Classmates.com 2004 Annual Report Download - page 38

Interest and Other Income, Net
Interest income, net decreased by $1.8 million, or 30%, to $4.3 million for the year ended June 30, 2003, compared to $6.1 million for the
year ended June 30, 2002. The decrease in interest income was due to lower interest rates, partially offset by increased interest income due to
higher average cash, cash equivalent and short-term investment balances, and reduced interest expense as a result of a decrease in capital lease
and notes payable balances. In August 2001, we sold substantially all of the assets of RocketCash and recognized a gain of approximately
$1.0 million.
Provision for Income Taxes
Our net deferred tax assets at June 30, 2003 and 2002 consisted primarily of federal and state net operating loss and tax credit
carryforwards. At June 30, 2002, our net deferred tax assets of $110.4 million were fully offset by a valuation allowance. At June 30, 2003, our
net deferred tax assets of $103.5 million were offset by a valuation allowance of $95.4 million. The change in the valuation allowance of
approximately $15 million was primarily due to the release of valuation allowance associated with actual and expected utilization of net
operating loss and tax credit carryforwards in 2003 and 2004, respectively.
Our effective income tax rate for the year ended June 30, 2003 differed from the statutory rate primarily as a result of the tax benefit
recognized from the release of a portion of the valuation allowance against deferred tax assets relating primarily to the actual and expected
utilization of net operating loss and tax credit carryforwards for the years ended June 30, 2003 and 2004 as discussed above, offset to a lesser
extent by state income taxes. We recorded a current provision for income taxes of $2.6 million for California state income tax purposes during
the year ended June 30, 2003. In September 2002, the State of California enacted legislation that suspends the utilization of net operating loss
carryforwards to offset current taxable income for a two-year period beginning in the year ended June 30, 2003, which required us to record a
California state income tax provision for the year ended June 30, 2003. For federal income tax purposes, current taxable income for the year was
fully offset by net operating loss carryforwards, the benefit of which had not been previously recognized. In the year ended June 30, 2002, we
generated pre-tax losses of $47.8 million, and as a result, we did not record a provision or benefit for income taxes.
At June 30, 2003, we had net operating loss and tax credit carryforwards for federal and state and local income tax purposes of
approximately $253 million and $267 million, respectively, which begin to expire in 2019 and 2006, respectively. These carryforwards have
been adjusted to reflect limitations under Section 382 of the Code resulting from the Merger and are also subject to annual usage limitations. We
have received income tax deductions resulting from the exercise of certain stock options and the related sale of common stock by employees.
Tax benefits resulting from these deductions are credited directly to additional paid-in capital. At June 30, 2003, approximately $7.4 million of
the valuation allowance for deferred tax assets was attributable to tax benefits received from the exercise of employee stock options.
36