3Ware 2002 Annual Report Download - page 41

Selling, General and Administrative. Selling, general and administrative (“SG&A”) expenses consist
primarily of personnel-related expenses, professional and legal fees, corporate branding and facilities expenses.
SG&A expenses were approximately $75.7 million, or 49.5% of net revenues, for the year ended March 31,
2002, as compared to approximately $69.2 million, or 15.9% of net revenues, for the year ended March 31, 2001.
The increase in SG&A expenses for the year ended March 31, 2002 was primarily attributable to investments
made in our corporate infrastructure, increases in professional and legal fees and additional marketing and
advertising investments associated with the introduction of new products. We expect SG&A in absolute dollars
to decrease modestly on a quarterly basis throughout fiscal 2003, as we implement cost reduction programs and
reduce discretionary spending.
Stock-based Compensation. Stock-based compensation expense represents the amortization of deferred
compensation. Deferred compensation is the difference between the fair value of our common stock at the date of
each acquisition and the exercise price of the unvested stock options assumed in the acquisition. In fiscal 2001,
we recorded approximately $438.8 million of deferred compensation, in connection with stock options assumed
in our purchase acquisitions. Stock-based compensation charges were $147.1 million and $79.7 million for the
years ended March 31, 2002 and 2001, respectively. The increase is directly related to our acquisitions in fiscal
2001. We currently expect to record amortization of deferred compensation with respect to these assumed
options of approximately $136.4 million, $33.6 million, and $495,000 during the fiscal years ended March 31,
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.
Amortization of Goodwill and Purchased Intangibles. Goodwill is recorded as the difference, if any,
between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible
assets acquired. Intangible assets acquired include developed technology, trademarks and assembled workforce.
Goodwill and purchased intangible assets are amortized on a straight-line basis over the economic lives of the
respective assets, ranging from one to six years. In connection with the six purchase transactions completed
during fiscal 2001, we recorded approximately $4.0 billion of goodwill and $329.8 million of purchased
intangible assets. Excluding the amortization of developed technology included in cost of revenues, amortization
of goodwill and purchased intangible assets was $239.6 million for the year ended March 31, 2002, compared to
$308.8 million for the year ended March 31, 2001.
As a result of our adoption of SFAS 142 in the first quarter of fiscal 2003, we will no longer be required to
amortize goodwill and other intangibles with indefinite lives. However, we will continue to amortize certain
other purchased intangibles. Currently, we expect amortization expense for certain other purchased intangibles,
including amounts charged to cost of revenues, to be $63.5 million annually through the fiscal year ended
March 31, 2005 and $35.9 million for the fiscal year ended March 31, 2006. We will perform the first of the
required impairment tests of goodwill and indefinite-lived intangible assets in fiscal 2003. Because we have not
yet performed any of these tests, we are currently unable to determine the effect that these tests will have on our
results of operations and financial position.
Goodwill Impairment Charge. As a result of industry conditions, lower market valuations and reduced
estimates of carrier capital equipment spending in the future, we determined that there were indicators of
impairment to the carrying value of our goodwill and purchased intangibles. During the first quarter of fiscal
2002, we performed a review of the value of our intangible assets in accordance with Statement of Financial
Accounting Standard No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of” (“SFAS 121”). Based on our review and an independent valuation, we recorded a charge of
$3.1 billion to write down the value of intangible assets associated with our purchase acquisitions.
Restructuring Charge. As a result of industry conditions, we announced a restructuring plan in July 2001.
The plan includes reducing our overall cost structure and aligning manufacturing capacity with current demand.
Restructuring costs of $11.6 million were recognized as operating expense in the year ended March 31, 2002.
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