Classmates.com 2008 Annual Report Download - page 79

Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks arising from transactions in the normal course of business, principally risk associated with interest
rate and foreign currency fluctuations.
Interest Rate Risk
We are exposed to interest rate risk on the outstanding balances of the UOL Credit Agreement and the FTD Credit Agreement. The term
loans under the UOL Credit Agreement bear interest at either LIBOR plus 3.50% per annum (with a LIBOR floor of 3.00%) or the prime rate
plus 2.00% per annum. The interest rate set forth in the FTD Credit Agreement for loans made under the revolving credit facility and term loan
A facility is either LIBOR plus 3.50% per annum (with a LIBOR floor of 3.00%) or the prime rate plus 2.50% per annum, in each case, with
step-downs in the interest rate depending on FTD's leverage ratio. The interest rate set forth in the FTD Credit Agreement for loans made under
the term loan B facility is either the prime rate plus 3.50% per annum or LIBOR plus 4.50% per annum (with a LIBOR floor of 3.00%), in each
case, with step-downs in the interest rate depending on FTD's leverage ratio. The FTD Credit Agreement also requires that FTD maintain one or
more interest rate swap agreements, interest rate cap agreements, interest rate collar agreements or other similar instruments to manage risks
associated with interest rate fluctuations and exposures on its credit facilities with Wells Fargo Bank, National Association. Accordingly, in
November 2008, we entered into a three
-year interest rate cap instrument based on a $150 million notional amount of our FTD Credit
Agreement. At December 31, 2008, the interest rate cap instrument was designated as a cash flow hedge and was intended to be in place from
January 2009 through September 2011. However, in January 2009, as economic and capital market conditions continued to deteriorate, we
determined that prime-based borrowings were more attractive than LIBOR-based borrowings. Therefore, in January 2009, the cash flow hedge
was de-designated, and will no longer qualify for hedge accounting. Therefore, fluctuations in market value of the interest rate cap will be
recorded in earnings. If interest rates were to increase 100 basis points, the result would be an annual increase in our interest expense related to
our debt of approximately $4.2 million.
We also have interest rate risk 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 typically have maintained 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, prior to 2008, auction rate securities. We have not
used derivative financial instruments in our short-term investments portfolio. Our principal objective in managing our short-term investments is
the preservation of principal and liquidity, while optimizing 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.
During the year ended December 31, 2008, in connection with our acquisition of FTD, we liquidated our short-term investments portfolio
and recognized gains of approximately $0.3 million. Additionally, during 2007, we liquidated, without any losses in principal, our investments in
auction rate securities and did not hold any auction rate securities in our portfolio at December 31, 2008 or 2007. We classify all of our short-
term investments as available-for-sale. Available-for-sale securities are
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