Classmates.com 2004 Annual Report Download - page 83

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Cost of Free Services —With respect to Internet access services, cost of free services includes direct costs incurred in providing certain
technical and customer support services to free access accounts as well as costs that have been allocated to free services based on the aggregate
hourly usage of free access accounts as a percentage of total hours used by the Company's active access accounts. Allocated costs consist
primarily of telecommunications and data center costs, personnel and overhead-related costs associated with operating the Company's network
and data centers, and depreciation of network computers and equipment. The Company allocates costs associated with Web hosting between pay
services and free services based on estimated bandwidth used by free Web-hosting accounts. Costs associated with the Company's community-
based networking services are allocated based on the number of Web site visits by free accounts relative to the total number of visits.
Sales and Marketing —Sales and marketing expenses include advertising and promotion expenses, fees paid to distribution partners to
acquire new pay and free accounts, personnel-
related expenses for sales and marketing personnel and telemarketing costs incurred to acquire pay
accounts, retain pay accounts and up-sell pay accounts to additional services, such as the Company's accelerated dial-up services. The Company
has expended significant amounts on sales and marketing, including national branding campaigns comprised of television, Internet,
sponsorships, radio, print and outdoor advertising and on retail and other performance-based distribution relationships. Marketing and
advertising costs to promote the Company's products and services are expensed in the period incurred. Advertising and promotion expenses
include media, agency and promotion expenses. Media production costs are expensed the first time the advertisement is run. Media and agency
costs are expensed over the period the advertising runs. Advertising and promotion expense for the year ended December 31, 2004, the six
months ended December 31, 2003 and the years ended June 30, 2003 and 2002 was $147.1 million, $57.6 million, $67.7 million and
$25.4 million, respectively. At December 31, 2004 and 2003, $4.3 million and $3.5 million, respectively, of prepaid advertising and promotion
expense was included in other current assets.
Product Development Costs —The Company capitalizes certain costs incurred for the development of software. Product development
expenses include expenses for the maintenance of existing software and the development of new or improved software and technology, including
personnel-related expenses for the software engineering department and the costs associated with operating the Company's facility in India.
Costs incurred by the Company to manage, monitor and operate the Company's services are generally expensed as incurred, except for certain
costs relating to the acquisition and development of internal-use software that are capitalized and depreciated over their estimated useful lives,
generally three years or less.
General and Administrative —General and administrative expenses include personnel-related expenses for executive, finance, legal,
human resources and internal customer support personnel. In addition, general and administrative expenses include fees for professional, legal,
accounting and financial services, non-income taxes, insurance, and occupancy and other overhead-related costs, as well as the expenses
incurred and credits received as a result of certain legal settlements.
Stock-Based Compensation —The Company accounts for stock-based employee compensation arrangements in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees
, Financial Accounting Standards
Board ("FASB") Interpretation No. ("FIN") 44, Accounting for Certain Transactions Involving Stock Compensation , and Emerging Issues Task
Force ("EITF") Issue No. 00-23, Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FIN No. 44 and
complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-
Based Compensation
—Transition and Disclosure, an amendment of FASB Statement No. 123 . Under APB Opinion No. 25, employee stock-
based compensation expense is recognized over the vesting period based on the difference, if any, on the date of grant, between the fair value of
the Company's stock and the exercise price. The Company accounts for stock issued to non-employees in accordance with
F-14