Earthlink 2001 Annual Report Download - page 42

Statement supersedes SFAS 121 and supersedes the provisions of APB Opinion 30, Reporting the Results of Operations—Discontinued Events
and Extraordinary Items , with regard to reporting the effects of a disposal of a segment of a business. The Statement provides a single
accounting model for long-lived assets to be disposed of and significantly changes the criteria required to classify an asset as held-for-sale.
Under the Statement, more dispositions will qualify for discontinued operations treatment in the statement of operations, which requires
expected future operating losses from discontinued operations to be displayed in discontinued operations in the period in which the losses are
incurred. The Statement is effective for fiscal years beginning after December 15, 2001. The Company does not expect that the adoption of
SFAS 144 will have a material impact on its financial statements.
F-14
2. Strategic Alliances and Acquisitions
On February 10, 1998, EarthLink Network entered into certain agreements to establish a broad strategic relationship (the "Strategic
Alliance") with Sprint Corporation ("Sprint") in the area of consumer Internet access and related services. In connection with the Strategic
Alliance, on June 5, 1998, Sprint consummated a tender offer for 4.0 million shares of EarthLink Network's common stock at a price per share
of $13.94 in cash to each tendering stockholder (the "Offer"). Immediately following the closing of the Offer, Sprint purchased approximately
13.2 million shares of the EarthLink Network's Series A convertible preferred stock, which was valued at $135 million, in exchange for
(i) transfer to the EarthLink Network of Sprint's approximately 130,000 Sprint Internet Passport subscribers, (ii) aggregate cash consideration
of approximately $24 million and (iii) the exclusive right to use certain ports within Sprint's high-speed data network for four years. EarthLink
Network and Sprint also entered into a Marketing and Distribution Agreement, which included a commitment by Sprint to deliver a minimum
of 150,000 new subscribers per year for five years through its own channels, EarthLink Network's right to be Sprint's exclusive provider of
consumer Internet access services for at least ten years and the right to use Sprint's brand and distribution network for at least ten years. Sprint
also provided EarthLink Network with a credit facility of up to $50 million (increasing to $100 million over three years) in the form of
convertible senior debt. Collectively, the above is referenced to as the "Sprint Transaction".
In February of 2001, the Company renegotiated its commercial and governance arrangements with Sprint. The Company continues to
provide dial-up Internet, web hosting and other Internet services to Sprint for resale to its customers. However, the Company's exclusive
marketing and co-branding arrangements with Sprint were terminated. Accordingly, management took a non-cash charge of approximately
$11.3 million to write off unamortized assets related to the termination of the marketing and co-branding agreements with Sprint. Sprint is free
to pursue relationships with other Internet providers and EarthLink is free to enter into commercial arrangements with other
telecommunications services providers. EarthLink released Sprint from its minimum commitment to provide EarthLink with 150,000 new
subscribers per year and Sprint's absolute right to acquire EarthLink commencing in September of 2001 was terminated. Sprint may maintain
its percentage of EarthLink's voting equity by purchasing shares on the market or from third parties in the event that we dilute Sprint's interest
by issuing voting securities in a financing, in a transaction or by the exercise of options or warrants or the conversion of convertible equities
into voting stock. However, Sprint has no other rights to acquire EarthLink securities. Sprint will retain the ability to make a counter-offer to
buy all, but not less than all, of the Company's equity in the event that the Company proceeds forward for a third-party to acquire controlling
interest in EarthLink. In that case, EarthLink's Board is not contractually obligated to accept Sprint's counter offer, but will analyze and weigh
it in exercising their fiduciary duties to stockholders.
In addition, Sprint relinquished its right to appoint two members to 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 Communication Services Inc., which subsequently changed its name to ICG
Netahead, Inc. and is a wholly owned subsidiary of ICG Communications, Inc. In this transaction, MindSpring acquired NETCOM's subscriber
base of approximately 408,000 individual Internet access accounts, 25,000 Web hosting accounts, 3,000 dedicated Internet access accounts in
the United States and property and equipment valued at $13.2 million. MindSpring paid NETCOM approximately $245 million for these
assets, consisting of $215 million in cash and $30 million in MindSpring common stock (752,232 shares, at a price per share of $39.88).
MindSpring incurred additional expenses of approximately $4.2 million in connection with this acquisition.
F-15
In January 2000, EarthLink entered into a strategic alliance with Apple Computer, Inc. and a subsidiary (together, "Apple"). In connection
with this alliance, EarthLink expanded its existing commercial relationship with Apple so that EarthLink serves as the default ISP for Apple's
line of Macintosh branded computers sold in the United States for a minimum of two years and the overall commercial relationship with Apple
has been extended through January 4, 2005. In addition, Apple purchased 7.1 million shares of the Company's Series C convertible preferred
stock for $200.0 million and gained the right to appoint one member to EarthLink's Board of Directors. However, Apple's right to appoint a
member of the Company's board of directors terminated in September 2001 upon Apple's conversion of all of its Series C preferred stock into
common stock. As a result, Apple's appointee resigned from the Board of Directors.