Western Digital 2008 Annual Report Download - page 79

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conjunction with a related contract, asset, or liability. The recorded values and estimated useful lives of the intangibles
acquired from Komag were:
Estimated Fair
Value
Estimated
Weighted-Average
Useful Life
(in millions) (in years)
Existing technology .................................... $79 9.7
Customer substrate relationships............................ 10 3.0
Total acquired identifiable intangible assets .................... $89 9.0
Existing technology relates to Komag’s media and substrate products that have reached technological feasibility as
well as a combination of Komag’s processes, patents, and trade secrets developed through years of experience in the design
and production of its products. Existing technology was valued using the Excess Earnings Method under the Income
Approach. This approach reflects the present value of projected cash flows that a market participant would expect to
generate from these technologies less charges related to the contribution of other assets to those cash flows. The fair value
of the existing technology is being amortized to Cost of Revenue over the weighted average useful life of 9.7 years.
The fair value of customer substrate relationships was determined using the Excess Earnings Method under the
Income Approach based on the estimated revenues to be derived from Komag’s customers. This approach reflects the
present value of projected cash flows that a market participant would expect to generate from these customer substrate
relationships less charges related to the contribution of other assets to those cash flows. The fair values of the customer
substrate relationships are being amortized to Cost of Revenue over the weighted average useful life of 3.0 years.
In-Process Research and Development
Komag had an in-process research and development project associated with technology for higher recording
densities on advanced perpendicular recording media. The project is expected to incorporate significant changes in the
magnetic structure of the media to achieve higher recording density. As these advanced products were not ready for
commercial production and had no alternative future use, the development effort did not qualify for capitalization.
Accordingly, the Company recorded $49 million as a charge to research and development expense at the time of the
Acquisition. Costs to complete the development of this technology were expected to approximate $5 million as of the
acquisition date and utilize existing engineering personnel. This technology may be necessary to remain competitive
with anticipated industry advances in areal recording densities for thin-film media. The in-process research and
development was valued using the Excess Earnings Method under the Income Approach. This approach reflects the
present value of projected cash flows that a market participant would expect to generate from these technologies less costs
related to the contribution of other assets to those cash flows.
Debt Assumed
In connection with the Acquisition, the Company assumed $250 million face value of additional debt in the form of
Convertible Subordinated Notes (the “Notes”) issued by Komag on March 28, 2007. In accordance with the terms of the
Notes, the Acquisition constituted a “Fundamental Change” that allowed the holders of the Notes to obligate the
Company, for a limited period of time, to purchase the Notes for an amount equal to 100% of the principal amount of the
Notes, plus accrued and unpaid interest through the purchase date. The holders of the Notes tendered their Notes to the
Company and on December 5, 2007, the Company paid $250 million plus accrued and unpaid interest to purchase the
Notes.
Adverse/Favorable Leasehold Interests
In accordance with the guidance in SFAS 141, the Company analyzed its contractual facility lease to determine the
fair value of the leasehold interest. An adverse leasehold position exists when the present value of the contractual rental
73
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)