Adaptec 2002 Annual Report Download - page 29

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Income Taxes
We have incurred losses and other costs that can be applied against future taxable earnings to reduce our
tax liability on those earnings. As we are uncertain of realizing the future benefit of those losses and
expenditures, we have taken a valuation allowance against all domestic deferred tax assets and recorded only
deferred tax assets that can be applied in currently taxable foreign jurisdictions.
Investment in Non−Public Entities
We have invested in non−public companies and in venture capital funds, which we review periodically to
determine if there has been a non−temporary decline in the market value of those investments below our
carrying value. Our assessment of impairment in carrying value is based on the market value trends of
similar public companies, the current business performance of the entities in which we have invested, and if
available, the estimated future market potential of the companies and venture funds. We recorded an
impairment of our investments in non−public entities of $15.3 million in the fourth quarter of 2002. When we
perform future assessments of these investments, a further decline in the value of these companies and
venture funds may require us to recognize additional impairment on the remaining $7.1 million investment.
Valuation of Long−Lived Assets Including Goodwill and Purchased
Intangible Assets
We review property and equipment, goodwill and purchased intangible assets for impairment on an annual basis
and between annual tests when events or changes in circumstances indicate the carrying value of an asset may
not be recoverable. Such events may include a change in business strategy, significant declines in our sales
forecast or prolonged negative industry or economic trends.
Our asset impairment review assesses the fair value of the assets based on the future cash flows the assets
are expected to generate. For long−lived assets, an impairment loss is recognized when estimated
undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from
disposition of the asset (if any) are less than the carrying value of the asset. For goodwill, an impairment
loss will be recorded to the extent than the carrying value of the goodwill exceeds its implied fair value.
In 2002, we recorded an impairment charge of $1.8 million reflecting the reduction in fair value of a
product tester. We did not identify any impairment to goodwill or purchased intangibles during our annual
assessment in 2002.
Business Outlook
Our annual networking revenues are impacted by short and longer−term trends in the demand for the networking
equipment that incorporate our products. Future demand for our customers' products is in turn affected by
the plans of their customers. Our customers' demand for our products is also impacted by levels of
inventories of our parts held by them or their supply chain partners.
In 2001 and 2002, many of our customers experienced significant declines in demand for their products, and
accumulated significant inventories of our products that exceed the amounts required to meet current
production levels. Consequently, the demand for our products declined in 2001 from approximately $120
million in the first quarter to approximately $47 million in the fourth quarter. Quarterly revenues during
2002 ranged from $50 million to $60 million.
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