3Ware 2001 Annual Report Download - page 22

2 0
M A N A G E M E N T’S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S
S E L L I N G , G E N E R A L A N D A D M I N I S T R AT I V E.Selling, general and administrative (“SG&A”) expenses were approxi-
mately $69.2 million, or 15.9% of revenues, for the year ended March 31, 2001, as compared to approximately $28.0
million, or 16.3% of net revenues, for the year ended March 31, 2000. The increase in SG&A expenses in absolute
dollars for the year ended March 31, 2001 was primarily attributable to investments made in our corporate infra-
structure, an increase in the size of our sales force and related commissions, additional marketing and advertising
investments associated with the introduction of new products, general corporate branding and increases in our
reserves for bad debt. The remaining increase is the result of our acquisition of MMC in the third quarter, which had
similar expenses not included in the prior year as a result of purchase accounting. We expect SG&A expenses
to increase in the future due principally to additional staffing in our sales and marketing departments, as well
as increased spending on information technology and product promotion, although we do expect that the rate
of increase will be reduced.
S T O C K -B A S E D C O M P E N S AT I O N.During the year ended March 31, 2001, deferred compensation of $438.8 million
was recorded related to restricted stock and unvested options granted to employees of acquired companies in accor-
dance with FASB interpretation No. 44 (“FIN 44”). Prior to FIN 44, the fair value of these stock awards would have
been included as part of the purchase price of the acquisitions, probably resulting in additional goodwill. Stock-based
compensation charges were $79.7 million and $0.5 million for the years ended March 31, 2001 and March 31, 2000,
respectively. The increase is directly related to the acquisitions of MMC, SiLUTIA, Inc. (“SiLUTIA”), YuniNetworks,
Inc. (“YuniNetworks”), pBaud Logic, Inc. (“pBaud”), Chameleon Technologies (“Chameleon”), and Raleigh
Technology Corporation (“RTC”). We currently expect to record amortization of deferred compensation with respect
to these option grants of approximately $147.2 million, $134.1 million, $63.5 million and $4.1 million during the
fiscal years ended March 31, 2002, 2003, 2004 and 2005, respectively. These charges could be reduced based on the
level of employee turnover. Future acquisitions of businesses may result in substantial additional charges. Such
charges may cause fluctuations in our interim or annual operating results.
A M O RT I Z AT I O N O F G O O D W I L L A N D P U R C H A S E D I N TA N G I B L E S .Amortization of goodwill and purchased intangible
assets was $308.8 million for the year ended March 31, 2001. These charges are related to the purchases of MMC,
SiLUTIA, YuniNetworks, pBaud, Chameleon and RTC. There were no amortization charges arising from purchase
acquisitions in the year ended March 31, 2000. Currently, we expect amortization expense to be $736.4 million,
$736.3 million, $734.4 million, $731.6 million and $704.0 million for the years ended March 31, 2002, 2003,
2004, 2005 and 2006, re s p e c t i ve l y. T h e r e can be no assurance that acquisitions of businesses by us in the future will
not result in substantial changes to the expected amortization, which may cause fluctuations in our interim or annual
operating results. The estimated amortization of goodwill expense is based on the current guidance for the amort i z a-
tion of intangible assets and does not reflect the exposure draft re g a rding the impairment only approach to goodwill
a m o rtization expected to be effective in fiscal 2002. If the new guidance becomes effective as it is currently drafted,
the amortization of goodwill would no longer be required.
A C Q U I R E D I N-P R O C E S S R E S E A R C H A N D D E V E L O P M E N T.For the year ended March 31, 2001, we recorded $202.1 mil-
lion of acquired in-process research and development (“IPR&D”) resulting from the acquisition of YuniNetworks,
SiLUTIA and MMC. This amount was expensed on the acquisition date because the acquired technology had not
yet reached technological feasibility and had no future alternative uses.
The following table summarizes the significant assumptions underlying the valuations related to the IPR&D at the
date of acquisition:
Estimated Cost Discount Rate Weighted-
IPR&D to Complete Applied to Average Cost
(dollars in thousands) Charge Technology IPR&D of Capital
MMC Networks, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $176,700 $11,494 20% 14%
SiLUTIA, Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600 276 22% 17%
YuniNetworks, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,800 3,078 21% 16%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $202,100 $14,848