Digital River 2002 Annual Report Download - page 55

49
Adv ertising Costs
The costs of advertising are charged to sales and marketing expense as incurred. The Company incurred advertising
expense of $413,000, $2,084,000 and $2,253,000 in 2002, 2001, 2000, respectively.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases
of assets and liabilities using currently enacted tax rates. No income taxes were paid in any of the years presented.
Stock-Based Compensation
At December 31, 2002, the Company has two stock-based employee compensation plans, which are described more
fully in Note 7. The Company accounts for these plans under the recognition and measurement principles of APB
Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee
compensation cost is reflected in net loss, as substantially all options granted under these plans had an exercise price
equal to the market value of the underlying common stock on the date of the grant. The following table illustrates the
effect on net loss and net loss per share if the Company had applied the fair value recognition provision of Financial
Accounting Standards Board Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based
employee compensation.
The Company has elected to apply the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation” as amended by SFAS No. 148. Accordingly, the Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, “Accounting for
Stock Issued to Employees”, and related interpretations. Compensation cost for stock options is measured as the excess,
if any, of the fair value of the Company’ s Common Stock at the date of grant over the stock option exercise price. Had
compensation costs for these plans been determined consistent with SFAS No. 123, the Company’ s net loss would have
been adjusted to the following pro forma amounts:
F or t he Ye ars Ende d D ec em ber 31,
2002 2001 2000
N et loss, a s re por te d....................................................................................... $ ( 510,000) $ ( 19,222,00
0
) $ ( 38,116,000)
A dd: Stock- ba se d c ompensa tion, as r e porte d ............................................ 37,000 218,00
0
443,00
0
D educ t: Total stoc k- based compe nsation de te rmine d under fa ir va lue
based me thod for a ll aw ar ds .................................................................... ( 8,668,000) ( 3,164,000) ( 11,484,000)
A djusted ne t loss, f a ir va lue method f or all stock- ba se d a wa r ds............. $ ( 9,141,000) $ ( 22,168,00
0
) $ ( 49,157,000)
Basic and dilute d loss pe r sha r e — a s re por te d ......................................... $ ( 0.02) $ ( 0.7
9
) $ ( 1.78)
Basic and dilute d loss pe r sha r e — SFA S N o. 123 adjuste d ................... $ ( 0.34) $ ( 0.9
1
) $ ( 2.30)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used: risk-free interest rates of 3.0%, 4.5%, and 6% in 2002, 2001, and
2000, respectively; no expected dividends; expected lives of five years; and a volatility factor of 1.4, 1.1, and 1.2 in
2002, 2001, and 2000, respectively. The weighted average fair value of the options granted in 2002, 2001, and 2000
was $7.16, $3.56, and $20.46, respectively.
Net Loss per Share
Basic loss per common share is computed by dividing net loss by the weighted average number of shares of common
stock outstanding during the year. The computation of diluted earnings per common share is similar to the computation
of basic loss per common share, except that the denominator is increased for the assumed conversion of convertible
securities and the exercise of dilutive options using the treasury stock method. The weighted average shares used in
computing basic and diluted loss per share were the same in each of the three years ended December 31, 2002. Stock
options and warrants totaling 6,115,950, 5,947,790 and 5,383,113 for 2002, 2001 and 2000, respectively, were
excluded from the computation of loss per share as their effect was antidilutive.
U se of Estimate s
The preparation of financial statements in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Ultimate results could differ from those estimates.