Adaptec 2004 Annual Report Download - page 64

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selling prices to end customers. At the time of shipment, product prices are fixed and determinable and the amount of future returns
and pricing allowances to be granted in the future can be reasonably estimated and accrued.
The Company has consignment inventory which is held at the customer’s premises. PMC recognizes revenue on these goods when
the customer uses them in production, as that is when title passes to the customer. These sales from consignment inventory are subject
to the same warranty terms that are applied to direct sales.
PMC product sales are subject to a one−year warranty against regular mechanical or electrical failure. PMC maintains accruals for
potential returns based on its historical experience.
Research and development expenses. The Company expenses research and development (R&D) costs as incurred. R&D costs include
payroll−related costs, materials, services and design tools used in product development, depreciation, and other overhead costs
including facilities and computer equipment costs. For the years ended December 31, 2004, 2003 and 2002, research and
development expenses were $120.5 million, $119.5 million and $137.7 million.
Product warranties. The Company provides a one−year limited warranty on most of its standard products and accrues for the cost of
this warranty based on its experience at the time of shipment. The following table summarizes the activity related to the product
warranty liability during fiscal 2004 and 2003:
December 31,
(in thousands) 2004 2003
Beginning balance $ 2,897 $ 2,399
Accrual for new warranties issued 1,343 1,152
Reduction for payments (in cash or in kind) (89) (226)
Adjustments related to changes in estimate of warranty accrual (659) (428)
$ 3,492 $ 2,897
The semiconductor industry is subject to volatility in shipment levels and the rate of warranty returns tends to fluctuate depending on
whether the industry is in times of growth or contraction. The Company adjusts its rate of accrual to reflect the level of returns typical
of the industry cycle.
Other Indemnifications. From time to time, on a limited basis, the Company indemnifies customers, as well as suppliers, contractors,
lessors, and others with whom we have contracts, against combinations of loss, expense, or liability arising from various triggering
events related to the sale and use of Company products, the use of their goods and services, the use of facilities, the state of assets that
we sell and other matters covered by such contracts, usually up to a specified maximum amount.
Stock−based compensation. The Company accounts for stock−based compensation in accordance with the intrinsic value method
prescribed by APB Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees”. Under APB 25, compensation is
measured as the amount by which the market price of the underlying stock exceeds the exercise price of the
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