Avid 2000 Annual Report Download - page 26

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In connection with the August 1998 acquisition of the business of Softimage, we allocated $28.4 million to in-
process research and development. In-process research and development represents development projects in areas that have
not reached technological feasibility and have no alternative future use. Accordingly, $28.4 million was expensed as of the
acquisition date and was reflected as a special charge to operations in 1998. The amounts allocated to acquired in-process
research and development were based on results of an independent appraisal. The values of 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 initial feature set. As of the acquisition date, we had 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. We actually incurred approximately $12.9 million on
this project through May 2000, at which time the product, SOFTIMAGE|XSI 1.0, was released. Total development
costs to complete this project were higher than originally anticipated due to challenges encountered in the development
process which caused a significant delay in the release of the product.
• 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 related principally 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, we had 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. The project was completed in December
1999 at a cost of approximately $7.8 million. Development costs were higher than originally anticipated due to the
addition of features and functionality, which expanded the scope of the original project.
The value of in-process research and development, specifically, was determined by estimating the costs to develop
the in-process projects into commercially viable products, estimating the resulting net cash flows from such projects,
discounting the net cash flows back to their present values, and adjusting that result to reflect each projects stage of
completion. The expected cash flows of the in-process projects were adjusted to reflect the contribution of completed and
core technologies. At the time of acquisition, total revenues from these in-process projects were forecasted to peak in 2002
and then to decline from 2002 to 2004 as new products were expected to be introduced by the Company. These revenue
forecasts were based on managements estimate of market size and growth, expected trends in technology, and the expected
timing of new product introductions. A discount rate of 21% was used for valuing the in-process research and development.
The discount rate was higher than our implied weighted average cost of capital due to the inherent uncertainties surrounding
the successful development of the in-process research and development and the related risk of realizing cash flows from
products that have not yet reached technological feasibility, among other factors.
Amortization of Acquisition-related Intangible Assets
In connection with the August 1998 acquisition of the business of Softimage, we allocated $127.8 million to
goodwill and $88.2 million to intangible assets consisting of completed technologies, workforce, and trade name. Included
in the operating results for 2000, 1999 and 1998 is amortization of these intangible assets and goodwill of $66.5 million,
$79.9 million, and $34.2 million, respectively. (See Note F to the Consolidated Financial Statements). During 1999, a
balance sheet purchase accounting adjustment was recorded which decreased goodwill by approximately $6.9 million. The
balance of the intangible assets, including goodwill, was $28.5 million at December 31, 2000. The remaining $28.5 million
is expected to be amortized through July 2001.
The amounts allocated to identifiable tangible and intangible assets were based on results of an independent
appraisal. The values of completed technologies were determined using a risk-adjusted, discounted cash flow approach. As
of the acquisition date, total revenues from the completed technologies were forecasted to peak in 1999 and to decline
through 2001. The Company discounted the net cash flows of the completed technologies to their present value using a
discount rate of 16%.
Other Income and Expense, Net