Netgear 2006 Annual Report Download - page 57

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Table of Contents
NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
R&D project, which is related to the development of a multimedia product that had not reached technological
feasibility and had no alternative use.
The fair value assigned to in-process R&D was determined using the income approach, under which the
Company considered the importance of products under development to the Company’s overall development plans,
estimated the costs to develop the purchased in-process R&D into commercially viable products, estimated the
resulting net cash flows from the products when completed and discounted the net cash flows to their present values.
The Company used a discount rate of 35% in the present value calculations, which was derived from a weighted-
average cost of capital analysis, adjusted to reflect additional risks related to the products’ development and success
as well as the products’ stage of completion. The estimates used in valuing in-process R&D were based upon
assumptions believed to be reasonable but which are inherently uncertain and unpredictable. These assumptions may
be incomplete or inaccurate, and unanticipated events and circumstances may occur. Accordingly, actual results may
vary from the projected results. The Company incurred costs of approximately $725,000 to complete the project, of
which approximately $575,000 was incurred through December 31, 2006. The Company completed the project in
February 2007.
$1.0 million of the $4.0 million in acquired intangible assets was designated as core technology. The value was
calculated based on the present value of the future estimated cash flows derived from estimated royalty savings
attributable to the core technology. This $1.0 million will be amortized over its four year useful life.
The remaining acquired intangible assets consist of non-competition agreements of $100,000, with a two year
useful life. None of the goodwill recorded as part of the SkipJam acquisition will be deductible for income tax
purposes.
Of the $1.1 million in total intangibles subject to amortization, $125,000 was expensed by the Company in the
year ended December 31, 2006.
As part of the acquisition, the Company has also agreed to pay up to $1.4 million in cash contingent on the
continued employment of certain SkipJam employees with the Company. These payments will be recorded as
compensation expense over a two-year period. During the year ended December 31, 2006, the Company recorded
$486,000 of additional compensation expense pursuant to this agreement.
Note 3 — Balance Sheet Components (in thousands):
Available-for-sale short-term investments consist of the following:
53
December 31,
2005
2006
Unrealized
Estimated
Unrealized
Estimated
Cost
Loss
Fair Value
Cost
Loss
Fair Value
Government Securities
$
83,744
$
(90
)
$
83,654
$
109,734
$
(5
)
$
109,729