eFax 2008 Annual Report Download - page 33

31
Income Taxes. Our effective income tax rate is based on pre-tax income, statutory tax rates, tax regulations (including those
related to transfer pricing) and different tax rates in the various jurisdictions in which we operate. The tax bases of our assets and
liabilities reflect our best estimate of the tax benefits and costs we expect to realize. When necessary, we establish valuation
allowances to reduce our deferred tax assets to an amount that will more likely than not be realized.
As of December 31, 2008, we had utilizable federal and state (California) net operating loss carryforwards (“NOLs”) of $5.7
million and $6.3 million, respectively, after considering substantial restrictions on the utilization of these NOLs due to “ownership
changes”, as defined in the Internal Revenue Code. We currently estimate that all of the above-mentioned federal and state NOLs will
be available for use before their expiration. These NOLs expire through the year 2021 for the federal and 2014 for the state. In
addition, as of December 31, 2008, we had available unrecognized state research and development tax credits of $0.8 million, which
last indefinitely.
Income tax expense amounted to $29.6 million, $27.0 million and $20.1 million for the years ended December 31, 2008, 2007
and 2006, respectively. Our effective tax rates for 2008, 2007 and 2006 were 29%, 28% and 27%, respectively. The increase in our
annual effective income tax rate over the three-year period was primarily attributable to an increase in the proportion of our taxable
income being sourced in the U.S. and subject to higher tax rates than in foreign jurisdictions, and decreases in tax-exempt interest
income.
Significant judgment is required in determining our provision for income taxes and in evaluating our tax positions on a
worldwide basis. We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the
jurisdictions in which we conduct our business. It is possible that these positions may be challenged, which may have a significant
impact on our effective tax rate.
The amount of income taxes we pay is subject to audit by federal, state and foreign tax authorities. Our estimate of the potential
outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts and circumstances existing at that
time. We believe that we have adequately provided for reasonably foreseeable outcomes related to these matters in accordance with
FIN 48. We recorded an additional liability for unrecognized tax benefits of $6.6 million in accordance with FIN 48 for the year ended
December 31, 2008. However, our future results may include material favorable or unfavorable adjustments to the estimated tax
liabilities in the period the assessments are made or resolved, which may impact our effective tax rate.
Liquidity and Capital Resources
Cash and Cash Equivalents and Investments
At December 31, 2008, we had total cash and investments of $161.9 million compared to total cash and investments of $229.8
million at December 31, 2007. The decrease in cash and investments resulted primarily from repurchases of common stock and
business acquisitions partially offset by cash provided by operations. Total cash and investments consists of cash and cash equivalents
of $150.8 million, short-term investments of $14,000 and long-term investments of $11.1 million. Our investments are comprised
primarily of readily marketable corporate debt securities, debt instruments of the U.S. government and its agencies, auction rate debt
preferred securities and certificates of deposits. For financial statement presentation, we classify our investments primarily as held-to-
maturity, and, thus, they are reported as short-term and long-term based upon their maturity dates. Short-term investments mature
within one year of December 31, 2008 and long-term investments mature one year or more from December 31, 2008. We retain a
substantial portion of our cash in foreign jurisdictions for future reinvestment. Repatriation of funds held overseas could result in U.S.
income tax on the repatriated amount at an approximate blended federal and state rate of 39.9%.
All of our long-term investments consists of auction rate debt securities that are illiquid due to failed auctions. During the fourth
quarter of 2007, as a result of such failed auctions, we reclassified certain short-term available-for-sale investments of $11.4 million to
long-term held-to-maturity investments and had an unrealized loss of $0.3 million in accumulated other comprehensive income/(loss)
in our consolidated financial statements. If the issuer is unable to successfully close future auctions and their credit rating deteriorates,
we may be required to adjust the carrying value of the investment through an impairment charge. We classify auction rate debt
securities as long-term investments as we intend to hold them to maturity. Based on our ability to access our cash and other short-term
investments, our expected operating cash flows, and our other sources of cash, we do not anticipate the lack of liquidity on these
investments to affect our ability to operate our business as usual. There have been no significant changes in the maturity dates and
average interest rates for our investment portfolio and debt obligations subsequent to December 31, 2008.
Cash Flows
Our primary sources of liquidity are cash flows generated from operations, together with cash and cash equivalents and short-
term investments. Net cash provided by operating activities was $90.7 million, $94.2 million and $73.0 million for the years ended