Earthlink 2003 Annual Report Download

Download and view the complete annual report

Please find the complete 2003 Earthlink annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 70

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70

FORM 10-K
EARTHLINK INC
(Annual Report)
Filed 3/5/2004 For Period Ending 12/31/2003
Address 1375 PEACHTREE STREET SUITE 400
ATLANTA, Georgia 30309
Telephone 404-815-0770
CIK 0001102541
Industry Computer Services
Sector Technology
Fiscal Year 12/31

Table of contents

  • Page 1
    EARTHLINK INC FORM 10-K (Annual Report) Filed 3/5/2004 For Period Ending 12/31/2003 Address Telephone CIK Industry Sector Fiscal Year 1375 PEACHTREE STREET SUITE 400 ATLANTA, Georgia 30309 404-815-0770 0001102541 Computer Services Technology 12/31

  • Page 2
    ... EARTHLINK, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware (State of Incorporation) 58-2511877 (I.R.S. Employer Identification No.) 1375 Peachtree St., Atlanta, Georgia 30309 (Address of Principal Executive Offices, Including Zip Code) (404) 815-0770 (Registrant's telephone...

  • Page 3
    ...Controls and Procedures PART III Item 10. Item 11. Item 12. Item 13. Item 14. Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management Certain Relationships and Related Transactions Principal Accounting Fees and Services...

  • Page 4
    ... service offerings are narrowband, broadband or high-speed, and wireless Internet access services; web hosting; and advertising and related services. We provide our broad range of services to more than five million paying customers through a nationwide network of dial-up points of presence ("POPs...

  • Page 5
    ...narrowband Internet access, including premium and value-priced dial-up access over traditional telephone lines and wireless access through a variety of handheld and laptop devices; high-speed or broadband access via DSL, cable modem, satellite and dedicated circuits; web hosting; and advertising and...

  • Page 6
    ... customer service and technical support are critical to attracting new and retaining existing customers. We provide the following services for our premium-priced narrowband, broadband and wireless Internet access subscribers toll-free, live telephone assistance available seven days a week, 24 hours...

  • Page 7
    ...Internet access services, we provide free email-based customer support and technical assistance seven days a week, 24 hours a day. We also offer free customer billing and software installation support via telephone seven days a week from 9 a.m. to 9 p.m. EST, and we offer fee-based technical support...

  • Page 8
    ...-managed POP. Customers located in a geographic area not currently serviced by a local POP can access the Internet through EarthLink's dial-up toll free service. We have access to POPs with third-party dial-up providers through network service agreements with Level 3 Communications, Inc., Sprint...

  • Page 9
    ... ISPs as a condition of the AOL-Time Warner merger. EarthLink also offers broadband Internet access over cable to Comcast customers in the Seattle and Boston area markets. In August 2003, the FCC issued its UNE Triennial Review Order which, among other things, eliminates line sharing. Line sharing...

  • Page 10
    ... as Sprint; content companies, such as Yahoo!, who are expanding their service offerings; cable television companies providing broadband access, including, among others, Comcast, Charter Communications, Inc. and Cox Communications, Inc.; and utility and local and long-distance telephone companies...

  • Page 11
    ... contact center service providers and, consequently, will close four contact centers. The closure of the four contact centers is expected to impact approximately 1,300 employees, primarily customer support personnel. Available Information EarthLink files annual, quarterly, and current reports...

  • Page 12
    ..., GA 30309 10 Item 2. Properties. We maintain facilities and offices at various locations throughout the U.S. for general corporate purposes, including technology centers, customer contact centers, office space and our corporate headquarters. Our principal executive offices are in Atlanta, Georgia...

  • Page 13
    ... compensation plans as of December 31, 2003 is set forth under the caption "Executive Compensation-Executive Officer Compensation-Amended Equity Compensation Plan Information" in our Proxy Statement referred to in Item 10 or in a subsequent amendment to this report. Such information is incorporated...

  • Page 14
    ... Internet service provider ("ISP"), providing nationwide Internet access and related value-added services to its individual and business customers. Our primary service offerings are narrowband, broadband or high-speed, and wireless Internet access services; web hosting services; and advertising...

  • Page 15
    ... offer services with a limited set of features priced typically at $9.95 to $14.95 per month and are currently demonstrating an ability to grow by attracting households new to the Internet or current Internet users interested in reducing their cost of Internet access. Broadband or high-speed access...

  • Page 16
    ... June 30, 2002, our full package of high-speed Internet access, content, applications and functionality was available in all 39 markets served. As of December 31, 2003, more than 20% of our broadband subscribers were serviced via either the Time Warner Cable or Bright House Networks network. We have...

  • Page 17
    ... data: Revenues: Narrowband access Broadband access Web hosting Content, commerce and advertising Total revenues Operating costs and expenses: Telecommunications service and equipment costs Sales incentives Total cost of revenues Sales and marketing Operations and customer support General and...

  • Page 18
    ... for employee, personnel and related costs; $0.5 million for real estate and telecommunications service termination costs; and $1.3 million in asset writedowns. In 2003, facility exit costs resulted from closing contact center facilities in Dallas, Texas; Sacramento, California; Pasadena, California...

  • Page 19
    ... Ended December 31, 2003 Compared to Year Ended December 31, 2002 Narrowband access revenues Narrowband access revenues primarily consist of monthly fees charged to customers for dial-up and wireless Internet access and equipment revenues associated with selling personal computers, handheld devices...

  • Page 20
    ... more intense. Broadband access revenues Broadband access revenues consist of fees charged for high-speed, high-capacity access services including DSL, cable, satellite and dedicated circuit services; installation fees; termination fees; and fees for equipment. Broadband revenues increased $110...

  • Page 21
    ... consumer's 23 home, and pays EarthLink to provide underlying Internet services such as authentication, email, web space, news and varying degrees of customer support. While retail services are generally priced above $40 per month per subscriber to cover all of the costs of the service, wholesale...

  • Page 22
    ... Corporation Verizon Communications Inc. Time Warner Cable March October December 2006 2006 2006 We have historically had wholesale relationships with Sprint and Charter. Our contract with Sprint to provide wholesale broadband services is not exclusive and has annual windows for termination...

  • Page 23
    ... and customer support Operations and customer support expenses consist of costs associated with technical support and customer service, providing our subscribers with toll-free access to our technical support and customer service centers, maintenance of customer information systems, software...

  • Page 24
    ... centers in Dallas, Texas; Sacramento, California; Pasadena, California; and Seattle, Washington during the months of February and March 2003. The closure of the four contact centers resulted in the termination of 1,220 employees and a net reduction of 920 employees, primarily customer support...

  • Page 25
    ... of acquired subscribers to standard EarthLink pricing plans, the migration of narrowband subscribers to broadband services, and the continued maturing and ongoing competitiveness of the market for narrowband Internet access which resulted in fewer new customers from our sales and marketing programs...

  • Page 26
    ... the mix of our broadband subscriber base from frame relay and dedicated circuit subscribers to retail DSL, retail cable and wholesale broadband relationships. The decrease also resulted from introductory pricing offered to new retail broadband customers in 2002 to stimulate increased sales. 29 The...

  • Page 27
    .... In connection with the closing of the Phoenix facility, we recorded facility exit costs of $3.5 million. These costs included approximately $1.7 million for employee, personnel and related costs; $0.5 million for real estate and telecommunications contract termination costs; and $1.3 million in...

  • Page 28
    ...to exit PeoplePC's international operations. The PeoplePC Plan called for the net reduction of 13 positions in operations and customer support, sales and marketing, and in general and administrative departments. The original estimates for costs associated with the PeoplePC Plan included $2.1 million...

  • Page 29
    ... 31, 2003 Payments Payments Non-Cash Items Payments (in thousands) Adjustments Balance December 31, 2003 Facility exit costs associated with the Contact Center Plan: Severance and personnel related costs Real estate and telecommunications contract termination costs, including non-cancelable...

  • Page 30
    ... 31, 2003, primarily related to non-cancelable operating lease payments accrued but payable in future periods, net of estimated sublease income. Excluding the accruals for the facility exit costs and the change in deferred revenue associated with the non-cash revenues, we used approximately $30...

  • Page 31
    ...also use cash to execute our plans to restructure our contact center operations in the first quarter of 2004, including payments for employee and personnel related costs and real estate obligations. We have no commitments for any additional financing and have no lines of credit or similar sources of...

  • Page 32
    ... and/or the telecommunications partner has latitude in establishing prices, EarthLink records revenue associated with the related subscribers on a net basis, netting the cost of revenue associated with the service against the gross amount billed the customer and recording the net amount as revenue...

  • Page 33
    ... (benefit) and net income (loss) in the period in which such determination is made. Restructuring and facility exit costs From time to time, EarthLink acquires businesses and identifies personnel of the acquiree that will be terminated and facilities used by the acquiree that it will close and exit...

  • Page 34
    ... while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we have invested in may be subject to market risk. This means that a change in prevailing interest rates may cause the fair value of the investments...

  • Page 35
    ...'s management, including EarthLink's Chief Executive Officer and Chief Financial Officer, of the effectiveness of EarthLink's disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based...

  • Page 36
    ...of 1934, as amended, will be set forth under the caption "Executive Officers-Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the above-referenced Proxy Statement or in a subsequent amendment to this Report. Information relating to EarthLink's Code of Ethics for directors and...

  • Page 37
    ... Effective Amendment to Registration Statement on Form S-8-File No. 333-108065). - EarthLink, Inc. Deferred Compensation Plan for Directors and Certain Key Employees (incorporated by reference to Exhibit 4.5 of EarthLink, Inc.'s Post Effective Amendment to Registration Statement on Form S-8-File No...

  • Page 38
    ...pursuant to its share repurchase program. EarthLink filed a Current Report on Form 8-K dated November 20, 2003 in which EarthLink reported under Item 5 that its Board of Directors approved the establishment of a sales plan by Sky D. Dayton, Chairman of the Board of Directors of EarthLink, to sell up...

  • Page 39
    ...or 15(d) of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EARTHLINK, INC. By: /s/ CHARLES G. BETTY Charles G. Betty, Chief Executive Officer Date: March 5, 2004 Each person whose signature appears...

  • Page 40
    ... with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the...

  • Page 41
    ... assets Total current assets Long-term investments in marketable securities Other long-term assets Property and equipment, net Subscriber bases, net Goodwill and other indefinite life intangible assets Total assets $ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable...

  • Page 42
    ... per share data) 2003 Revenues: Narrowband access Broadband access Web hosting Content, commerce and advertising Total revenues Operating costs and expenses: Telecommunications service and equipment costs Sales incentives Total cost of revenues Sales and marketing Operations and customer support...

  • Page 43
    ... of common stock pursuant to employee stock purchase plan Issuance of restricted stock units Amortization of deferred compensation Repurchase of common stock Unrealized holding losses on certain investments Net loss Total comprehensive loss Balance at December 31, 2003 - $ - 176,410 $ 1,764 $ 1,949...

  • Page 44
    ... Purchases of property and equipment, net Proceeds from the sale of fixed assets Investments in marketable securities Purchases Sales and maturities Equity investments in other companies Purchases of businesses, net of cash acquired Purchases of subscriber bases Net cash used in investing activities...

  • Page 45
    ... subscriber line ("DSL"), cable, satellite, fixed wireless and dedicated circuit services. Broadband access revenues also include installation, shipping, and equipment revenues as well as activation and early termination fees. Web hosting revenues consist of fees earned by leasing server space...

  • Page 46
    ... Company's Internet access services; fees paid to content providers for information provided on the Company's online properties, including the Company's Personal Start Pageâ„¢; the costs of equipment sold to customers for use with the Company's narrowband and broadband Internet access services; and...

  • Page 47
    ... 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...

  • Page 48
    ... of stock options used to compute pro forma net loss is the estimated fair value at the date of grant using the Black-Scholes option-pricing model with the following assumptions: Year Ended December 31, 2001 2002 2003 Annual dividends Expected volatility Risk free interest rate Expected life zero...

  • Page 49
    ... 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...

  • Page 50
    ... acquired directly are valued at cost plus assumed service liabilities, which approximates fair value at the time of purchase. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for as purchases. When management...

  • Page 51
    ...January 2002, the Company acquired the proprietary software platform of OmniSky Corporation ("OmniSky") in a Bankruptcy Code Section 363 purchase of assets. OmniSky was a provider of wireless data applications and services for use on mobile devices. The aggregate cost to acquire the OmniSky platform...

  • Page 52
    ...is included in telecommunications service and equipment costs in the Company's Consolidated Statement of Operations for the year ended December 31, 2003. PeoplePC In July 2002, EarthLink purchased the outstanding stock of PeoplePC. PeoplePC provides value-priced Internet access using a costefficient...

  • Page 53
    ...support its broadband service offerings. In connection with the Contact Center Plan, EarthLink recorded facility exit costs of $36.6 million. These F-18 costs included approximately $10.7 million for employee, personnel and related costs, $18.2 million for real estate and telecommunications service...

  • Page 54
    ...(296) $ Balance December 31, 2003 - - - - Non-Cash Items Payments (in thousands) Adjustments Facility exit costs associated with the Contact Center Plan: Severance and personnel related costs Real estate and telecommunications contract termination costs, including non-cancelable leases Write-off...

  • Page 55
    ... assets that are not deemed to have indefinite lives acquired in conjunction with the purchases of businesses and subscriber bases from other ISPs, but exclude any acquired software. Generally, definite life intangible assets are amortized on a straight-line basis over three years from the date of...

  • Page 56
    ...abandoned and disposed property and equipment associated with the Contact Center Plan with an aggregate net book value of $8.2 million. The retired property and equipment associated with the Contact Center Plan, primarily leasehold improvements and office equipment, had a cost basis of $18.3 million...

  • Page 57
    ...Repurchase Program does not require the Company to acquire any specific number of shares and may be terminated at any time. During the years ended December 31, 2002 and 2003, the Company repurchased 2.6 million and 5.8 million shares, respectively, of its common stock for an aggregate purchase price...

  • Page 58
    ... at such time by the conversion value per share in effect at such time. Sprint received dividends on Series A and Series B convertible preferred stock at an annual rate of 3% of the stated liquidation value per share, compounded quarterly. Through June 2003, such dividends were payable "in kind...

  • Page 59
    ..., eligible employees may have up to 15% of eligible compensation deducted from their pay to purchase EarthLink common stock. Under the ESPP, withholdings are used to purchase shares at the beginning of each quarter at a per share purchase price equal to 85% of the lesser of the closing price on the...

  • Page 60
    ...: Year Ended December 31, 2001 2002 (in thousands) 2003 Federal income tax benefit at statutory rate State income taxes, net of federal benefit Nondeductible goodwill, acquisition costs and other permanent items Net change to valuation allowance Other $ (119,372) $ (12,633) 13,389 121,633 (3,017...

  • Page 61
    ... of owned POPs is provided through capacity leased from a number of third-party providers such as Level 3 and Sprint. EarthLink is, in effect, buying this capacity in bulk at a discount, and providing access to EarthLink's customer base at F-28 EarthLink's normal rates. Amounts payable at December...

  • Page 62
    ... costs from these non-cancelable network service agreements totaled $449.5 million, $263.3 million and $212.0 million for the years ended December 31, 2001, 2002 and 2003, respectively. 15. Profit Sharing Plans In January 2001, the Company consolidated the legacy 401(k) savings plans of EarthLink...

  • Page 63
    ... and further utilize outsourced contact center service providers. Under the plan, EarthLink will close contact center operations in Harrisburg, Pennsylvania; Roseville, California; San Jose, California; and Pasadena, California and reduce its contact center operations in Atlanta, Georgia by the end...

  • Page 64
    ... stock at a 3% annual rate, compounded quarterly, and dividends related to the beneficial conversion features of the Series A and Series B convertible preferred stock in accordance with EITF Issue No. 98-5. Because of the method used in calculating per share data, the quarterly net income (loss) per...

  • Page 65
    ...Power of Attorney (see the Power of Attorney in the signature page hereto). - Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules... QuickLinks EARTHLINK, INC. Annual Report on Form 10-K For the Year Ended December 31, 2003 TABLE OF CONTENTS PART I Item 1. Business. Item...

  • Page 66
    ... 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Item 9a. Controls and Procedures. PART III Item 10. Directors and Executive Officers of the Registrant. Item 11. Executive Compensation. Item 12. Security Ownership of Certain Beneficial Owners and Management...

  • Page 67
    ... involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 5, 2004 By: /s/ CHARLES G. BETTY Charles G. Betty Chief Executive Officer QuickLinks CERTIFICATION OF CEO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a...

  • Page 68
    ... 31.2 CERTIFICATION OF CFO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Lee Adrean, the Chief Financial Officer of EarthLink, Inc., certify that: 1. 2. I have reviewed this annual report on Form 10-K for the year...

  • Page 69
    ... OF 2002 In connection with the Annual Report on Form 10-K of EarthLink, Inc. (the "Company") for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Charles G. Betty, Chief Executive Officer of the Company, certify, pursuant to...

  • Page 70