3Ware 2004 Annual Report Download - page 31

original equipment manufacturers, or OEMs, such as EMC, Hitachi Data Systems, Network Appliance,
StorageTek and Sun Microsystems.
In September 2003 and January 2004, we purchased assets and licensed intellectual property associated with
IBM’s PowerPRS Switch Fabric product line (the PRS Business) for approximately $50 million in cash to
complement our existing switch fabric product portfolio. In October 2003, we completed the acquisition of all
outstanding shares of JNI Corporation (JNI), a provider of Fibre Channel hardware and software products that are
critical elements of storage networks, for approximately $196.4 million in cash. During the fourth quarter of
fiscal 2004, we signed a definitive agreement to acquire 3Ware, Inc. 3Ware provides high-performance, high
capacity SATA storage solutions for emerging storage applications. Subsequent to our fiscal year end, on April 1,
2004, we paid approximately $145.0 million in cash to complete this transaction. In addition, on April 13, 2004,
we announced a definitive agreement to acquire intellectual property and a portfolio of assets associated with
IBM’s 400 series of embedded PowerPC®standard products, (the Embedded Processor Business) for
approximately $227.9 million in cash. The PowerPC 400 series product line delivers performance and a rich mix
of features for Internet, communication, data storage, consumer and imaging applications. We plan to continue
evaluating strategic opportunities as they arise, including business combinations, strategic relationships, capital
infusions and the purchase and sale of assets.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting principles generally accepted in the
United States requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the
reporting period. We regularly evaluate our estimates and assumptions related to inventory valuation and
warranty liabilities, which affects our cost of sales and gross margin; the valuation of purchased intangibles and
goodwill, which affects our amortization and impairments of goodwill and other intangibles; the valuation of
restructuring liabilities, which affects the amount and timing of restructuring charges; and the valuation of
deferred income taxes, which affects our income tax expense and benefit. We also have other key accounting
policies, such as our policies for revenue recognition, including the deferral of a portion of revenues on sales to
distributors, and allowance for bad debts. The methods, estimates and judgments we use in applying these most
critical accounting policies have a significant impact on the results we report in our financial statements. We base
our estimates and assumptions on historical experience and on various other factors that we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. To the extent there are material
differences between our estimates and the actual results, our future results of operations will be affected.
Inventory Valuation and Warranty Liabilities
Our policy is to value inventories at the lower of cost or market on a part-by-part basis. This policy requires
us to make estimates regarding the market value of our inventories, including an assessment of excess or obsolete
inventories. We determine excess and obsolete inventories based on an estimate of the future demand for our
products within a specified time horizon, generally 12 months. The estimates we use for future demand are also
used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. If
our demand forecast is greater than our actual demand we may be required to take additional excess inventory
charges, which would decrease gross margin and net operating results in the future. Our products typically carry
aone to three year warranty. We establish reserves for estimated product warranty costs at the time revenue is
recognized. Although we engage in extensive product quality programs and processes, our warranty obligation is
affected by product failure rates, use of materials and service delivery costs incurred in correcting any product
failure. Should actual product failure rates, use of materials or service delivery costs differ from our estimates,
additional warranty reserves could be required, which could reduce our gross margins.
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