Classmates.com 2007 Annual Report Download - page 71

Interest Rate Risk
We have interest rate risk as well as market rate risk primarily related to our short-
term investments portfolio. As a result, we are exposed to
the impact of interest rate changes and changes in the market values of our investments. Our interest income is sensitive to changes in the general
level of U.S. interest rates.
We maintain a short-term investments portfolio consisting, at times, of U.S. commercial paper, U.S. corporate notes, U.S. Government or
U.S. Government agencies obligations, and municipal securities, including auction rate securities. We have not used derivative financial
instruments in our short-term investments portfolio. Our primary objective in managing our short-term investments is the preservation of
principal and liquidity while maximizing yield without significantly increasing risk. The minimum long-term credit rating is A, and if a long-
term credit rating is not available, we require a minimum short-term credit rating of A1 and P1. Furthermore, by policy, we limit the amount of
credit exposure to any one issuer. Our short-term investments, at times in both fixed-rate and variable-rate interest-earning instruments, carry a
degree of interest rate risk. Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates, while
variable-rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income
may fall short of expectations due to changes in interest rates, or we may suffer losses in principal by selling securities which have declined in
market value due to changes in interest rates.
Our short-term investments at December 31, 2007 consisted solely of municipal securities. As a result of the recent adverse conditions in
the U.S. credit markets, we liquidated, without any losses in principal, our investments in auction rate securities and did not hold any auction rate
securities in our portfolio as of December 31, 2007. We classify all of our short-term investments as available-for-sale. Available-for-sale
securities are carried at fair value, with unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. As of
December 31, 2007, unrealized gains in our short-term investments aggregated $254,000. We did not have any unrealized losses in our short-
term investments at December 31, 2007.
During the year ended December 31, 2007, our short-term investments portfolio yielded an annual effective interest rate of 3.86% and an
annual taxable equivalent yield of 5.80%. If interest rates were to decrease 100 basis points throughout the year, the result would be an annual
decrease in our interest income related to our short-term investments and cash and cash equivalents of approximately $1.5 million.
Foreign Currency Risk
We transact business in different foreign currencies and may be exposed to financial market risk resulting from fluctuations in foreign
currency exchange rates, particularly the Indian Rupee (INR) and the Euro, which may result in a gain or loss of earnings to us. The volatilities
of the INR and the Euro (and all other applicable foreign currencies) are monitored by us throughout the year. We face two risks related to
foreign currency exchange rates: translation risk and transaction risk. Amounts invested in our foreign operations are translated into U.S. dollars
using period-
end exchange rates. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income
(loss) in stockholders' equity. Our foreign subsidiaries generally collect revenues and pay expenses in currencies other than the U.S. dollar.
When the functional currencies of our foreign operations are denominated in the local currency of our subsidiaries, the foreign currency
translation adjustments are reflected as a component of stockholders' equity and do not impact our operating results. Foreign currency transaction
gains or losses arising from transactions in our foreign operations denominated in currencies other than the local functional currency are included
in operating expenses. Revenues and expenses in foreign currencies translate into higher or lower revenues and expenses in U.S. dollars as
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