Earthlink 2005 Annual Report Download - page 77

Download and view the complete annual report

Please find page 77 of the 2005 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 113

  • 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
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113

EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Management has concluded that one entity in which the Company has invested is a VIE, eCompanies Venture Group, L.P. (“EVG”).
EVG
is a limited partnership formed to invest in domestic emerging Internet-related companies. The Company made capital investments in EVG
totaling $10.0 million during the years ended December 31, 1999 and 2000, and through these investments is a limited partner investor. The
Company does not consolidate the results of EVG because management has determined that the Company is not the primary beneficiary. The
Company has no exposure to loss as a result of its involvement in EVG, as the carrying value of the Company’s investment in EVG as of
December 31, 2005 was zero. In addition, the Company is not required to make any contributions. Management has concluded that the
Company did not have any other arrangements with entities that qualify as a VIE and, accordingly, does not consolidate the results of any other
investees.
Investment in HELIO
The Company accounts for its investment in HELIO under the equity method of accounting because the Company can exert significant
influence over HELIO’s operating and financial policies. The Company determined that HELIO does not qualify as a VIE under FIN No. 46,
so consolidation pursuant to FIN No. 46 is not required. In accordance with the equity method of accounting, EarthLink’s investment in
HELIO was recorded at original cost and is adjusted to recognize EarthLink’s proportionate share of HELIO’s net income (loss), amortization
of basis differences and additional contributions made.
The Company records its proportionate share of HELIO’s net income (loss) and amortization of basis differences in net losses of equity
affiliate in the Consolidated Statements of Operations. During the year ended December 31, 2005, the Company recorded $20.7 million of
equity method losses related to its HELIO investment, partially offset by $5.1 million of amortization associated with the difference between
the carrying value and fair value of assets contributed. See Note 6, “Investments.”
Fair Value of Financial Instruments
The carrying amounts of the Company’
s cash, cash equivalents, trade receivables and trade payables approximate their fair values because
of their nature and respective durations. The Company’s short- and long-term investments in marketable securities consist of available-for-sale
securities and are carried at market value, which is based on quoted market prices, with unrealized gains and losses included in stockholders’
equity. The Company’s equity investments in publicly-held companies are stated at fair value, which is based on quoted market prices. The
Company’s investments in privately-held companies are stated at cost, net of other-than-temporary impairments.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is determined using the straight-line
method over the estimated useful lives of the various asset classes, which are generally three to five years for computers, telecommunications
equipment and furniture and other office equipment and 15 years for buildings. Leasehold improvements are depreciated using the straight-line
method over the shorter of their estimated useful lives or the remaining term of the lease. When leases are extended, the remaining useful lives
of leasehold improvements are increased as appropriate, but not for a period in excess of the remaining lease term. Expenditures for
maintenance and repairs are charged to operating expense as incurred. Upon retirements or sales, the original cost and related accumulated
depreciation are removed from the respective accounts, and the gains and losses are included in interest
76