Earthlink 2001 Annual Report Download - page 40

generally three to five years for computers and computer and telecommunications related equipment and five years for other non-computer
furniture and equipment. Leasehold improvements are amortized using the straight-line method over the shorter of their estimated lives or the
term of the lease, ranging from one to ten years.
Equipment under Capital Lease
The Company leases certain of its data communications and other equipment under capital lease agreements. The assets and liabilities
under capital lease are recorded at the lesser of the present value of aggregate future minimum lease payments, including estimated bargain
purchase options, or the fair value of the assets under lease. Assets under capital lease are amortized over the lesser of their estimated useful
lives of three to five years or the term of the lease.
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Intangibles
Intangible assets consist primarily of acquired customer bases, long-term marketing agreements, goodwill, and other items. Customer
bases acquired directly are valued at cost, which approximates fair value at the time of purchase. When material intangible assets, such as
customer bases and goodwill are acquired in conjunction with the purchase of a company, EarthLink undertakes a study by an independent
third party to determine the allocation of the total purchase price to the various assets acquired and the liabilities assumed. The costs assigned to
intangible assets are being amortized on a straight-line basis over the estimated useful lives of the assets, which is 36 months for substantially
all remaining intangible assets as of December 31, 2001. Goodwill and other intangible assets are periodically reviewed for impairment to
ensure they are appropriately valued. Conditions that may indicate an impairment issue exists include an economic downturn, changes in the
churn rate of subscribers or a change in the assessment of future operations. In the event that a condition is identified that may indicate an
impairment issue exists, an assessment is performed using a variety of methodologies, including cash flow analysis, estimates of sales proceeds
and independent appraisals. Where applicable, an appropriate interest rate is utilized, based on appropriate economic factors, risk and cost of
capital.
Advertising
Advertising costs are included in sales and marketing. Advertising costs include a variety of programs and strategies including,
(i) broadcast campaigns in television and radio, (ii) direct mail, (iii) co-marketing and bundling agreements, (iv) print publications, and
(v) other more innovative means, such as extensive online promotion and co-branding with a wide variety of interactive services partners.
Direct mail advertising consists of production, printing, mailing and postage, related to disks and coupons distributed through the mail; and
through promotional inserts in packages, periodicals and newspapers. Such costs are expensed as incurred. Advertising expenses were
$98.4 million, $182.0 million and $157.2 million in 1999, 2000 and 2001, respectively.
Income Taxes
Income taxes are accounted for under the liability method. Under this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting basis and tax basis of assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Net Loss per Share
Net loss per share has been computed according to SFAS No. 128, Earnings Per Share ("SFAS 128"), which requires disclosure of basic
and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options, shares subject to repurchase, warrants, and
convertible securities. Diluted earnings per share include the impact of potentially dilutive securities. The Company's potentially dilutive
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securities are antidilutive and, therefore, are not included in the computation of weighted-average shares used in computing diluted loss per
share. Such potentially dilutive securities consist of the following:
December 31,
1999 2000 2001
(In thousands)