Avid 2005 Annual Report Download - page 74

60
D. INVENTORIES
Inventories consist of the following (in thousands):
December 31,
2005 2004
Raw materials $26,878 $14,925
Work in process 13,040 3,622
Finished goods 56,927 35,399
$96,845 $53,946
Of the $42.9 million increase in inventory since December 31, 2004, approximately $27.3 million relates to acquired Pinnacle
inventory, of which $4.8 million, $6.8 million and $15.7 million represents raw material, work in process, and finish goods as of
December 31, 2005, respectively. As of December 31, 2005 and 2004, the finished goods inventory also included inventory at
customer locations of $8.9 million and $9.0 million, respectively, associated with product shipped to customers for which revenue
had not yet been recognized.
E. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
Depreciable December 31,
Life 2005 2004
Computer and video equipment and software 2 to 5 years $111,207 $92,862
Office equipment 3 years 3,850 6,872
Furniture and fixtures 3 years 12,209 7,101
Leasehold improvements 3 to 10 years 23,493 20,865
150,759 127,700
Less accumulated depreciation and amortization 112,196 98,608
$38,563 $29,092
Depreciation and amortization expense related to property and equipment was $16.8 million, $12.0 million and $10.9 million for the
years ended December 31, 2005, 2004 and 2003, respectively. The Company wrote off fully depreciated assets with gross values of
$2.3 million, $6.2 million and $2.1 million in 2005, 2004 and 2003, respectively.
F. ACQUISITIONS
Pinnacle
On August 9, 2005, Avid completed the acquisition of California-based Pinnacle Systems, Inc., a supplier of digital video products
to customers ranging from individuals to broadcasters. Under the terms of the agreement, Pinnacle common shareholders received
0.0869 of a share of Avid common stock plus $1.00 in cash for each share of Pinnacle common stock outstanding at the closing
of the transaction. In total, Avid paid $72.1 million in cash and issued 6.2 million shares of common stock, resulting in common
stock consideration of approximately $362.9 million, in exchange for all of the outstanding shares of Pinnacle. The price used to
value the Avid shares issued as partial consideration for Pinnacle was $58.09 per share of Avid common stock, which represents
the five-day average closing price of the stock during the period beginning two days before and ending two days after the merger
announcement date of March 21, 2005. Avid also incurred $6.5 million of transaction costs.
The acquisition of Pinnacle was made to allow Avid to expand its offerings within the Professional Video market segment through
the integration of Pinnacle’s broadcast and professional offerings, including the Deko on-air graphics system and the MediaStream
playout server, into that segment and to provide entry into a new Consumer Video segment by offering Pinnacle’s consumer
products, including Pinnacle Studio and other products. The Company has performed an allocation of the total purchase price
of $441.4 million to the net tangible and intangible assets of Pinnacle based on their fair values as of the consummation of the
acquisition. The determination of these fair values included Avid management’s consideration of a valuation of Pinnacle’s intangible
assets prepared by an independent valuation specialist. The valuation method used to determine the intangible asset values was
the income approach.
The income approach presumes that the value of an asset can be estimated by the net economic benefit, usually the cash flows
discounted to present value, to be received over the life of the asset. The income approach typically uses a projection of revenues
and expenses specifically attributed to the intangible assets to calculate a potential income stream which is then discounted using a
rate of return that accounts for both the time value of money and risk factors. This approach was used to value Pinnacle’s developed
technology, in-process research and development (“R&D”) and customer relationships.