Classmates.com 2008 Annual Report Download - page 68

Table of Contents
In the year ended December 31, 2006, we recorded restructuring charges totaling $0.6 million primarily for lease termination costs and
termination benefits paid to certain employees.
Interest Income. Interest income increased by $1.3 million, or 23%, to $7.1 million for the year ended December 31, 2007, compared to
$5.8 million for the year ended December 31, 2006. The increase was primarily due to higher average cash and cash equivalents and short-term
investments balances and higher interest rates.
Interest Expense. Interest expense decreased to $3,000 for the year ended December 31, 2007, compared to $1.6 million for the year
ended December 31, 2006. The decrease was primarily the result of a decrease in amortized deferred financing costs related to our term loan. In
January 2006, we expensed the remaining $1.5 million in deferred financing costs upon our repayment of the $54.2 million balance of the term
loan.
Other Income (Expense), net. Other expense, net remained relatively flat at $0.7 million for the years ended December 31, 2007 and
2006. Other expense, net increased slightly as a result of an increase in foreign currency exchange rate losses, partially offset by a $0.3 million
decrease in imputed interest on the acquired member redemption liability of our loyalty marketing service. Net realized gains on sales of our
short-term investments were not significant for the years ended December 31, 2007 and 2006.
Provision for Income Taxes. For the year ended December 31, 2007, we recorded a tax provision of $40.9 million on pre-tax income of
$98.7 million, resulting in an effective tax rate of 41.5%. 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
Internal Revenue Code, or the Code; (3) foreign losses, the benefit of which is not currently recognizable due to uncertainty regarding
realization; (4) the re-measurement of certain deferred tax assets in New York; (5) employee stock purchase plan compensation, the benefit of
which is not currently recognized under SFAS No. 123R but which is recognized upon a disqualified disposition; and (6) the benefit of federal
tax exempt interest income.
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 certain deferred tax assets in
New York; (5) employee stock purchase plan compensation, the benefit of which is not currently recognized under SFAS No. 123R but which is
recognized upon a disqualified disposition; and (6) the benefit of federal tax exempt interest income.
Cumulative Effect of Accounting Change, Net of Tax. In the year ended December 31, 2006, we recorded a $1.1 million pre-tax benefit
($1.0 million, net of tax) as the cumulative effect of accounting change upon the adoption of SFAS No. 123R to recognize the effect of
estimating the number of equity awards granted prior to January 1, 2006 that are not ultimately expected to vest.
Classmates Media Segment Results
Classmates Media Revenues. Classmates Media services revenues increased by $25.4 million, or 31%, to $106.5 million for the year
ended December 31, 2007, compared to $81.1 million for the year ended December 31, 2006. The increase in Classmates Media services
revenues was due to a 36% increase in our average number of pay accounts from 2.0 million for the year ended December 31, 2006 to
2.7 million for the year ended December 31, 2007. This increase in the average number of pay accounts was primarily attributable to a
Classmates pay feature, our digital guestbook, which was
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