional services, exclusive of post-contract customer support, have been completed. Deferred costs related to fully deferred contracts are recorded as a component of inventories in the consolidated balance sheet, and generally all other costs of sales are recognized when revenue recognition commences. We record a provision for estimated returns and other allowances as a reduction of revenues in the same period that related revenues are recorded. Use of management estimates is required in connection with establishing and maintaining a sales allowance for expected returns and other credits, including rebates and returns. In making these estimates, we analyze historical returns and credits and other relevant factors. While we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. The amount and timing of our revenues for any period may be affected if actual product returns prove to be materially different from our estimates. We record as revenues all amounts billed to customers for shipping and handling costs and record the actual shipping costs as a component of cost of revenues. Reimbursements received from customers for out-of-pocket expenses are recorded as revenues, with related costs recorded as cost of revenues. We present revenues net of any taxes collected from customers and remitted to government authorities. In the consolidated statements of operations, we classify revenues as product revenues or services revenues. For multiple element arrangements that include both product and service elements, including Implied Maintenance Release PCS, we evaluate available indicators of fair value and apply our judgment to reasonably classify the arrangement fee between product revenues and services revenues. The amount of multiple element arrangement fees classified as product and services revenues based on management estimates of fair value when VSOE of fair value for all elements of an arrangement does not exist could differ from amounts classified as product and service revenues if VSOE of fair value for all elements existed. 37 Stock-Based Compensation We account for stock-based compensation at fair value. The vesting of stock options and restricted stock awards may be based on time, performance, market conditions, or a combination of performance and market conditions. In the future, we may grant stock awards, options, or other equity-based instruments allowed by our stock-based compensation plans, or a combination thereof, as part of our overall compensation strategy. We generally use the Black-Scholes option pricing model to estimate the fair value of stock option grants with time-based vesting. The Black-Scholes option pricing model relies on a number of key assumptions to calculate estimated fair values. Our assumed dividend yield of zero is based on the fact that we have never paid cash dividends, we have no present intention to pay cash dividends and our current credit agreement precludes us from paying dividends. Our expected stock-price volatility assumption is based on recent (six-month trailing) implied volatility of the traded options. These calculations are performed on exchange-traded options of our common stock based on the implied volatility of long-term (9- to 39-month term) exchange-traded options. During 2014 we changed the method of calculating the expected volatility. The expected volatility is now based on actual historic stock volatility for periods equivalent to the expected term of the award. The assumed risk-free interest rate is the U.S. Treasury security rate with a term equal to the expected life of the option. The assumed expected life is based on company-specific historical experience, considering the exercise behavior of past grants and models the pattern of aggregate exercises. The fair values of restricted stock and restricted stock unit awards with time-based vesting are based on the intrinsic values of the awards at the date of grant as these awards have a purchase price of $0.01 per share. We have also issued stock option grants or restricted stock unit awards with vesting based on market conditions, which historically included Avid’s stock price or performance conditions, generally our adjusted EBITDA. The fair values and derived service periods for all grants that include vesting based on market conditions are estimated using the Monte Carlo simulation method. For stock option grants that include vesting based on performance conditions, the fair values are estimated using the Black-Scholes option pricing model. For restricted stock unit awards that include vesting based on performance conditions, the fair values are estimated based on the intrinsic values of the awards at the date of grant as these awards have a purchase price of $0.01 per share. Income Tax Assets and Liabilities We record deferred tax assets and liabilities based on the net tax effects of tax credits, operating loss carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes compared to the amounts used for income tax purposes. We regularly review our deferred tax assets for recoverability with consideration for such factors as historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on the magnitude of our gross deferred tax assets, which totaled approximately $425 million at December 31, 2015, and our level of historical U.S. losses, we have determined that the uncertainty regarding the realization of these assets is sufficient to warrant the need for a full valuation allowance against our U.S. deferred tax assets. We also determined that a valuation allowance is warranted on a portion of our foreign deferred tax assets. Our assessment of the valuation allowance on our U.S. and foreign deferred tax assets could change in the future based on our levels of pre-tax income and other tax-related adjustments. Reversal of the valuation allowance in whole or in part would result in a non-cash reduction in income tax expense during the period of reversal. To the extent some or all of our valuation allowance is reversed, future financial statements would reflect an increase in non-cash income tax expense until such time as our deferred tax assets are fully utilized. The amount of income taxes we pay is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. We have taken and will continue to take tax positions based on our interpretation of such tax laws. There can be no assurance that a taxing authority will not have a different interpretation of applicable law and assess us with additional taxes. Should we be assessed with additional taxes, it could have a negative impact on our results of operations or financial condition. We account for uncertainty in income taxes recognized in our financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon examination by the taxing authorities, based on the technical merits of the position. If the tax position is deemed more likely than not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the 38 financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. Our provision for income taxes includes the effects of any resulting tax reserves, referred to as unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties. At December 31, 2015 and 2014, the amounts recorded for unrecognized tax benefits in our consolidated balance sheets totaled $26.0 million and $25.8 million, respectively, including interest and penalties. If these benefits had been recognized, a reduction of our income tax provision of $3.2 million and $0.8 million would have resulted at December 31, 2015 and 2014. Restructuring Charges and Accruals We recognize facility-related restructuring charges upon exiting all or a portion of a leased facility and meeting cease-use and other requirements. The amount of restructuring charges is based on the fair value of the lease obligation for the abandoned space, which includes a sublease assumption that could be reasonably obtained. Based on our policies for the calculation and payment of severance benefits, we account for employee-related restructuring charges as an ongoing benefit arrangement in accordance with ASC Topic 712, Compensation - Nonretirement Postemployment Benefits. Severance-related charges are accrued when it is determined that a liability has been incurred, which is when the expected severance payments are probable and can be reasonably estimated. Restructuring charges require significant estimates and assumptions, including sub-lease income and severance period assumptions. Our estimates involve a number of risks and uncertainties, some of which are beyond our control, including future real estate market conditions and our ability to successfully enter into subleases or termination agreements with terms as favorable as those assumed when arriving at our estimates. We monitor these estimates and assumptions on at least a quarterly basis for changes in circumstances and any corresponding adjustments to the accrual are recorded in our statement of operations in the period when such changes are known. 39 RESULTS OF OPERATIONS The following table sets forth certain items from our consolidated statements of operations as a percentage of net revenues for the periods indicated: Net revenues: Product revenues Services revenues Total net revenues Cost of revenues Gross margin Operating expenses: Research and development Marketing and selling General and administrative Amortization of intangible assets Restructuring costs, net Total operating expenses Operating income Interest and other income (expense), net Income before income taxes (Benefit) provision for income taxes Net income Net Revenues Year Ended December 31, 2014 2013 2015 66.5 % 33.5 % 71.4 % 28.6 % 70.2 % 29.8 % 100.0 % 100.0 % 100.0 % 39.1 % 60.9 % 19.0 % 24.2 % 14.7 % 0.5 % 1.2 % 59.6 % 1.3 % (1.2)% 0.1 % (0.4)% 0.5 % 38.6 % 61.4 % 17.0 % 25.1 % 15.3 % 0.3 % — % 57.7 % 3.7 % (0.5)% 3.2 % 0.4 % 2.8 % 39.7 % 60.3 % 16.9 % 23.8 % 13.8 % 0.5 % 1.0 % 55.9 % 4.4 % (0.1)% 4.3 % 0.5 % 3.8 % Our net revenues are derived mainly from sales of video and audio hardware and software products and solutions for digital media content creation, distribution and monetization, and related professional services and maintenance contracts. We commonly sell large, complex solutions to our customers that, due to their strategic nature, have long lead times where the timing of order execution and fulfillment can be difficult to predict. As a result, the timing and amount of product revenue recognized each quarter related to these large orders, as well as the services associated with them, can fluctuate significantly from quarter to quarter and cause quarterly and annual operating results to vary. Net Revenues for the Years Ended December 31, 2015 and 2014 (dollars in thousands) 2015 Change 2014 Net Revenues $ 201,559 $ 134,812 336,371 169,224 $ 505,595 $ $ (31,905) (10,351) (42,256) 17,600 (24,656) % Net Revenues (13.7)% (7.1)% (11.2)% 11.6% (4.6)% $ $ 233,464 145,163 378,627 151,624 530,251 Video products and solutions Audio products and solutions Total products and solutions Services Total net revenues 40 Net Revenues for the Years Ended December 31, 2014 and 2013 (dollars in thousands) 2014 Change Net Revenues $ $ 233,464 $ 145,163 378,627 151,624 $ 530,251 $ (9,709) (7,195) (16,904) (16,257) (33,161) % (4.0)% (4.7)% (4.3)% (9.7)% (5.9)% 2013 Net Revenues $ $ 243,173 152,358 395,531 167,881 563,412 Video products and solutions Audio products and solutions Total products and solutions Services Total net revenues The following table sets forth the percentage of our net revenues attributable to geographic regions for the periods indicated: United States Other Americas Europe, Middle East and Africa Asia-Pacific Video Products and Solutions Revenues 2015 Compared to 2014 Year Ended December 31, 2014 36% 9% 41% 14% 2013 39% 7% 38% 16% 2015 37% 7% 41% 15% Video products and solutions revenues decreased $31.9 million, or 13.7%, for 2015, compared to 2014. The decrease in video revenues was primarily due to lower amortization of deferred revenues attributable to transactions executed on or before December 31, 2010. As a result of our adoption of ASU No. 2009-13 and ASU No. 2009-14 on January 1, 2011, many of our product orders now qualify for upfront revenue recognition; however, prior to adoption of this accounting guidance the same orders required ratable recognition over periods of up to eight years. Deferred revenue associated with transactions executed prior to the adoption of ASU No. 2009-13 and ASU No. 2009-14 will continue to decline through 2016, before the balance is largely amortized, contributing less revenue each period. Revenues for the twelve months ended December 31, 2014 were also higher due to increased demand attributable to the 2014 Winter Olympics and 2014 FIFA World Cup events. Declines in video products and solutions revenue in 2015 were partially offset by the impact of additional revenue attributed to the sale of Orad products after completion of the acquisition on June 23, 2015. 2014 Compared to 2013 Video products and solutions revenues decreased $9.7 million, or 4.0%, for 2014, compared to 2013. The decrease in video revenues was primarily impacted by the previously discussed lower amortization of deferred revenues attributable to transactions executed on or before December 31, 2010. Audio Products and Solutions Revenues 2015 Compared to 2014 Audio products and solutions revenues decreased $10.4 million, or 7.1%, for 2015, compared to 2014. The decrease in audio revenues was primarily the result of the previously discussed lower amortization of deferred revenues attributable to transactions executed on or before December 31, 2010. Also contributing to the decrease in audio revenues for the year ended December 31, 2015 were delays in the development of certain features related to Pro Tools 12 software, which reduced revenue recognition and, along with price points that were inconsistent with market dynamics, negatively impacted new product bookings. 41 2014 Compared to 2013 Audio products and solutions revenues decreased $7.2 million, or 4.7%, for 2014, compared to 2013. The decrease in audio revenues was primarily the result of the previously discussed lower amortization of deferred revenues attributable to transactions executed on or before December 31, 2010. Services Revenues 2015 Compared to 2014 Services revenues are derived primarily from maintenance contracts, as well as professional services and training. The $17.6 million, or 11.6%, increase in services revenues for 2015, compared to 2014, was primarily the result of the determination that Implied Maintenance Release PCS on Media Composer 8.0 no longer exists, resulting in accelerated recognition of maintenance revenues that were previously being recognized over the expected period of Implied Maintenance Release PCS rather than the contractual maintenance period. The increased revenues in 2015 reflected the recognition of orders received after the release of Media Composer 8.0 that would have qualified for earlier recognition under GAAP. 2014 Compared to 2013 The $16.3 million, or 9.7%, decrease in services revenues for 2014, compared to 2013, was primarily the result of the previously discussed lower amortization of deferred revenues attributable to transactions executed on or before December 31, 2010. Revenue Backlog At December 31, 2015, we had revenue backlog of approximately $552 million, compared to $540 million at December 31, 2014. Revenue backlog, as we define it, consists of firm orders received and includes both (i) orders where the customer has paid in advance of our performance obligations being fulfilled, which are reflected as deferred revenues in our balance sheet and (ii) orders for future product deliveries or services that have not yet been invoiced by us. Revenue backlog associated with arrangement consideration paid in advance primarily consists of deferred revenue related to (i) the undelivered portion of annual support contracts, (ii) software arrangements for which VSOE of fair value of undelivered elements does not exist, (iii) Implied Maintenance Release PCS performance obligations, and (iv) in-process installations that are subject to substantive customer acceptance provisions. Revenue backlog associated with orders for future product deliveries and services where cash has not been received primarily consists of (i) product orders received but not yet shipped, (ii) professional services not yet rendered and (iii) future years of multi-year support agreements not yet billed. A meaningful, albeit rapidly declining portion of our revenue backlog is attributable to deferred revenue related to transactions that occurred prior to our January 1, 2011 adoption of the accounting guidance related to multiple-element arrangements (ASU No. 2009-13) and the accounting guidance related to differentiating software and hardware in a combined product offering (ASU No. 2009-14). Prior to our adoption of ASU No. 2009-14, the majority of our products were subject to software revenue recognition guidance that required us to recognize revenue ratably for periods as long as eight years from product delivery because we did not have VSOE of fair value for the Implied Maintenance Release PCS deliverable included in most of our customer arrangements. Upon adoption of ASU No. 2009-14, most of our products are now excluded from the scope of software revenue recognition, resulting in recognition of arrangement consideration upon product shipments (based on management’s best estimate of selling price) with only the arrangement consideration attributable to Implied Maintenance Release PCS being recognized ratably over an extended period of time. As a result of the change in accounting standards, even with consistent or increasing aggregate order values, we will experience significant declines in revenues, deferred revenues and revenue backlog in the coming year as revenue backlog associated with transactions occurring prior to January 1, 2011 decreases each quarter without being replaced by comparable revenue backlog from new transactions. 42 The expected timing of recognition of revenue backlog as revenue in the future is as follows as of December 31, 2015 (in thousands): For the Year Ending December 31, 2016 2017 2018 2019 2020 Thereafter Total Orders executed prior to January 1, 2011 $ 24,772 $ 952 $ 144 $ — $ — $ — $ 25,868 Orders executed or materially modified on or after January 1, 2011 244,112 117,458 68,011 35,292 21,407 39,938 526,218 $ 268,884 $ 118,410 $ 68,155 $ 35,292 $ 21,407 $ 39,938 $ 552,086 Orders included in revenue backlog may be reduced, canceled or deferred by our customers. The expected timing of the recognition of revenue backlog as revenue is based on our current estimates and could change based on a number of factors, including (i) the timing of delivery of products and services, (ii) customer cancellations or change orders, or (iii) changes in the estimated period of time Implied Maintenance Release PCS is provided to customers. As there is no industry standard definition of revenue backlog, our reported revenue backlog may not be comparable with other companies. Revenue backlog as of any particular date should not be relied upon as indicative of our net revenues for any future period. Cost of Revenues, Gross Profit and Gross Margin Percentage Cost of revenues consists primarily of costs associated with: • • • warehousing; • • • • procurement of components and finished goods; assembly, testing and distribution of finished products; customer support related to maintenance; royalties for third-party software and hardware included in our products; amortization of technology; and providing professional services and training. Amortization of technology included in cost of revenues represents the amortization of developed technology assets acquired as part of acquisitions and is described further in the Amortization of Intangible Assets section below. Costs of Revenues for the Years Ended December 31, 2015 and 2014 (dollars in thousands) Products Services Amortization of intangible assets Total cost of revenues 2015 Costs $ $ 131,881 61,501 4,063 197,445 Change $ (11,884) 845 4,013 (7,026) % (8.3)% 1.4% 8,026.0% (3.4)% $ 2014 Costs 143,765 60,656 50 204,471 Gross profit $ 308,150 $ (17,630) (5.4)% $ 325,780 43 Costs of Revenues for the Years Ended December 31, 2014 and 2013 (dollars in thousands) Products Services Amortization of intangible assets Total costs of revenues 2014 Costs $ 143,765 $ 60,656 50 204,471 Change $ (15,499) (2,521) (1,418) (19,438) % (9.7)% (4.0)% (96.6)% (8.7)% 2013 Costs $ 159,264 63,177 1,468 223,909 Gross profit $ 325,780 $ (13,723) (4.0)% $ 339,503 Gross Margin Percentage Gross margin percentage, which is net revenues less costs of revenues divided by net revenues, 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. Our total gross margin percentage for 2015 decreased slightly to 60.9%, from 61.4% for 2014. The decrease in gross margin was primarily due to the previously discussed lower amortization of deferred revenues attributable to transactions executed on or before December 31, 2010, partially offset by the revenue recognized from the ended Implied Maintenance Release PCS on Media Composer 8.0 and improved product mix. As previously discussed, the revenues recognized from the amortization of deferred revenues (that is, the recognition of revenue backlog) attributable to transactions executed on or before December 31, 2010 will continue to decline until the related deferred revenue balance are largely amortized by 2016. These revenues have 100% margins, because the timing of the recognition of the deferred costs did not change as a result of our restatement, and our gross margin percentages will be negatively impacted as these revenues decline. Gross Margin % for the Years Ended December 31, 2015, 2014 and 2013 (Decrease) Increase in Gross Margin % (1.2)% 2015 Gross Margin % 2014 Gross Margin % Increase (Decrease) in Gross Margin % 2.3% 60.8% 62.0% 63.7% 60.9% 3.7% (0.5)% 60.0% 61.4% (2.4)% 1.1% 2013 Gross Margin % 59.7% 62.4% 60.3% Products Services Total Gross Margin 2015 Compared to 2014 The decrease in products gross margin percentage for 2015, compared to 2014, was primarily due to the previously discussed lower amortization of deferred revenues attributable to transactions executed on or before December 31, 2010. The increase in services gross margin percentage for 2015, compared to 2014, was attributable to the revenue recognized as a result of the conclusion that Implied Maintenance Release PCS on Media Composer 8.0 has ended and improved product mix. 2014 Compared to 2013 The increase in products gross margin percentage for 2014, compared to 2013, was driven by the cost reduction initiatives, partially offset by the impact of the previously discussed lower amortization of deferred revenues attributable to transactions executed on or before December 31, 2010. The decrease in services gross margin percentage for 2014, compared to 2013, was due to lower services revenues on relatively fixed costs. As previously discussed, the revenues recognized from the amortization of deferred revenues (that is, the recognition of revenue backlog) attributable to transactions executed on or before December 31, 2010 will continue to decline until the related deferred revenue balance are largely amortized by 2016. These revenues have 100% margins, because the timing of the 44 recognition of the deferred costs did not change as a result of our restatement, and our gross margin percentages will be negatively impacted as these revenues decline. Operating Expenses and Operating Income Operating Expenses and Operating Income for the Years Ended December 31, 2015 and 2014 (dollars in thousands) Research and development expenses Marketing and selling expenses General and administrative expenses Amortization of intangible assets Restructuring (recoveries) costs, net Total operating expenses Operating income 2015 Expenses $ 95,898 $ 122,511 74,109 2,354 6,305 301,177 6,973 $ $ $ $ Change $ 5,508 (10,538) (7,072) 728 6,470 (4,904) % 6.1% (7.9)% (8.7)% 44.8% (3,921.2)% (1.6)% (12,726) (64.6)% Operating Expenses and Operating Income for the Years Ended December 31, 2014 and 2013 (dollars in thousands) 2014 Expenses Change $ Research and development expenses Marketing and selling expenses General and administrative expenses Amortization of intangible assets Restructuring costs, net Total operating expenses Operating income Research and Development Expenses $ 90,390 $ 133,049 81,181 1,626 (165) 306,081 19,699 $ $ $ $ (4,859) (841) 3,603 (1,022) (5,535) (8,654) % (5.1)% (0.6)% 4.6% (38.6)% (103.1)% (2.7)% (5,069) (20.5)% 2014 Expenses 90,390 133,049 81,181 1,626 (165) 306,081 19,699 2013 Expenses 95,249 133,890 77,578 2,648 5,370 314,735 24,768 $ $ $ $ $ $ Research and development, or R&D, expenses include costs associated with the development of new products and the enhancement of existing products, and consist primarily of employee salaries and benefits; facilities costs; depreciation; costs for consulting and temporary employees; and prototype and other development expenses. R&D expenses increased $5.5 million, or 6.1%, during the year ended December 31, 2015, compared to 2014. The table below provides further details regarding the changes in components of R&D expense. 45 Year-Over-Year Change in Research and Development Expenses for the Years Ended December 31, 2015 and 2014 (dollars in thousands) Consulting and outside services Facilities and information technology Computer hardware and supplies Personnel-related Other expenses Total research and development expenses (decrease)/increase 2015 Compared to 2014 2015 Increase/(Decrease) From 2014 2014 Increase/(Decrease) From 2013 $ 3,209 1,214 718 598 (231) 5,508 $ $ % 21.2% 7.8% 14.9% 1.1% (9.7)% 6.1% $ 973 (2,050) 1,467 (5,150) (99) (4,859) % 6.9% (11.6)% 43.8% (8.9)% (4.0)% (5.1)% $ $ The increases in consulting and outside services and computer hardware and supplies expenses for 2015, compared to 2014, were primarily the result of the timing of certain development projects in 2015, compared to 2014, as we develop new products and solutions consistent with our Avid Everywhere strategic vision. The increase in personnel-related expenses for 2015, compared to 2014, was due to Orad R&D personnel-related expenses, partially offset by decreased incentive-based compensation accrual and stock-based compensation costs. The increase in facilities and information technology expenses for 2015, compared 2014, was a result of R&D headcount increase and higher usage. 2014 Compared to 2013 The decreases in personnel-related expenses and facilities and information technology infrastructure costs for 2014, compared to 2013, reflect lower employee headcount which resulted in lower usage of facilities and information technology overhead. The increases in computer hardware and supplies expenses and consulting and outside services expenses were primarily the result of the timing of certain development projects in 2014, compared to 2013, as we develop new products and solutions consistent with our Avid Everywhere strategic vision. Marketing and Selling Expenses Marketing and selling expenses consist primarily of employee salaries and benefits for selling, marketing and pre-sales customer support personnel; commissions; travel expenses; advertising and promotional expenses; web design costs and facilities costs. Marketing and selling expenses decreased $10.5 million, or 7.9%, during the year ended December 31, 2015, compared to 2014. The table below provides further details regarding the changes in components of marketing and selling expense. Year-Over-Year Change in Marketing and Selling Expenses for Years Ended December 31, 2015 and 2014 (dollars in thousands) Facilities and information technology infrastructure Personnel-related Foreign exchange losses (gains) Consulting and outside services Product introduction Web advertising Other expenses Total marketing and selling expenses decrease 2015 Decrease From 2014 $ (4,607) (3,461) (2,137) (1,278) — 755 190 (10,538) % (14.4)% (4.5)% (235.3)% (6.5)% —% 4,541.4% 4.4% (7.9)% $ $ $ $ 2014 Decrease From 2013 $ (342) 1,536 % (1.1)% 2.1% 721 385.4% 1,478 (3,666) — (568) (841) 8.2% 100.2% —% (11.0)% (0.6)% 46 2015 Compared to 2014 The decrease in facilities and information technology infrastructure expenses for 2015, compared to 2014, was primarily the result of less usage of facilities and information technology in 2015. The decrease in personnel-related expenses for 2015, compared to 2014, was primarily due to decreased incentive-based compensation accrual, commission expenses and stock-based compensation costs. The decrease in consulting and outside services expenses was primarily due to our cost reduction initiatives. The web advertising expenses were related to our large advertising campaigns in 2015, which was not present at the same level during 2014. The net foreign exchange gains (specifically, resulting from foreign currency forward contracts, foreign currency denominated transactions, and the revaluation of foreign currency denominated assets and liabilities), which are included in marketing and selling expenses, were $1.3 million for 2015, compared to losses of $(0.9) million in 2014. We classify these gains and losses within marketing and selling expenses because the gains and losses generally arise from revenue arrangements that are denominated in foreign currencies to facilitate sales in certain foreign jurisdictions. 2014 Compared to 2013 The decrease in product introduction expenses in 2014 was the result of significant new product introductions during 2013, which was not present at the same level in 2014. The increase in consulting and outside services expenses for 2014, compared to 2013, was primarily the result of costs related to our Avid Customer Association, or ACA, which was launched in September 2013, and the inaugural ACA events, Avid Connect and Avid Connect Europe, which took place in April 2014 and September 2014, respectively. The increase in personnel-related expenses for 2014, compared to 2013, was primarily due to increased incentive- based compensation accrual, commission expenses and stock-based compensation costs. The net foreign exchange losses were $0.9 million for 2014, compared to losses of $0.2 million in the 2013 period. General and Administrative Expenses General and administrative expenses consist primarily of employee salaries and benefits for administrative, executive, finance and legal personnel; audit, legal and strategic consulting fees; and insurance, information systems and facilities costs. Information systems and facilities costs reported within general and administrative expenses are net of allocations to other expenses categories. General and administrative expenses decreased $7.1 million, or 8.7%, during the year ended December 31, 2015, compared to 2014. The table below provides further details regarding the changes in components of general and administrative expense. Year-Over-Year Change in General and Administrative Expenses for the Years Ended December 31, 2015 and 2014 (dollars in thousands) Consulting and outside services Merger and acquisition Personnel-related Facilities and information technology Other expenses Total general and administrative expenses (decrease)/increase 2015 Compared to 2014 2015 (Decrease)/Increase From 2014 2014 Increase From 2013 $ (17,426) 11,162 (1,733) 480 445 (7,072) $ $ % (47.4)% 100.0% (5.5)% 4.9% 12.5% (8.7)% $ $ 256 — 2,325 848 174 $ 3,603 % 0.7% —% 8.0% 9.4% 5.2% 4.6% The decrease in consulting and outside services expenses for 2015, compared to 2014, was primarily the result of a decrease in restatement-related costs and litigation expenses. The merger and acquisition expenses in 2015 were primarily the professional and consulting services expenses related to the acquisition and integration of Orad. The decrease in personnel-related expenses for 2015, compared to 2014, was primarily the result of decreased incentive-based compensation accrual. 47 2014 Compared to 2013 The increase in personnel-related expenses for 2014, compared to 2013, was primarily due to an increase in incentive-based compensation accrual and stock based compensation expenses, partially offset by a decrease in salaries expenses and management transition related costs. The increase in facilities and information technology infrastructure costs was primarily the result of increased usage of facilities costs by the general and administrative function. Amortization of Intangible Assets Intangible assets result from acquisitions and include developed technology, customer-related intangibles, trade names and other identifiable intangible assets with finite lives. These intangible assets are amortized using the straight-line method over the estimated useful lives of such assets, which are generally two years to twelve years. Amortization of developed technology is recorded within cost of revenues. Amortization of customer-related intangibles, trade names and other identifiable intangible assets is recorded within operating expenses. Year-Over-Year Change in Amortization of Intangible Assets for the Years Ended December 31, 2015 and 2014 (dollars in thousands) 2015 Increase From 2014 $ % Amortization of intangible assets recorded in cost of revenues Amortization of intangible assets recorded in operating expenses Total amortization of intangible assets $ $ 4,013 8,026.0% $ 728 4,741 44.8% 282.9% $ 2015 Compared to 2014 2014 Decrease From 2013 $ (1,418) (1,022) (2,440) % (96.6)% (38.6)% (59.3)% The increase in amortization of intangible assets for 2015, compared to 2014, was the result of the intangible assets that we acquired through our acquisition of Orad in June 2015. We had $32.3 million of unamortized balance of our identifiable intangible assets related to the Orad acquisition, and $0.9 million of unamortized balance related to all other acquisitions at December 31, 2015. We expect amortization of these intangible assets to be approximately $10.3 million in 2016 and $9.3 million in 2017. See Note J, Intangible Assets, to our Consolidated Financial Statements in Item 8 for further information regarding our identifiable intangible assets. 2014 Compared to 2013 The decrease in amortization of intangible assets recorded in cost of revenues and operating expenses during 2014, compared to 2013, was primarily the result of certain acquired intangible assets becoming fully amortized. Restructuring Costs, Net 2016 Restructuring Plan In the first quarter of 2016, we commenced restructuring actions that are part of a broad restructuring plan encompassing a series of measures intended to allow us to more efficiently operate in a leaner, and more directed cost structure. These include reductions in our workforce, facilities consolidation, transferring certain business processes to lower cost regions, and reducing other third- party services costs. In connection with this restructuring plan, we expect to incur incremental cash expenditures of approximately $25 million relating to termination benefits, facility costs, employee overlap expenses and related actions. We anticipate that the restructuring plan will be substantially complete by the end of the second quarter of 2017 and will result in annualized costs savings of approximately $68 million. The restructuring charges of $5.8 million recorded during the quarter ended December 31, 2015, represented an initial elimination of 111 positions worldwide during January and February of 2016. 48 2013 Restructuring Actions In June 2013, our leadership evaluated the marketing and selling teams and, in an effort to better align sales resources with our strategic goals and enhance our global account team approach, eliminated 31 positions. As a result, we recognized related restructuring costs of $1.7 million in 2013. During November and December 2013, our executive management team identified opportunities to lower costs in the supply and hardware technology group by eliminating 29 positions in hardware shared services and 15 positions in the supply and technology group. Additionally, an engineering reorganization at the same time resulted in the elimination of four engineering positions. As a result, we recognized $1.7 million of related restructuring costs in 2013. All of the restructuring costs related to 2013 restructuring actions were fully paid as of December 31, 2015, no further actions are anticipated. Interest and Other Income (Expense), Net Interest and other income (expense), net, generally consists of interest income and interest expense. Interest and Other Income (Expense) for the Years Ended December 31, 2015 and 2014 (dollars in thousands) Interest income Interest expense Other income (expense), net Total interest and other income (expense), net 2015 Income (Expense) $ $ $ 113 (6,346) (175) (6,408) $ Change $ (13) (4,575) 963 (3,625) % (10.3)% 258.3% (84.6)% 130.3% Interest and Other Income (Expense) for the Years Ended December 31, 2014 and 2013 (dollars in thousands) Interest income Interest expense Other income (expense), net Total interest and other income (expense), net 2015 Compared to 2014 2014 Income (Expense) $ $ $ 126 (1,771) (1,138) (2,783) $ Change $ (429) (197) (1,481) (2,107) % (77.3)% 12.5% (431.8)% 311.7% 2014 Income (Expense) 126 (1,771) (1,138) (2,783) 2013 Income (Expense) 555 (1,574) 343 (676) $ $ $ $ The increase in interest expense for 2015, compared to 2014, was due to the interest on our outstanding 2.00% convertible senior notes and related debt discount accretion. See Note R, Long Term Debt and Credit Agreement, to our Consolidated Financial Statements in Item 8 for further information. The decrease in other expense for 2015, compared to 2014, was primarily the result of changes in the valuation of a deferred compensation plan. With the increase in our debt, we expect interest expense to increase in 2016. 2014 Compared to 2013 The change in interest and other income (expense), net for 2014, compared to 2013, was primarily the result of changes in the valuation of a deferred compensation plan. During 2014, there was an increase in the valuation of the plan obligations resulting in 49 net expense recorded in other income (expense), compared to a decrease in the valuation in 2013 that resulted in net income recorded as other income (expense). (Benefit from) Provision for Income Taxes Provision for Income Taxes for the Years Ended December 31, 2015 and 2014 (dollars in thousands) Provision for income taxes 2015 Benefit Change $ $ (1,915) $ (4,103) % (187.5)% 2014 Provision $ 2,188 Provision for Income Taxes for the Years Ended December 31, 2014 and 2013 (dollars in thousands) Provision for income taxes 2014 Provision Change $ $ 2,188 $ (751) % (25.6)% 2013 Provision $ 2,939 Our effective tax rate, which represents our tax provision as a percentage of income before tax, was (338.9)%, 12.9% and 12.2%, respectively, for 2015, 2014 and 2013. Our 2015 provision for income taxes decreased by $4.1 million from 2014, primarily due to a benefit of $6.5 million that was recorded as a discrete item resulting from the creation of a deferred tax liability associated with the portion of the convertible note offering that was classified within stockholders’ equity. While GAAP requires the offset of the deferred tax liability to be recorded in additional paid in capital, consistent with the equity portion of the convertible senior notes, the creation of the deferred tax liability produced evidence of recoverability of deferred tax assets, which resulted in the release of a valuation allowance, totaling $6.5 million reflected as an income tax benefit. The $6.5 million benefit was primarily offset by increased foreign profits, where we currently pay income taxes. Our 2014 provision for income taxes decreased by $0.8 million from 2013, primarily as a result of a $0.3 million benefit for the reversal of a previously accrued Canada withholding tax penalty and a $0.5 million benefit associated with a change in the Company’s indefinite reinvestment assertion with respect to its Canadian subsidiary. During 2013 there were no significant discrete tax items that impacted the tax provision. We have significant net deferred tax assets that are primarily a result of tax credits and operating loss carryforwards. The realization of the net deferred tax assets is dependent upon the generation of sufficient future taxable income in the applicable tax jurisdictions. We regularly review our deferred tax assets for recoverability with consideration for such factors as historical losses, projected future taxable income, the expected timing of the reversals of existing temporary differences, and tax planning strategies. ASC Topic 740, 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 magnitude of our deferred tax assets at December 31, 2015 and our level of historical U.S. losses, we have determined that the uncertainty regarding the realization of these assets is sufficient to warrant the need for a full valuation allowance against our U.S. deferred tax assets. We have also determined that a valuation allowance is warranted on a portion of our foreign deferred tax assets. LIQUIDITY AND CAPITAL RESOURCES Liquidity and Sources of Cash We have generally funded our operations in recent years through the use of existing cash balances, which we have supplemented from time to time with the proceeds of long-term debt, including from the issuance of the convertible senior notes due 2020, and borrowings under our credit facilities. At December 31, 2015, our principal sources of liquidity included cash and cash equivalents totaling $17.9 million and available borrowings of $27.0 million under our credit agreement with KeyBank National Association, as administrative agent, and the other lender parties (the “KeyBank Credit Agreement”), with total liquidity aggregating approximately $44.9 million. At 50 December 31, 2015, our working capital was $(167.5) million, compared to $(157.5) million at December 31, 2014. Our working capital deficit at both dates was largely due to the significant level of deferred revenues recorded on our balance sheet, which consist of service obligations that do not represent meaningful cash requirements. We have deferred a significant portion of revenues from sales transactions and recorded them as deferred revenues. The satisfaction of the obligations that give rise to the deferred revenue are not expected to require significant use of cash in 2016. Our cash requirements vary depending on factors such as the growth of our business, changes in working capital, capital expenditures, our acquisition of businesses or technologies, obligations under restructuring programs, and our debt servicing costs. We are continuing to focus on maintaining adequate liquidity and further reducing costs and improving our operational efficiency, including pursuant to the restructuring program we announced in February 2016. We believe that we will have sufficient cash, cash equivalents, funds generated from operations and funds available under the Credit Facility to meet our operational objectives for at least the next 12 months, as well as for the foreseeable future. However, if our cash needs fluctuate significantly we may not have sufficient liquidity to meet all of our obligations. We may need additional financing in the future, the availability of which will depend on a variety of factors such as our future financial and operating performance and financial market conditions. We may have difficulty obtaining additional financing on attractive terms or at all. Cerberus Financing Agreement On February 26, 2016, we entered into a financing agreement with Cerberus Business Finance, LLC, as collateral and administrative agent, and other lender parties (the “Cerberus Financing Agreement”). Pursuant to the Cerberus Financing Agreement, the lenders agreed to provide us with (a) a term loan in the aggregate principal amount of $100 million (the “Term Loan”) and (b) a revolving credit facility of up to a maximum of $5 million in borrowings outstanding at any time (the “Credit Facility”). We borrowed the full amount of the Term Loan, or $100 million, as of the closing date, but did not borrow any amount under the Credit Facility as of the Closing Date. All outstanding loans under the Cerberus Financing Agreement will become due and payable on the earlier of February 26, 2021 and the date that is 30 days prior to the scheduled maturity date of our outstanding 2.00% convertible senior notes due 2020, which is June 15, 2020. Prior to the maturity of the Credit Facility, any amounts borrowed under the Credit Facility may be repaid and, subject to the terms and conditions of the Cerberus Financing Agreement, reborrowed in whole or in part without penalty. Concurrently with the entry into the Cerberus Financing Agreement, we terminated the KeyBank Credit Agreement and repaid all outstanding borrowings under such agreement. There were no penalties paid by us in connection with this termination. In addition to repaying borrowings under the KeyBank Credit Agreement, the Term Loan proceeds will be used to fund the Company’s restructuring program announced in February 2016 and to provide ongoing liquidity, including to fund operations. Financial terms and prepayments. Interest accrues on outstanding borrowings under the Term Loan and the Credit Facility at a rate of either the LIBOR Rate (as defined in the Financing Agreement) plus 6.75% or a Reference Rate (as defined in the Financing Agreement) plus 5.75%, at the option of the Company. The Term Loan is subject to a $1.25 million mandatory principal amortization per quarter commencing in June 2016. The Company may prepay all or any portion of the Term Loan prior to its stated maturity, subject to the payment of certain fees based on the amount repaid. The Company must pay to the lenders, on a monthly basis, an unused line fee at a rate of 0.5% per annum on an amount equal to (1) the total lending commitments under the Credit Facility less (2) the average daily amount of the outstanding borrowings under the Credit Facility during the immediately preceding month. During the term of the Credit Facility, the Company is entitled to reduce the maximum amounts of the lenders’ commitments under the Credit Facility, subject to the payment of certain fees based on the amount of any reduction. In addition, subject to limited exceptions the Company will be required to prepay the borrowings under the Cerberus Financing Agreement with proceeds it receives from specified events, including sales of assets, tax refunds, legal judgments and settlements, third party indemnities insurance proceeds and condemnation awards. Each year the Company will be required to prepay the borrowings under the Cerberus Financing Agreement in an amount equal to 50% of the excess cash flow of the Company. Collateral and guarantees. The Company and its subsidiary, Avid Technology Worldwide, Inc. (“Avid Worldwide”), granted a security interest on substantially all of their assets to secure the obligations of all obligors under the Term Loan and the Credit Facility. Avid Worldwide provided a guarantee of all the Company’s obligations under the Cerberus Financing Agreement. Future subsidiaries of the Company (other than certain foreign and immaterial subsidiaries) are also required to become a party to the applicable security agreements and guarantee the obligations under the Cerberus Financing Agreement. 51 Financial and other covenants. The Cerberus Financing Agreement contains customary representations and warranties and covenants. These include covenants requiring the Company to maintain a Leverage Ratio (defined to mean the ratio of (a) consolidated total funded indebtedness to (b) consolidated EBITDA) of no greater than 4.35:1.00 for the four quarters ending June 30, 2016, 5.40:1.00 for the four quarters ending September 30, 2016, 4.20:1.00 for the four quarters ending December 31, 2016 and thereafter declining over time from 3.50:1.00 to 2.50:1.00. The Financing Agreement also restricts the Company from making capital expenditures in excess of $20,000,000 in any fiscal year. The Financing Agreement contains restrictive covenants that are customary for an agreement of this kind, including, for example, covenants that restrict the Company from incurring additional indebtedness, granting liens, making investments and restricted payments, making acquisitions, paying dividends, and engaging in transactions with affiliates. Certain exceptions to these restrictive covenants are not available in the event the Company’s liquidity (defined as cash held in U.S. accounts and availability under the Credit Facility) is less than $30.0 million. Events of default. The Cerberus Financing Agreement contains customary events of default under which the Company’s payment obligations may be accelerated. These events of default include, among others, failure to pay amounts payable under the Cerberus Financing Agreement when due, breach of representations and warranties, failure to perform covenants, a change of control, default or acceleration of material indebtedness, certain judgments and certain impairments to the collateral. 2.00% Convertible Senior Notes On June 15, 2015, we issued $125.0 million aggregate principal amount of our 2.00% Convertible Senior Notes due 2020 (the “Notes”). The net proceeds from the offering were $120.3 million after deducting the offering expenses. The Notes pay interest semi-annually on June 15 and December 15 of each year, beginning on December 15, 2015, at an annual rate of 2.00% and mature on June 15, 2020 unless earlier converted or repurchased in accordance with their terms prior to such date. In connection with the offering of the Notes, on June 9, 2015, we entered into a capped call derivative transaction with a third party (the “Capped Call”). The Capped Call is expected generally to reduce the potential dilution to the common stock and/or offset any cash payments we may be required to make in excess of the principal amount upon conversion of the Notes in the event that the market price per share of the common stock is greater than the strike price of the Capped Call. The Capped Call has a strike price of $21.94 and a cap price of $26.00 and is exercisable by us when and if the Notes are converted. The Capped Call expires on June 15, 2020. Cash Flows The following table summarizes our cash flows for the years ended December 31, 2015, 2014 and 2013 (in thousands): Net cash used in operating activities Net cash used in investing activities Net cash provided by (used in) financing activities Effect of foreign currency exchange rates on cash and cash equivalents Net decrease in cash and cash equivalents Cash Flows from Operating Activities Year Ended December 31, 2014 2013 2015 $ $ (34,026) $ (81,796) 109,558 (890) (7,154) $ (9,897) $ (11,800) (436) (1,014) (23,147) $ (9,145) (11,536) (96) (1,410) (22,187) Cash used in operating activities aggregated $34.0 million for the year ended December 31, 2015. The cash usage during 2015 was primarily attributable to the annual bonus payments, product development costs, and the professional and consulting services related to the acquisition of Orad. Cash Flows from Investing Activities For the year ended December 31, 2015, the net cash flow used in investing activities reflected $66.0 million used for our acquisition of Orad, and $15.3 million used for the purchase of property and equipment. Our purchases of property and 52 equipment largely consist of computer hardware and software to support R&D activities and information systems and leasehold improvements. Cash Flows from Financing Activities For the year ended December 31, 2015, the net cash flow provided by financing activities reflected $120.4 million net proceeds from the Notes due 2020, $10.1 million paid for the Capped Call, $8.0 million paid for the shares of common stock we repurchased, and $1.2 million issuance costs paid for our Credit Agreement with KeyBank. At December 31, 2015, we had $5.0 million in outstanding borrowings under our Credit Agreement with Keybank, which was repaid on February 26, 2016 without penalties. CONTRACTUAL AND COMMERCIAL OBLIGATIONS The following table sets forth future payments that we were obligated to make at December 31, 2015 under existing lease agreements and commitments to purchase inventory and other goods and services (in thousands): Operating leases Unconditional purchase obligations (a) Total $ $ 68,031 39,500 107,531 $ $ Less than 1 Year 1 – 3 Years 3 – 5 Years After 5 Years 17,825 39,500 57,325 $ $ 25,251 — 25,251 $ $ 18,242 — 18,242 $ $ 6,713 — 6,713 (a) At December 31, 2015, we had entered into purchase commitments for certain inventory and other goods and services used in our normal operations. The purchase commitments covered by these agreements are generally for a period of less than one year. Other contractual arrangements or unrecognized tax positions that may result in cash payments consisted of the following at December 31, 2015 (in thousands): Unrecognized tax positions and related interest Stand-by letters of credit Total Less than 1 Year 1 – 3 Years 3 – 5 Years After 5 Years $ $ 3,217 2,566 5,783 $ $ 121 723 844 $ $ 3,096 560 3,656 $ $ — $ 1,283 1,283 $ — — — We have the Notes of $125.0 million maturing in June 2020 with semi-annual interest payment of $1.3 million. On February 26, 2016, we entered into the Financing Agreement and borrowed the full amount of the Term Loan, or $100 million, as described in more detail in Item 1. Business - Recent Events. We have letters of credit that are used as security deposits in connection with our leased Burlington, Massachusetts headquarters office space and other leases. In the event of default on the underlying leases, the landlords would, at December 31, 2015, be eligible to draw against the letters of credit to a maximum of $2.2 million in the aggregate. The letters of credit are subject to aggregate reductions provided that we are not in default of the underlying leases and meet certain financial performance conditions. In no case will the letters of credit amounts for the Burlington leases be reduced to below $1.2 million in the aggregate throughout the lease periods, all of which extend to May 2020. In addition, we have letters of credit totaling $0.4 million that support our ongoing operations. These letters of credit have various terms and expire during 2016 and beyond, while some of the letters of credit may automatically renew based on the terms of the underlying agreements. OFF-BALANCE SHEET ARRANGEMENTS Other than operating leases, we do not engage in off-balance sheet financing arrangements or have any variable-interest entities. At December 31, 2015, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. 53 RECENT ACCOUNTING PRONOUNCEMENTS Recent Accounting Pronouncements On May 28, 2014, the Financial Accounting Standards Board (the “FASB”) and the International Accounting Standards Board (the “IASB”) issued substantially converged final standards on revenue recognition. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new revenue recognition guidance becomes effective for us on January 1, 2018, and early adoption as of January 1, 2017 is permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance in the ASU. We have not yet selected a transition method and are evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures. In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. Early adoption is permitted for financial statements that have not been previously issued. We incurred transaction costs of $4.7 million relating to the issuance of the Notes, and have adopted the guidance in 2015. In accounting for the transaction costs, we allocated the costs of the offering between debt and equity in proportion to the fair value of the debt and equity recognized. The transaction costs allocated to the debt component of approximately $3.6 million were recorded as a direct deduction from the face amount of the Notes and are being amortized as interest expense over the term of the Notes using the interest method. In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern. ASU 2014-15 provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. We are evaluating the potential impact of adopting this standard on our financial statements. On November 20, 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The standard requires entities to present all deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) as non-current in a classified balance sheet. The standard simplifies the current guidance, which requires entities to separately present DTAs and DTLs as current and non-current in a classified balance sheet. The new standard is effective for fiscal years and interim periods within those fiscal years, beginning December 15, 2016. Early adoption is permitted. We early adopted the guidance to simplify our reporting for the current year and have disclosed the nature of and reason for the change in accounting principle in accordance with the guidance. Prior balance sheets were retrospectively adjusted, resulting in a $0.3 million reclassification of current DTAs to long- term DTAs in the consolidated balance sheet at December 31, 2014. On February 25, 2016, the FASB issued new lease accounting standard, ASU 2016-02, Leases (Topic 842). Lessees will need to recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. The new guidance becomes effective for us on January 1, 2019, and early adoption is permitted upon issuance. We are evaluating the potential impact of adopting this standard our its financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Foreign Currency Exchange Risk We have significant international operations and, therefore, our revenues, earnings, cash flows and financial position are exposed to foreign currency risk from foreign-currency-denominated receivables, payables, sales transactions and net investments in foreign operations. 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 affect our revenues, net income and cash flow. 54 We may use derivatives in the form of foreign currency contracts to manage certain short-term exposures to fluctuations in the foreign currency exchange rates that exist as part of our ongoing international business operations. We do not enter into any derivative instruments for trading or speculative purposes. The success of our hedging programs depends on forecasts of transaction activity in the various currencies and contract rates versus financial statement rates. To the extent these forecasts are overstated or understated during periods of currency volatility, we could experience unanticipated currency gains or losses. We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and whether we have elected to designate the derivative as a hedge. We may also enter into derivative contracts that are intended to economically hedge certain of our risks, even though we elect not to apply hedge accounting. In an effort to hedge against the foreign exchange exposure of certain forecasted receivables, intercompany accounts, payables and cash balances, we enter into short-term foreign currency forward contracts. There are two objectives of this foreign currency forward-contract program: (1) to offset any foreign exchange currency risk associated with cash receipts expected to be received from our customers and cash payments expected to be made to our vendors 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 functional currency of the legal entity. These forward contracts typically mature within 30 days of execution. We have not designated these forward contracts as hedging instruments and, accordingly, we recorded the fair value of these contracts at the end of each reporting period in our consolidated balance sheet, with changes in the fair value recorded in our marketing and selling expenses. We had no outstanding foreign currency forward contracts and short-term foreign currency spot contracts at December 31, 2015. We assumed from Orad outstanding foreign currency spot contracts and call and put options to hedge cash flow risks associated with foreign exchange rates. The aggregate notional value of the outstanding contracts and options was $1.0 million at December 31, 2015. During the years ended December 31, 2015, 2014 and 2013, we recorded net gains (losses) of $1.3 million, $(0.9) million and $(0.2) million, respectively, that resulted from foreign currency forward contracts, foreign currency denominated transactions, and the revaluation of foreign currency denominated assets and liabilities. A hypothetical change of 10% in appreciation or depreciation of foreign currency exchange rates from the quoted foreign currency exchange rates at December 31, 2015, would not have a significant impact on our financial position, results of operations or cash flows. Interest Rate Risk At December 31, 2015, we maintained a revolving Credit Facility with Keybank that allowed us to borrow up to $35.0 million. We had $5.0 million in outstanding borrowings under our Credit Facility with Keybank at December 31, 2015, which was repaid on February 26, 2016 without penalties. A hypothetical 10% increase or decrease in interest rates paid on outstanding borrowings under the Credit Facility with Keybank would not have had a material impact on our financial position, results of operations or cash flows. On February 26, 2016, we borrowed $100.0 million under the Term Loan, that bears interest at approximately 7.75%. We also maintain a revolving Credit Facility that allows us to borrow up to $5.0 million. A hypothetical 10% increase or decrease in interest rates paid on outstanding borrowings under the Financing Agreement would not have a material impact on our financial position, results of operations or cash flows. On June 15, 2015, we issued $125.0 million aggregate principal amount of the Notes pursuant to the terms of an indenture. The Notes pay interest semi-annually on June 15 and December 15 of each year, beginning on December 15, 2015, at an annual rate of 2.00% and mature on June 15, 2020 unless earlier converted or repurchased in accordance with their terms prior to such date. The fair value of the Notes is dependent on the price and volatility of our common stock as well as movements in interest rates. The fair value of our common stock and interest rate changes affect the fair value of the Notes, but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligations. 55 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION AVID TECHNOLOGY, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITEM 8: Report of Independent Registered Public Accounting Firm Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2015, 2014 and 2013 Consolidated Balance Sheets as of December 31, 2015 and 2014 Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 Notes to Consolidated Financial Statements Page 57 58 59 60 61 62 63 56 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Avid Technology, Inc. Burlington, Massachusetts We have audited the accompanying consolidated balance sheets of Avid Technology, Inc. and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive (loss) income, stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2016 expressed an adverse opinion on the Company's internal control over financial reporting due to the material weaknesses identified. /s/ Deloitte & Touche LLP Boston, Massachusetts March 15, 2016 57 AVID TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Net revenues: Products Services Total net revenues Cost of revenues: Products Services Amortization of intangible assets Total cost of revenues Gross profit Operating expenses: Research and development Marketing and selling General and administrative Amortization of intangible assets Restructuring costs (recoveries), net Total operating expenses Operating income Interest income Interest expense Other (expense) income, net Income before income taxes (Benefit) provision for income taxes Net income Net income per common share – basic and diluted Weighted-average common shares outstanding – basic Weighted-average common shares outstanding – diluted The accompanying notes are an integral part of the consolidated financial statements. $ $ $ Year Ended December 31, 2015 2014 2013 $ $ $ 336,371 169,224 505,595 131,881 61,501 4,063 197,445 308,150 95,898 122,511 74,109 2,354 6,305 301,177 6,973 113 (6,346) (175) 565 (1,915) 2,480 0.06 39,423 40,380 $ $ $ 378,627 151,624 530,251 143,765 60,656 50 204,471 325,780 90,390 133,049 81,181 1,626 (165) 306,081 19,699 126 (1,771) (1,138) 16,916 2,188 14,728 0.38 39,147 39,267 395,531 167,881 563,412 159,264 63,177 1,468 223,909 339,503 95,249 133,890 77,578 2,648 5,370 314,735 24,768 555 (1,574) 343 24,092 2,939 21,153 0.54 39,044 39,070 58 AVID TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (in thousands) Net income Other comprehensive loss: Foreign currency translation adjustments Year Ended December 31, 2014 2013 2015 $ 2,480 $ 14,728 $ 21,153 (6,566) (7,540) (1,717) Comprehensive (loss) income $ (4,086) $ 7,188 $ 19,436 The accompanying notes are an integral part of the consolidated financial statements. 59 AVID TECHNOLOGY, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) Current assets: ASSETS Cash and cash equivalents Accounts receivable, net of allowances of $9,226 and $10,692 at December 31, 2015 and 2014, respectively Inventories Prepaid expenses Other current assets Total current assets Property and equipment, net Intangible assets, net Goodwill Long-term deferred tax assets, net Other long-term assets Total assets LIABILITIES AND STOCKHOLDERS’ DEFICIT Current liabilities: Accounts payable Accrued compensation and benefits Accrued expenses and other current liabilities Income taxes payable Short-term debt Deferred revenues Total current liabilities Long-term debt Long-term deferred tax liabilities, net Long-term deferred revenues Other long-term liabilities Total liabilities Commitments and contingencies (Note L) Stockholders’ deficit: Preferred stock, $0.01 par value, 1,000 shares authorized; no shares issued or outstanding Common stock, $0.01 par value, 100,000 shares authorized; 42,339 shares issued, and 39,530 shares and 39,294 shares outstanding at December 31, 2015 and 2014, respectively Additional paid-in capital Accumulated deficit Treasury stock at cost, net of reissuances, 2,809 shares and 3,045 shares at December 31, 2015 and 2014, respectively Accumulated other comprehensive loss Total stockholders’ deficit Total liabilities and stockholders’ deficit The accompanying notes are an integral part of the consolidated financial statements. 60 $ $ $ December 31, 2015 2014 $ $ $ 17,902 58,807 48,073 6,548 6,119 137,449 35,481 33,219 32,643 2,011 7,123 247,926 45,511 28,124 35,354 1,023 5,000 189,887 304,899 95,950 3,443 158,495 14,711 577,498 25,056 54,655 48,001 6,892 17,932 152,536 32,136 2,445 — 2,208 2,274 191,599 32,951 32,636 32,353 5,480 — 206,608 310,028 — 136 208,232 14,273 532,669 — — 423 1,055,838 (1,319,318) 423 1,049,969 (1,321,798) (58,336) (8,179) (329,572) 247,926 $ (68,051) (1,613) (341,070) 191,599 $ AVID TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT (in thousands) Balances at January 1, 2013 Shares of Common Stock Additional Issued 42,339 In Treasury (3,403) Common Stock 423 Paid-in Capital 1,039,562 Accumulated Deficit (1,357,679) Treasury Stock (75,542) Accumulated Other Comprehensive Income (Loss) 7,644 Total Stockholders’ Deficit (385,592) Stock issued pursuant to employee stock plans 146 Stock-based compensation Net income Other comprehensive loss (3,095) 6,917 2,999 21,153 Balances at December 31, 2013 42,339 (3,257) 423 1,043,384 (1,336,526) (72,543) Stock issued pursuant to employee stock plans 212 Stock-based compensation Net income Other comprehensive loss (4,928) 11,513 4,492 14,728 Balances at December 31, 2014 42,339 (3,045) 423 1,049,969 (1,321,798) (68,051) Stock issued pursuant to employee stock plans 823 (14,215) 17,691 Stock-based compensation Convertible senior notes conversion feature (net of taxes of $6,493 and net of issuance cost of $1,088) Purchase of capped call transaction 9,514 20,718 (10,125) Repurchase of common stock (587) (23) (7,976) Net income Other comprehensive loss 2,480 (96) 6,917 21,153 (1,717) 5,927 (1,717) (359,335) (436) 11,513 14,728 (7,540) (1,613) (7,540) (341,070) 3,476 9,514 20,718 (10,125) (7,999) 2,480 (6,566) (6,566) Balances at December 31, 2015 42,339 (2,809) $423 $1,055,838 $(1,319,318) $(58,336) $(8,179) $(329,572) The accompanying notes are an integral part of the consolidated financial statements. 61 AVID TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization (Recovery) provision for doubtful accounts Gain on sales of assets Stock-based compensation expense Non-cash interest expense Unrealized foreign currency transaction gains (Benefit) provision for deferred taxes Changes in operating assets and liabilities: Accounts receivable Inventories Prepaid expenses and other current assets Accounts payable Accrued expenses, compensation and benefits and other liabilities Income taxes payable Deferred revenues Net cash used in operating activities Cash flows from investing activities: Purchases of property and equipment Change in other long-term assets Payments for business acquisitions, net of cash acquired Proceeds from divestiture of consumer business Proceeds from sale of assets Increase in restricted cash Net cash used in investing activities Cash flows from financing activities: Proceeds from long-term debt, net of issuance costs Payments for repurchase of common stock Cash paid for capped call transaction Proceeds from the issuance of common stock under employee stock plans Common stock repurchases for tax withholdings for net settlement of equity awards Proceeds from revolving credit facilities Payments on revolving credit facilities Payments for credit facility issuance costs Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental information: Cash paid for income taxes, net of refunds Cash paid for interest Non-cash transaction – property and equipment included in accounts payable or accruals Issuance costs for long-term debt The accompanying notes are an integral part of the consolidated financial statements. 62 Year Ended December 31, 2014 2013 2015 $ 2,480 $ 14,728 $ 21,153 20,088 (23) — 9,514 2,890 (7,013) (6,693) 2,442 3,056 10,000 11,232 (11,842) (1,041) (69,116) (34,026) (15,330) (43) (65,967) — — (456) (81,796) 120,401 (7,999) (10,125) 5,035 (1,559) 70,500 (65,500) (1,195) 109,558 (890) (7,154) 25,056 17,902 2,251 3,456 500 130 $ $ 17,954 (143) — 11,513 220 (6,730) 69 2,258 12,122 (2,130) (947) (5,758) (1,090) (51,963) (9,897) (13,292) (8) — 1,500 — — (11,800) — — — 252 (688) 25,500 (25,500) — (436) (1,014) (23,147) 48,203 25,056 2,146 1,551 — — $ $ 22,767 157 (125) 6,917 294 (10) 730 11,030 9,021 4,393 (1,416) 8,932 (1,324) (91,664) (9,145) (11,625) (36) — — 125 — (11,536) — — — 177 (273) — — — (96) (1,410) (22,187) 70,390 48,203 2,173 1,281 — — $ $ AVID TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. BUSINESS Description of Business Avid Technology, Inc. (“Avid” or the “Company”) provides technology solutions that enable the creation, distribution and monetization of audio and video content. Specifically, the Company develops, markets, sells and supports software and hardware for digital media content 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 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 independent video and audio creative professionals, as well as aspiring professionals and enthusiasts. Projects produced using Avid’s products include feature films, television programming, live events, news broadcasts, commercials, music, video and other digital media content. Management Plans The Company has generally funded operations in recent years through the use of existing cash balances, supplemented from time to time with borrowings under credit facilities. Cash used in operating activities aggregated $34.0 million for the year ended December 31, 2015. In the first quarter of 2016, the Company commenced restructuring actions that are part of a broad restructuring plan encompassing a series of measures intended to allow the Company to more efficiently operate in a leaner, and more directed cost structure. These include reductions in the Company’s workforce, facilities consolidation, transferring certain business processes to lower cost regions, and reducing other third-party services costs. In connection with this restructuring plan, the Company expects to incur incremental cash expenditures of approximately $25 million relating to termination benefits, facility costs, employee overlap expenses and related actions. The Company anticipates that the restructuring plan will be substantially complete by the end of the second quarter of 2017 and when fully implemented, is expected to result in annualized costs savings of appropriately $68 million. In connection with the cost efficiency program, on February 26, 2016, the Company entered into a term loan with an aggregate principal amount of $100 million and up to a maximum of $5 million in revolving credit (collectively, the “Financing Agreement”). All outstanding loans under the Financing Agreement will become due and payable in February 2021, or in May 2020 if the $125.0 million in outstanding principal from the 2.00% convertible senior notes due June 15, 2020 have not been repaid or refinanced. The Financing Agreement requires the Company to comply with a financial statement covenant that stipulates a maximum leverage ratio commencing in June 30, 2016. Proceeds from the Financing Agreement will be used to replace the existing $35 million revolving credit facility, finance the Company’s efficiency program and other initiatives, and provide operating flexibility throughout the remainder of the transformation in this period of heightened market volatility. The Company estimates that after paying for both debt issuance costs and the efficiency program, the new financing will provide approximately $70 million of available liquidity, about half of which replaces the existing revolving credit facility with the remainder providing incremental liquidity to fund operations. Concurrent with entering into the Financing Agreement, the Company terminated its existing revolving credit agreement, and repaid all outstanding borrowings under the revolving credit agreement. There were no penalties paid by the Company in connection with the termination of the revolving credit agreement. The Company’s principal sources of liquidity include cash and cash equivalents totaling $17.9 million at December 31, 2015 and the proceeds from the Financing Agreement. The Company’s cash requirements vary depending on factors such as the growth of the business, changes in working capital, capital expenditures, acquisitions of businesses or technologies and obligations under restructuring programs. Management expects to operate the business and execute its strategic initiatives principally with funds generated from operations and the proceeds from the Financing Agreement. Management anticipates that the Company will have sufficient internal and external sources of liquidity to fund operations and anticipated working capital and other expected cash needs for at least the next twelve months as well as for the foreseeable future. 63 B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated. Basis of Presentation 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. Actual results could differ from the Company’s estimates. Revenue Recognition General The Company commences revenue recognition when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is reasonably assured. Generally, the products the Company sells do not require significant production, modification or customization. Installation of the Company’s products is generally routine, consists of implementation and configuration and does not have to be performed by the Company. At the time of a sales transaction, the Company makes an assessment of the collectability of the amount due from the customer. Revenues are recognized only if it is reasonably assured that collection will occur. When 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, revenues are recognized on a cash basis, provided that all other revenue recognition criteria are satisfied. At the outset of the arrangement, the Company also assesses whether the fee associated with the order is fixed or determinable and free of contingencies or significant uncertainties. When assessing whether the fee is fixed or determinable, the Company considers the payment terms of the transaction, the Company’s 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, revenues are 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, the Company evaluates whether the Company has sufficient history of successfully collecting past transactions with similar terms without offering concessions. If that collection history is sufficient, revenue recognition commences, upon delivery of the products, assuming all other revenue recognition criteria are satisfied. If the Company was to make different judgments or assumptions about any of these matters, it could cause a material increase or decrease in the amount of revenues reported in a particular period. The Company often receives multiple purchase orders or contracts from a single customer or a group of related customers that are evaluated to determine if they are, in effect, part of a single arrangement. In situations when the Company has concluded that two or more orders with the same customer are so closely related that they are, in effect, parts of a single arrangement, the Company accounts for those orders as a single arrangement for revenue recognition purposes. In other circumstances, when the Company has concluded that two or more orders with the same customer are independent buying decisions, such as an earlier purchase of a product and a subsequent purchase of a software upgrade or maintenance contract, the Company accounts for those orders as separate arrangements for revenue recognition purposes. For many of the Company’s products, there has been an ongoing practice of Avid making available at no charge to customers minor feature and compatibility enhancements as well as bug fixes on a when-and-if-available basis (collectively “Software Updates”), for a period of time after initial sales to end users. The implicit obligation to make such Software Updates available to customers over a period of time represents implied post-contract customer support, which is deemed to be a deliverable in each arrangement and is accounted for as a separate element (“Implied Maintenance Release PCS”). Over the course of the last two years, in connection with a strategic initiative to increase support and other recurring revenue streams, the Company has taken a number of steps to eliminate the longstanding practice of providing Implied Maintenance Release PCS for the Media Composer, Pro Tools and Sibelius product lines. On Media Composer 8.0 in particular, which was released in May 2014, management has (i) clearly communicated a policy of no longer providing any Software Updates or other support to customers that are not covered under a paid support plan and (ii) implemented robust digital rights management tools to enforce the policy. With the new 64 policy and technology for Media Composer 8.0 in place, combined with management’s intent to continue to adhere to the policy, management concluded in the third quarter of 2015 that Implied Maintenance Release PCS for Media Composer 8.0 transactions no longer exists. As a result of the conclusion that Implied Maintenance Release PCS on Media Composer 8.0 has ended, revenue and net income for the twelve months ended December 31, 2015 increased by $13.0 million, reflecting the recognition of orders received after the launch of Media Composer 8.0 that would have qualified for earlier recognition using the residual method of accounting. In addition, as the elimination of Implied Maintenance Release PCS also resulted in the accelerated recognition of maintenance and product revenues that were previously being recognized over the expected period of Implied Maintenance Release PCS rather than the contractual maintenance period, the change in the estimated amortization period of transactions being recognized on a ratable basis resulted in an additional $9.5 million of revenue during the twelve months ended December 31, 2015. Management also concluded in the fourth quarter of 2015 that Implied Maintenance Release PCS on Sibelius 8.0 had ended, which did not have a significant impact on revenue recognition for the twelve months ended December 31, 2015. Management will continue to evaluate the judgment of whether Implied Maintenance Release PCS exists on each product line and version. If and when management concludes Implied Maintenance Release PCS no longer exists for other product lines or versions in future quarters, software revenue related to orders affected will be accelerated and prospective revenue recognition on new product orders will be recognized upfront, assuming all other revenue recognition criteria are met and vendor specific objective evidence (“VSOE”) of fair value exists for all undelivered elements. The Company enters into certain contractual arrangements that have multiple elements, one or more of which may be delivered subsequent to the delivery of other elements. These multiple-deliverable arrangements may include products, support, training, professional services and Implied Maintenance Release PCS. For these multiple-element arrangements, the Company allocates revenue to each deliverable of the arrangement based on the relative selling prices of the deliverables. In such circumstances, the Company first determines the selling price of each deliverable based on (i) VSOE of fair value if that exists; (ii) third-party evidence of selling price (“TPE”), when VSOE does not exist; or (iii) best estimate of the selling price (“BESP”), when neither VSOE nor TPE exists. Revenue is then allocated to the non-software deliverables as a group and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the selling price hierarchy. The Company’s process for determining BESP for deliverables for which VSOE or TPE does not exist involves significant management judgment. In determining BESP, the Company considers a number of data points, including: • • • • the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis; contractually stated prices for deliverables that are intended to be sold on a standalone basis; the pricing of standalone sales that may not qualify as VSOE of fair value due to limited volumes or variation in prices; and other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the customer size and type. In determining a BESP for Implied Maintenance Release PCS, which the Company does not sell separately, the Company considers (i) the service period for the Implied Maintenance Release PCS, (ii) the differential in value of the Implied Maintenance Release PCS deliverable compared to a full support contract, (iii) the likely list price that would have resulted from the Company’s established pricing practices had the deliverable been offered separately, and (iv) the prices a customer would likely be willing to pay. The Company estimates the service period of Implied Maintenance Release PCS based on the length of time the product version purchased by the customer is planned to be supported with Software Updates. If facts and circumstances indicate that the original service period of Implied Maintenance Release PCS for a product has changed significantly after original revenue recognition has commenced, the Company will modify the remaining estimated service period accordingly and recognize the then-remaining deferred revenue balance over the revised service period. The Company has established VSOE of fair value for all professional services and training and for some of the Company’s support offerings. The Company’s policy for establishing VSOE of fair value consists of evaluating standalone sales, where available, to determine if a substantial portion of the transactions fall within a reasonable range. If a sufficient volume of standalone sales exist and the standalone pricing for a substantial portion of the transactions falls within a reasonable range, management concludes that VSOE of fair value exists. In accordance with ASU No. 2009-14, the Company excludes from the scope of software revenue recognition requirements the Company’s sales of tangible products that contain both software and non-software components that function together to deliver the essential functionality of the tangible products. The Company adopted ASU No. 2009-13 and ASU No. 2009-14 prospectively on January 1, 2011 for new and materially modified arrangements originating after December 31, 2010. Prior to the Company’s adoption of ASU No. 2009-14, the Company primarily recognized revenues using the revenue recognition criteria of Accounting Standards Codification, or ASC, Subtopic 985-605, Software-Revenue Recognition. As a result of the 65 Company’s adoption of ASU No. 2009-14 on January 1, 2011, a majority of the Company’s products are now considered non-software elements under GAAP, which excludes them from the scope of ASC Subtopic 985-605 and includes them within the scope of ASC Topic 605, Revenue Recognition. Because the Company had not been able to establish VSOE of fair value for Implied Maintenance Release PCS, as described further below, substantially all revenue arrangements prior to January 1, 2011 were recognized on a ratable basis over the service period of Implied Maintenance Release PCS. Subsequent to January 1, 2011 and the adoption of ASU No. 2009-14, the Company determines a relative selling price for all elements of the arrangement through the use of BESP, as VSOE and TPE are typically not available, resulting in revenue recognition upon delivery of arrangement consideration attributable to product revenue, provided all other criteria for revenue recognition are met, and revenue recognition of Implied Maintenance Release PCS and other service and support elements over time as services are rendered. Revenue Recognition of Non-Software Deliverables Revenue from products that are considered non-software deliverables is recognized upon delivery of the product to the customer. Products are considered delivered to the customer once they have been shipped and title and risk of loss has been transferred. For most of the Company’s product sales, these criteria are met at the time the product is shipped. Revenue from support that is considered a non-software deliverable is initially deferred and is recognized ratably over the contractual period of the arrangement, which is generally 12 months. Professional services and training services are typically sold to customers on a time and materials basis. Revenue from professional services and training services that are considered non-software deliverables is recognized for these deliverables as services are provided to the customer. Revenue for Implied Maintenance Release PCS that is considered a non-software deliverable is recognized ratably over the service period of Implied Maintenance Release PCS, which ranges from 1 to 8 years. Revenue Recognition of Software Deliverables The Company recognizes the following types of elements sold using software revenue recognition guidance: (i) software products and software upgrades, when the software sold in a customer arrangement is more than incidental to the arrangement as a whole and the product does not contain hardware that functions with the software to provide essential functionality, (ii) initial support contracts where the underlying product being supported is considered to be a software deliverable, (iii) support contract renewals, and (iv) professional services and training that relate to deliverables considered to be software deliverables. Because the Company does not have VSOE of the fair value of its software products, the Company is permitted to account for its typical customer arrangements that include multiple elements using the residual method. Under the residual method, the VSOE of fair value of the undelivered elements (which could include support, professional services or training, or any combination thereof) is deferred and the remaining portion of the total arrangement fee is recognized as revenue for the delivered elements. If evidence of the VSOE of fair value of one or more undelivered elements does not exist, revenues are deferred and recognized when delivery of those elements occurs or when VSOE of fair value can be established. VSOE of fair value is typically based on the price charged when the element is sold separately to customers. The Company is unable to use the residual method to recognize revenues for many arrangements that include products that are software deliverables under GAAP since VSOE of fair value does not exist for Implied Maintenance Release PCS elements, which are included in many of the Company’s arrangements. For software products that include Implied Maintenance Release PCS, an element for which VSOE of fair value does not exist, revenue for the entire arrangement fee, which could include combinations of product, professional services, training and support, is recognized ratably as a group over the longest service period of any deliverable in the arrangement, with recognition commencing on the date delivery has occurred for all deliverables in the arrangement (or begins to occur in the case of professional services, training and support). Standalone sales of support contracts are recognized ratably over the service period of the product being supported. From time to time, the Company offers certain customers free upgrades or specified future products or enhancements. When a software deliverable arrangement contains an Implied Maintenance Release PCS deliverable, revenue recognition of the entire arrangement will only commence when any free upgrades or specified future products or enhancements have been delivered, assuming all other products in the arrangement have been delivered and all services, if any, have commenced. Other Revenue Recognition Policies In a limited number of arrangements, the professional services and training to be delivered are considered essential to the functionality of the Company’s software products. If services sold in an arrangement are deemed to be essential to the functionality of the software products, the arrangement is accounted for using contract accounting. As the Company has concluded that it cannot reliably estimate its contract costs, the Company uses the completed contract method of contract accounting. The completed contract method of 66 accounting defers all revenue and costs until the date that the products have been delivered and professional services, exclusive of post-contract customer support, have been completed. Deferred costs related to fully deferred contracts are recorded as a component of inventories in the consolidated balance sheet, and generally all other costs of sales are recognized when revenue recognition commences. The Company records as revenues all amounts billed to customers for shipping and handling costs and records its actual shipping costs as a component of cost of revenues. Reimbursements received from customers for out-of-pocket expenses are recorded as revenues, with related costs recorded as cost of revenues. The Company presents revenues net of any taxes collected from customers and remitted to government authorities. In the consolidated statements of operations, the Company classifies revenues as product revenues or services revenues. For multiple- element arrangements that include both product and service elements, including Implied Maintenance Release PCS, the Company evaluates available indicators of fair value and applies its judgment to reasonably classify the arrangement fee between product revenues and services revenues. The amount of multiple-element arrangement fees classified as product and service revenues based on management estimates of fair value when VSOE of fair value for all elements of an arrangement does not exist could differ from amounts classified as product and service revenues if VSOE of fair value for all elements existed. Allowance for Sales Returns and Exchanges The Company maintains allowances for estimated potential sales returns and exchanges from its customers. 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 based on historical experience and specific customer analysis. Use of management estimates is required in connection with establishing and maintaining a sales allowance for expected returns and other credits. If actual returns differ from the estimates, additional allowances could be required. The following table sets forth the activity in the allowance for sales returns and exchanges for the years ended December 31, 2015, 2014 and 2013 (in thousands): Allowance for sales returns and exchanges – beginning of year Additions and adjustments to the allowance Deductions against the allowance Allowance for sales returns and exchanges – end of year Year Ended December 31, 2015 2014 2013 $ $ 9,510 $ 12,519 $ 8,468 (9,395) 8,583 $ 9,260 (12,269) 9,510 $ 19,460 9,243 (16,184) 12,519 The allowance for sales returns and exchanges, which is recorded as a reduction to gross accounts receivable, reflects an estimate of amounts invoiced that will not be collected, as well as other allowances and credits that have been or are expected to offset the trade receivables. Since many of the Company’s transactions require some or all of amounts invoiced to be recorded in deferred revenue under GAAP due to revenue recognition considerations, the Company has recorded reductions to deferred revenue of $3.2 million, $3.7 million and $6.1 million as of December 31, 2015, 2014 and 2013, respectively, to eliminate the estimated deferred revenue attributable to transactions already provided for by the sales, returns and exchanges allowance. 67 Allowances for Doubtful Accounts The Company maintains allowances for estimated losses from bad debt 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. To date, actual bad debts have not differed materially from management’s estimates. The following table sets forth the activity in the allowance for doubtful accounts for the years ended December 31, 2015, 2014 and 2013 (in thousands): Allowance for doubtful accounts – beginning of year Bad debt (recovery) expense Reduction in allowance for doubtful accounts Allowance for doubtful accounts – end of year Translation of Foreign Currencies Year Ended December 31, 2015 2014 2013 $ $ 1,182 (23) (516) 643 $ $ 1,444 (143) (119) 1,182 $ $ 1,517 157 (230) 1,444 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 due to the extensive interrelationship of the operations of the Irish branch and the U.S. parent and the high volume of intercompany transactions between that branch and the parent. 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 rates that approximate those in effect during the period. Cumulative translation adjustments are included in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ deficit. 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. The U.S. parent company and its Irish manufacturing branch, both of whose functional currency is the U.S. dollar, carry certain 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 foreign currencies. 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. See Note E for the net foreign exchange gains and losses recorded in the Company’s statements of operations during the years ended December 31, 2015, 2014 and 2013 that resulted from the gains and losses on Company’s foreign currency contracts and the revaluation of the related hedged items. The U.S. parent company and various other wholly owned subsidiaries have long-term intercompany loan balances denominated in foreign currencies that are remeasured into the U.S. dollar at the current exchange rate in effect at the balance sheet date. Such loan balances are not expected to be settled in the foreseeable future. Any gains and losses relating to these loans are included in the accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ deficit. 68 Cash, Cash Equivalents and Marketable Securities The Company measures cash equivalents and marketable securities at fair value on a recurring basis. The cash equivalents and market securities consist primarily of money market investments, mutual funds and insurance contracts held in deferred compensation plans. The money market investments and mutual funds held in the Company’s deferred compensation plan in the U.S. are reported at fair value within other current assets using quoted market prices with the gains and losses included as other (expense) income in the Company’s statement of operations. The insurance contracts held in the deferred compensation plans for employees in Israel and Germany are reported at fair value within other long term assets using other observable inputs. Other than the investments held in the Company’s deferred compensation plans, the Company held no marketable securities at December 31, 2015 or 2014. Amortization or accretion of premium or discount is included in interest income (expense) in the results of operations. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, foreign currency contracts and accounts receivable. The Company places its cash and cash equivalents with financial institutions that management believes to be of high credit quality, and, generally, there are no significant concentrations in any one issuer. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers that make up the Company’s customer base and their dispersion across different regions. No individual customer accounted for 10% or more of the Company’s net revenues or net accounts receivable in the periods presented. Foreign Currency Risk The Company has significant international operations and, therefore, the Company’s revenues, earnings, cash flows and financial position are exposed to foreign currency risk from foreign-currency-denominated receivables, payables, sales and expense transactions, and net investments in foreign operations. The Company derives more than half of its 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, the Company is exposed to the risks that changes in foreign currency could adversely affect its revenues, net income, cash flow and financial position. The Company uses derivatives in the form of foreign currency contracts to manage its short-term exposures to fluctuations in the foreign currency exchange rates that exist as part of its ongoing international business operations. The Company does not enter into any derivative instruments for trading or speculative purposes. The Company records all foreign currency contract derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as hedges of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk are considered fair value hedges. Derivatives designated and qualifying as hedges of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. Under hedge accounting, the determination of hedge effectiveness is dependent upon whether the gain or loss on the hedging derivative is highly effective in offsetting the gain or loss in the value of the item being hedged. The Company has not accounted for any foreign currency contracts as hedges in the periods presented. 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 lack of marketability based on assumptions about future inventory demand 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. 69 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. The Company typically depreciates its property and equipment using the following minimum and maximum useful lives: Computer and video equipment and software, including internal use software Manufacturing tooling and testbeds Office equipment Furniture, fixtures and other Depreciable Life (years) Minimum 2 Maximum 5 3 3 3 5 5 8 The Company capitalizes certain development costs incurred in connection with its internal use software. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct, are capitalized until the software is substantially complete and ready for its intended use. Capitalized costs are recorded as part of property and equipment. Maintenance and training costs are expensed as incurred. Internal use software is amortized on a straight line basis over its estimated useful life, generally three years. 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 (expense) income in the results of operations. Acquisition-Related Intangible Assets and Goodwill Acquisition-related intangible assets consist of customer relationships, developed technology, trade names and non-compete agreements. These assets are determined to have either finite or indefinite lives. For finite-lived intangible assets amortization is straight-line over the estimated useful lives of such assets, which are generally two years to twelve years. Straight-line amortization is used because the Company cannot reliably determine a discernible pattern over which the economic benefits would be realized. The Company does not have any indefinite-lived intangible assets. Intangible assets are tested for impairment when events and circumstances indicate there is an impairment. The impairment test involves comparing the sum of undiscounted cash flows to the carrying value as of the measurement date. Impairment occurs when the carrying value of the assets exceeds the sum of undiscounted cash flows. Impairment is then measured as the difference between the carrying value and fair value determined using a discounted cash flow method. In estimating the fair value using a discounted cash flow method, the Company uses assumptions that include forecast revenues, gross margins, operating profit margins, growth rates and long term discount rates, all of which require significant judgment by management. Changes to these assumptions could affect the estimated fair value of the intangible asset and could result in an impairment charge in future. The Company performs its annual and interim goodwill impairment tests when it is more likely than not that a goodwill impairment exists. The Company has concluded it has one reporting unit and the annual measurement date is October 31, 2015. Long-Lived Assets The Company periodically evaluates its long-lived assets 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. Advertising Expenses All advertising costs are expensed as incurred and are classified as marketing and selling expenses. Advertising expenses were not material in the periods presented. 70 Research and Development Costs Research and development costs are expensed as incurred. 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 periodically evaluates the assets, considering a number of business and economic factors, to determine if an impairment exists. No amounts have been capitalized during 2015, 2014, and 2013 as the costs incurred subsequent to the establishment of technological feasibility have not been material. Income Taxes The Company accounts for income taxes using 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. The Company records deferred tax assets and liabilities based on the net tax effects of tax credits, operating loss carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes compared to the amounts used for income tax purposes. Deferred tax assets are regularly reviewed for recoverability with consideration for such factors as historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. The Company is required 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. The Company accounts for uncertainty in income taxes recognized in its financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon examination by the taxing authorities, based on the technical merits of the position. If the tax position is deemed more-likely-than-not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves (“unrecognized tax benefits”) that are considered appropriate as well as the related net interest and penalties. Accounting for Stock-Based Compensation The Company’s stock-based employee compensation plans allow the Company to grant stock awards, options, or other equity-based instruments, or a combination thereof, as part of its overall compensation strategy. For stock-based awards granted, the Company records stock-based compensation expense based on the grant date fair value over the requisite service periods for the individual awards, which generally equal the vesting periods. The vesting of stock-based award grants may be based on time, performance conditions, market conditions, or a combination of performance or market conditions. Product Warranties The Company provides warranties on externally sourced and internally developed hardware. The warranty period for all of the Company’s products is generally 90 days to one year, but can extend up to 5 years depending on the manufacturer’s warranty or local law. For internally developed hardware and in cases where the warranty granted to customers for externally sourced hardware is greater than that provided by the manufacturer, the Company records an accrual for the related liability based on historical trends and actual material and labor costs. At the end of each quarter, the Company reevaluates its estimates to assess the adequacy of the recorded warranty liabilities and adjusts the accrued amounts accordingly. Computation of Net Income Per Share Net income per share is presented for both basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic EPS is based on the weighted-average number of common shares outstanding during the period, excluding non-vested restricted stock held by employees. Diluted EPS is based on 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 non-vested restricted stock and restricted stock units, the proceeds and remaining unrecorded compensation expense of which are then assumed to have been used to repurchase outstanding common stock using the treasury stock method. For periods when the Company reports a loss, all potential common stock is considered anti-dilutive. For periods when the Company reports net income, potential common shares with combined purchase prices and unamortized compensation costs in excess of the Company’s average common stock fair value for the related period or that are contingently issuable are considered anti-dilutive. The Company issued convertible senior notes 71 in 2015, and the Company applied the treasury stock method in measuring the dilutive impact of those potential common shares to be issued. Accounting for Restructuring Plans The Company records facility-related and contract termination restructuring charges in accordance with ASC Topic 420, Liabilities: Exit or Disposal Cost Obligations. Based on the Company’s policies for the calculation and payment of severance benefits, the Company accounts for employee-related restructuring charges as an ongoing benefit arrangement in accordance with ASC Topic 712, Compensation - Nonretirement Postemployment Benefits. The Company recognizes facility-related restructuring charges upon exiting all or a portion of a leased facility and meeting cease-use and other requirements. The amount of restructuring charges is based on the fair value of the lease obligation for the abandoned space, which includes a sublease assumption that could be reasonably obtained. Restructuring charges and accruals require significant estimates and assumptions, including sub-lease income assumptions. These estimates and assumptions are monitored on at least a quarterly basis for changes in circumstances and any corresponding adjustments to the accrual are recorded in the Company’s statement of operations in the period when such changes are known. Related Party Transactions From time to time the Company enters into arrangements with parties which may be affiliated with the Company, executive officers and members of the Company’s Board of Directors. These transactions are primarily comprised of sales transactions in the normal course of business and are immaterial to the financial statements for all periods presented. Recent Accounting Pronouncements On May 28, 2014, the Financial Accounting Standards Board (the “FASB”) and the International Accounting Standards Board (the “IASB”) issued substantially converged final standards on revenue recognition. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new revenue recognition guidance becomes effective for the Company on January 1, 2018, and early adoption as of January 1, 2017 is permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance in the Accounting Standards Update (“ASU”). The Company has not yet selected a transition method and is evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures. In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. Early adoption is permitted for financial statements that have not been previously issued. The Company incurred transaction costs of $4.7 million relating to the issuance of the convertible senior notes, and has adopted the guidance in 2015. In accounting for the transaction costs, the Company allocated the costs of the offering between debt and equity in proportion to the fair value of the debt and equity recognized. The transaction costs allocated to the debt component of approximately $3.6 million were recorded as a direct deduction from the face amount of the convertible senior notes and are being amortized as interest expense over the term of the notes using the interest method. In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern. ASU 2014-15 provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The new standard is effective for the Company beginning January 1, 2017. Early adoption is permitted. The Company is evaluating the potential impact of adopting this standard on its financial statements. On November 20, 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The standard requires entities to present all deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) as non-current in a classified balance sheet. The standard simplifies the current guidance, which requires entities to separately present DTAs and DTLs as current and non-current in a classified balance sheet. The new standard is effective for fiscal years and interim periods within those fiscal years, beginning December 15, 2016. Early adoption is permitted. The Company early adopted the guidance retrospectively, resulting in a $0.3 million reclassification of current DTAs to long-term DTAs in the consolidated balance sheet at December 31, 2014. On February 25, 2016, the FASB issued new lease accounting standard, ASU 2016-02, Leases (Topic 842). Lessees will need to recognize virtually all of their leases on the balance sheet, by recording a right-of-use asset and lease liability. The new guidance 72 becomes effective for the Company on January 1, 2019, and early adoption is permitted upon issuance. The Company is evaluating the potential impact of adopting this standard on its financial statements. C. ACQUISITION On June 23, 2015, the Company completed the acquisition of Orad Hi-Tech Systems Ltd. (“Orad”), an Israeli company previously listed on the Frankfurt Stock Exchange. Each issued and outstanding share of Orad common stock was canceled and converted into the right to receive consideration equal to €5.67 in cash, representing total consideration paid of $66.0 million based on the exchange rate on the date of closing, net of estimated cash acquired. As a result of the acquisition, the Company incurred merger and integration cost of $5.7 million, which was recorded as general and administrative expenses in the Company’s statement of operations. Orad provides 3D real-time graphics, video servers and related asset management solutions. The acquisition adds applications to Avid’s Studio Suite which the Company intends to connect to the Avid MediaCentral Platform. The following table summarizes the purchase price allocation to the fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands). Cash Accounts receivable, net Inventories Other current assets Property and equipment Identifiable intangible assets Other assets Goodwill Total assets acquired Accounts payable Accrued expenses and other current liabilities Deferred revenue and deposits Deferred tax liabilities, net Other long-term liabilities Total liabilities assumed Net assets acquired $ $ 7,477 6,625 3,128 1,217 1,338 37,200 3,187 32,643 92,815 (1,395) (7,769) (2,714) (3,554) (3,939) (19,371) 73,444 The purchase price allocation resulted in goodwill of $32.6 million, which is not deductible for tax purposes. The goodwill is attributable to expected synergies from combining the operations of Orad with the Company and intangible assets that do not qualify for separate recognition, such as an assembled workforce. The following table presents the identifiable intangible assets acquired and their respective weighted average useful lives (dollars in thousands): Core and completed technology Customer relationships Trade name Total Weighted Average Life (Years) 4 4 1 Amount $ 31,200 5,800 200 $ 37,200 The estimated fair value of intangible assets was determined using the excess earnings method for technology, replacement cost method for customer relationships and relief from royalty method for trade name. 73 Pro Forma Financial Information for Acquisition of Orad (in thousands except per share data, unaudited) The results of operations of Orad have been included in the results of operations of the Company since June 23, 2015, the date of acquisition. The net revenues and net loss for Orad, which are included in the Company’s consolidated statements of operations from the date of acquisition, were $13.1 million and $8.5 million, respectively, for the year ended December 31, 2015. The following unaudited pro forma financial information presents the Company’s results of operations for the years ended December 31, 2015 and 2014 as if the acquisition of Orad had occurred at the beginning of 2014. 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 acquisition had taken place at the beginning of fiscal 2014, or of future results. Net revenues Net (loss) income Net (loss) income per share: Basic Diluted D. NET INCOME PER SHARE Year Ended December 31, 2015 2014 520,918 $ 570,766 (2,300) 8,638 (0.06) (0.06) $ $ 0.22 0.22 $ $ $ Net income per common share is presented for both basic income per share (“Basic EPS”) and diluted income per share (“Diluted EPS”). Basic EPS is based on the weighted-average number of common shares outstanding during the period. Diluted EPS is based on the weighted-average number of common shares and common shares equivalents outstanding during the period. The potential common shares that were considered anti-dilutive securities were excluded from the diluted earnings per share calculations for the relevant periods either because the sum of the exercise price per share and the unrecognized compensation cost per share was greater than the average market price of the Company’s common stock for the relevant period, or because they were considered contingently issuable. The contingently issuable potential common shares result from certain stock options and restricted stock units granted to the Company’s employees that vest based on performance conditions, market conditions, or a combination of performance or market conditions. The following table sets forth (in thousands) potential common shares that were considered anti-dilutive securities. Options Non-vested restricted stock units Anti-dilutive potential common shares Year Ended December 31, 2014 2013 2015 1,901 470 2,371 4,748 118 4,866 5,193 352 5,545 On June 15, 2015, the Company issued $125.0 million aggregate principal amount of its 2.00% Convertible Senior Notes due 2020 (the “Notes”). The Notes are convertible into cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election, based on an initial conversion rate, subject to adjustment. In connection with the offering of the Notes, the Company entered into a capped call transaction with a third party (the “Capped Call”) (see Note R, Long-Term Debt and Credit Agreement). The Company uses the treasury stock method in computing the dilutive impact of the Notes. The Notes are convertible into shares but the Company’s stock price was less than the conversion price at December 31, 2015, and therefore, the Notes are excluded from diluted income per share. The Capped Call is not reflected in diluted net income per share as it will always be anti-dilutive. 74 E. FOREIGN CURRENCY CONTRACTS As a hedge against the foreign exchange exposure of certain forecasted receivables, payables and cash balances of foreign subsidiaries, the Company enters into short-term foreign currency forward contracts, which typically mature within 30 days of execution. The changes in fair value of the foreign currency forward contracts are intended to offset foreign currency exchange risk on cash flows associated with net monetary assets, and are recorded as gains or losses in the Company’s statement of operations in the period of change. The Company had no outstanding foreign currency forward contracts at December 31, 2015. The Company had foreign currency forward contracts outstanding with an aggregate notional value of $25.4 million at December, 2014 as hedges against such forecasted foreign-currency-denominated receivables, payables and cash balances. The Company may also enter into short-term foreign currency spot and forward contracts as a hedge against the foreign currency exchange risk associated with certain of its net monetary assets denominated in foreign currencies. The Company had no outstanding short-term foreign currency spot contracts at December 31, 2015. The Company had foreign currency contracts outstanding with an aggregate notional value of $2.8 million at December 31, 2014. Because these contracts are not accounted for as hedges, the changes in fair value of these foreign currency contracts are recorded as gains or losses in the Company’s statement of operations. The Company assumed from Orad outstanding foreign currency spot contracts and call and put options to hedge cash flow risks associated with foreign exchange rates. The aggregate notional value of the outstanding contracts and options was $1.0 million at December 31, 2015. The following table sets forth the balance sheet classification and fair values of the Company’s foreign currency contracts (in thousands): Derivatives Not Designated as Hedging Instruments Under Accounting Standards Codification (“ASC”) Topic 815 Balance Sheet Classification Fair Value at December 31, 2015 Fair Value at December 31, 2014 Financial liabilities: Foreign currency contracts Accrued expenses and other current liabilities $14 $518 The following table sets forth the net foreign exchange gains (losses) recorded as marketing and selling expenses in the Company’s statements of operations during the years ended December 31, 2015, 2014 and 2013 that resulted from foreign currency forward contracts, foreign currency denominated transactions, and the revaluation of foreign currency denominated assets and liabilities (in thousands): Net foreign exchange gain (loss) recorded in marketing and selling expenses Twelve Months Ended December 31, 2013 2014 $(187) $(908) 2015 $1,288 See Note F for additional information on the fair value measurements for all financial assets and liabilities, including derivative assets and derivative liabilities, that are measured at fair value on a recurring basis. F. FAIR VALUE MEASUREMENTS Assets and Liabilities Measured at Fair Value on a Recurring Basis On a recurring basis, the Company measures certain financial assets and liabilities at fair value, including foreign-currency contracts and deferred compensation investments. At December 31, 2015 and 2014, all of the Company’s financial assets and liabilities were classified as either Level 1 or Level 2 in the fair value hierarchy. Assets valued using quoted market prices in active markets and classified as Level 1 are certain deferred compensation investments, primarily money market and mutual funds. Assets and liabilities valued based on other observable inputs and classified as Level 2 are foreign currency contracts and certain deferred compensation investments, primarily insurance contracts. 75 The following tables summarize the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis (in thousands): Financial Assets: Deferred compensation investments (1) Financial Liabilities: Foreign currency contracts Financial Assets: Deferred compensation investments Financial Liabilities: Foreign currency contracts Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2015 $ $ 3,617 $ 572 $ 3,045 $ 14 $ — $ 14 $ — — Fair Value Measurements at Reporting Date Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) December 31, 2014 $ $ 1,859 $ 1,245 $ 614 $ 518 $ — $ 518 $ — — (1) Deferred compensation investments at December 31, 2015 included $2.4 million of funds that Orad invested in insurance contracts for the post-employment benefits that Orad employees earned. Financial Instruments Not Recorded at Fair Value The carrying amounts of the Company’s other financial assets and liabilities including cash, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values because of the relatively short period of time between their origination and their expected realization or settlement. At December 31, 2015, the net carrying amount of the Notes is $96.0 million, and the fair value of the Notes is approximately $85.5 million based on open market trading activity, which constitutes a Level 1 input in the fair value hierarchy. G. ACCOUNTS RECEIVABLE Accounts receivable, net of allowances, consisted of the following at December 31, 2015 and 2014 (in thousands): Accounts receivable Less: Allowance for doubtful accounts Allowance for sales returns and rebates Total December 31, 2015 2014 68,033 $ 65,347 (643) (8,583) 58,807 $ (1,182) (9,510) 54,655 $ $ 76 H. INVENTORIES Inventories consisted of the following at December 31, 2015 and 2014 (in thousands): Raw materials Work in process Finished goods Total December 31, 2015 2014 $ $ 9,594 $ 256 38,223 48,073 $ 9,942 248 37,811 48,001 At December 31, 2015 and 2014, finished goods inventory included $5.3 million and $4.3 million, respectively, associated with products shipped to customers or deferred labor costs for arrangements where revenue recognition had not yet commenced. I. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31, 2015 and 2014 (in thousands): Computer and video equipment and software Manufacturing tooling and testbeds Office equipment Furniture, fixtures and other Leasehold improvements Less: Accumulated depreciation and amortization Total December 31, 2015 2014 $ 116,751 $ 113,220 3,044 4,942 9,621 33,744 168,102 132,621 $ 35,481 $ 2,327 4,664 8,659 29,431 158,301 126,165 32,136 The Company capitalizes certain development costs incurred in connection with its internal use software. For the year ended December 31, 2015, the Company capitalized $5.1 million of contract labor and internal labor costs related to internal use software, and recorded the capitalized costs in Computer and video equipment and software. There were $3.4 million of contract labor and internal labor costs capitalized for the year ended December 31, 2014, and no costs capitalized for the year ended December 31, 2013. Internal use software is amortized on a straight line basis over its estimated useful life of 3 years, and the Company recorded $1.8 million and $0.5 million of amortization expense during 2015 and 2014, respectively. Depreciation and amortization expense related to property and equipment was $13.7 million, $16.1 million and $17.8 million for the years ended December 31, 2015, 2014 and 2013, respectively. 77 J. INTANGIBLE ASSETS AND GOODWILL Intangible Assets Amortizing identifiable intangible assets related to the Company’s acquisitions or capitalized costs of internally developed or externally purchased software that form the basis for the Company’s products consisted of the following at December 31, 2015 and 2014 (in thousands): 2015 Accumulated Amortization Gross December 31, Net Gross 2014 Accumulated Amortization Completed technologies and patents $ 58,032 $ Customer relationships Trade names Capitalized software costs Total 54,656 1,346 4,911 $ 118,945 $ (30,902) $ (48,767) (1,146) (4,911) (85,726) $ 27,130 $ 51,950 $ 5,889 200 — 49,216 5,936 5,043 33,219 $ 112,145 $ (51,950) $ (46,771) (5,936) (5,043) (109,700) $ Net — 2,445 — — 2,445 During 2015, the Company wrote off fully amortized technologies and trade names with gross book values of $24.3 million and $4.8 million, respectively. Those technologies and trade names were no longer in use. Amortization expense related to intangible assets in the aggregate was $6.4 million, $1.8 million and $4.9 million for the years ended December 31, 2015, 2014 and 2013, respectively. The Company expects amortization of intangible assets to be approximately $10.3 million in 2016, $9.3 million in 2017, $9.3 million in 2018 and $4.3 million in 2019. Goodwill The acquisition of Orad resulted in goodwill of $32.6 million in 2015. As of October 31, 2015, the Company’s goodwill impairment measurement date, the Company concluded that it was not more likely than not that a goodwill impairment existed. K. OTHER LONG-TERM LIABILITIES Other long-term liabilities consisted of the following at December 31, 2015 and 2014 (in thousands): Deferred rent Accrued restructuring Deferred compensation Total December 31, 2015 2014 6,755 $ 647 7,309 8,236 1,334 4,703 14,711 $ 14,273 $ $ 78 L. 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, 2015 were as follows (in thousands): Year Ending December 31, 2016 2017 2018 2019 2020 Thereafter Total $ $ 17,825 14,135 11,116 11,042 7,200 6,713 68,031 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 2021 and represent an aggregate obligation of $7.0 million through 2021. The Company has restructuring accruals of $1.7 million at December 31, 2015, which represents the difference between this aggregate future obligation and future sublease income under actual or estimated potential sublease agreements, on a net present value basis, as well as other facilities-related obligations. The Company received $0.6 million and $0.7 million of sublease income during the years ended December 31, 2015 and 2014, respectively, but none during the year ended December 31, 2013. The Company’s leases for corporate office space in Burlington, Massachusetts, which expire in May 2020, contain renewal options to extend the respective terms of each lease for up to two additional five-year periods. The accompanying consolidated results of operations reflect rent expense on a straight-line basis over the term of the leases. Total expense under operating leases was $14.0 million, $15.0 million and $16.3 million for the years ended December 31, 2015, 2014 and 2013, respectively. Other Commitments The Company has letters of credit that are used as security deposits in connection with the Company’s leased Burlington, Massachusetts office space and other leases. In the event of default on the underlying leases, the landlords would, at December 31, 2015, be eligible to draw against the letters of credit to a maximum of $2.2 million in the aggregate. The letters of credit are subject to aggregate reductions provided the Company is not in default under the underlying leases and meets certain financial performance conditions. In no case will the letters of credit amounts for the Burlington leases be reduced to below $1.2 million in the aggregate throughout the lease periods, all of which extend to May 2020. The Company also has additional letters of credit totaling $0.4 million that support its ongoing operations. These letters of credit have various terms and expire during 2016 and beyond, while some of the letters of credit may automatically renew based on the terms of the underlying agreements. Purchase Commitments and Sole-Source Suppliers At December 31, 2015, the Company had entered into purchase commitments for certain inventory and other goods and services used in its normal operations. The purchase commitments covered by these agreements are generally for a period of less than one year and in the aggregate total $39.5 million. The Company depends on sole-source suppliers for certain key hardware components of its products. Although the Company has procedures in place to mitigate the risks associated with its sole-sourced suppliers, the Company cannot be certain that it will be able to obtain sole-sourced components or finished goods from alternative suppliers or that it will be able to do so on commercially reasonable terms without a material impact on its results of operations or financial position. The Company procures product components and builds inventory based on forecasts of product life cycle and customer demand. If the Company is unable to provide 79 accurate forecasts or manage inventory levels in response to shifts in customer demand, the Company may have insufficient, excess or obsolete product inventory. Contingencies In March 2013 and May 2013, two purported securities class action lawsuits were filed against the Company and certain of the Company’s former executive officers seeking unspecified damages in the U.S. District Court for the District of Massachusetts. In July 2013, the two cases were consolidated and the original plaintiffs agreed to act as co-plaintiffs in the consolidated case. In September 2013, the co- plaintiffs filed a consolidated amended complaint on behalf of those who purchased the Company’s common stock between October 23, 2008 and March 20, 2013. The consolidated amended complaint, which named the Company, certain of the Company’s current and former executive officers and the Company’s former independent accounting firm as defendants, purported to state a claim for violation of federal securities laws as a result of alleged violations of the federal securities laws pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder. In October 2013, the Company filed a motion to dismiss the consolidated amended complaint, resulting in the dismissal of some of the claims, and the dismissal of Mr. Hernandez and one of the two plaintiffs from the case. On December 31, 2014, the parties reached an agreement to settle the case. The agreement called for Avid to cause payment of $2.5 million in respect of the settlement. The settlement was approved and the case was dismissed on May 12, 2015. In April and May 2013, the Company received a document preservation request and inquiry from the SEC Division of Enforcement and a federal grand jury subpoena from the Department of Justice requesting certain documents, including in particular documents related to the Company’s disclosures regarding the Company’s accounting review and revenue transactions. On August 13, 2015, the Company received a letter from the SEC Division of Enforcement stating that the investigation had been completed and that the Division of Enforcement did not intend to recommend any enforcement action against the Company by the SEC. On October 20, 2015, the Company was notified by the Department of Justice that the Department of Justice intends to close its inquiry. The Company’s industry is characterized by the existence of a large number of patents and frequent claims and litigation regarding patent and other intellectual property rights. In addition to the legal proceedings described above, the Company is involved in legal proceedings from time to time arising from the normal course of business activities, including claims of alleged infringement of intellectual property rights and contractual, commercial, employee relations, product or service performance, or other matters. The Company does not believe these matters will have a material adverse effect on the Company’s financial position or results of operations. However, the outcome of legal proceedings and claims brought against the Company is subject to significant uncertainty. Therefore, the Company’s financial position or results of operations may be negatively affected by the unfavorable resolution of one or more of these proceedings for the period in which a matter is resolved. The Company’s results could be materially adversely affected if the Company is accused of, or found to be, infringing third parties’ intellectual property rights. The Company considers all claims on a quarterly basis and based on known facts assesses whether potential losses are considered reasonably possible, probable and estimable. Based upon this assessment, the Company then evaluates disclosure requirements and whether to accrue for such claims in its consolidated financial statements. The Company records a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. At December 31, 2015 and as of the date of filing of these consolidated financial statements, the Company believes that, other than as set forth in this note, no provision for liability nor disclosure is required related to any claims because: (a) there is no reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial. Additionally, the Company provides indemnification to certain customers for losses incurred in connection with intellectual property infringement claims brought by third parties with respect to the Company’s products. These indemnification provisions generally offer perpetual coverage for infringement claims based upon the products covered by the agreement and the maximum potential amount of future payments the Company could be required to make under these indemnification provisions is theoretically unlimited. To date, the Company has not incurred material costs related to these indemnification provisions; accordingly, the Company believes the estimated fair value of these indemnification provisions is immaterial. Further, certain of the Company’s arrangements with customers include clauses whereby the Company may be subject to penalties for failure to meet certain performance obligations; however, the Company has not recorded any related material penalties to date. 80 The Company provides warranties on externally sourced and internally developed hardware. For internally developed hardware and in cases where the warranty granted to customers for externally sourced hardware is greater than that provided by the manufacturer, the Company records an accrual for the related liability based on historical trends and actual material and labor costs. The following table sets forth the activity in the product warranty accrual account for the years ended December 31, 2015, 2014 and 2013 (in thousands): Accrual balance at January 1, 2013 Accruals for product warranties Cost of warranty claims Accrual balance at December 31, 2013 Accruals for product warranties Cost of warranty claims Accrual balance at December 31, 2014 Accruals for product warranties Cost of warranty claims Accrual balance at December 31, 2015 M. CAPITAL STOCK Preferred Stock $ $ 4,476 5,346 (6,321) 3,501 3,985 (4,694) 2,792 3,025 (3,583) 2,234 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 may be determined by the Company’s board of directors (the “Board”). Common Stock Repurchases On June 8, 2015, the Company’s Board approved a stock repurchase plan authorizing the Company to repurchase up to $9.0 million of common stock in open market or other transactions from time to time until September 6, 2015. The Company completed the stock repurchase in July 2015. In aggregate, the Company purchased 586,825 shares for a total purchase price of $8.0 million. The repurchased shares are held in treasury. Under some of the Company’s equity compensation plans, employees have the option or may be required to satisfy minimum withholding tax obligations by tendering to the Company a portion of the common stock received under the award. Stock Incentive Plans In November 2014, the Company registered an aggregate of 3,750,000 of its shares of $0.01 par value per share common stock, which have been authorized and reserved for issuance under the Avid Technology, Inc. 2014 Stock Incentive Plan (the “Plan”). The Plan was originally adopted by the Company’s Board of Directors on September 14, 2014 and approved by the Company’s stockholders on October 29, 2014. In connection with the approval of the Plan the Company’s Amended and Restated 2005 Stock Incentive Plan has been closed; no additional awards may be granted under that Plan. Shares available for issuance under the Company’s 2014 Stock Incentive Plan totaled 2,213,283 at December 31, 2015. Under the Plan, the Company may grant stock awards or options to purchase the Company’s common stock to employees, officers, directors and consultants. The exercise price for options generally must be no less than market price on the date of grant. Awards may be performance-based where vesting or exercisability is conditioned on achieving performance objectives, time-based or a combination of both. Current option grants become exercisable over various periods, typically three to four years for employees and one year for non-employee directors, and have a maximum term of seven to ten years. Restricted stock and restricted stock unit awards with time-based vesting typically vest over three to four years for employees and one year for non-employee directors. In November 2014, the Compensation Committee of the Board of Directors modified certain market and performance based options and restricted stock units held by seven employees of the Company that were originally granted between 2009 and 2013. The 81 modifications included (i) a conversion of vesting conditions from market and performance bases to a four year service period, including providing credit for service already rendered prior to the modification and (ii) an acceleration clause that allows vesting of between 50% and 100% of unvested awards if certain 2014 Adjusted EBITDA targets were achieved. In total, options to purchase 933,750 shares and 31,250 restricted stock units were modified, which resulted in incremental compensation expense of $4.3 million, $2.3 million of which was recognized upon modification, $1.5 million of which was recognized in the quarter ended December 31, 2014 upon achieving specific 2014 Adjusted EBITDA targets and the remaining $0.5 million was recognized in 2015. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option grants with time-based vesting. The Black-Scholes model relies on a number of key assumptions to calculate estimated fair value. The assumed dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present expectation to pay cash dividends and the Company’s current Financing Agreement precludes the Company from paying dividends. The expected volatility is now based on actual historic stock volatility for periods equivalent to the expected term of the award. The assumed risk-free interest rate is the U.S. Treasury security rate with a term equal to the expected life of the option. The assumed expected life is based on company-specific historical experience considering the exercise behavior of past grants and models the pattern of aggregate exercises. The fair value of restricted stock and restricted stock unit awards with time-based vesting is based on the intrinsic value of the awards at the date of grant, as the awards have a purchase price of $0.01 per share. The Company also issues stock option grants or restricted stock unit awards with vesting based on market conditions, specifically the Company’s stock price and performance conditions, generally using adjusted EBITDA. The fair values and derived service periods for all grants that include vesting based on market conditions are estimated using the Monte Carlo valuation method. For stock option grants that include vesting based on performance conditions, the fair values are estimated using the Black-Scholes option pricing model. For restricted stock unit awards that include vesting based on performance conditions, the fair values are estimated based on the intrinsic values of the awards at the date of grant, as the awards have a purchase price of $0.01 per share. Information with respect to options granted under all stock option plans for the year ended December 31, 2015 was as follows: Options outstanding at January 1, 2015 Granted Exercised Forfeited or canceled Options outstanding at December 31, 2015 Options vested at December 31, 2015 or expected to vest Options exercisable at December 31, 2015 Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (years) Aggregate Intrinsic Value (in thousands) Total Shares 5,564,111 $11.20 4,000 (421,961) (800,816) 4,345,334 4,289,778 3,622,761 $9.10 $9.55 $14.84 $10.68 $10.72 $11.28 4.05 4.03 3.82 $— $— $— The following table sets forth the weighted-average key assumptions and fair value results for stock options granted during the years ended December 31, 2015, 2014 and 2013: Expected dividend yield Risk-free interest rate Expected volatility Expected life (in years) Weighted-average fair value of options granted (per share) Year Ended December 31, 2014 0.00% 1.24% 50.3% 4.16 $3.03 2013 0.00% 0.87% 50.1% 4.68 $3.33 2015 0.00% 1.07% 52.0% 4.48 $3.91 The cash received from the stock options exercised during the year ended December 31, 2015 was $5.0 million. During the years ended December 31, 2014 and 2013, the cash received from and the aggregate intrinsic value of stock options exercised was not significant. 82 Information with respect to non-vested restricted stock units for the year ended December 31, 2015 was as follows: Non-vested at January 1, 2015 Granted Vested Forfeited Non-vested at December 31, 2015 Expected to vest Non-Vested Restricted Stock Units Weighted- Average Grant-Date Fair Value Weighted- Average Remaining Contractual Term (years) Aggregate Intrinsic Value (in thousands) Total Shares 811,880 1,264,116 (421,314) (388,674) 1,266,008 $10.01 $10.31 $10.04 $10.90 $9.97 820,741 $11.14 0.99 0.94 $9,216 $5,975 The weighted-average grant date fair value of restricted stock units granted during the years ended December 31, 2015, 2014 and 2013 was $10.31, $10.19 and $7.84, respectively. The total fair value of restricted stock units vested during the years ended December 31, 2015, 2014, and 2013 was $4.2 million, $2.5 million, and $1.1 million, respectively. Employee Stock Purchase Plan The Company’s Second Amended and Restated 1996 Employee Stock Purchase Plan (the “ESPP”) offers the Company’s shares for purchase at a price equal to 85% of the closing price on the applicable offering period termination date. Shares issued under the ESPP are considered compensatory. Accordingly, the Company is required to measure fair value and record compensation expense for share purchase rights granted under the ESPP. The Company last issued shares under the ESPP on October 31, 2015. In July 2015 the Board of Directors approved an amendment to the plan to change the subscription period from three to six months and accordingly to adjust the payroll cap to $5,000 per plan period. A total of 343,613 shares remained available for issuance under the ESPP at December 31, 2015. The Company uses the Black-Scholes option pricing model to calculate the fair value of shares issued under the ESPP. The Black- Scholes model relies on a number of key assumptions to calculate estimated fair values. The following table sets forth the weighted- average key assumptions and fair value results for shares issued under the ESPP during the years ended December 31, 2015, 2014 and 2013: Expected dividend yield Risk-free interest rate Expected volatility Expected life (in years) Weighted-average fair value of shares issued (per share) Year Ended December 31, 2014 0.00% 0.09% 35.0% 0.17 $2.02 2013 0.00% 0.09% 51.0% 0.25 $1.00 2015 0.00% 0.03% 37.0% 0.24 $2.15 The following table sets forth the quantities and average prices of shares issued under the ESPP for the years ended December 31, 2015, 2014 and 2013: Shares issued under the ESPP Average price of shares issued Year Ended December 31, 2014 2015 98,300 — $10.17 $— 2013 27,936 $6.29 The Company did not realize a material tax benefit from the tax deductions for stock option exercises, vested restricted stock units and shares issued under the ESPP during the years ended December 31, 2015, 2014 or 2013. 83 Stock-Based Compensation Expense The Company uses the accelerated method of attribution for awards with performance conditions and graded vesting features for options granted. The Company estimates forfeiture rates at the time awards are made based on historical and estimated future turnover rates and applies these rates in the calculation of estimated compensation cost. The estimation of forfeiture rates includes a quarterly review of historical turnover rates and an update of the estimated forfeiture rates to be applied to employee classes for the calculation of stock-based compensation. Forfeiture rates for the calculation of stock-based compensation were estimated and applied based on three classes, non-employee directors, executive management staff and other employees. The Company’s annualized estimated forfeiture rates were 0% for non-employee director awards, 10% for executive management staff and 15% for other employee awards. Then-current estimated forfeiture rates are applied quarterly to all outstanding stock options and non-vested restricted stock awards, which may result in a revised estimate of compensation costs related to these stock-based grants. Stock-based compensation was included in the following captions in the Company’s consolidated statements of operations for the years ended December 31, 2015, 2014 and 2013, respectively (in thousands): Cost of products revenues Cost of services revenues Research and development expenses Marketing and selling expenses General and administrative expenses Total Year Ended December 31, 2014 2013 2015 $ $ 199 624 461 1,785 6,445 $ 397 279 502 3,658 6,677 $ 9,514 $ 11,513 $ 360 436 582 1,778 3,761 6,917 At December 31, 2015, there was $9.8 million of total unrecognized compensation cost, before forfeitures, related to non-vested stock-based compensation awards granted under the Company’s stock-based compensation plans. The Company expects this amount to be amortized approximately as follows: $6.0 million in 2016, $3.0 million in 2017 and $0.8 million in 2018. At December 31, 2015, the weighted-average recognition period of the unrecognized compensation cost was approximately one year. N. EMPLOYEE BENEFIT PLANS Employee Benefit Plans The Company has a Section 401(k) plan that covers 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 Company’s board of directors, make discretionary contributions to the plan. The Company’s contributions to the plan totaled $2.3 million, $2.2 million and $2.2 million in 2015, 2014 and 2013, respectively. In addition, the Company has various retirement and post-employment plans covering certain international employees. Certain of the plans allow the Company to match employee contributions up to a specified percentage as defined by the plans. The Company’s contributions to these plans totaled $2.2 million, $2.0 million and $1.2 million in 2015, 2014 and 2013, respectively. Deferred Compensation Plans The Company maintains a nonqualified deferred compensation plan (the “Deferred Plan”). The Deferred Plan covers senior management and members of the Board. In November 2013, the Board determined to indefinitely suspend the plan, and not offer participants the opportunity to participate in the Deferred Plan as of 2014. The benefits payable under the Deferred Plan represent an unfunded and unsecured contractual obligation of the Company to pay the value of the deferred compensation in the future, adjusted to reflect deemed investment performance. Payouts are generally made upon termination of employment with the Company. The assets of the deferred plan, as well as the corresponding obligations, were approximately $0.6 million and $1.2 million at December 31, 2015 and 2014, respectively, and were recorded in “other current assets” and “accrued compensation and benefits” at those dates. 84 In connection with the acquisition of a business in 2010, the Company assumed the assets and liabilities of a deferred compensation arrangement for a single individual in Germany. The arrangement represents a contractual obligation of the Company to pay a fixed euro amount for a period specified in the contract. In connection with the acquisition of Orad, the Company assumed the assets and liabilities of a deferred compensation arrangement for employees in Israel. At December 31, 2015 and 2014, the Company’s assets and liabilities related to the arrangements consisted of assets recorded in “other long-term assets” of $3.0 million at December 31, 2015 and $0.6 million at December 31, 2014, representing the value of related insurance contracts and investments, and liabilities recorded as “long-term liabilities” of $7.3 million at December 31, 2015 and $4.7 million at December 31, 2014, respectively, representing the fair value of the estimated benefits to be paid under the arrangements. O. INCOME TAXES Income from before income taxes and the components of the income tax provision consisted of the following for the years ended December 31, 2015, 2014 and 2013 (in thousands): Year Ended December 31, 2014 2013 2015 (23,977) $ 24,542 565 $ (6,864) $ 23,780 16,916 $ (16,414) 40,506 24,092 115 $ 14 $ 3 (180) 3,734 3,672 (6,493) 906 (5,587) (1,915) $ 83 (180) 2,217 2,134 — 54 54 (104) 114 (170) 2,369 2,209 — 730 730 2,188 $ 2,939 Income from operations before income taxes: United States Foreign Total income from operations before income taxes (Benefit) provision for income taxes: Current tax expense (benefit): Federal State Foreign benefit of net operating losses Other foreign Total current tax expense Deferred tax (benefit) expense: Federal benefit related to Note issuance Other foreign Total deferred tax (benefit) expense Total (benefit) provision for income taxes $ $ $ $ 85 Net deferred tax assets (liabilities) consisted of the following at December 31, 2015 and 2014 (in thousands): Deferred tax assets: Tax credit and net operating loss carryforwards Allowances for bad debts Difference in accounting for: Revenues Costs and expenses Inventories Acquired intangible assets Gross deferred tax assets Valuation allowance Deferred tax assets after valuation allowance Deferred tax liabilities: Difference in accounting for: Costs and expenses Acquired intangible assets Basis difference convertible notes Gross deferred tax liabilities Net deferred tax (liabilities) assets Recorded as: Long-term deferred tax assets, net Long-term deferred tax liabilities, net Net deferred tax (liabilities) assets December 31, 2015 2014 $ 318,471 $ 290,523 372 231 54,475 34,116 7,576 9,799 424,809 (406,123) 18,686 (5,654) (8,554) (5,910) (20,118) (1,432) $ 2,011 (3,443) (1,432) $ $ $ 63,916 29,004 7,004 13,667 404,345 (398,733) 5,612 (3,540) — — (3,540) 2,072 2,208 (136) 2,072 On January 1, 2015 the Company adopted ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The standard requires entities to present DTAs and DTLs as non-current in the classified balance sheet. The standard simplifies the current guidance, which requires entities to separately present DTAs and DTLs as current and non-current in a classified balance sheet. The Company early adopted the guidance to simplify its reporting for the current year. The consolidated balance sheet at December 31, 2014 was retrospectively adjusted, resulting in a $0.3 million reclassification of current DTAs to long-term DTAs. Deferred tax assets and liabilities reflect the net tax effects of the tax credits and net operating loss carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used 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. Based on the magnitude of the deferred tax assets at December 31, 2015 and 2014 and the level of historical U.S. tax losses, management has determined that the uncertainty regarding the realization of these assets warranted a significant valuation allowance at December 31, 2015 and 2014. For U.S. federal and state income tax purposes at December 31, 2015, the Company had tax credit carryforwards of $53.1 million, which will expire between 2016 and 2035, and net operating loss carryforwards of $745.6 million, which will expire between 2019 and 2035. The federal net operating loss and tax credit amounts are subject to annual limitations under Section 382 change of ownership rules of the Internal Revenue Code. The Company completed an assessment at March 31, 2015 regarding whether there may have been a Section 382 ownership change and concluded that it is more likely than not that none of the Company’s net operating loss and tax credit amounts are subject to any Section 382 limitation. Additionally, the Company has foreign net operating loss carryforwards of $33.8 million and tax credit carryforwards of $3.7 million that begin to expire in 2029. The Company has determined there is uncertainty regarding the realization of a portion of these assets and has recorded a valuation allowance against $23.1 million of net operating losses and $3.7 million of tax credits at December 31, 2015. 86 The Company’s assessment of the valuation allowance on the U.S. and foreign deferred tax assets could change in the future based on 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. Excluded from the above deferred tax schedule at December 31, 2015 are tax assets totaling $33.7 million resulting from the exercise of employee stock options, because recognition of these assets will occur upon utilization of these deferred tax assets to reduce taxes payable and will result in a credit to additional paid-in capital within stockholders’ equity rather than the provision for income taxes. The following table sets forth a reconciliation of the Company’s income tax provision (benefit) to the statutory U.S. federal tax amount for the years ended December 31, 2015, 2014 and 2013: Statutory tax Tax credits Foreign operations Non-deductible expenses and other Federal benefit related to Note issuance Increase in valuation allowance (Benefit) provision for income taxes Year Ended December 31, 2014 2013 2015 $ $ $ 198 (2,972) (4,055) 2,303 (6,493) 9,104 (1,915) $ $ 5,921 (1,589) (6,047) 771 — 3,132 2,188 $ 8,432 (1,482) (10,542) 516 — 6,015 2,939 The cumulative amount of undistributed earnings of foreign subsidiaries, which is intended to be indefinitely reinvested and for which U.S. income taxes have not been provided, totaled $38.5 million at December 31, 2015. The Company does not have any plans to repatriate these earnings because the underlying cash will be used to fund the ongoing operations of the foreign subsidiaries. The additional taxes that might be payable upon repatriation of foreign earnings are not significant. A tax position must be more likely than not to be sustained before being recognized in the financial statements. It also requires the accrual of interest and penalties as applicable on unrecognized tax positions. The Company is disclosing unrecognized tax benefits primarily related to the foreign tax implications arising from the changes in revenue recognition that arose in periods prior to 2012. The unrecognized tax benefits did not have an impact on the effective tax rate because the Company maintains a full valuation allowance on the related loss carryforwards. At December 31, 2013, the Company’s unrecognized tax benefits and related accrued interest and penalties totaled $24.7 million, of which $0.8 million would affect the Company’s income tax provision and effective tax rate if recognized. At December 31, 2014, the Company’s unrecognized tax benefits and related accrued interest and penalties totaled $25.8 million, of which $0.8 million would affect the Company’s effective tax rate if recognized. At December 31, 2015, the Company’s unrecognized tax benefits and related accrued interest and penalties totaled $26.0 million, of which $3.2 million would affect the Company’s income tax provision and effective tax rate if recognized. The following table sets forth a reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding the impact of interest and penalties, for the years ended December 31, 2015, 2014 and 2013 (in thousands): Unrecognized tax benefits at January 1, 2013 Increases for tax positions taken during a prior period Decreases related to the lapse of applicable statutes of limitations Unrecognized tax benefits at December 31, 2013 Increases for tax positions taken during a prior period Unrecognized tax benefits at December 31, 2014 Increases for tax positions taken during a prior period Unrecognized tax benefits at December 31, 2015 $ 22,629 2,205 (105) 24,729 1,118 25,847 148 $ 25,995 The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. Accrued interest and penalties related to uncertain tax positions at December 31, 2015 and 2014 were not material. 87 The tax years 2008 through 2015 remain open to examination by taxing authorities in the jurisdictions in which the Company operates. The most significant operating jurisdictions include: the United States, Ireland, the Netherlands, Germany, Israel, Japan, and the United Kingdom. P. RESTRUCTURING COSTS AND ACCRUALS 2016 Restructuring Plan In the first quarter of 2016, the Company commenced restructuring actions that are part of a broad restructuring plan encompassing a series of measures intended to allow the Company to more efficiently operate in a leaner, and more directed cost structure. These include reductions in the Company’s workforce, facilities consolidation, transferring certain business processes to lower cost regions, and reducing other third-party services costs. In connection with this restructuring plan, the Company expects to incur incremental cash expenditures of approximately $25 million relating to termination benefits, facility costs, employee overlap expenses and related actions. The Company expects approximately $14 million of the expenditures will be recorded as restructuring expenses in the quarters ending December 31, 2015 through June 30, 2017. The Company anticipates that the restructuring plan will be substantially complete by the end of the second quarter of 2017 and will result in annualized costs savings of appropriately $68 million. The restructuring charges of $5.8 million recorded during the quarter ended December 31, 2015, represented an initial elimination of 111 positions worldwide during January and February of 2016. 2013 Restructuring Actions In June 2013, the Company’s leadership evaluated the marketing and selling teams and, in an effort to better align sales resources with the Company’s strategic goals and enhance its global account team approach, eliminated 31 positions. As a result, the Company recognized related restructuring costs of $1.7 million in 2013. During November and December 2013, the Company’s executive management team identified opportunities to lower costs in the supply and hardware technology group by eliminating 29 positions in hardware shared services and 15 positions in the supply and technology group. Additionally, an engineering reorganization at the same time resulted in the elimination of four engineering positions. As a result, the Company recognized $1.7 million of related restructuring costs in 2013. All of the restructuring costs related to 2013 restructuring actions were fully paid as of December 31, 2015, no further actions are anticipated. 2012 Restructuring Plan In June 2012, the Company committed to a series of strategic actions (the “2012 Plan”) to focus on its Broadcast and Media market and Video and Audio Post and Professional market and to drive improved operating performance. These actions included the divestiture of certain of the Company’s consumer-focused product lines, a rationalization of the business operations and a reduction in force. Actions under the plan included the elimination of approximately 280 positions in June 2012, the abandonment of one of the Company’s facilities in Burlington, Massachusetts and the partial abandonment of facilities in Mountain View and Daly City, California, in September 2012, and the partial abandonment of the facility in Pinewood, UK, in December 2012. During 2012, the Company recorded restructuring charges of $13.9 million related to severance costs and $8.6 million for the closure or partial closure of facilities, which included non-cash amounts of $1.4 million for fixed asset write-offs and $1.0 million for deferred rent liability write-offs during 2012. During 2013, the Company recorded $0.1 million in additional severance costs and revisions totaling $1.8 million resulting from sublease assumption changes and other costs related to the abandoned facilities under the 2012 Plan. The Company substantially completed all actions under the 2012 Plan prior to December 31, 2012. In June 2014, the Company signed an agreement for surrender of the partially abandoned property at Pinewood, UK. As a result, the Company recorded a recovery of $0.2 million, as the Company was released from all obligations related to the surrendered property. In June 2015, the Company recorded a revision of restructuring costs of $0.5 million resulting from an update to the sublease assumption related to the Company’s Mountain View, California facility that was partially abandoned in 2012. 88 No further actions are anticipated under the 2012 restructuring plans. Prior Years’ Restructuring Plans The remaining accrual balance of $0.3 million at December 31, 2015 was related to the closure of part of the Company’s Dublin, Ireland facility under the 2008 Plan. No further actions are anticipated under the prior years’ restructuring plans. Restructuring Summary The following table sets forth the activity in the restructuring accruals for the years ended December 31, 2015, 2014 and 2013 (in thousands): Employee- Related Facilities- Related & Other Total Accrual balance at January 1, 2013 $ $ 11,433 $ 15,731 New restructuring charges – operating expenses Revisions of estimated liabilities Accretion Cash payments Foreign exchange impact on ending balance Accrual balance at December 31, 2013 New restructuring charges – operating expenses Revisions of estimated liabilities Accretion Cash payments Foreign exchange impact on ending balance Accrual balance at December 31, 2014 New restructuring charges – operating expenses Revisions of estimated liabilities Accretion Cash payments Foreign exchange impact on ending balance Accrual balance at December 31, 2015 4,298 3,539 50 — (5,469) (19) 2,399 — — — (2,340) (1) 58 5,766 — — (315) — $ 5,509 $ — 1,781 612 (7,736) 12 6,102 — (165) 565 (4,172) (45) 2,285 — 539 226 (1,301) (78) 1,671 $ 3,539 1,831 612 (13,205) (7) 8,501 — (165) 565 (6,512) (46) 2,343 5,766 539 226 (1,616) (78) 7,180 The employee-related accruals at December 31, 2015 and 2014 represent severance costs to former employees that will be paid out within twelve months, and are, therefore, included in the caption “accrued expenses and other current liabilities” in the Company’s consolidated balance sheets. The facilities-related and other accruals at December 31, 2015 and 2014 represent contractual lease payments, net of estimated sublease income, on space vacated as part of the Company’s restructuring actions. The leases, and payments against the amounts accrued, extend through 2021 unless the Company is able to negotiate earlier terminations. Of the total facilities-related accruals, $1.0 million was included in the caption “accrued expenses and other current liabilities” and $0.6 million was included in the caption “other long-term liabilities” in the Company’s consolidated balance sheet at December 31, 2015. At December 31, 2014, $1.0 million was included in the caption “accrued expenses and other current liabilities” and $1.3 million was included in the caption “other long- term liabilities.” 89 Q. PRODUCT AND GEOGRAPHIC INFORMATION The Company provides digital media content-creation, management and distribution products and solutions for film, video, audio and broadcast professionals, as well as artists and musicians, which the Company classifies as two types, video and audio. The Company also classifies all its maintenance, professional services and training revenues as services revenues. 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 in deciding how to allocate resources and in assessing performance. The Company’s evaluation of the discrete financial information that is regularly reviewed by the chief operating decision makers determined that in 2015, 2014 and 2013 the Company had only one operating segment. Specifically, the Company does not internally measure profitability based upon video, audio, or service revenue. The Company’s video products and solutions are designed to improve the productivity of video and film editors and broadcasters by enabling them to edit video, film and sound; manage media assets; and automate workflows. Professional video creative software and hardware products include the Media Composer product line used to edit film, television programmings, news broadcasts, commercials and other video content. Video products also include Avid ISIS shared storage systems and Avid Interplay asset management solutions that provide complete network, storage and database solutions to enable users to simultaneously share and manage media assets throughout a project or organization. The Company’s audio products and solutions include digital audio software and workstation solutions, control surfaces, live sound systems and notation software that provide music creation; audio recording, editing, and mixing; and live performance solutions. Audio products include Pro Tools digital audio software and workstation solutions to facilitate the audio production process, including music and sound creation, recording, editing, signal processing, integrated surround mixing and mastering, and reference video playback. Audio products also include a range of complementary control surfaces and consoles, including the System 5 and System 6 modular consoles, as well as the VENUE live-sound systems and Sibelius-branded notation software. The Company’s services revenues are primarily derived from the sale of maintenance contracts and professional service and the recognition of revenues for Implied Maintenance Release PCS. The Company provides online and telephone support and access to software upgrades for customers whose products are under warranty or covered by a maintenance contract. The Company’s professional services team provides installation, integration, planning, consulting and training services. The following is a summary of the Company’s revenues by type for the years ended December 31, 2015, 2014 and 2013 (in thousands): Video products and solutions Audio products and solutions Total products and solutions Services Total net revenues Year Ended December 31, 2014 2013 2015 $ 201,559 $ 233,464 $ 134,812 336,371 169,224 145,163 378,627 151,624 $ 505,595 $ 530,251 $ 243,173 152,358 395,531 167,881 563,412 The following table sets forth the Company’s revenues from by geographic region for the years ended December 31, 2015, 2014 and 2013 (in thousands): Revenues: United States Other Americas Europe, Middle East and Africa Asia-Pacific Total net revenues Year Ended December 31, 2014 2013 2015 $ 185,109 $ 193,060 $ 218,154 37,081 206,192 77,213 45,342 217,767 74,082 43,131 214,441 87,686 $ 505,595 $ 530,251 $ 563,412 90 The following table presents the Company’s long-lived assets, excluding intangible assets, by geography at December 31, 2015 and 2014 (in thousands): Long-lived assets: United States Other countries Total long-lived assets R. LONG TERM DEBT AND CREDIT AGREEMENT 2.00% Convertible Senior Notes due 2020 December 31, 2015 2014 $ $ 30,684 11,920 42,604 $ $ 30,465 3,945 34,410 On June 15, 2015, the Company issued $125.0 million aggregate principal amount of its 2.00% Convertible Senior Notes due 2020 (the “Notes”) in an offering conducted in accordance with Rule 144A under the Securities Act of 1933. The net proceeds from the offering were $120.3 million after deducting the offering expenses. The Notes pay interest semi-annually on June 15 and December 15 of each year, beginning on December 15, 2015, at an annual rate of 2.00% and mature on June 15, 2020 unless earlier converted or repurchased in accordance with their terms prior to such date. Additional interest may be payable upon the occurrence of certain event of default relating to the Company’s failure to deliver certain documents or reports to the Trustee, the Company’s failure to timely file any document or report required pursuant to Section 13 or 15 (d) of the Exchange Act or if the Notes are not freely tradable as of one year after the last date of original issuance of the Notes. The Notes are convertible into cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election, based on an initial conversion rate, subject to adjustment, of 45.5840 shares per $1,000 principal amount of Notes, which is equal to an initial conversion price of $21.94 per share. Prior to December 15, 2019, the Notes are convertible only in the following circumstances: (1) during any calendar quarter commencing after September 30, 2015, if the last reported sale price of the Company’s common stock is greater than or equal to 130% of the applicable conversion price for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) during the five business day period after any five consecutive trading day period (the “Measurement Period”) in which the trading price per $1,000 principal amount of Notes for each trading day in the Measurement Period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions. On or after December 15, 2019 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances. The Company may not redeem the Notes prior to their maturity, which means that the Company is not required to redeem or retire the Notes periodically. The Notes are senior unsecured obligations. Upon the occurrence of certain specified fundamental changes, the holders may require the Company to repurchase all or a portion of the Notes for cash at 100% of the principal amount of the Notes being purchased, plus any accrued and unpaid interest. In accounting for the Notes at issuance, the Company allocated proceeds from the Notes into debt and equity components according to the accounting standards for convertible debt instruments that may be fully or partially settled in cash upon conversion. The initial carrying amount of the debt component, which approximates its fair value, was estimated by using an interest rate for nonconvertible debt, with terms similar to the Notes. The excess of the principal amount of the Notes over the fair value of the debt component was recorded as a debt discount and a corresponding increase in additional paid-in capital. The debt discount is accreted to the carrying value of the Notes over their term as interest expense using the interest method. Upon issuance of the Notes, the Company recorded $96.7 million as debt and $28.3 million as additional paid-in capital in stockholders’ equity. The effective interest rate used to estimate the fair value of the debt was 7.66%. The Company recorded $2.9 million debt discount accretion as interest expenses in the Company’s statement of operations for the year ended December 31, 2015. Total interest expense for the year ended December 31, 2015 was $4.3 million, reflecting the coupon and accretion of the discount. In connection with the issuance of the Notes, the Company recorded an income tax benefit of $6.5 million as a discrete item for the year ended December 31, 2015 as a result of the creation of a deferred tax liability associated with the portion of the Notes that was classified within stockholders’ equity. While GAAP requires the offset of the deferred tax liability to be recorded in additional paid-in capital, consistent with the equity portion of the Notes, the creation of the deferred tax liability produced evidence of recoverability of 91 deferred tax assets, which resulted in the release of a valuation allowance, totaling $6.5 million, reflected as an income tax benefit in the current period. The Company incurred transaction costs of $4.7 million relating to the issuance of the Notes. The Company adopted ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs be classified as a reduction in the carrying value of the debt. In accounting for these costs, the Company allocated the costs of the offering between debt and equity in proportion to the fair value of the debt and equity recognized. The transaction costs allocated to the debt component of approximately $3.6 million were recorded as a direct deduction from the face amount of the Notes and are being amortized as interest expense over the term of the Notes using the interest method. The transaction costs allocated to the equity component of approximately $1.1 million were recorded as a decrease in additional paid-in capital. The net carrying amount of the liability component of the Notes consisted of the following at December 31, 2015 (in thousands): Principal amount of Notes Original debt discount due to: Allocation of proceeds to equity Allocation of issuance costs to debt Accumulated accretion Net carrying value Capped Call Transaction December 31, 2015 125,000 $ (28,299) (3,641) 2,890 95,950 $ In connection with the offering of the Notes, on June 9, 2015, the Company entered into a capped call derivative transaction with a third party (the “Capped Call”). The Capped Call is expected generally to reduce the potential dilution to the common stock and/or offset any cash payments the Company may be required to make in excess of the principal amount upon conversion of the Notes in the event that the market price per share of the common stock is greater than the strike price of the Capped Call. The Capped Call has a strike price of $21.94 and a cap price of $26.00 and is exercisable by the Company when and if the Notes are converted. If, upon conversion of the Notes, the price of the Company’s common stock is above the strike price of the Capped Call, the counterparty will deliver shares of common stock and/or cash with an aggregate value approximately equal to the difference between the price of the common stock at the conversion date (as defined, with a maximum price for purposes of this calculation equal to the cap price) and the strike price, multiplied by the number of shares of common stock related to the portion of the Capped Call being exercised. The Capped Call expires on June 15, 2020. The Company paid $10.1 million for the Capped Call and recorded the payment as a decrease to additional paid-in capital. Credit Facilities On February 26, 2016, the Company entered into a Financing Agreement (the “Financing Agreement”) with Cerberus Business Finance, LLC, as collateral and administrative agent, and the lenders party thereto (the “Lenders”). Pursuant to the Financing Agreement, the Lenders agreed to provide the Company with (a) a term loan in the aggregate principal amount of $100 million (the “Term Loan”) and (b) a revolving credit facility (the “Credit Facility”) of up to a maximum of $5 million in borrowings outstanding at any time. All outstanding loans under the Financing Agreement will become due and payable, on the earlier of February 26, 2021 and the date that is 30 days prior to June 15, 2020, the scheduled maturity date of the Notes. The Company borrowed the full amount of the Term Loan, or $100 million, as of the Closing Date, but did not borrow any amount under the Credit Facility as of the Closing Date. Concurrently with the entry into the Financing Agreement, on February 26, 2016 the Company terminated its existing Credit Agreement, dated June 22, 2015, among the Company and certain of its subsidiaries, as borrowers, KeyBank National Association, as Administrative Agent and the other lender parties thereto, and repaid all outstanding borrowings under such agreement. There were no penalties paid by the Company in connection with this termination. Interest accrues on outstanding borrowings under the Credit Facility and the Term Loan at a rate of either the LIBOR Rate (as defined in the Financing Agreement) plus 6.75% or a Reference Rate (as defined in the Financing Agreement) plus 5.75%, at the option of the Company. The Company must also pay to the Lenders, on a monthly basis, an unused line fee at a rate of 0.5% per annum. The Company may prepay all or any portion of the Term Loan prior to its stated maturity, subject to the payment of certain fees based on 92 the amount repaid. The Term Loan requires quarterly principal payments of $1.25 million commencing in June 2016. The Term Loan also requires the Company to use excess cash, as defined in the Financing Agreement, to repay outstanding principal. The Company granted a security interest on substantially all of their assets to secure the obligations under the Credit Facility and the Term Loan. The Financing Agreement contains customary representations and warranties, covenants, mandatory prepayments, and events of default under which the Company’s payment obligations may be accelerated. The Financing Agreement includes covenants requiring the Company to maintain a Leverage Ratio (defined as the ratio of (a) consolidated total funded indebtedness to (b) consolidated Adjusted EBITDA) of no greater than 4.35:1.00 for the four quarters ending June 30, 2016, 5.40:1.00 for the four quarters ending September 30, 2016, 4.20:1.00 for the four quarters ending December 31, 2016 and thereafter declining over time from 3.50:1.00 to 2.50:1.00. The Financing Agreement also restricts the Company from making capital expenditures in excess of $20,000,000 in any fiscal year. The Financing Agreement contains restrictive covenants that are customary for an agreement of this kind, including, for example, covenants that restrict the Company from incurring additional indebtedness, granting liens, making investments and restricted payments, making acquisitions, paying dividends and engaging in transactions with affiliates. S. 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) 2015 2014 Quarter Ended Net revenues Cost of revenues Amortization of intangible assets Gross profit Operating expenses: Research and development Marketing and selling General and administrative Amortization of intangible assets Restructuring costs (recoveries), net Total operating expenses Operating (loss) income Other expense, net (Loss) income before income taxes Provision for (benefit from) income taxes Net (loss) income Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31 $138,806 $137,436 $109,767 $119,586 $128,196 $142,429 $124,644 $134,982 54,912 1,950 81,944 24,190 30,091 21,463 786 5,766 82,296 (352) (1,727) (2,079) 2,306 47,672 1,950 87,814 25,225 31,564 15,834 786 — 73,409 14,405 (2,519) 11,886 768 43,306 47,492 50,548 52,788 50,420 50,665 163 — — — — 50 66,298 72,094 77,648 89,641 74,224 84,267 23,310 32,811 17,425 408 539 74,493 (8,195) (1,439) (9,634) (5,550) 23,173 28,045 19,387 374 — 70,979 1,115 (723) 392 561 23,212 34,527 22,222 375 — 80,336 (2,688) (1,620) (4,308) 22,154 31,410 20,644 373 — 74,581 15,060 22,070 34,297 19,984 398 (165) 76,584 (2,360) 22,954 32,815 18,331 480 — 74,580 9,687 (455) (357) (351) 14,605 (2,717) 761 365 622 9,336 440 $ (4,385) $ 11,118 $ (4,084) $ (169) $ (5,069) $ 14,240 $ (3,339) $ 8,896 Net (loss) income per share – basic and diluted $ (0.11) $ 0.28 $ (0.10) $ 0.00 $ (0.13) $ 0.36 $ (0.09) $ 0.23 Weighted-average common shares outstanding – basic Weighted-average common shares outstanding – diluted 39,439 39,439 39,231 39,750 39,635 39,635 39,387 39,387 39,234 39,234 39,133 39,201 39,119 39,119 39,099 39,122 93 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management, with the participation and supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified under SEC rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2015. Based on this evaluation, our management concluded that as of December 31, 2015 these disclosure controls and procedures were not effective at the reasonable assurance level as a result of the material weaknesses in our internal control over financial reporting, which are described below. As discussed below, our internal control over financial reporting is an integral part of our disclosure controls and procedures. Management's Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by our 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 accounting principles generally accepted in the United States of America (“GAAP”) and includes those policies and procedures that: (1) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of inherent limitations, no matter how well designed and operated, internal control over financial reporting may not prevent or detect misstatements and can only provide reasonable assurance of achieving the desired control objectives. In addition, the design of internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Our Chief Executive Officer and Chief Financial Officer have performed an evaluation of our internal control over financial reporting under the framework in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. The objective of this assessment was to determine whether our internal control over financial reporting was effective at December 31, 2015. Based on the results of this evaluation, we have concluded that our internal control over financial reporting was not effective at December 31, 2015 due to an ineffective control environment, 94 ineffective control activities, ineffective information and communications controls, and ineffective monitoring controls. We believe these deficiencies are material weaknesses. A material weakness is a deficiency, or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Our independent registered public accounting firm, Deloitte & Touche LLP, has audited our consolidated financial statements and has issued an attestation report on our internal control over financial reporting as of December 31, 2015, which report is included herein. Material Weakness Discussion and Remediation In September 2014, we completed a complex restatement of our financial statements, where we corrected errors in revenue recognition impacting millions of customer transactions for interim and annual periods from January 1, 2005 to September 30, 2012. For the year ended December 31, 2014, we concluded that the circumstances that allowed the errors in the misapplication of GAAP in revenue recognition and other financial statement balances to go undetected for an extended period of time, which necessitated the restatement of historical financial statements, were indicative of several control deficiencies, including: • Risk Assessment - We did not have an effective risk assessment process. From a governance perspective, we historically did not have a formal process to identify, update and assess risks, including changes in our business practices, that could significantly impact our consolidated financial statements as well as the system of internal control over financial reporting. • Control Environment - We did not maintain an effective control environment, which is the foundation for the discipline and structure necessary for effective internal control over financial reporting, as evidenced by: (i) an insufficient number of personnel appropriately qualified to perform control monitoring activities, including the recognition of the risks and complexities of our transactions and business operations, (ii) an insufficient number of personnel with an appropriate level of GAAP knowledge and experience or ongoing training in the application of GAAP commensurate with our financial reporting requirements, which resulted in erroneous judgments regarding the proper application of GAAP, and (iii) insufficient corporate involvement to adequately exercise appropriate oversight of accounting judgments and estimates. • Control Activities - We did not have control activities that were designed and operating effectively, including controls over the inputs inherent in the Company’s revenue recognition models. Control activities that were historically in place (i) did not always address relevant risks, (ii) were sometimes performed with incomplete information and (iii) were not performed on all relevant transactions. In addition, the level of precision of the management review controls was not sufficient to identify all potential errors. • Information and Communications - We did not implement appropriate information technology controls related to change management and access for certain information systems that are relevant to the preparation of the consolidated financial statements and our system of internal control over financial reporting. As a result of the material weaknesses identified, there is a possibility that the effectiveness of business process controls, which are dependent on the affected information systems or electronic data and financial reports generated from the affected information systems, may be adversely affected. • Monitoring Activities - We did not maintain effective monitoring of controls related to the financial close and reporting process. During the year ended December 31, 2015, we have designed and implemented effective risk assessment controls to remediate the deficiencies in our risk assessment process. With respect to the control environment deficiency, we believe we have made progress in changes to our staffing levels and skills in place to (i) identify and address risks and judgmental accounting matters, (ii) ensure appropriate application of GAAP and (iii) perform appropriate oversight and monitoring activities. In light of the magnitude of the restatement and the significant changes 95 to processes experienced in 2015, we do not believe the enhancements in our control environment have been in place for a sufficient period of time to allow us to conclude that the control environment is effective as of December 31, 2015. For the deficiency on control activities, with the assistance of our internal audit department that we have outsourced to a big four accounting firm, we have completed a design assessment of all transaction cycles, identified gaps in control design and have formulated a remediation plan to address each gap noted, however, we have not yet implemented all new controls needed to address design gaps and, for those controls that have been implemented, we have not been able to evidence that controls were operating for a sufficient period of time to allow us to conclude that they are effective. For the information systems deficiency, and in particular information systems that relate to revenue recognition, being mindful of the new revenue recognition standard that will have a pervasive impact on our revenue recognition models, we are in the process of completing a sustainable design of controls that strikes a balance between processes and systems necessary for the current revenue recognition models and those that will be required prospectively. As these activities were still in process as of December 31, 2015, the deficiency noted above related to information and communication systems continues to exist as of December 31, 2015. Lastly, the deficiency related to monitoring continues to exist at December 31, 2015. We believe that remediation of the deficiencies in the control environment, control activities and information systems is necessary before an appropriate monitoring program can be effectively implemented. Between September 2014 and May 2015, as we completed the restatement of our historical financial statements and regained our status as a current filer with the SEC, we filed two Annual Reports on Form 10-K and four Quarterly Reports on Form 10-Q, covering over 10 years of financial data in this eight month period. Due to the compressed timeframe of these filings and significant level of effort devoted to completing the restatement and getting caught up on filings, we did not have sufficient time during the remainder of 2015 to fully remediate the aforementioned deficiencies and demonstrate that new and enhanced controls were operating for a sufficient period of time to conclude they were effective. As a result, certain control deficiencies described herein continued to exist as of December 31, 2015. We believe the control deficiencies described herein, individually and when aggregated, represent material weaknesses in our internal control over financial reporting at December 31, 2015 since such deficiencies result in a reasonable possibility that a material misstatement in our annual or interim consolidated financial statements may not be prevented or detected on a timely basis by our internal controls. As a result of our assessment, we have therefore concluded that our internal control over financial reporting was not effective at December 31, 2015. To address the material weaknesses discussed above, management intends to finalize its efforts around implementing effective internal controls and closely test and monitor the operating effectiveness of these controls throughout 2016 to ensure they meet their designed control objectives and, where necessary, take additional corrective measures to ensure that deficiencies are remediated. With respect to controls over information systems that relate to revenue recognition, we are in the process of working with software vendors and third-party consultants to design appropriate automated controls over revenue recognition. Due to the complexity of our revenue recognition models and the volume of transactions we apply them to, we utilize a highly customized revenue recognition system to calculate revenue recognition in accordance with GAAP. As our system is highly customized and not an established, mature system, implementing systematic automated controls requires significant time and investment. In addition, with the issuance of ASU 2014-09, Revenue From Contracts With Customers, that we could adopt as early as January 1, 2017, which supersedes nearly all existing revenue recognition guidance, additional changes to our customized software solution and the processes that surround it will be necessary to comply with the new accounting standards. We plan to continue to implement automated controls and processes in 2016 that address both current and prospective GAAP requirements. The management team was able to obtain a reasonable level of assurance that revenue recognition and other financial statement balances were accurate and complete through highly substantive validation procedures and review processes. As a result of these procedures, we believe that the consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2015 fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP. We believe that the remediation measures described above will strengthen our internal control over financial reporting and remediate the material weaknesses we have identified. We expect that our remediation efforts, including design, implementation and testing will continue throughout fiscal year 2016. 96 Changes in Internal Control over Financial Reporting As described above under “Material Weakness Discussion and Remediation,” we have undertaken a broad range of remedial actions to address the material weaknesses in our internal control over financial reporting, including changes in staffing, as well as design and implementation of new controls. These remedial procedures continued throughout the quarter ended December 31, 2015. Inherent Limitation on the Effectiveness of Internal Controls The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not absolute, assurances. In addition, 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. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure that such improvements will be sufficient to provide us with effective internal control over financial reporting. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Avid Technology, Inc. Burlington, Massachusetts We have audited the internal control over financial reporting of Avid Technology, Inc. and subsidiaries (the “Company”) as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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, included in the accompanying management’s annual report on internal control over financial reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit 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. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 97 A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's assessment: an ineffective control environment, ineffective control activities, ineffective information and communications controls, and ineffective monitoring controls. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the Company’s consolidated financial statements as of and for the year ended December 31, 2015 and this report does not affect our report on such financial statements. In our opinion, because of the effect of the material weaknesses identified above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s consolidated financial statements as of and for the year ended December 31, 2015, and our report dated March 15, 2016 expressed an unqualified opinion on those financial statements. /s/ Deloitte & Touche LLP Boston, Massachusetts March 15, 2016 ITEM 9B. OTHER INFORMATION Not Applicable. 98 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 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, 75 Network Drive, Burlington, MA 01803, Attention: Corporate Secretary. Our Code of Business Conduct and Ethics is also available in the Investor Relations section of our website at www.avid.com. If we were to amend or waive any provision of our Code of Business Conduct and Ethics applicable to any of our principal executive officers, our principal financial officer, our principal accounting officer or any person performing similar functions, we intend to satisfy our disclosure obligations with respect to any such waiver or amendment by posting such information on our Internet website set forth above rather than by filing a Form 8-K. The remainder of the response to this item will be contained in our Proxy Statement for our 2016 Annual Meeting of Stockholders, or the 2016 Proxy Statement, under the captions “Directors,” “Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Board Committees” and “Director Nomination Process,” all of which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The response to this item will be contained in our 2016 Proxy Statement under the captions “Director Compensation,” “Executive Compensation,” “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation” 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 will be contained in our 2016 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 will be contained in the 2016 Proxy Statement under the caption “Equity Compensation Plan Information” and are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The response to this item will be contained in our 2016 Proxy Statement under the captions “Board Committees” and “Related Person Transaction Policy” and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The response to this item will be contained in our 2016 Proxy Statement under the caption “Independent Registered Public Accounting Firm Fees” and is incorporated herein by reference. 99 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES PART IV (a) 1. FINANCIAL STATEMENTS The following consolidated financial statements are included in Item 8: - Report of Independent Registered Public Accounting Firm - Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013 - Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013 - Consolidated Balance Sheets as of December 31, 2015 and 2014 - Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2015, 2014 and 2013 - Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 - Notes to Consolidated Financial Statements (a) 3. LISTING OF EXHIBITS. The list of exhibits, which are filed or furnished with this report or are incorporated herein by reference, is set forth in the Exhibit Index immediately preceding the exhibits and is incorporated herein by reference. 100 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. SIGNATURES AVID TECHNOLOGY, INC. (Registrant) By: /s/ Louis Hernandez, Jr. Louis Hernandez, Jr. Chairman, Chief Executive Officer and President (Principal Executive Officer) Date: March 15, 2016 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/ Louis Hernandez, Jr. Louis Hernandez, Jr. Chairman, Chief Executive Officer and President (Principal Executive Officer) By: By: /s/ John W. Frederick John W. Frederick Executive Vice President, Chief Financial Officer and Chief Administrative Officer (Principal Financial Officer) /s/ Ryan H. Murray Ryan H. Murray Vice President of Finance and Chief Accounting Officer (Principal Accounting Officer) Date: March 15, 2016 Date: March 15, 2016 Date: March 15, 2016 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 /s/ Louis Hernandez, Jr. Louis Hernandez, Jr. /s/ Nancy Hawthorne Nancy Hawthorne /s/ Robert M. Bakish Robert M. Bakish /s/ Paula E. Boggs Paula E. Boggs /s/ Elizabeth M. Daley Elizabeth M. Daley /s/ Youngme E. Moon Youngme E. Moon /s/ John H. Park John H. Park /s/ Peter Westley Peter Westley TITLE DATE Chairman of the Board of Directors March 15, 2016 Lead Director March 15, 2016 March 15, 2016 March 15, 2016 March 15, 2016 March 15, 2016 March 15, 2016 March 15, 2016 Director Director Director Director Director Director 101 EXHIBIT INDEX Incorporated by Reference Filed with this Form 10-K Form or Schedule 8-K SEC Filing Date July 27, 2005 SEC File Number 000-21174 10-Q November 14, 2005 000-21174 8-K October 21, 2011 000-21174 S-1 March 11, 1993* 033-57796 8-K January 7, 2014 000-21174 8-K January 7, 2014 000-21174 8-K November 25, 2009 000-21174 8-K November 25, 2009 000-21174 Description Certificate of Amendment of the Third Amended and Restated Certificate of Incorporation of the Registrant Third Amended and Restated Certificate of Incorporation of the Registrant Amended and Restated By-Laws of the Registrant, as amended Specimen Certificate representing the Registrant’s Common Stock Rights Agreement, dated as of January 6, 2014, between Registrant and Computershare Trust Company, N.A. as Rights Agent, including all exhibits thereto Amended Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock Network Drive at Northwest Park Office Lease dated as of November 20, 2009 between Avid Technology, Inc. and Netview 5 and 6 LLC (for premises at 65 Network Drive, Burlington, Massachusetts) Network Drive at Northwest Park Office Lease dated as of November 20, 2009 between Avid Technology, Inc. and Netview 1,2,3,4 & 9 LLC (for premises at 75 Network Drive, Burlington, Massachusetts) 1993 Director Stock Option Plan, as amended 10-K February 29, 2008 000-21174 Second Amended and Restated 1996 Employee Stock Purchase Plan, as amended Amendment No #2 to Second Amended and Restated 1996 Employee Stock Purchase Plan, as amended 10-K March 16, 2010 000-21174 10-K September 12, 2014 001-36254 1997 Stock Option Plan 10-K March 27, 1998 000-21174 1997 Stock Incentive Plan, as amended 10-Q May 14, 1997 000-21174 Second Amended and Restated Non-Qualified Deferred Compensation Plan 10-K February 29, 2008 000-21174 1998 Stock Option Plan 10-K March 16, 2005 000-21174 Amended and Restated 1999 Stock Option Plan 10-K March 16, 2005 000-21174 Amended and Restated 2005 Stock Incentive Plan 10-Q August 7, 2008 000-21174 Amendment No. 1 to Amended and Restated 2005 Stock Incentive Plan Form of Incentive Stock Option Agreement under the Registrant’s Amended and Restated 2005 Stock Incentive Plan Form of Nonstatutory Stock Option Agreement under the Registrant’s Amended and Restated 2005 Stock Incentive Plan 10-K September 12, 2014 001-36254 10-K September 12, 2014 001-36254 10-K September 12, 2014 001-36254 Exhibit No. 3.1 3.2 3.3 4.1 4.2 4.3 10.1 10.2 #10.3 #10.4 #10.5 #10.6 #10.7 #10.8 #10.9 #10.10 #10.11 #10.12 #10.13 #10.14 #10.15 #10.16 #10.17 #10.18 #10.19 #10.20 #10.21 #10.22 #10.23 #10.24 #10.25 #10.26 #10.27 #10.28 #10.29 #10.30 #10.31 #10.32 #10.33 10.34 10.35 Form of Nonstatutory Stock Option Agreement for Outside Directors under the Registrant’s Amended and Restated 2005 Stock Incentive Plan Form of Restricted Stock Unit Agreement under the Registrant’s Amended and Restated 2005 Stock Incentive Plan Form of Restricted Stock Unit Agreement for Outside Directors under the Registrant’s Amended and Restated 2005 Stock Incentive Plan Form of Stock Option Agreement for UK Employees under the HM Revenue and Customs Approved Sub-Plan for UK Employees under the Registrant’s Amended and Restated 2005 Stock Incentive Plan Form of Nonstatutory Stock Option Grant Terms and Conditions (under the 1997 Stock Incentive Plan) Form of Incentive Stock Option Grant Terms and Conditions (under the 1997 Stock Incentive Plan) 2014 Stock Incentive Plan Form of Restricted Stock Unit Agreement under the Registrant’s Amended and Restated 2014 Stock Incentive Plan Form of NSO Agreement under the Registrant’s 2014 Stock Incentive Plan Form of ISO/NSO Agreement under the Registrant’s 2014 Stock Incentive Plan Separation Agreement dated February 6, 2013 between Registrant and Gary G. Greenfield Consulting and Separation Agreement dated April 22, 2013 between the Registrant and Kenneth A Sexton Amended and Restated Executive Employment Agreement dated December 22, 2010 between the Registrant and Christopher C. Gahagan Form of Executive Officer Employment Letter as of January 1, 2012 Summary of 2013 Annual Executive Incentive Program Executive Employment Agreement dated February 11, 2013 between the Registrant and Louis Hernandez, Jr. Amended and Restated Executive Employment Agreement dated April 22, 2013 between the Registrant and John Frederick 2013 Remediation Bonus Plan Summary of 2014 Annual Executive Incentive Program Agreement and Plan of Merger, dated as of April 12, 2015, by and among Orad Hi-Tech Solutions Form of Voting and Support Agreement between Avid Technology, Inc. and certain shareholders of Orad Hi-Tech Solutions Ltd. 8-K July 8, 2008 000-21174 8-K July 8, 2008 000-21174 8-K July 8, 2008 000-21174 8-K July 8, 2008 000-21174 8-K February 21, 2007 000-21174 8-K February 21, 2007 000-21174 10-K March 16, 2015 001-36254 10-K March 16, 2015 001-36254 10-K March 16, 2015 001-36254 10-K March 16, 2015 001-36254 8-K/A February 12, 2013 000-21174 10-Q September 12, 2014 001-36254 10-K March 14, 2011 000-21174 10-K February 29, 2012 000-21174 10-K September 12, 2014 001-36254 8-K/A February 12, 2013 000-21174 10-Q September 12, 2014 001-36254 8-K 10-Q 8-K 8-K July 25, 2013 000-21174 September 23, 2014 001-36254 April 13, 2015 001-36254 April 13, 2015 001-36254 8-K April 13, 2015 001-36254 10-Q May 8, 2015 001-36254 8-K/A June 16, 2015 001-36254 8-K/A June 16, 2015 001-36254 8-K June 23, 2015 001-36254 10-Q November 6, 2015 001-36254 10.36 #10.37 10.38 10.39 10.40 #10.41 10.42 21 23.1 31.1 31.2 32.1 Financing Commitment Letter, dated April 12, 2015, by and between Avid Technology, Inc. and the Lenders specified therein Summary of Avid Technology, Inc.’s 2015 Executive Bonus Plan Indenture, dated as of June 15, 2015, between Avid Technology, Inc. and Wells Fargo Bank, National Association (including the form of 2.00% Convertible Senior Notes due 2020) Base capped call transaction confirmation, dated as of June 9, 2015, by and between Jefferies International Limited and Avid Technology, Inc., in reference to the 2.00% Convertible Senior Notes due 2020 Credit Agreement among Avid Technology, Inc., the Lenders named therein and KeyBank National Association dated June 22, 2015 Second Amended and Restated 1996 Employee Stock Purchase Plan, as amended July 2015 Financing Agreement, dated February 26, 2016, among Avid Technology, Inc., the Lenders named therein and Cerberus Business Finance, LLC. Subsidiaries of the Registrant Consent of Deloitte & Touche LLP 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 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 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **100.INS XBRL Instance Document **100.SCH XBRL Taxonomy Extension Schema Document **100.CAL XBRL Taxonomy Calculation Linkbase Document **100.DEF XBRL Taxonomy Definition Linkbase Document **100.LAB XBRL Taxonomy Label Linkbase Document **100.PRE XBRL Taxonomy Presentation Linkbase Document ______________________________________ X X X X X X X X X X X X # * ** Management contract or compensatory plan identified pursuant to Item 15(a)3. Effective date of Form S-1. Pursuant to Rule 406T of Regulation S-T, XBRL (Extensible Business Reporting Language) information is deemed not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934 and otherwise is not subject to liability under these sections. (This page has been left blank intentionally.) Consolidated Statements of Operations Data (in thousands except per share data) Year ended December 31, Net revenues Net income Net income per share (basic) 2015 $505,595 $2,480 $0.06 2014 $530,251 $14,728 $0.38 2013 $563,412 $21,153 $0.54 Consolidated Balance Sheet Data (in thousands except employee data) As of December 31, Cash and marketable securities Total assets Total stockholders’ (deficit) Employees 2015 $17,902 $247,926 ($329,572) 1,522 2014 $25,056 $191,599 ($341,070) 1,413 2013 $48,203 $235,142 ($359,335) 1,478 Worldwide Offices Beijing Boca Raton Brussels Burlington Cologne Dubai Dublin Helsinki Hilversum Hong Kong Kaiserslautern Kfar Saba London Los Angeles Madrid Montreal Mountain View Munich New York Paris Seoul Singapore Stockholm Sydney Szczecin Taipei City Taguig City Tokyo Washington, D.C Wroclaw Avid Corporate Headquarters 75 Network Drive Burlington, MA 01803 tel 978 640 6789 www.avid.com Independent Registered Public Accountants BDO USA, LLP Boston, Massachusetts Transfer Agent and Registrar Computershare P.O. Box 30170 College Station,TX 77842-3170 Shareholder website www.computershare.com Shareholder online inquiries www.computershare.com Common Shares Traded on The Nasdaq Global Select Market under the symbol “AVID” Shareholder Inquiries Inquiries related to the Company, its activities, or its securities should be addressed to: Jonathan Huang Vice President, Investor Relations 75 Network Drive Burlington, MA 01803 tel 978 640 5126 jonathan.huang@avid.com Board of Directors Louis Hernandez, Jr. Chairman, President and Chief Executive Officer Avid Technology, Inc. Robert M. Bakish President and Chief Executive Officer, Viacom International Media Networks Paula E. Boggs Owner, Boggs Media LLC Dr. Elizabeth M. Daley Dean, University of Southern California School of Cinematic Arts Nancy Hawthorne Lead Director, Avid Technology, Inc.; Partner, Hawthorne Financial Advisors Dr. Youngme E. Moon Senior Associate Dean for Strategy and Innovation; Donald K. David Professor of Business Administration, Harvard Business School John H. Park Partner, Jackson Park Capital, LLC Peter M. Westley Partner, Blum Capital Partners, L.P. Executive Management Louis Hernandez, Jr. Chairman, President and Chief Executive Officer Jason Duva Senior Vice President, General Counsel and Corporate Secretary John Frederick Executive Vice President, Chief Financial Officer and Chief Administrative Officer Rick Lowenstein Senior Vice President of Customer Success and Professional Services Ryan Murray Vice President of Finance and Chief Accounting Officer Jeff Rosica Senior Vice President, Chief Sales and Marketing Officer Dana Ruzicka Vice President and Chief Product Officer On March 30, 2016 the Audit Committee of the Board of Directors of the Company dismissed Deloitte & Touche LLP as the Company’s independent registered public accounting firm, effective immediately and appointed BDO USA, LLP as its independent registered public accounting firm. For more information please see “Proposal 3 – Ratification of the Selection of our Independent Registered Public Accounting Firm” in our Proxy Statement, which is being delivered herewith and incorporated herein. © 2016 Avid Technology, Inc. All rights reserved. Product features, specifications, system requirements and availability are subject to change without notice. Avid, the Avid logo, and other Avid trademarks are either registered trademarks or trademarks of Avid Technology, Inc. or its subsidiaries in the United States and/or other countries. Oscar is a trademark and service mark of the Academy of Motion Picture Arts and Sciences. Emmy is a registered trademark of ATAS/NATAS. Grammy is a trademark of the National Academy of Recording Arts and Sciences, Inc. iPad is a registered trademark of Apple Inc. The name Interplay is used with the permission of Interplay Entertainment Corp., which bears no responsibility for the product. All other trademarks contained herein are the property of their respective owners. Avid 75 Network Drive Burlington, MA 01803 USA www.avid.com 

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