Adaptec 2002 Annual Report Download - page 58

Download and view the complete annual report

Please find page 58 of the 2002 Adaptec annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 114

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114

The Company relies on a limited number of suppliers for wafer fabrication
capacity.
Revenue recognition. Revenues from product sales direct to customers and minor distributors are recognized
at the time of shipment. The Company accrues for warranty costs, sales returns and other allowances at the
time of shipment based on its experience. Certain of the Company's product sales are made to major
distributors under agreements allowing for price protection and/or right of return on products unsold.
Accordingly, the Company defers recognition of revenue on such sales until a distributor sell the products.
Product warranties. The Company provides a one−year limited warranty on most of its standard products and
accrues for the cost of this warranty based on its experience at the time of shipment. Reconciliation of the
product warranty liability for the year ended December 31, 2002 is as follows:
(in thousands)
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
Beginning balance $ 2,421
Accrual for new warranties issued 946
Reduction for payments (in cash or in kind) (576)
Adjustments related to changes in estimate
of warranty accrual (392)
−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−
$ 2,399
================
The semiconductor industry is subject to volatility in shipment levels and the rate of warranty returns
tends to fluctuate depending on whether the industry is in times of growth or contraction. The Company
adjusts its rate of accrual to reflect the level of returns typical of the industry cycle.
Stock−based compensation. The Company accounts for stock−based compensation in accordance with the intrinsic
value method prescribed by APB Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees". Under
APB 25, compensation is measured as the amount by which the market price of the underlying stock exceeds the
exercise price of the option on the date of grant; this compensation is amortized over the vesting period.
Pro forma information regarding net income (loss) and net income (loss) per share is required by SFAS 123
for awards granted or modified after December 31, 1994 as if the Company had accounted for its stock−based
awards to employees under the fair value method of SFAS 123. The fair value of the Company's stock−based
awards to employees was estimated using a Black−Scholes option pricing model. The Black−Scholes model was
developed for use in estimating the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, the Black−Scholes model requires the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's stock−based awards to employees have
characteristics significantly different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of its stock−based awards to
employees. The fair value of the Company's stock−based awards to employees was estimated using the multiple
option approach, recognizing forfeitures as they occur, assuming no expected dividends and using the
following weighted average assumptions:
56