Earthlink 2003 Annual Report Download - page 47

co-branding with a wide variety of interactive partners. Direct mail advertising consists of production, printing, mailing and postage related to
disks and coupons distributed through the mail and as promotional inserts in packages, periodicals and newspapers. Advertising costs are
expensed as incurred. Advertising expenses were $157.2 million, $145.8 million and $173.0 million during the years ended December 31,
2001, 2002 and 2003, respectively.
Software Development Costs
EarthLink accounts for research and development costs in accordance with several accounting pronouncements, including Statement of
Financial Accounting Standards ("SFAS") No. 2, "Accounting for Research and Development Costs," and SFAS No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." SFAS No. 86 specifies that costs incurred internally in creating a
computer software product should be charged to expense when incurred as research and development until technological feasibility has been
established for the product. Once technological feasibility is established, all software costs should be capitalized until the product is available
for general release to customers. Judgment is required in determining when the technological feasibility of a product is established. The
Company has determined that technological feasibility for its products is reached very shortly before the
F-9
products are released. Costs incurred after technological feasibility is established are not material, and, accordingly, the Company expenses
research and development costs when incurred.
Income Taxes
Income taxes are accounted for under the liability method. Under this method, deferred tax assets and liabilities are recognized for
operating loss carryforwards, tax credit carryforwards and the estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which the temporary differences are expected to be recovered or settled. A valuation
allowance is recorded to reduce the carrying amounts of deferred tax assets if there is uncertainty regarding their realization.
Net Loss per Share
Net loss per share has been computed according to SFAS No. 128, "Earnings per Share," which requires disclosure of basic and diluted
net loss per share. Basic and diluted net loss per share for all periods is calculated by dividing net loss by the weighted average number of
common shares outstanding during the period. Due to the Company's net losses, the effect of potentially dilutive securities or common stock
equivalents that could be issued was excluded from the diluted net loss per share calculation due to the anti-dilutive effect. Such potentially
dilutive securities consist of the following:
The options and warrants amounts included in the above table represent all options and warrants outstanding. However, certain of these
options and warrants have exercise prices greater than the market value of the Company's common stock and, consequently, are anti-dilutive.
Additionally, in accordance with SFAS No. 128, the Company would utilize the treasury stock method to determine the dilution attributable to
options and warrants, and the application of such method generally results in a number of options and warrants included in diluted weighted
average shares outstanding being less than the absolute quantity outstanding. Using the application of the treasury stock method, potentially
dilutive options and warrants during the year ended December 31, 2003 would have resulted in approximately 2.4 million shares included in
diluted weighted average shares outstanding, if such securities would have had a dilutive effect.
Stock-Based Compensation
As of December 31, 2003, EarthLink had various stock-based compensation plans and the EarthLink, Inc. Employee Stock Purchase Plan
("ESPP"), which are more fully described in Note 12, "Stock Compensation Plans and Warrants." EarthLink accounts for those plans under the
intrinsic value
As of December 31,
2001 2002 2003
(in thousands)
Convertible preferred stock
26,951
17,979
—
Options and warrants
21,022
28,356
22,742
Restricted stock units
—
—
24
Total
47,973
46,335
22,766