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additional tax valuation allowance for all or a portion of the net deferred tax assets, which may have a material adverse effect on our business,
results of operations and financial condition. Alternatively, if our future results of operations are better than expected, these assessments may
result in the reduction of our valuation allowances. Given the magnitude of our valuation allowance, future adjustments to this allowance based
on actual results could result in a significant adjustment to our net earnings.
We are subject to ongoing examinations by certain taxation authorities of the jurisdictions in which we operate. We regularly assess the status
of these examinations and the potential for adverse outcomes to determine the adequacy of the provision for income and other taxes. We
believe that we have adequately provided for tax adjustments that we believe are probable as a result of any ongoing examination.
We had previously entered into Advance Pricing Arrangements, or APAs, with the taxation authorities of the U.S. and Canada in connection
with our intercompany transfer pricing and cost sharing arrangements between Canada and the U.S. These arrangements expired in 1999 and
2000. In 2002, we filed APA requests with the taxation authorities of the U.S. Canada and the United Kingdom, or the U.K., that are expected
to apply to the taxation years beginning in 2000. The APA requests are currently under consideration. We have applied the transfer pricing
methodology proposed in the APA requests since 2001. As part of the APA applications, we have requested that the methodology adopted in
2001 be applied retroactively to the 2000 taxation year. If the retroactive application is accepted by the taxation authorities, it would result in
an increase in taxable income in certain jurisdictions offset by an equal decrease in taxable income in the other jurisdictions. We have provided
for any taxes and interest that would be due as a result of retroactive application of the APAs.
Although the outcome of the APA applications are uncertain, we do not believe the ultimate resolution of these negotiations will have a
material adverse effect on our consolidated financial position, results of operations or cash flows. However, if this matter is resolved
unfavorably, it could have a material adverse effect on our business, results of operations, financial condition and liquidity.
Goodwill valuation
Commencing January 1, 2002, we test goodwill for possible impairment on an annual basis on October 1 of each year and at any other time if
an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Circumstances that could trigger an impairment test include, but are not limited to:
The determination as to whether a write down of goodwill is necessary involves significant judgment based on the short-term and long-term
projections of the future performance of the reporting unit to which the goodwill is attributed. The assumptions supporting the estimated future
cash flows of the reporting unit, including the discount rate used and estimated terminal value, reflect our best estimates.
We have not yet finalized our assessment for potential triggering events for fiscal year 2004 and further have not yet completed our annual
impairment test for 2004, which is to be performed effective October 1, 2004. The results of these assessments may or may not result in a
triggering event. We do not believe that our goodwill impairment test would result in an impairment charge.
In 2003, we concluded that an impairment of our goodwill did not exist and no write down was recorded.
In 2002, we incurred a goodwill write down of $595. As a result of the continued decline in both our overall market value generally and within
Optical Networks specifically, we evaluated the goodwill associated with the businesses within Optical Networks for potential impairment. The
conclusion of those evaluations was that the fair value associated with the businesses within Optical Networks could no longer support the
carrying value of the remaining goodwill associated with them. Fair value was estimated using the then expected present value of discounted
future cash flows of these businesses. The discount rate used ranged from 12% to 16% and the terminal values were estimated based on
terminal growth rates ranging from 3% to 5%.
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Tax contin
g
encies
• a significant adverse change in the business climate or legal factors;
• an adverse action or assessment by a regulator;
• unanticipated competition;
• loss of key personnel;
• the likelihood that a reporting unit or a significant portion of a reporting unit will be sold or disposed of;
• results of testing for recoverability of a significant asset group within a reporting unit; and/or
• recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.