Avid 2006 Annual Report Download - page 52

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In March 2006, we implemented a restructuring program within our Consumer Video segment under which 23
employees worldwide, primarily in the marketing and selling and the research and development teams, were
notified that their employment would be terminated. The purpose of the program was to maximize the efficiency
of our organizational structure. In connection with this action, we recorded a charge of $1.1 million in the statement
of operations during the first quarter of 2006. In the third quarter of 2006, payments to these employees were
completed and approximately $0.1 million remaining in the related restructuring accrual was reversed. The
estimated annual cost savings expected to result from this restructuring action total approximately $3 million.
In December 2005, we implemented a restructuring program within our Professional Video segment under which
20 employees worldwide were terminated and a portion of a leased facility in Montreal, Canada was vacated. In
connection with these actions, we recorded charges of $0.8 million for employment terminations and $0.5 million
for facilities costs. The estimated annual cost savings expected to result from these restructuring activities total
$2.0 million. The remaining 2005 restructuring charge of $1.9 million primarily resulted from a revised estimate of
the lease obligation associated with a facility that was vacated as part of a restructuring plan in 1999. The revision
became necessary when one of the subtenants in the facility gave notice of their intention to discontinue their
sublease.
In-process Research and Development
We recorded in-process research and development, or R&D, charges of:
•฀ $0.5 million in the third quarter of 2006 related to the acquisition of Sibelius;
•฀ $0.3 million in the first quarter of 2006 related to the acquisition of Medea;
•฀ $32.3 million in the third quarter of 2005 related to the acquisition of Pinnacle, and
•฀ $0.1 million in the third quarter of 2005 related to the acquisition of Wizoo.
These in-process R&D charges represent product development efforts that were underway at Sibelius, Medea,
Pinnacle and Wizoo at the time of the respective acquisitions for which technological feasibility had not yet been
established. Technological feasibility is established when either of the following criteria is met: 1) detailed 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. As of the respective acquisition dates, Sibelius, Medea, Pinnacle and Wizoo
had not completed product designs or working models for the in-process technology, and we determined that
there was no future alternative use for the technologies beyond the stated purpose of the specific R&D projects;
therefore, the fair value of the in-process R&D efforts were expensed at the time of the respective acquisitions.
The key assumptions used in the in-process R&D valuations consisted of the expected completion dates for the
in-process projects, estimated costs to complete the projects, revenue and expense projections assuming future
release of the product and a risk-adjusted discount rate. The discount rate is based upon the weighted-average
cost of capital adjusted for risks such as delays or uncertainties in bringing the products to market and competitive
pressures. Such risks vary from acquisition to acquisition based on the characteristics of the acquired company and
the applications of the acquired technology. Projections of revenues and expenses, the estimated costs to complete
the projects and the determination of the appropriate discount rate reflect management’s best estimates of such
factors at the time of the valuation. For purposes of valuing the in-process R&D of Sibelius, Medea, Pinnacle and
Wizoo, we used discount rates of 19%, 20%, 17% and 22%, respectively.