3Ware 2004 Annual Report Download - page 95

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Significant components of the Company’s deferred tax assets and liabilities for federal and state income
taxes are as shown below (in thousands):
March 31,
2004 2003 2002
Deferred tax assets:
Net operating loss carryforwards .............................. $238,996 $ 196,314 $ 159,733
Research and development credit carryforwards .................. 90,713 74,905 60,572
Inventory write-downs and other reserves ....................... 40,182 31,952 32,944
Capitalization of inventory and research and development costs ..... 30,061 22,192 6,257
Depreciation and amortization ................................ 1,629 257 —
Intangible assets ........................................... 7,807 — —
Other .................................................... 2,544 1,955 1,551
Total deferred tax assets ..................................... 411,932 327,575 261,057
Deferred tax liabilities:
Depreciation and amortization ................................ — — (53)
Purchase accounting ........................................ (15,685) (17,911) (163,027)
Total deferred tax liabilities .................................. (15,685) (17,911) (163,080)
Net deferred tax assets before valuation allowance ................ 396,247 309,664 97,977
Valuation allowance ........................................ (396,247) (309,664) (97,977)
Net deferred tax assets after valuation allowance ................. $ — $ — $ —
At March 31, 2004, the Company has federal and state research and development tax credit carryforwards of
approximately $67.8 million and $35.2 million, respectively, which will begin to expire in fiscal 2010 unless
previously utilized. The Company also has federal and state net operating loss carryforwards of approximately
$657.5 million and $129.3 million, respectively, which will begin to expire in fiscal 2012 and fiscal 2005,
respectively. Federal and state laws impose restrictions on the utilization of net operating loss and tax credit
carryforwards in the event of an “ownership change” for tax purposes as defined by Section 382 of the Internal
Revenue Code. As a result, utilization of the portion of the Company’s carryforwards from acquired companies
may be restricted.
The Company has established a valuation allowance against its net deferred tax assets, due to uncertainty
regarding their future realization. In assessing the realizability of its deferred tax assets, management considers
the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies.
Based on the projections for future taxable income over the periods in which the deferred tax assets are realizable
and the full utilization of the Company’s loss carryback potential, management concluded that a full valuation
allowance should be recorded in 2002, 2003 and 2004.
If or when recognized, the tax benefits relating to any reversal of the valuation allowance on deferred tax
assets at March 31, 2004 will be accounted for as follows: approximately $138.7 million will be recognized as a
reduction of income tax expense and $257.5 million will be recognized as an increase in shareholders’ equity for
certain tax deductions from employee stock options.
In fiscal year 2004 the Internal Revenue Service completed a routine audit of the Company’s income tax
returns for the fiscal years 1998, 1999, 2000, and 2001. As a result of the completion of the audit the Company
was able to release tax liability reserves in the amount of $2.4 million.
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