Avid 1998 Annual Report Download - page 22

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marketing expense in 1997 was primarily due to the effect of the restructuring of the Company’ s sales and marketing
operations during the first quarter of 1997 to an indirect sales model. The Company had shifted its primary distribution
emphasis from a direct sales force to indirect sales channels, which reduced certain costs including direct sales
compensation and office overhead expenses in 1997 and 1998. The reduction in 1997 costs was partially offset by the
allocation in 1997 of product marketing costs to sales and marketing rather than to research and development. Marketing
and selling expenses increased as a percentage of net revenues to 26.0% in 1998 from 25.5% in 1997, and decreased as a
percentage of net revenues from 29.6% in 1996. The increase in 1998 was primarily due to the increases in selling and
marketing expenses noted above. The decrease in 1997 was primarily due to the increase in net revenues in 1997 compared
to 1996.
General and Administrative
General and administrative expenses increased $2.7 million (10.6%) in the year ended December 31, 1998 compared to
1997 and increased by $1.6 million (6.6%) in the year ended December 31, 1997 compared to 1996. The increased
expenditures in 1998 were primarily due to five months of incremental Softimage costs as well as higher compensation
related costs. The increase in general and administrative expenses for 1997 compared to 1996 was primarily due to
provisions resulting from the Company’ s profit sharing plan. General and administrative expenses increased as a
percentage of net revenues to 5.9% in 1998 from 5.5% in 1997, and from 5.6% in 1996. The increase in 1998 was
primarily due to the increases in general and administrative expenses noted above.
Nonrecurring Costs and Amortization of Acquisition-related Intangible Assets
In connection with the August 1998 acquisition of the business of Softimage, the Company allocated $28.4 million to in-
process research and development; $88.2 million to intangible assets consisting of completed technologies, work force and
trade name; and $127.8 million to goodwill. In-process research and development represented development projects in
areas that had not reached technological feasibility and had no alternative future use. Accordingly, its value of $28.4
million was expensed as of the acquisition date and is reflected as a nonrecurring charge to operations in 1998. Results for
the year ended December 31, 1998 also reflect amortization of $34.2 million associated with the acquired intangible assets,
including goodwill, as well as a tax benefit of $8.2 million related to the charge for in-process research and development
(see Note O and Q to the Consolidated Financial Statements).
The amounts allocated to identifiable tangible and intangible assets, including acquired in-process research and
development, were based on results of an independent appraisal. The values of completed technologies and in-process
research and development were determined using a risk-adjusted, discounted cash flow approach.
In-process research and development projects identified at the acquisition date included next-generation three-dimensional
modeling, animation and rendering software, and new graphic, film and media management capabilities for effects-
intensive, on-line finishing applications for editing. A description of each project follows:
• Next Generation Three-Dimensional Modeling, Animation and Rendering Software. The efforts required to develop
this project into a commercially viable product principally relate to completion of the animation and real-time playback
architecture, completion and integration of architectural software components, validation of the resulting architecture,
and finalization of the feature set. As of the acquisition date, the Company assessed that the overall project was 81%
complete and calculated a value of $25.7 million for this in-process research and development. The estimated costs to
complete this project as of the acquisition date were $5.1 million, of which $3.2 million has been incurred through
December 31, 1998. The Company currently expects to incur $4.4 million of additional costs during fiscal year 1999.
Development costs through December 31, 1998 and as expected to be incurred in the future are higher than originally
anticipated due to challenges encountered in the development process. Anticipated completion of this project is
expected during the second half of 1999, at which time the Company expects to begin to benefit economically.
• New Graphics, Film and Media Management Capabilities for Effects-Intensive, On-line Finishing. The efforts required
to develop this project into a commercially viable product principally relate to the rebuilding of the framework
architecture, the rewriting of software code of the compositing engine to accommodate significant new features, and the
rewriting of software code of the titling component. As of the acquisition date, the Company assessed that the overall
project was 6% complete and calculated a value of $2.7 million for this in-process research and development. The
estimated costs to complete this project as of the acquisition date were $3.8 million, of which $2.5 million has been
incurred through December 31, 1998. The Company currently expects to incur $3.2 million of additional costs during