Seagate 2007 Annual Report Download - page 112

Table of Contents
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
—
(
Continued)
The fair value of customer relationships was determined using the Excess Earnings Method under the Income Approach based on the
estimated revenues to be derived from Maxtor’s OEM, distribution and retail customers. This approach reflects the present value of projected
cash flows that a market participant would expect to generate from these customer relationships less charges related to the contribution of other
assets to those cash flows. The fair values of the customer relationships are being amortized to Operating Expenses on a straight-line basis over
the estimated lives of three to four years.
Trade names reflect the value associated with Maxtor’s brand names. Trade names were valued using the Relief-from-Royalty Method, a
form of the Income Approach, which estimates the royalty cost avoided by owning the trade names as opposed to having to license them from an
independent third party. The resulting cash flow savings estimated over the remaining useful life of the trade names are then discounted to
present value to arrive at the fair value allocated to this intangible. Trade names are being amortized to Operating Expenses over the estimated
useful life of four years.
In-Process Research and Development
As of the date of the acquisition, all future development activities at Maxtor were discontinued. Therefore there were no assets that
qualified as in-process research and development.
Debt Assumed
Upon the closing of the Merger, the Company assumed all of Maxtor’s outstanding debt, including Maxtor’s convertible senior notes. In
addition, upon the closing of the Merger, Seagate and Maxtor entered into a supplemental indenture whereby Seagate agreed to unconditionally
guarantee the notes on a senior unsecured basis (see Note 14).
In accordance with APBO 14, the Company determined the existence of a substantial premium for both the 2.375% Notes and 6.8% Notes
and recorded the notes at par value with the resulting excess over par (the substantial premium) recorded in Additional Paid-In Capital included
in Shareholders’ Equity. All other debt was recorded at fair market value.
Adverse/Favorable Leasehold Interests
Par
Value
Estimated
Fair Value on
May 19, 2006
Substantial
Premium
Recorded in
Additional Paid in
Capital
Initial
Carrying
Amount
(In millions)
6.80% Senior Convertible Notes due April 2010
$
135
$
153
$
18
$
135
5.75% Subordinated Debentures due March 2012
55
49
—
49
2.375% Senior Convertible Notes due August 2012
326
483
157
326
LIBOR Based China Manufacturing Facility Loan
60
60
—
60
$
576
$
745
$
175
$
570
In accordance with the guidance in SFAS No. 141, the Company analyzed all contractual leases to determine the fair value of the leasehold
interests. An adverse leasehold position exists when the present value of the contractual rental obligation is greater than the present value of the
market rental obligation. Conversely, a favorable leasehold interest exists if the present value of the contractual rental obligation is less than the
present value of the market rental obligation. The Company recorded adverse leasehold interests totaling $74 million and favorable leasehold
interest aggregating $4 million, which have been and will be amortized to Cost of Revenue and Operating Expenses over the remaining duration
of the leases.
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