Earthlink 2004 Annual Report Download - page 72

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EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
projected and historical financial performance, cash flow forecasts and financing needs. During the years ended December 31, 2002, 2003 and
2004, the Company recognized losses due to other-than-temporary declines of the value of investments of $0.6 million, $0.2 million and $1.4
million, respectively. These losses are included in loss on investments in other companies in the Consolidated Statements of Operations.
Management evaluates investments in other companies to determine if EarthLink must consolidate the results of the investee pursuant to
FIN No. 46, “Consolidation of Variable Interest Entities”. Variable interest entities (“VIEs”)
are entities that either do not have equity investors
with proportionate economic and voting rights or have equity investors that do not provide sufficient financial resources for the entity to
support its activities. Consolidation is required if it is determined that the Company absorbs a majority of the expected losses and/or receives a
majority of the expected returns. In determining if an equity investee is a VIE and whether EarthLink must consolidate its results, management
evaluates whether the equity of the entity is sufficient to absorb its expected losses and whether EarthLink is the primary beneficiary.
Management generally performs this assessment at the date EarthLink becomes involved with the entity and upon changes in the capital
structure or related governing documents of the entity.
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’s maximum exposure to loss as a result of its involvement in EVG is $0.6 million, the carrying value of the Company’
s investment in
EVG as of December 31, 2004. 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 equity investees.
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 two years. Through January 2004, the Company’
s
wholly-owned subsidiary, PeoplePC Inc. (“PeoplePC”), offered a package that included a personal computer and prepaid Internet access
services for a period of up to four years. The Company defers revenue recognition of advanced billings and prepayments and recognizes such
amounts as revenues as services are delivered. Deferred revenue associated with periods more than one year from the date of the financial
statements is classified as long-term.
69