Adaptec 2001 Annual Report Download - page 24

24
In Process Research and Development (“ IPR& D” )
IPR& D charges were $38.2 million in 2000. There were no IPR&D charges in 2001 or 1999.
The amounts expensed to in process research and development in 2000 arose from the
acquisitions of M alleable and Datum. We did not make any acquisitions that were accounted
for using the purchase method in 2001 or 1999.
We calculated the charge for IPR&D related to M alleable and Datum by determining the fair
value of the existing products as well as the technology that was currently under development
using the income approach. Under the income approach, expected future after-tax cash flows
from each of the projects under development are estimated and discounted to their net present
value at an appropriate risk-adjusted rate of return. Revenues were estimated based on
relevant market size and growth factors, expected industry trends, individual product sales
cycles and the estimated life of each product’s underlying technology. Estimated operating
expenses, income taxes and charges for the use of contributory assets were deducted from
estimated revenues to determine estimated after-tax cash flow s for each project. These projected
future cash flows were further adjusted for the value contributed by any core technology and
development efforts expected to be completed post acquisition.
These forecasted cash flows were then discounted based on rates derived from our weighted
average cost of capital, w eighted average return on assets and venture capital rates of return
adjusted upward to reflect additional risks inherent in the development life cycle. The risk
adjusted discount rates used involved consideration of the characteristics and applications of
each product, the inherent uncertainties in achieving technological feasibility, anticipated levels
of market acceptance and penetration, market grow th rates and risks related to the impact of
potential changes in future target markets. After considering these factors, w e determined risk
adjusted discount rates of 35% and 30% for Malleable and Datum, respectively.
In our opinion, the pricing model used for products related to these acquisitions were standard
within the high-technology industry and the estimated IPR& D amounts so determined
represented fair value and did not exceed the amounts that a third party would have paid for
these projects. When w e acquired these companies, we did not expect to achieve a material
amount of expense reduction or synergies as a result of integrating the acquired in process
technology. Therefore, the valuation assumptions did not include anticipated cost savings.
A description of the IPR& D projects acquired is set forth below:
The in process technology acquired from M alleable was planned to detect incoming voice
channels and process them using voice compression algorithms. The compressed voice was to
be converted, using the appropriate protocols, to A TM cells or IP packets to achieve higher
channel density and support multiple speech compression protocols and different packetization
requirements. At the date of acquisition we estimated that Malleable’s technology was 58%
complete and the costs to complete the project to be $4.4 million.
The technology acquired from Datum is a digitally controlled amplifier architecture, which was
designed to increase base station system capacities, w hile reducing cost, size and power