3Ware 2005 Annual Report Download - page 86

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 2003, 2004 and 2005.
The tax benefits relating to any reversal of the valuation allowance on deferred tax assets at March 31, 2005
will be accounted for as follows: approximately $147.3 million will be recognized as a reduction of income tax
expense, $261.2 million will be recognized as an increase in shareholders’ equity for certain tax deductions from
employee stock options, and $69.2 million will be recognized as a reduction of goodwill.
7. Goodwill and Purchased Intangible Asset Impairments:
The Company performed the annual impairment assessments of the carrying value of the goodwill recorded
in connection with various acquisitions as required under SFAS 142 in March 2005, 2004 and 2003. In
accordance with SFAS 142, the Company compared the carrying value of each of its reporting units that existed
at those times to their estimated fair values. In performing the tests in fiscal 2005, 2004 and 2003, the Company
had three, two and two reporting units, respectively. The Company determined and identified those reporting
units in accordance with SFAS 142.
The Company estimated the fair values of its reporting units using both the income approach valuation
methodology that includes the discounted cash flow method and the market approach that includes utilizing
certain market multiples to determine values. The discounted cash flows for each reporting unit were based on
discrete five-year financial forecasts developed by management for planning purposes. Cash flows beyond the
five year discrete forecast were estimated using a terminal value calculations. Future cash flows were discounted
to present value using discount rates ranging from 15% to 17%, and terminal value growth rates ranging from 5%
to 7.5%. Publicly available information regarding the market capitalization of the Company was also considered
in assessing the reasonableness of the cumulative fair values of its reporting. Upon completion of the annual
impairment test for fiscal 2005 the Company determined that no impairment was indicated as the estimated fair
values of the three reporting units exceeded their respective carrying values.
In November 2004, following a workforce reduction and restructuring plan the Company determined that
indicators of impairment existed for certain purchased intangible assets associated the JNI acquisition. In
accordance with FAS 144, the Company performed an impairment analysis of the identified intangible assets.
Based on this assessment, the Company recorded a charge of $27.3 million in December 2004 to write down the
value of the identified intangible assets acquired in the JNI acquisition to zero. The Company also tested the
goodwill associated with the related reporting unit for impairment in accordance with SFAS 142 in the third
quarter. Upon completion of the impairment test for the related reporting unit consistent with the methodology
used for the annual test the company determined that the estimated fair value of the reporting unit exceeded the
carrying values at that time.
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