Adaptec 2002 Annual Report Download - page 24

Costs of Merger
We did not make any pooling acquisitions, and therefore did not incur any merger costs in 2002 or 2001. The
$38.0 million of merger costs that were incurred in 2000 related to five pooling acquisitions and consisted
primarily of investment banking and other professional fees.
In Process Research and Development ("IPR&D")
We did not make any acquisitions that were accounted for using the purchase method in 2002 or 2001, and
therefore did not incur any IPR&D charges in either of those years.
The $38.2 million expensed to in process research and development in 2000 arose
from the acquisitions of Malleable and Datum.
We calculated the charge for IPR&D related to Malleable and Datum by determining the fair value of the
existing products as well as the technology that was currently under development using the income approach.
Under the income approach, expected future after−tax cash flows from each of the projects under development
are estimated and discounted to their net present value at an appropriate risk−adjusted rate of return.
Revenues were estimated based on relevant market size and growth factors, expected industry trends,
individual product sales cycles and the estimated life of each product's underlying technology. Estimated
operating expenses, income taxes and charges for the use of contributory assets were deducted from estimated
revenues to determine estimated after−tax cash flows for each project. These projected future cash flows
were further adjusted for the value contributed by any core technology and development efforts expected to
be completed post acquisition.
These forecasted cash flows were then discounted based on rates derived from our weighted average cost of
capital, weighted average return on assets and venture capital rates of return adjusted upward to reflect
additional risks inherent in the development life cycle. The risk adjusted discount rates used involved
consideration of the characteristics and applications of each product, the inherent uncertainties in
achieving technological feasibility, anticipated levels of market acceptance and penetration, market growth
rates and risks related to the impact of potential changes in future target markets. After considering these
factors, we determined risk adjusted discount rates of 35% for Malleable and 30% for Datum.
In our opinion, the pricing model used for products related to these acquisitions were standard within the
high−technology industry and the estimated IPR&D amounts so determined represented fair value and did not
exceed the amounts that a third party would have paid for these projects. When we acquired these companies,
we did not expect to achieve a material amount of expense reduction or synergies as a result of integrating
the acquired in process technology. Therefore, the valuation assumptions did not include anticipated cost
savings.
A description of the IPR&D projects acquired is set forth below:
The in process technology acquired from Malleable was planned to detect incoming voice channels and process
them using voice compression algorithms. The compressed voice was to be converted, using the appropriate
protocols, to ATM cells or IP packets to achieve higher channel density and support multiple speech
compression protocols and different packetization requirements. At the date of acquisition we estimated that
Malleable's technology was 58% complete and the costs to complete the project to be $4.4 million.
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