Classmates.com 2005 Annual Report Download - page 102

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the current utilization of net operating loss carryforwards and net deferred tax liabilities recorded in connection with the acquisition of
Classmates.
The increase in the valuation allowance of $2.7 million during the year ended December 31, 2005 is attributable to compensation that is
expected to be limited under Section 162(m) of the Code and foreign losses, the benefit of which is not currently recognizable due to uncertainty
regarding utilization. Consistent with prior periods, in determining the need for a valuation allowance related to the Company’s deferred tax
assets at December 31, 2005, the Company reviewed both positive and negative evidence pursuant to the requirements of SFAS No. 109,
including current and historical results of operations, the annual limitation on utilization of net operating loss carryforwards pursuant to
Section 382 of the Code, future income projections and potential tax-planning strategies. Based upon the Company’s assessment of all available
evidence, it concluded that, primarily with the exception of certain foreign net operating losses, it is more likely than not that the remaining
deferred tax assets will be realized. This conclusion is based primarily on the Company’s trend of profitable operations and current financial
projections that indicate the continued generation of taxable income in future periods and utilization of deferred tax assets. The Company will
continue to monitor all available evidence in assessing the realization of its deferred tax assets in future periods, including recognizing an
amount of taxable income during the carryforward period that equals or exceeds the Section 382 limitation.
The decrease in the valuation allowance of $85.3 million during the year ended December 31, 2004 is primarily attributable to the release of
the valuation allowance due to the expectation that the Company will realize its deferred tax assets in the future.
In accordance with APB Opinion No. 23, Accounting for Income Taxes—Special Areas , the Company has not recognized federal deferred
income taxes on the undistributed earnings of certain of its foreign subsidiaries that are indefinitely reinvested outside the U.S. The Company has
indefinitely reinvested approximately $1.2 million of the cumulative undistributed earnings of certain foreign subsidiaries, of which $0.4 million
was earned during the year ended December 31, 2005. If these earnings were distributed, a U.S. income tax liability would result.
At December 31, 2005, the Company had net operating loss and tax credit carryforwards for federal and state income tax purposes of
approximately $192 million and $249 million, respectively, which begin to expire in 2018 and 2007, respectively. With respect to the state net
operating losses, certain amounts will be further reduced pursuant to the state allocation and apportionment laws. These carryforwards have been
adjusted to reflect limitations under Section 382 of the Code. The Company has also claimed income tax deductions from the exercise of certain
stock options and the related sale of common stock by employees, and for the years ended December 31, 2005 and 2004, the six months ended
December 31, 2003 and the year ended June 30, 2003, benefits of $7.2 million, $8.6 million, $18.3 million and $5.2 million, respectively, were
credited to stockholders’ equity.
8. STOCK OPTIONS AND STOCK ISSUANCE PLANS
Option Plans
In September 2001, the Board of Directors adopted the United Online, Inc. 2001 Stock Incentive Plan (the “2001 SIP”). The 2001 SIP is a
shareholder-
approved plan under which nonstatutory and incentive stock options, as well as direct stock issuances, may be granted to employees,
officers, directors and consultants of the Company. An aggregate of 19.9 million shares have been reserved under the 2001 SIP, of which
1.0 million shares were available for future grant at December 31, 2005, and 9.0 million options and 1.6 million RSUs were outstanding at
December 31, 2005.
In September 2001, the Board of Directors also adopted the United Online, Inc. 2001 Supplemental Stock Incentive Plan (the “2001 SSIP”
).
The 2001 SSIP is a non-shareholder approved plan under which
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