Classmates.com 2007 Annual Report Download - page 64

sharing assets, using the income approach, discounted cash flow method. We had no indefinite-lived intangible assets at December 31, 2006.
Under SFAS No. 144, long-lived assets, other than indefinite-lived intangible assets, must be tested for impairment when events or changes
in circumstances indicate that the carrying amount of an asset may not be recoverable. In the December 2006 quarter, we recognized asset
impairment charges of $4.5 million attributable to certain assets of our VoIP services within the Communications segment. As a result of slower
than expected growth of the VoIP market in the United States, current period operating losses and projected continuing operating losses, we
evaluated the recoverability of certain assets and wrote off $4.3 million of capitalized software and $0.2 million of prepaid marketing and
domain names. We were 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 associated with these assets. See Note 6—"Impairment of
Goodwill, Intangible Assets and Long-Lived Assets" of the Consolidated Financial Statements.
We determined that our goodwill was not impaired based on our annual test during the year ended December 31, 2005. In addition, we had
no indefinite-lived intangible assets at December 31, 2005.
Interest and Other Income, Net
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 short-term investments 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 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
redemption liability of MyPoints.
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 an
effective tax rate of 46.8%. The effective tax rate differs from the statutory federal income tax rate primarily due to (1) state income taxes, net of
federal benefit; (2) compensation, including stock-based compensation, that is limited under Section 162(m) of the Code; (3) foreign losses, the
benefit of which is not currently recognizable due to uncertainty regarding realization; (4) the re-measurement of deferred tax assets in New
York; and (5) employee stock purchase plan compensation, the benefit of which is not recognized under SFAS No. 123R but which is
recognized upon a disqualified disposition. This increase was completely offset by the benefit of federal tax 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 federal income tax rate primarily due to (1) state income taxes, net of
federal benefit; (2) compensation, including stock-based compensation, that is limited under Section 162(m) of the Code; (3) foreign losses, the
benefit of which is not currently recognizable due to uncertainty regarding realization; and (4) the re-measurement of deferred tax assets,
including a change in New York state tax law.
61