Avid 2005 Annual Report Download - page 75

61
A variation of the income approach, the relief-from-royalty method, was used to value Pinnacle’s trade names. The relief-from-royalty
method uses a projection of revenues specifically attributed to the intangible assets to calculate an estimated royalty savings that
would accrue to an owner of the intangible assets that would otherwise have to be paid as royalty to a third party. The resulting
royalty savings stream is then discounted using a rate of return that accounts for the time value of money and risk factors. In the
valuation of Pinnacle’s trade names, a royalty rate of 1.0% – 1.5% was used to determine the royalty savings directly attributable to
the trade names.
The weighed-average discount rate (or rate of return) used to determine the value of Pinnacle’s intangible assets was 16% and the
effective tax rate used was 35%.
The following table summarizes the allocation of the purchase price to the estimated fair value of the assets acquired and liabilities
assumed at the date of acquisition. This allocation was originally done on a preliminary basis in the third quarter of 2005 (the quarter
in which Pinnacle was acquired). During the fourth quarter of 2005, the Company continued its analysis of the fair values of certain
assets and liabilities, in particular inventories, deferred tax assets and liabilities, pre-acquisition commitments made to customers
and accruals for facilities closures and employees terminations, and recorded adjustments to these estimates with a corresponding
increase in goodwill of $1.3 million.
(in thousands)
Cash and marketable securities $120,164
Accounts receivable, net 9,312
Inventories 18,699
Other current assets 7,859
Property and equipment and other long-term assets 12,925
Identifiable intangible assets:
Customer relationships 34,400
Trade names 15,200
Developed technology 41,200
In-process research and development 32,300
Goodwill 226,480
Total assets acquired 518,539
Accounts payable (11,069)
Accrued expenses and other current liabilities (46,052)
Deferred revenue and deposits (11,493)
Long-term deferred tax liabilities, net (8,542)
Total liabilities assumed (77,156)
Net assets acquired $441,383
The identifiable intangible assets, with the exception of the in-process research and development (“R&D”), are being amortized over
their estimated useful lives of six and one-half years for customer relationships, seven years for the trade names and two to three
years for the developed technology. The weighted average amortization period for these intangible assets in total is approximately
five years. These intangible assets are being amortized using the straight-line method, with the exception of developed technology.
Developed technology is being amortized on a product-by-product basis over the greater of the amount calculated using the
ratio of current quarter revenues to the total of current quarter and anticipated future revenues over the estimated useful lives
of two to three years, or the straight-line method over each product’s remaining respective useful life. Amortization expense for
these intangibles totaled $12.6 million for the year ended December 31, 2005 and accumulated amortization was $12.6 million at
December 31, 2005.
The allocation of $32.3 million to in-process R&D was determined through management’s consideration of a valuation prepared by
an independent valuation specialist. This in-process R&D represents product development efforts that were underway at Pinnacle
at the time of acquisition, for which technological feasibility had not yet been established. Technological feasibility is established
when either of the following criteria is met: 1) the detail program design has been completed, documented and traced to product
specifications and its high-risk development issues have been resolved; or 2) a working model of the product has been finished
and determined to be complete and consistent with the product design. Upon the acquisition, Pinnacle did not have a completed
product design or working model for the in-process technology, and the Company believes that there is no future alternative use
for such technology beyond the stated purpose of the specific R&D project; therefore the in-process R&D of $32.3 million was
expensed during the year ended December 31, 2005.