Earthlink 2001 Annual Report Download

Download and view the complete annual report

Please find the complete 2001 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 58

  • 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

FORM 10-K
EARTHLINK INC
(Annual Report)
Filed 3/21/2002 For Period Ending 12/31/2001
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 3/21/2002 For Period Ending 12/31/2001 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
    ... 31, 2001 Commission file number 001-15605 EARTHLINK, INC. (Exact name of Registrant as specified in its charter) Delaware (State of Incorporation) 58-2511877 (I.R.S. Employer Identification Number) 1375 Peachtree St., Atlanta, Georgia 30309 (Address of principal executive offices, including...

  • Page 3
    EARTHLINK, INC. Annual Report on Form 10-K For the Year Ended December 31, 2001 TABLE OF CONTENTS Part I Item 1. Item 2. Item 3. Item 4. Business Properties Legal Proceedings Submission of Matters to a Vote of Security-Holders Part II Item 5. Item 6. Item 7. Item 7a. Item 8. Item 9. Market for ...

  • Page 4
    ... install and use, in addition to offering high-quality customer service and technical support, we intend to continue to achieve high levels of customer satisfaction. In addition, we provide a customizable personal start page that lets our subscribers create their own launch point to the Internet. As...

  • Page 5
    ... a static IP address telecommuting service and our home network product to leverage the value and revenue potential of our retail DSL offering. EarthLink's broadband revenues were $167.9 million or 14% of total revenues in 2001. Web hosting We lease server space and provide web hosting services to...

  • Page 6
    ... month of standard access service fees for each customer who refers a new customer to our service. Services Our primary service offerings include Narrowband or dial-up Internet access, High speed or broadband access via DSL, cable modem, satellite, fixed wireless or dedicated circuits, Web hosting...

  • Page 7
    ...(Pacific time), help sites and Internet guide files on the EarthLink Web site, and printed reference material. We also provide support for businesses with dedicated access connections and web sites. In addition, we maintain newsgroups on the Internet where subscribers can post requests for help and...

  • Page 8
    ... rates and decreased demand for advertising space on our web sites. Competitors may charge less than we do for Internet services, causing us to reduce (or preventing us from raising) our fees. As a result, our revenues may not grow at anticipated rates and our business may suffer. As the ISP...

  • Page 9
    ... as Sprint's broadband services, and some of its web hosting services. We do this through a wholesale arrangement with Sprint. Sprint continues to sell EarthLink-branded dial-up Internet access service, though Sprint may now, at its election, create a Sprint-branded dial-up service, using EarthLink...

  • Page 10
    ... the United States for general corporate purposes, including technology centers, customer call centers, office space and our corporate headquarters. Our principal executive offices are in Atlanta, Georgia. We lease approximately 328,000 square feet in our headquarters building at a current monthly...

  • Page 11
    ...thereto included elsewhere in this Report. Selected Consolidated Financial Information Year Ended December 31, 1997 1998 1999 2000 2001 (in thousands, except per share amounts) Statement of operations data: Revenues Operating costs and expenses Loss from operations Net loss Deductions for accretion...

  • Page 12
    ... network providers may be unwilling or unable to provide Internet access; (10) that we may be unable to maintain or increase our customer levels if we do not have uninterrupted and reasonably priced access to local and long-distance telecommunications systems for delivering dial-up and/or broadband...

  • Page 13
    ... key business areas: • Narrowband access revenues, which consist of monthly fees charged to customers for dial-up Internet access, monthly service fees, any associated equipment revenues for the Internet appliance and wireless access services provided as part of the Company's "EarthLink Everywhere...

  • Page 14
    ... subscribers, for EarthLink to offer its broadband Internet services over Time Warner Cable systems. Under this agreement, EarthLink's full package of high-speed Internet access, content, applications and functionality is now or will soon be available to the approximately 20 million homes accessed...

  • Page 15
    ...1999 2000 2001 (In thousands, except employee data) Statement of operations data: Revenues: Narrowband access Broadband access Web hosting Content, commerce and advertising Total revenues Operating costs and expenses: Cost of revenues Sales and marketing Operations and member support General and...

  • Page 16
    ... consist of monthly fees charged to customers for dial-up Internet access. Narrowband access revenues also include monthly service fees, any associated equipment revenues for the Internet appliance and wireless access services provided as part of the Company's "EarthLink Everywhere" initiative...

  • Page 17
    ... link to the consumer's 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 the costs of the service...

  • Page 18
    ... support expenses consist of costs associated with (i) technical support and customer service, (ii) providing our subscribers with toll-free access to our technical support and customer service centers, (iii) maintenance of customer information systems, (iv) software development, and (v) network...

  • Page 19
    ...December 31, 2000 (in thousands) Costs incurred to effect the merger of EarthLink Network and MindSpring: Investment banking fees $ Printing, filing, mailing, proxy solicitation, legal, accounting and advisory fees Acceleration of unamortized costs associated with line of credit and convertible debt...

  • Page 20
    ... costs represent the amortization of intangible assets, such as customer lists and goodwill, acquired in purchase transactions from companies such as NETCOM and OneMain as well as the acquisition of subscribers from smaller ISPs. Generally, such intangible assets are amortized on a straight line...

  • Page 21
    ...of the OneMain subscribers, which were at a lower average revenue per user than the EarthLink subscribers, and to an approximately 1% decline in average revenue per user on the EarthLink subscribers due to an increase in sales of discounted service plans. Broadband access revenues Broadband revenues...

  • Page 22
    ... marketing personnel headcount. The increase was also a result of the cost of modems, which were given to customers for free, or amounts significantly below EarthLink's costs, as an inducement to subscribe to our DSL service. Growth in sales and marketing expenses slowed to 3% from the third...

  • Page 23
    ... on a straight-line basis over their estimated useful lives. The customer base and goodwill associated with the Sprint Internet Passport business that we acquired in that transaction, which represents the excess of consideration over the fair value of net assets acquired, were fully amortized...

  • Page 24
    ... end of the lease term. Access to the Internet for customers outside of our base of owned POPs is provided through capacity leased from a number of third party providers under non-cancelable network service agreements expiring in various years through 2011. On December 31, 2001, we had approximately...

  • Page 25
    ... at fair value, with any unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. Realized gains and losses are included in investment income and are determined on a specific identification basis. Bad Debt We maintain allowances for doubtful accounts for...

  • Page 26
    ... borrowing rates. Network service costs Access to the Internet for customers outside of our base of owned POPs is provided through capacity leased from a number of third-party telecom providers. We are, in effect, buying this capacity in bulk at a discount, and providing access to our customer base...

  • Page 27
    ... of the adoption is expected to be limited to the classification of expense items within the statements of operations. We offered sales incentives such as free Internet access on a trial basis, cameras, modems and starter kits as introductory offers. The costs of these incentives were recorded as...

  • Page 28
    ... amendment to this Report. Such information is incorporated by reference, except for the information set forth under the captions "Executive Compensation-Compensation Committee Report on Executive Officer Compensation", "Audit Committee-Audit Committee Report" and "Stock Performance Graph", which...

  • Page 29
    ...Statement on Form S-8-File No. 333-30024). - EarthLink, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 of EarthLink, Inc.'s Registration Statement on Form S-8-File No. 333-83870). - (a) Netscape Communications Corporation Internet Service Provider Navigator Distribution...

  • Page 30
    ...000-20799). - Internet Wizard Sign-Up Agreement, between EarthLink Network, Inc. and Microsoft Corporation, dated August 16, 1996 (incorporated by reference to Exhibit 10.19 of EarthLink Network, Inc.'s Registration Statement on Form S-1-File No. 33315781). 34 10.10 - Office Lease Agreement dated...

  • Page 31
    ..., Executive Vice President-Finance and Administration and Chief Financial Officer (principal financial officer) Date: March 20, 2002 /s/ D. CARY SMITH D. Cary Smith, Vice President-Corporate Controller (principal accounting officer) Date: March 20, 2002 /s/ SKY D. DAYTON Sky D. Dayton, Chairman...

  • Page 32
    ... financial position of EarthLink, Inc. at December 31, 2000 and 2001, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Atlanta, Georgia January 23...

  • Page 33
    ... year ended December 31, 1999 of MindSpring Enterprises, Inc. in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Atlanta, Georgia February 7, 2000 F-4 EARTHLINK, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) December 31,

  • Page 34
    ...and 2001, respectively Common stock, $0.01 par value, 300,000 shares authorized, 130,064 and 147,994 shares issued and outstanding at December 31, 2000 and 2001, respectively Additional paid-in capital Warrants to purchase common stock Accumulated deficit Total stockholders' equity Total liabilities...

  • Page 35
    ... share data) 2001 Revenues: Narrowband access Broadband access Web hosting Content, commerce and advertising Total revenues Operating costs and expenses: Cost of revenues Sales and marketing Operations and customer support General and administrative Merger-related charges Acquisition-related costs...

  • Page 36
    ... costs Loss on investments in other companies Write-off of intangible assets Loss on sale of assets (Increase) decrease in net accounts receivable (Increase) decrease in prepaid expenses and other assets Increase in accounts payable and accrued liabilities $ (173,694) $ (345,922) $ (341,061 ) 2001...

  • Page 37
    ... Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Acquisition, net of cash acquired (Note 2): Issuance of common stock Acquistion of business Transaction costs...

  • Page 38
    ... Internet service provider, or ISP, providing reliable nationwide Internet access and related value-added services to our individual and business customers. The Company was formed in February 2000 by way of the merger of EarthLink Network, Inc., ("EarthLink Network"), and MindSpring Enterprises...

  • Page 39
    ... of fees charged for high-speed, highcapacity access services including DSL, cable, satellite, fixed wireless, and dedicated circuit services, installation, termination fees and fees for equipment. Web hosting revenues consist of fees earned by leasing server space and providing web services to...

  • Page 40
    ... 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...

  • Page 41
    ...during the reporting period. Actual results could differ from those estimates. Stock-Based Compensation The Company accounts for stock-based compensation issued to employees using the intrinsic value method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees , and...

  • Page 42
    ... the EarthLink Board of Directors. Accordingly, Sprint's representatives resigned from their positions on our Board. In February 1999, MindSpring completed its acquisition of certain assets used in connection with the United States Internet access and Web hosting business operated by NETCOM On-Line...

  • Page 43
    ... and Los Angeles markets. In December 2001, EarthLink purchased, via a tender offer, approximately 80% of the outstanding stock of Cidco Incorporated ("Cidco"), a developer, distributor and provider of email appliances and related services. The acquisition added approximately 123,000 customers to...

  • Page 44
    ...December 31, 2001 Payments Payments (in thousands) Costs incurred to effect the merger of EarthLink Network and MindSpring: Investment banking fees $ Printing, filing, mailing, proxy solicitation, legal, accounting and advisory fees Acceleration of unamortized costs associated with line of credit...

  • Page 45
    Non-cancellable leases Subtotal Exit costs included in CIDCO purchase price Write-off of duplicative assets Severance costs Non-cancellable leases Subtotal $ 1,000 11,765 - - - - 51,176 $ - (4,322) - - - - (5,398) $ - (2,000) - - - - (35,710) $ 1,000 5,443 - - - - 10,068 $ - - 1,219 2,043 2,000...

  • Page 46
    ... Sky Dayton is a founder and director of eCompanies, and Austin Beutner, a member of EarthLink's Board of Directors, is a director of eCompanies. F-19 5. Property and Equipment Property and equipment consist of: December 31, 2000 (In thousands) 2001 Data center equipment Office and other equipment...

  • Page 47
    ... was paid in April 2001. The untendered notes will continue to be subject to the Indenture Agreement. The repurchase resulted in an extraordinary loss of $5.3 million, which was recorded as merger related costs. 8. Common Stock Issued Follow-on Offerings In January 1999, EarthLink Network completed...

  • Page 48
    ... provided pursuant to a consulting agreement. The fair value of the shares was recorded as prepaid professional services and amortized ratably over the term of the contract. Under this agreement, EarthLink Network issued 32,000 additional shares of its common stock in January 1999. In March 2001...

  • Page 49
    ..., the fair value of all stock options granted is estimated using the Black-Scholes option-pricing model. The following weighted average assumptions were used for stock options granted by EarthLink: Year Ended December 31, 1999 2000 2001 Annual dividends Expected volatility Risk free interest rate...

  • Page 50
    ..., 2001, the Company issued warrants to purchase a total of 164,388 shares of the Company's common stock. The warrants were issued on September 12, 2000 in connection with the acquisition of OneMain. They have an exercise price of $18.25 per share and expire on September 12, F-24 2005. The value of...

  • Page 51
    ... the tax-free merger with OneMain in September 2000, the Company acquired $32.9 million of additional deferred tax liabilities primarily related to the customer base and related intangibles. Additionally, the Company acquired $49.4 million of additional deferred tax assets, primarily related to net...

  • Page 52
    ... merger of EarthLink Network and MindSpring, the acquisition of several companies, and other issuances of common stock and common stock equivalents, utilization of the Company's net operating loss carryforwards to offset future income may be limited. At December 31, 2000 and 2001, the net operating...

  • Page 53
    ...to the Internet for customers outside of the Company's base of owned POPs is provided through capacity leased from a number of third party providers such as UUNET, Level 3 and Sprint, among others. EarthLink is, in effect, buying this capacity in bulk at a discount, and providing access to EarthLink...

  • Page 54
    ... Corporation, ("OmniSky"), a provider of wireless data applications and services for use on mobile devices, for approximately $5.0 million. The bankruptcy court approved the proposed Section 363 asset purchase plan and the transaction closed in January 2002. In accordance with the plan, EarthLink...

  • Page 55
    ...EarthLink Network, Inc. and Apple Computer, Inc. Limited (incorporated by reference to Exhibit 2.7 of EarthLink, Inc.'s Report on Form 10-K for the fiscal year ended December 31, 1999-File No. 001-15605). - Amended and Restated Registration Rights Agreement, dated as of February 8, 2001, with Sprint...

  • Page 56
    ...Statement on Form S-8-File No. 333-30024). - EarthLink, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 of EarthLink, Inc.'s Registration Statement on Form S-8-File No. 333-83870). - (a) Netscape Communications Corporation Internet Service Provider Navigator Distribution...

  • Page 57
    ... on Accounting and Financial Disclosure 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 Item 13. Certain Relationships and Related Transactions PART IV SIGNATURES EARTHLINK...

  • Page 58
    ... As independent public accountants, we hereby consent to the incorporation by reference of our reports dated February 7, 2000 on the financial statements of MindSpring Enterprises, Inc. included in this Form 10-K of EarthLink, Inc.'s, into Earthlink Inc.'s previously filed Registration Statements...