Classmates.com 2004 Annual Report Download - page 30

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approximately $76.5 million in goodwill resulting from the acquisition of Classmates and the acquisition of the Web-hosting assets of
About, Inc. In accordance with the provisions set forth in SFAS No. 142, Goodwill and Other Intangible Assets
, goodwill is not being amortized
but is tested for impairment at a reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its carrying value amount.
Amortization of intangible assets increased by $4.5 million, or 29%, to $20.4 million for the year ended December 31, 2004, compared to
$15.9 million for the year ended December 31, 2003. The increase is due to the amortization of identifiable intangible assets from the acquisition
of the Web-hosting assets of About, Inc. in April 2004 and the acquisition of Classmates in November 2004. We recorded a reduction in
intangible assets of approximately $11.2 million during the December 2004 quarter in connection with the release of the deferred tax valuation
allowance. Amortization of intangible assets is expected to increase significantly in 2005 due to the acquisition of Classmates. Certain of the
acquired intangible assets are amortized on an accelerated basis to better match the expense to the expected cash flows from those assets.
Restructuring Charges
We had no restructuring charges or benefits during the year ended December 31, 2004 as compared to a $0.2 million benefit to restructuring
charges during the year ended December 31, 2003 as a result of contract termination fees expensed in earlier periods in excess of final negotiated
settlements.
Interest and Other Income, Net
Interest income consists of earnings on our cash, cash equivalents and short-term investments. Interest expense consists of interest expense
on our term loan, capital leases and the amortization of premiums on certain of our short-term investments. Other income consists of realized
gains and losses recognized in connection with the sale of short-term investments.
Interest and other income, net decreased by $0.7 million, or 15%, to $3.9 million for the year ended December 31, 2004, compared to
$4.6 million for the year ended December 31, 2003. The decrease is the result of lower average returns due to a shift toward tax-
exempt holdings
and an increase in interest expense as a result of the outstanding balance on the term loan in the December 2004 quarter. Other income associated
with net realized gains on our short-term investments was $0.1 million for the year ended December 31, 2004. Interest expense is expected to
increase significantly in 2005 due to the outstanding balance on the term loan.
Provision for Income Taxes
For the year ended December 31, 2004, we recorded a tax benefit of $34.1 million on pre-
tax income of $83.4 million. The effective tax rate
differs from the statutory rate primarily due to the release of substantially all of the valuation allowance attributable to the expected utilization of
deferred tax assets in the future.
For the year ended December 31, 2003, we recorded a tax benefit of $0.8 million on pre-tax income of $54.1 million. The effective tax rate
differs from the statutory rate primarily as a result of tax benefits recognized in the June 2003 and December 2003 quarters 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
credit carryforwards in the years ending December 31, 2004 and 2005, offset by state income taxes.
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