Netgear 2009 Annual Report Download - page 69

Table of Contents
products to provide organizations with enhanced protection for their network, web access and email traffic. The aggregate purchase price was
$14 million, paid in cash. Additionally, the acquisition agreement specified that CP Secure shareholders may receive a total additional payout of
up to $3.5 million in cash over the five years following closure of the acquisition if developed products pass certain acceptance criteria. This
additional payout was earned and paid in the year ended December 31, 2009, and was accounted for as additional purchase price and recorded as
a $3.5 million increase to goodwill.
The results of CP Secure’s operations have been included in the consolidated financial statements since the date of acquisition. The
historical results of operations of CP Secure prior to the acquisition were not material to the Company’s results of operations.
The accompanying consolidated financial statements reflect a purchase price of approximately $14.6 million, consisting of cash, and other
costs directly related to the acquisition as follows (in thousands):
In accordance with the purchase method of accounting, the Company allocated the total purchase price to tangible assets, liabilities and
identifiable intangible assets based on their estimated fair values. Purchased intangibles are amortized on a straight-line basis over their
respective estimated useful lives. Goodwill was recorded based on the residual purchase price after allocating the purchase price to the fair
market value of tangible and intangible assets acquired less liabilities assumed. Goodwill arises as a result of, among other factors, future
unidentified new products and new technologies as well as the implicit value of future cost savings as a result of the combining of entities. The
allocation of the purchase price in December 2008 was as follows (in thousands):
Of the $10.7 million of goodwill recorded on the acquisition of CP Secure, $4.5 million and $10.7 million is deductible for federal and
state income tax purposes, respectively. Of the $3.5 million additional payout recorded as goodwill in the year ended December 31, 2009, $1.7
million and $3.5 million is deductible for federal and state income tax purposes, respectively.
A total of $1.8 million of the $3.9 million in acquired intangible assets was designated as in-process research and development. In-process
research and development was expensed upon acquisition because technological feasibility had not been established and no future alternative
uses existed. The Company acquired two in-process research and development projects, which involve improvements to threat management
characteristics of future products. These two projects required further research and development to determine technical feasibility and
commercial viability. The fair value assigned to in-process research and development 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 research and development 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 32% discount rate 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
67
Purchase price
$
14,000
Direct acquisition costs
635
Total consideration
$
14,635
Inventories
82
Property and equipment, net
49
Intangibles, net
3,900
Goodwill
10,686
Other accrued liabilities
(82
)
Total purchase price allocation
$
14,635