3Ware 2005 Annual Report Download - page 30

severely impacted our customers and has resulted in significantly less demand for the quantity of these products
than expected when some of the developments commenced. Second, as a result of restructuring activities, we
have discontinued development of several new products and slowed down development of other new products as
we realized that demand for these products would not materialize as originally anticipated.
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.
The increase in SG&A expenses of 32.6% for the year ended March 31, 2005 was primarily due to the effect of
higher payroll and related benefits, corporate branding, commissions, and contracted services of approximately
$16.8 million, as a result of our fiscal 2004 and fiscal 2005 acquisitions, offset by lower professional services and
insurance expense of $2.1 million. Future acquisitions of businesses may result in substantial additional on-going
costs.
Stock-Based Compensation. The following table presents stock-based compensation expense for
employees engaged in R&D and S,G&A activities for the fiscal years ended March 31, 2005 and March 31,
2004, all of which was excluded from those operating expenses (in thousands):
Fiscal Years Ended March 31,
Increase
(Decrease) Change
2005 2004
Amount
%ofNet
Revenue Amount
%ofNet
Revenue
Research and development ................... $3,407 1.3% $15,444 11.8% $(12,037) -77.9%
Selling, general and administrative ............ 5,259 2.1% 5,195 4.0% 64 1.2%
$8,666 3.4% $20,639 15.7% $(11,973) -58.0%
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 2005,
we recorded approximately $19.0 million of deferred compensation in connection with stock options assumed in
our acquisition of 3ware. Stock-based compensation charges, including amounts charged to cost of revenues,
were $9.3 million for the year ended March 31, 2005, compared to $21.2 million for the year ended March 31,
2004. We currently expect to record amortization of deferred compensation with respect to these assumed
options of approximately $6.1 million in fiscal 2006, $2.8 million in fiscal 2007, and $200,000 in fiscal 2008.
These charges could be reduced as a result of employee turnover. Acquisitions of businesses may result in
substantial additional on-going costs. Such charges may cause fluctuations in our interim or annual operating
results.
Acquired In-process Research and Development. For the fiscal year ended March 31, 2005, we recorded
$13.4 million of acquired IPR&D resulting from the acquisitions of 3ware and the Embedded Products Business.
These amounts were expensed on the acquisition dates because the acquired technology had not yet reached
technological feasibility and had no future alternative uses. The IPR&D charge related to the 3ware acquisition
was made up of two projects that were 42% and 25% complete at the date of acquisition. The estimated cost to
complete these projects was $650,000 and $2.3 million, respectively, and the discount rate applied to calculate
the IPR&D charge was 30% and 35%, respectively. The IPR&D charge related to the Embedded Products
Business acquisition was made up of three projects, which were between 42% and 69% complete at the date of
acquisition. The estimated aggregate cost to complete these projects was $9.1 million. The discount rate applied
to calculate the IPR&D charge ranged from 25% to 30%.
For the year ended March 31, 2004, we recorded $21.8 million of acquired IPR&D resulting from the
acquisition of JNI Corporation and the PRS business. These amounts were expensed on the acquisition dates
because the acquired technology had not yet reached technological feasibility and had no future alternative uses.
The IPR&D charge related to the PRS acquisition was made up of five projects which were between 38% and
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