Creative 2002 Annual Report Download - page 12

10
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACQUISITIONS
In May 2002, Creative completed the acquisition of 3Dlabs, a graphics vendor, supplying graphics accelerator solutions
for professionals in Computer Aided Design (“CAD”), Digital Content Creation (“DCC”), and visual simulation markets.
Creative believes that the acquisition will provide Creative a significant competitive advantage in the graphics space and
allow Creative to re-emphasize graphics products.
To acquire the remaining outstanding capital stock of 3Dlabs, Creative paid approximately $37.0 million in cash, issued
approximately 6.3 million shares of Creative’s ordinary shares valued at approximately $71.7 million at the time of the
closing, and assumed 3Dlabs outstanding options exercisable into approximately 1.6 million shares of Creative ordinary
shares valued at approximately $12.0 million at the time of the closing. As a result of the acquisition, Creative also
assumed 3Dlabs net liabilities of $21.1 million. In addition, Creative incurred approximately $1.3 million in transaction
fees, including legal, valuation and accounting fees. The ordinary shares issued were valued in accordance with EITF Issue
No. 99-12, “Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase
Business Combination,” using the average closing prices for the Creative ordinary shares during the two days before and
two days after (and including) the day on which the total number of Creative shares issuable to holders of 3Dlabs common
shares were fixed and determinable. The assumed stock options were valued using the Black-Scholes valuation model,
with a volatility rate of 60%, a risk-free interest rate of 2.20% to 4.93%, expected dividend yield of 2.5%, and an
estimated vest term of 0.01 years after vest date.
Of the total assumed stock options of 3Dlabs, approximately 1.3 million stock options with an intrinsic value of $7.0
million were unvested. In accordance with FASB Interpretation No. 44, “Accounting for Certain Transactions Involving
Stock Compensation,” these unvested options were accounted for as deferred stock-based compensation and are being
recognized as compensation expense over their related vesting periods. Total stock-based compensation expenses with
respect to the unvested options totaled $0.3 million in fiscal 2002.
Creative accounted for the acquisition using the purchase method of accounting and has included the results of 3Dlabs
from the acquisition date of May 15, 2002. The allocation of the purchase price to in-process technology and identifiable
intangible assets acquired was based on independent appraisals.
In accordance with SFAS 142, “Goodwill and Other Intangible Assets,” intangible assets are being amortized over their
respective benefit periods, which range from one to six years. Goodwill, which represents the excess of the purchase price
over the fair value of the identifiable assets and liabilities of 3Dlabs will not be subject to amortization and the carrying
value will be evaluated at least annually for impairment.
In accordance with the prevailing accounting standards, the amount of $26.1 million allocated to acquired in-process
technology was written off as other charges in fiscal 2002. It is reasonably possible that the development of this
technology could fail because of either prohibitive cost, inability to perform the required efforts to complete the technology
or other factors outside of Creative’s control such as a change in the market for the resulting developed products. In
addition, at such time that the project is completed it is reasonably possible that the completed products do not receive
market acceptance or that Creative is unable to produce and market the product cost effectively.