Earthlink 2003 Annual Report Download - page 27

Sales incentives decreased 45% from $67.9 million during the year ended December 31, 2001 to $37.7 million during the year ended
December 31, 2002. The decrease in sales incentives is attributable to declines in the prices of broadband modems provided to new customers,
including support provided by broadband network partners to offset such costs, and a shift in emphasis from sales incentives to reduced price
introductory offers to attract new subscribers.
Sales and marketing
Sales and marketing expenses increased 14% from $328.0 million during the year ended December 31, 2001 to $373.5 million during the
year ended December 31, 2002. The increase was primarily due to sales and marketing expenses incurred during the year ended December 31,
2002 associated with the products and services acquired and developed in connection with the acquisitions of Cidco (MailStation), the
OmniSky platform and PeoplePC in December 2001, January 2002 and July 2002, respectively, as well as an increase in sales and marketing
costs associated with our EarthLink Everywhere initiative. The increase was also due to an increase in expenses associated with enhancing the
customer relationship in an effort to reduce churn as well as direct and performance-based sales and marketing expenses. As a percentage of
revenues, sales and marketing expenses increased from 26% to 28% of total revenues for the years ended December 31, 2001 and 2002,
respectively.
Operations and customer support
Operations and customer support expenses decreased from $339.5 million during the year ended December 31, 2001 to $324.6 million
during the year ended December 31, 2002. The decrease in operations and customer support costs was due to improved efficiencies in customer
service operations.
General and administrative
General and administrative expenses decreased $4.4 million from $127.8 million during the year ended December 31, 2001 to
$123.4 million during the year ended December 31, 2002. The decrease is due to a reduction in personnel, occupancy and tax expenses offset
by higher professional fees and higher payment processing and bad debt costs, which are largely variable to revenues.
The reduction in personnel and related overhead costs during the year ended December 31, 2002 as compared to the same period of the
prior year is due to the integration of OneMain during the first quarter of 2001. A substantial portion of the integration costs incurred in the first
quarter of 2001 represented the salaries and benefits paid to legacy OneMain personnel and the overhead associated with the personnel during
the integration period. Subsequent acquisitions were significantly smaller, and we incurred minimal incremental integration costs during the
year ended December 31, 2002.
Acquisition
-related amortization
Acquisition-related amortization decreased 49% from $217.5 million during the year ended December 31, 2001 to $110.9 million during
the year ended December 31, 2002. Acquisition-related amortization declined $77.4 million as a result of the intangible assets acquired in the
Spry, Inc. and NETCOM transactions in October 1998 and February 1999, respectively, becoming fully amortized in November 2001 and
February 2002, respectively. Acquisition-related amortization also decreased $42.3 million as a result of the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which required us to cease amortization of goodwill and
other indefinite life intangible assets on January 1, 2002. These decreases were offset by the amortization of definite-life intangible assets
resulting from our acquisitions of Cidco and PeoplePC in December 2001 and July 2002, respectively, and other subscriber acquisitions.
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Facility exit costs
During the fourth quarter of 2002, we closed our Phoenix, Arizona contact center facility to consolidate operations and reduce overall
costs. The closure of the Phoenix facility resulted in the termination of 259 employees. 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 asset write-downs.
Intangible asset write
-off
In February 2001, we renegotiated our commercial and governance arrangements with Sprint. Under the renegotiated arrangements, our
exclusive marketing and co-branding arrangements with Sprint were terminated. Accordingly, we recorded a non-
cash charge of approximately
$11.3 million to write-off unamortized intangible assets related to the marketing and co-branding arrangements with Sprint.
Write
-
off of equity investments in other companies