Netgear 2008 Annual Report Download - page 38

Table of Contents
approach, we utilized our own information as well as publicly available industry information to determine earnings multiples and revenue
multiples that were used to value the Company. Under the income approach, we determined the fair value based on estimated future cash flows,
discounted by an estimated weighted-average cost of capital, which reflects our overall level of inherent risk and the rate of return an outside
investor would expect to earn. Determining our fair value is judgmental in nature and requires the use of significant estimates and assumptions,
including revenue growth rates and operating margins, discount rates and future market conditions, among others.
Solely for the purpose of establishing inputs for the fair value calculation, we made the following assumptions. For the income approach, a
3% growth factor was used to calculate our terminal value and the discount rate was estimated at 20%. For the market approach, we applied a
control premium of 30% which seeks to give effect to the increased consideration a potential acquirer would be required to pay in order to gain
sufficient ownership to set policies, direct operations and make decisions related to the Company. In conducting our impairment test in the fourth
quarter of 2008, we determined the fair value of the Company exceeded the carrying value of our net assets by approximately 12%. No goodwill
impairment loss was recognized in the years ended December 31, 2006, 2007, or 2008.
Given the current economic environment and the uncertainties regarding the impact on our business, there can be no assurance that our
estimates and assumptions regarding the duration of the ongoing economic downturn, or the period or strength of recovery, made for purposes of
our goodwill impairment testing during the year ended December 31, 2008 will prove to be accurate predictions of the future. If our assumptions
regarding forecasted revenue or earnings are not achieved, we may be required to record goodwill impairment charges in future periods, whether
in connection with our next annual impairment testing in the fourth quarter of 2009 or prior to that, if any such change constitutes a triggering
event outside of the quarter from when the annual goodwill impairment test is performed. It is not possible at this time to determine if any such
future impairment charge would result or, if it does, whether such charge would be material.
Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets,
which range from two to five years. Purchased intangible assets determined to have indefinite useful lives are not amortized. Long-lived assets,
including property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. Such conditions may include an economic downturn or a change in the assessment of
future operations. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset
and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the
fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. The
carrying value of the asset is reviewed on a regular basis for the existence of facts, both internal and external, that may suggest impairment.
In the fourth quarter of 2008, a key employee responsible for managing the asset group acquired in connection with our 2006 acquisition of
Skipjam Corp. departed the Company. The departure of this employee, along with the recent economic environment, resulted in our decision to
reduce efforts geared at marketing the related products. As a result, we performed an impairment analysis of these long-lived assets during the
fourth quarter of 2008. Based on the results of the analysis, we recorded an impairment charge within cost of revenue in the Consolidated
Statements of Operations of $458,000 for the net carrying value of intangibles acquired in connection with our 2006 acquisition of Skipjam
Corp. During the years ended December 31, 2007 and 2006, there were no events or changes in circumstances that indicated the carrying amount
of our long-lived assets may not be recoverable from their undiscounted cash flows. Consequently, we did not perform an impairment test or
record an impairment of our long-lived assets during those periods.
We will continue to evaluate the carrying value of our long-lived assets and if we determine in the future that there is a potential further
impairment, we may be required to record additional charges to earnings which could affect our financial results.
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