Adaptec 2003 Annual Report Download - page 64

failure. PMC maintains accruals for potential returns based on its historical experience.
Research and development expenses. The Company expenses research and development (R&D) costs as incurred. R&D costs include
payroll−related costs, materials, services and design tools used in product development, depreciation, and other overhead costs
including facilities and computer equipment costs. For the years ended December 2003, 2002 and 2001, research and development
expenses were $119.5 million, $137.7 million and $201.1 million.
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. The following table summarizes the activity related to the product
warranty liability during fiscal 2003 and 2002:
December 31,
(in thousands) 2003 2002
Beginning balance $ 2,399 $ 2,421
Accrual for new warranties issued 1,152 946
Reduction for payments (in cash or in kind) (226) (576)
Adjustments related to changes in estimate of warranty accrual (428) (392)
$ 2,897 $ 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.
Other Indemnifications. From time to time, on a limited basis, the Company indemnifies customers, as well as suppliers, contractors,
lessors, and others with whom we have contracts, against combinations of loss, expense, or liability arising from various triggering
events related to the sale and use of Company products, the use of their goods and services, the use of facilities, the state of assets that
we sell and other matters covered by such contracts, usually up to a specified maximum amount.
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
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