Nutrisystem 2005 Annual Report Download - page 57

The significant items comprising the Company’s deferred income tax assets and liabilities are as follows:
December 31,
2005 2004
Deferred tax asset—
Reserves and accruals ............................................ $ 927 $ 129
Goodwill ...................................................... 433 428
Net operating loss carryforward .................................... 5,974 3,815
Other ......................................................... 176 339
7,510 4,711
Valuation allowance ................................................. (125) (329)
7,385 4,382
Deferred tax liability—
Property and equipment .......................................... (21) (23)
$7,364 $4,359
At December 31, 2005, the Company had net operating loss carryforwards of approximately $12,900 and
$22,500 for federal and state tax purposes, respectively. As a result of a change of control transaction which
occurred in December 2002, approximately $2,000 of the net operating loss carryforwards are subject to usage
limitations pursuant to the rules of Internal Revenue Code section 382. Net operating losses will begin to expire
in 2014.
Through March 2003, a valuation allowance had been maintained for the deferred tax asset based on
management’s assessment that the deferred tax asset would not be realized given the historical taxable levels of
income (loss), the uncertainty of future operating results, tax planning strategies, and the expiration date of net
operating loss carryforwards. In the second quarter of 2003, management determined based on an analysis of the
cumulative level of pretax profits over the past three years, projected levels of profits, schedule of reversal of
deferred taxes, and tax strategies that recognition of the benefits related to deferred tax assets was more likely
than not. As a result, the valuation allowance was reduced, a deferred tax asset was recorded on the consolidated
balance sheet and an income tax benefit was recorded. A portion of the deferred tax asset recognized arose prior
to a 1999 merger transaction; in order to reflect the recognition of the deferred tax asset on the previously
recorded merger transaction the Company eliminated $290 of goodwill and credited equity by $790.
Management continues to believe that the deferred tax assets are realizable at December 31, 2005 based on the
projected levels of profits, schedule of reversal of deferred taxes, and tax strategies.
Starting in 2001, the Company offset taxable income for federal tax purposes with net operating loss
carryforwards. For state tax purposes, there is a limitation on the amount of net operating loss carryforwards that
can be utilized in a given year to offset state taxable income. However, the state taxable income in 2005, 2004
and 2003 is below the annual limitation.
The Company incurred a tax loss for 2005 as a direct result of the exercise of certain stock options which
provided a tax deduction of approximately $39,000. Absent the tax deduction for the exercise of the
aforementioned options, the Company would have attained profitability for federal and state income tax
purposes. Accordingly, the Company’s net operating losses and corresponding deferred asset increased in 2005.
In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of
approximately $17,000 for federal and $26,000 for state tax purposes prior to the expiration of the net operating
loss carryforwards. The taxable loss for 2005, 2004 and 2003 was approximately $(3,500), $(900) and $(3,300),
respectively. Based on the projected level of future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not that the Company will realize the deferred
tax assets.
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