Classmates.com 2006 Annual Report Download - page 76

performed under the contract and has billed for its services, but the collection of the receivable is not reasonably assured. In such case, revenue is
recognized once the collection of the cash is no longer in doubt. Also, deferred revenue represents invoiced services that have not yet been
performed.
Cost of Revenues— Cost of revenues includes telecommunications and data center costs; personnel and overhead-related costs associated
with operating our networks and data centers; depreciation of network computers and equipment; email technical support and license fees; costs
related to providing telephone technical support; customer billing and billing support to our pay accounts; domain name registration fees; and
costs of providing rewards to members of our loyalty marketing service.
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. The Company has expended significant amounts on sales and
marketing, including branding and customer acquisition campaigns consisting 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 years ended December 31, 2006, 2005 and 2004 was $117.7 million, $159.5 million and
$147.1 million, respectively. At December 31, 2006 and 2005, $1.3 million and $3.6 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.
Software Development Costs— The Company accounts for cost incurred to develop software for internal use in accordance with Statement
of Position 98-1, Accounting for Costs of Computer Software Developed or Obtained for Internal Use , which requires such costs be capitalized
and amortized over the estimated useful life of the software. We capitalize costs associated with customized internal-use software systems that
have reached the application development stage. Such capitalized costs include external direct costs utilized in developing or obtaining the
applications and payroll and payroll-related expenses for employees who are directly associated with the applications. Capitalization of such
costs begins when the preliminary project stage is complete and ceases at the point in which the project is substantially complete and ready for
its intended purpose. The Company capitalized costs associated with internal-use software of $8.1 million and $4.5 million in the years ended
December 31, 2006 and 2005, respectively, which are being depreciated on a straight-line basis over each project’
s estimated useful life which is
generally three years. Capitalized internal use software is included within computer software and equipment category within property and
equipment, net.
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.
F- 14