Classmates.com 2006 Annual Report Download - page 41

required to reduce the carrying value of the assets to fair value and recognized asset impairment charges because the carrying value of the
affected assets exceeded the future undiscounted cash flows. See Note 6 of the consolidated financial statements.
We determined that our goodwill and long-lived assets were not impaired based on our annual test during the year ended December 31,
2005.
Interest and Other Income, Net
Interest income consists of earnings on our cash, cash equivalents and short-term investments. Other income and expense, net consists of
realized gains and losses recognized in connection with the sale of short-term investments.
Interest and other income, net decreased by $0.8 million, or 12%, to $6.1 million for the year ended December 31, 2006, compared to
$6.9 million for the year ended December 31, 2005 as a result of lower average balances on our cash and cash equivalents and short-term
investments, partially offset by higher yields in our investment portfolio. Net realized gains on our short-term investments were not significant
for the years ended December 31, 2006 and 2005.
Interest Expense
Interest expense consists of interest expense on our term loan retired in January 2006, capital leases, the amortization of premiums on
certain of our short-term investments and imputed interest on the acquired member retention liability.
Interest expense decreased by $3.5 million, or 58%, to $2.6 million for the year ended December 31, 2006, compared to $6.1 million for the
year ended December 31, 2005. The decrease was primarily the result of decreases in interest expense and amortized deferred financing costs
related to the term loan. In January 2006, we expensed the remaining $1.5 million in deferred financing costs upon the repayment of the $54.2
million balance of the term loan. The decrease was partially offset by a $0.5 million increase in imputed interest on the acquired member
retention liability.
Provision for Income Taxes
For the year ended December 31, 2006, we recorded a tax provision of $36.3 million on pre-tax income of $77.5 million, resulting in a
year
-to-date effective tax rate of 46.8%. The effective tax rate differs from the statutory rate primarily due to (1) stock-based compensation that
is limited under Section 162(m) of the Internal Revenue Code (the “Code”); (2) foreign losses, the benefit of which is not currently recognizable
due to uncertainty regarding realization; and (3) the re-measurement of net deferred tax assets in New York. Additionally, in 2006, the effective
rate was increased due to employee stock purchase plan compensation, the benefit of which is not recognized under SFAS No. 123R. This
increase was completely offset by the benefit of federal exempt interest income.
For the year ended December 31, 2005, we recorded a tax provision of $40.2 million on pre-tax income of $87.4 million, resulting in an
effective tax rate of 46.1%. The effective tax rate differs from the statutory rate primarily due to compensation, including stock-based
compensation, that is limited under Section 162(m) of the Code; foreign losses, the benefit of which is not currently recognizable due to
uncertainty regarding realization; and the re-measurement of net deferred tax assets, including a change in New York state tax law. This re-
measurement resulted in an increase to the tax provision for the year ended December 31, 2005 by approximately $2.5 million, or 2.8%.
At December 31, 2006, we had net operating loss and tax credit carryforwards for federal and state income tax purposes of approximately
$175 million and $61 million, respectively, which begin to expire in 2018 and 2007, respectively. With respect to the state net operating losses,
certain amounts will be further
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