8x8 2003 Annual Report Download - page 18

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• significant negative industry or economic trends;
• significant decline in our stock price for a sustained period; and
• our market capitalization relative to net book value.
Goodwill is included in our Centile reporting unit, which is the same as our Centile operating segment. During our
impairment assessment, we compare the carrying value of our Centile reporting unit to its fair value. If the fair
value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair
value of the goodwill within the reporting unit is less than the carrying value. The fair value for goodwill is
determined based on discounted cash flows, market multiples or appraised values, as appropriate.
In the fourth quarter of fiscal 2003, the Company recorded an impairment charge of $1.5 million to write-off its
remaining goodwill. The impairment assessment resulted from our plan implemented in the fourth quarter of fiscal
2003 to reduce the workforce of Centile’s France office by seventy percent.
Income taxes
As part of the process of preparing our consolidated financial statements we are required to estimate our income
taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax
expense together with assessing temporary differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are
included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will
be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a
valuation allowance. In the event that we determine that we would be able to realize deferred tax assets in the future
in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period
such determination was made.
Significant management judgment is required in determining the valuation allowance recorded against our net
deferred tax assets, which primarily consist of net operating loss and tax credit carryforwards. We have recorded a
valuation allowance of $51 million as of March 31, 2003, due to uncertainties related to our ability to utilize most of
our deferred tax assets before they expire. The valuation allowance is based on our estimates of taxable income by
jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable.
Litigation
Management's current estimated range of liability related to pending litigation involving the Company is based on
claims for which our management can estimate the amount and range of loss. We have recorded the minimum
estimated liability related to those claims, where there is a range of loss. At March 31, 2003, liabilities related to
litigation matters were not significant. Because of the uncertainties related to both the amount and range of loss on
pending litigation, management is unable to make a reasonable estimate of the liability that could result from an
unfavorable outcome. As additional information becomes available, we will assess the potential liability, if any,
related to our pending litigation and revise our estimates. Such revisions in our estimates of the potential liability
could materially impact our results of operation and financial position.