Classmates.com 2005 Annual Report Download - page 53

Interest and Other Income, Net
Interest income, net increased by $0.6 million, or 26%, to $3.0 million for the six months ended December 31, 2003, compared to
$2.4 million for the six months ended December 31, 2002. The increase in interest income was due to higher average cash, cash equivalent and
short-term investment balances.
Interest Expense
Interest expense increased by $0.3 million, or 85%, to $0.6 million for the six months ended December 31, 2003, compared to $0.3 million
for the six months ended December 31, 2002.
Provision for Income Taxes
Our deferred tax assets, net of valuation allowance, at December 31, 2003 of $26.4 million represented the expected utilization of net
deferred tax assets through the period ended December 31, 2005. At December 31, 2002 our deferred tax assets were fully offset by valuation
allowance based upon our assessment of all available evidence.
Consistent with prior periods, in determining the need for a valuation allowance at December 31, 2003, we 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 our assessment of all available evidence, we concluded that, with the exception of the net deferred tax assets that were at
the time expected to be utilized through December 31, 2005, it was not more likely than not that the remaining deferred tax assets would be
realized. This conclusion was based primarily on our history of net operating losses as compared to, at the time, only a recent trend of profitable
operations, the potential for future stock option deductions to significantly reduce taxable income, our annual net operating loss limitations under
Section 382 of the Code and the need to generate significant amounts of taxable income in future periods, on a consistent and prolonged basis, in
order to utilize the remaining deferred tax assets. Of the $87.2 million of valuation allowance recorded at December 31, 2003, approximately
$31.9 million was attributable to the deferred tax assets acquired in connection with the Merger.
For the six months ended December 31, 2003, we recorded a tax provision of $1.7 million on pre-tax income of $35.0 million, resulting in
an effective tax rate of 4.9%. The effective tax rate differs from the statutory tax rate primarily due to the release of valuation allowance
attributable to the expected utilization of net operating loss and tax credit carryforwards in the years ending December 31, 2004 and 2005, offset
by current California state income tax. In September 2002, the State of California enacted legislation that suspend 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. As a result, we recorded a
California state income tax provision for the period.
For the six months ended December 31, 2002, we recorded a tax provision of $0.7 million on pre-
tax income of $6.9 million, which resulted
in an effective tax rate of approximately 10%. The effective tax rate differed from the statutory tax rate primarily due to the actual utilization of
federal net operating loss carryforwards during the period, the benefit of which had not been previously recognized, offset by current California
state income tax due to the legislation enacted in September 2002. At December 31, 2002, based upon our assessment of all available evidence,
we determined that it was not more likely than not that we would realize the benefit of our remaining net deferred tax assets.
At December 31, 2003, we had net operating loss and tax credit carryforwards for federal and state income tax purposes of approximately
$272 million and $324 million, respectively, which begin to expire in
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