3Ware 2003 Annual Report Download - page 27

Research and Development. Research and development, or R&D, expenses consist primarily of salaries
and related costs of employees engaged in research, design and development activities, costs related to
engineering design tools, subcontracting costs and facilities expenses. R&D expenses decreased 15% in absolute
dollars to approximately $131.9 million, or 130% of net revenues, for the year ended March 31, 2003, from
approximately $154.6 million, or 101% of net revenues, for the year ended March 31, 2002. This decrease in
R&D spending is a result of the streamlining and prioritizing of our product development efforts, reducing
subcontracting costs and the effect of our workforce reductions. We believe that a continued commitment to
R&D is vital to maintain a leadership position with innovative communications products. Currently, R&D
expenses are focused on the development of products for the communications markets and we expect to continue
this focus. We expect R&D expenses in absolute dollars to continue to decrease in the first three quarters of fiscal
2004 as we continue to streamline our cost structure and implement our restructuring plan announced in April
2003. See “Restructuring Charges.” Future acquisitions of businesses may result in substantial additional
charges.
Selling, General and Administrative. Selling, general and administrative, or SG&A, expenses consist
primarily of personnel-related expenses, professional and legal fees, corporate branding, and facilities expenses.
SG&A expenses were approximately $59.6 million, or 59% of net revenues, for the year ended March 31, 2003,
as compared to approximately $75.7 million, or 50% of net revenues, for the year ended March 31, 2002. The
decrease in SG&A expenses in absolute dollars was primarily attributable to the decrease in payroll and related
benefit expenses as a result of reduced headcount, decreases in sales commissions as a result of lower net
revenues and lower travel and marketing expenses as we reduced discretionary spending. We expect SG&A
expenses in absolute dollars to continue to decrease in the first three quarters of fiscal 2004 as we implement the
restructuring program announced in April 2003 and continue to reduce discretionary spending. See
“Restructuring Charges.” Future acquisitions of businesses may result in substantial additional charges.
Stock-Based Compensation. Stock-based compensation expense represents the amortization of deferred
compensation related to acquisitions. 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, including amounts
charged to cost of revenues, were $131.9 million and $147.1 million for the years ended March 31, 2003 and
2002, respectively. We currently expect to record amortization of deferred compensation with respect to these
assumed options of approximately $22.8 million and $387,000 during the fiscal years ending March 31, 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 amount by which the
aggregate consideration paid for an acquisition exceeds the fair value of the net tangible and intangible assets
acquired. Purchased intangible assets acquired include developed technology, trademarks and assembled
workforce. Upon the adoption of SFAS 142 in April 2002, we ceased amortizing goodwill and reclassified
$6.3 million of assembled workforce to goodwill. Including the amortization of the developed technology
component of cost of revenues, amortization of goodwill and purchased intangible assets was $6.3 million for the
year ended March 31, 2003, compared to $297.9 million for the year ended March 31, 2002. We expect
amortization expense for purchased intangibles, including amounts to be charged to cost of revenues, to be
$6.3 million, $6.3 million and $3.1 million for the fiscal years ending March 31, 2004, 2005 and 2006,
respectively.
Goodwill and Purchased Intangible Asset Impairment Charges. Upon adoption of SFAS 142 during the
first quarter of fiscal 2003, we completed our initial goodwill impairment review. As a result, we recorded a
$102.2 million non-cash charge for the impairment of goodwill, which is reflected as the cumulative effect of an
accounting change in the accompanying consolidated statements of operations. In performing the fair value
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