Earthlink 2003 Annual Report Download - page 49

gains and losses which are excluded from the Consolidated Statements of Operations in accordance with SFAS No. 130, "Reporting
Comprehensive Income." For the years ended December 31, 2002 and 2003, these amounts included unrealized gains and losses on certain
investments classified as available-for-sale. The amounts are presented net of tax-
related effects which management estimates to be zero, due to
losses incurred by the Company and uncertainty regarding realization of deferred tax assets.
Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents.
These investments primarily consist of money market funds, asset-backed securities and commercial paper.
Investments
Investments in marketable securities are accounted for in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." All investments with original maturities greater than three months and with maturities less than one year from the
balance sheet date are considered short-term investments. Investments with maturities greater than one year from the balance sheet date are
considered long-term investments. The investments are of investment grade and include corporate bonds, asset-backed securities and
government agency notes.
The Company has classified all short- and long-term investments in marketable securities as available-for-sale. Available-for-sale
securities are carried at fair value, with any unrealized gains and losses, net of tax, included in unrealized gains (losses) on investments as a
separate component of stockholders' equity. Realized gains and losses are included in interest income and other, net, in the Consolidated
Statements of Operations and are determined on a specific identification basis.
Equity investments in other companies, including investments in venture capital funds, are accounted for under the cost method.
Management regularly evaluates the recoverability of its equity investments in other companies based on the performance and the financial
position of those companies as well as other evidence of market value. During the years ended December 31, 2001, 2002 and 2003, the
Company recognized losses of $10.0 million, $0.6 million and $0.2 million, respectively, to write down its equity investments in other
companies to their estimated realizable value. These losses are included in write-off of equity investments in other companies in the
Consolidated Statements of Operations.
Accounts Receivable and Deferred Revenue
The Company generally bills for Internet access services monthly in advance for customers on month-to-month service plans. The
Company offers prepay plans that allow customers to prepay for services for periods of up to two years. The Company's wholly-owned
subsidiary, PeoplePC Inc. ("PeoplePC"), offers a package that includes a personal computer and prepaid Internet access services for
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a period of up to four years. The Company defers advanced billings and prepayments and recognizes such amounts as revenues as services are
delivered. Deferred revenue associated with periods more than one year from the date of the financial statements is classified as long-term.
EarthLink maintains allowances for doubtful accounts for estimated losses resulting from the inability of EarthLink's customers to make
required payments. In assessing the adequacy of the allowance for doubtful accounts, management considers multiple factors including the
aging of its receivables, historical bad debt experience and the general economic environment. If the financial condition of EarthLink's
customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. With
respect to receivables due from consumers, the Company's policy is to specifically reserve for all receivables 60 days or more past due and
provide a general reserve for receivables less than 60 days past due. EarthLink provides a general reserve for commercial accounts receivable
and periodically evaluates commercial accounts receivable and provides specific reserves when accounts are deemed uncollectible. The
Company has recorded an allowance for doubtful accounts of $5.0 million and $5.9 million at December 31, 2002 and 2003, respectively. The
Company recorded bad debt expense of $29.1 million, $29.1 million and $33.4 million during the years ended December 31, 2001, 2002 and
2003, respectively.
Financial Instruments
By their nature, all financial instruments involve risk, including credit risk for non-performance by counterparties. Financial instruments
that potentially subject the Company to credit risk consist principally of cash, cash equivalents, investments in marketable securities and trade
receivables. The Company's cash investment policy limits investments to shorter-term, investment grade instruments. Credit risk with respect
to trade receivables is limited due to the large number of customers comprising the Company's customer base. The carrying values reported in
the Consolidated Balance Sheets for cash, cash equivalents, investments in marketable securities and trade receivables approximate their fair
values.