Creative 2002 Annual Report Download - page 47

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NOTE 15 – BUSINESS COMBINATION
In May 2002, Creative completed the acquisition of 3Dlabs, a graphics vendor, supplying graphics accelerator solutions for
professionals in Computer Aided Design (“CAD”), Digital Content Creation (“DCC”), and visual simulation markets.
Creative believes that the acquisition will provide Creative a significant competitive advantage in the graphics space and
allow Creative to re-emphasize graphics products.
To acquire the remaining outstanding capital stock of 3Dlabs, Creative paid $37.0 million in cash, issued approximately
6.3 million shares of Creative’s ordinary shares valued at approximately $71.7 million at the time of closing, and assumed
3Dlabs’ outstanding options exercisable into approximately 1.6 million shares of Creative ordinary shares valued at
approximately $12.0 million at the time of closing. As a result of the acquisition, Creative also assumed 3Dlabs net
liabilities of $21.1 million. In addition, Creative incurred approximately $1.3 million in transaction fees, including legal,
valuation and accounting fees. The ordinary shares issued were valued in accordance with EITF Issue No. 99-12,
“Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business
Combination,” using the average for the Creative closing prices ordinary shares during the two days before and two days
after (and including) the day on which the total number of Creative shares issuable to holders of 3Dlabs common shares
were fixed and determinable. The assumed stock options were valued using the Black-Scholes valuation model, with a
volatility rate of 60%, a risk-free interest rate of 2.20% to 4.93%, expected dividend yield of 2.5%, and an estimated vest
term of 0.01 years after vest date.
Of the total assumed stock options of 3Dlabs, approximately 1.3 million stock options with an intrinsic value of $7.0
million were unvested. In accordance with FASB Interpretation No. 44, “Accounting for Certain Transactions Involving
Stock Compensation,” these unvested options were accounted for as deferred stock-based compensation and are being
recognized as compensation expense over their related vesting periods. Total stock-based compensation expense with
respect to the unvested options totaled $0.3 million in fiscal 2002.
Creative accounted for the acquisition using the purchase method of accounting and has included the results of 3Dlabs
from the acquisition date of May 15, 2002. The allocation of the purchase price to in-process technology and identifiable
intangible assets acquired was based on independent appraisals. The income approach, which includes an analysis of the
markets, cash flows and risks associated with achieving such cash flows, was the primary technique utilized in valuing the
existing technology, in-process technology and non-competition agreements. The estimated net free cash flows generated
by the existing technology, in-process technology and non-competition agreements were discounted at rates ranging from
16% to 40%. In estimating the fair value of the patents/core technology and trade name/trademarks, royalty savings
approach was used, whereby the value of an asset was estimated by capitalizing the royalties saved, with discount rates
ranging from 18% to 28%.
The following table summarizes the estimated fair values of the tangible assets acquired and the liabilities assumed at the
date of acquisition (in US$’000):
Cash $ 11,285
Other current assets 13,899
Property and equipment 10,717
Total assets acquired 35,901
Total liabilities assumed (56,963)
Net liabilities assumed $ (21,062)