Memorex 2007 Annual Report Download - page 43

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experience and industry knowledge. No assurance can be given that we will be able to attract and retain employees and
key talent.
Significant litigation matters could result in large costs and distraction to our business. We are subject to
various pending or threatened legal actions, including the Philips and SanDisk disputes, in the ordinary course of our
business. Litigation is always subject to many uncertainties and outcomes that are not predictable. We cannot ascertain
the ultimate aggregate amount of any monetary liability or financial impact that may be incurred by us in litigation. In
addition, our management may have its attention diverted as it continues to defend against litigated matters. See Item 3.
Legal Proceedings for a description of our disputes with Philips and SanDisk.
An impairment in the carrying value of goodwill or other assets could negatively affect our consolidated
results of operations and net worth. Goodwill represents the difference between the purchase price of acquired
companies and the related fair values of net assets acquired. Goodwill is not subject to amortization and is tested for
impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred.
Impairment testing is performed for each of our reporting units. We compare the carrying value of a reporting unit,
including goodwill, to the fair value of the unit. Carrying value is based on the assets and liabilities associated with the
operations of that reporting unit, which often requires allocation of shared or corporate items among reporting units. If the
carrying amount of a reporting unit exceeds its fair value, we revalue all of the assets and liabilities of the reporting unit,
including goodwill, to determine if goodwill is impaired. If the fair value of goodwill is less than its carrying amount,
impairment has occurred. Our estimates of fair value are determined based on a discounted cash flow model and then
compared to the market capitalization of the Company. Growth rates for sales and profits are determined using inputs from
our annual long-range planning process. We also make estimates of discount rates, perpetuity growth assumptions, market
comparables and other factors.
As of December 31, 2007, we had $55.5 million of goodwill which reflects the impact of a $94.1 million impairment
charge. Accounting standards require consideration of current market capitalization when completing the annual goodwill
impairment assessment. At stock price levels during the fourth quarter, the Company’s total book value was above its
market capitalization, indicating the presence of a potential goodwill impairment which was analyzed and recorded. While
the fair value of our remaining goodwill exceeds its carrying value, materially different assumptions regarding future
performance of our businesses or significant declines in our stock price could result in additional impairment losses.
We also evaluate other assets on our balance sheet, including intangible assets, whenever events or changes in
circumstances indicate that their carrying value may not be recoverable. Our estimate of the fair value of the assets may
be based on fair value appraisals or discounted cash flow models using various inputs.
As of December 31, 2007, we had $371.0 million of definite-lived intangible assets subject to amortization and
$205.9 million of other long-term assets. While we currently believe that the fair value of these assets exceed their
carrying value, materially different assumptions regarding future performance of our businesses could result in significant
impairment losses.
Our stock price may be subject to significant volatility due to our own results or market trends. If revenue,
earnings or cash flows in any quarter fail to meet the investment community’s expectations, there could be an immediate
negative impact on our stock price. Our stock price may also be affected by broader market trends and world events
unrelated to our performance.
Item 1B. Unresolved Staff Comments.
None.
14