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FORM 10-K
EARTHLINK INC
(Annual Report)
Filed 3/1/2007 For Period Ending 12/31/2006
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 3/1/2007 For Period Ending 12/31/2006 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
    ...name of registrant as specified in its charter) Delaware (State of incorporation) 58-2511877 (I.R.S. Employer Identification No.) 1375 Peachtree St., Atlanta, Georgia 30309 (Address of Principal Executive Offices, Including Zip Code) (404) 815-0770 (Registrant's telephone number, including area code...

  • Page 3
    ...Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and Services...

  • Page 4
    ... its products and services during April 2006. Our corporate offices are located at 1375 Peachtree St., Atlanta, Georgia 30309, and our telephone number at that location is (404) 815 0770. Business Strategy Our business strategy is to generate profits from our existing core access services and to...

  • Page 5
    ... dial-up connections during 2006. We provide wireline high-speed Internet access services in markets throughout the U.S. and have established a national broadband footprint via multiple wholesale vendors, enabling us to offer digital subscriber line ("DSL"), cable and/or satellite broadband services...

  • Page 6
    ...costs to develop, implement and build wireless broadband networks in these municipalities, as well as increased costs to market the new services. Business services. In April 2006, we acquired New Edge Networks ("New Edge"), a single-source national provider of secure multi-site managed data networks...

  • Page 7
    ...fees; and equipment revenues associated with the sale of modems and other access devices to our subscribers. Municipal Wireless Broadband Municipal wireless, or Wi-Fi, broadband access provides a fast, low cost Internet connection. Wi-Fi is short for wireless fidelity. It enables a person to connect...

  • Page 8
    ... and Home Phone Service is a bundle offer that includes EarthLink high-speed Internet at speeds up to 8.0Mbp and home phone service. It combines the last mile of traditional telephone copper wiring with the advanced features of VoIP by taking advantage of the next-generation Digital Subscriber Line...

  • Page 9
    ...of Total Access include a task panel that provides one-click access to the Internet, email and personal web space; automatic notification when newer versions of relevant software are available; improved email features; and enhanced search features powered by Google. PeoplePC Online PeoplePC's access...

  • Page 10
    ...to provide broadband services over each company's cable network in substantially all Time Warner Cable and Bright House Networks markets and certain Comcast markets. New Edge's network is comprised of ATM/frame relay/DSL switches in central office collocations. In addition, New Edge has access under...

  • Page 11
    ...of the local telephone network to originate and terminate long distance calls, generally on a per-minute basis. Were there to be a regulatory change that would result in the imposition of access charges, it would adversely affect us because this would substantially increase our cost of providing ISP...

  • Page 12
    ... networks that is directly connected to homes and businesses. ILECs were previously required to make DSL-based broadband access service available on a non-discriminatory basis to ISPs like us. However, an FCC order published in September 2005 eliminated the FCC's long-standing regulated access...

  • Page 13
    .... Broadband Access Agreements We have commercial agreements with varying terms with all of our significant broadband network providers. Our largest providers of broadband connectivity are Covad and Time Warner Cable. We also do lesser amounts of business with a wide variety of local, regional...

  • Page 14
    ... financial, technical, marketing and other resources than we have. Competition in the market for Internet access services is likely to continue increasing, and competition impacts the pricing of our services, sales and marketing costs to acquire new subscribers and the number of customers that...

  • Page 15
    ... web site is not meant to be incorporated by reference into this Annual Report on Form 10-K. We also provide a copy of our Annual Report on Form 10-K via mail, at no cost, upon receipt of a written request to the following address: Investor Relations EarthLink, Inc. 1375 Peachtree Street Atlanta, GA...

  • Page 16
    ... presence and greater financial, technical, marketing and other resources than we have. We compete directly or indirectly with the following categories of companies: • established online services companies, such as Time Warner (AOL) and the Microsoft Network (MSN); • local and regional ISPs; 15

  • Page 17
    ... their service offerings; • cable companies providing broadband access, including Comcast, Charter Communications, Inc. and Cox Communications, Inc.; • local and long distance telephone companies; • municipalities and other entities operating municipal wireless networks, some of which are free...

  • Page 18
    .... This may allow them to devote greater resources to the development, promotion and sale of advertising services. The companies we compete with for Internet access subscribers also compete with us for subscribers to value-added services, such as email storage and security products. In certain cases...

  • Page 19
    ... to grow. Broadband access generally offers users faster connection and download speeds than narrowband access. Pricing for broadband services, particularly for introductory promotional periods; services bundled with cable and telephone services; and services with slower speeds has been declining...

  • Page 20
    ... is directly connected to homes and businesses. We have agreements with several network providers that allow us to use the last mile element of their network to provide high-speed Internet access services via DSL or cable. The availability of and charges for access with any of our network providers...

  • Page 21
    .... As of December 31, 2006, our broadband subscriber count and total subscriber count included approximately 755,000 subscribers under the marketing relationship. We utilize third-parties for technical and customer support and certain billing services, and our business may suffer if our partners...

  • Page 22
    ... electronic equipment. These technology centers host and manage Internet content, email, web hosting and authentication applications and services. Despite precautions taken by us and our third-party network providers, over which we have no control, a natural disaster or other unanticipated problem...

  • Page 23
    ...A number of proposals have been made at the federal, state and local levels and by foreign governments that could impose taxes on the online sale of goods and services and other Internet activities. Future federal and state laws imposing taxes on the provision of goods and services over the Internet...

  • Page 24
    ... protection laws and enforcement actions regarding advertising and user privacy, especially relating to children, are becoming more prevalent. The Federal Trade Commission ("FTC") and some state Attorney General offices have conducted investigations into the privacy practices of companies that...

  • Page 25
    ... number of subscribers to generate the returns anticipated on our investments to construct and deploy municipal wireless broadband networks. An important element of our business strategy is to deploy competitive alternatives to DSL and cable for delivering broadband Internet access services...

  • Page 26
    ... maintaining our municipal wireless network, which could adversely affect customer satisfaction, increase subscriber churn and reduce our revenues. The success of our municipal wireless broadband initiative depends on developing and providing services that give subscribers a high quality experience...

  • Page 27
    ... phone numbers are not available through directory assistance services offered by traditional telephone companies. • Our customers cannot accept collect calls. • Our VoIP service requires an operative broadband connection. In the event of a power loss or Internet access interruption experienced...

  • Page 28
    ...company, respectively. The quality of some broadband Internet connections may be too poor for customers to use our services properly. In addition, if there is any interruption to a customer's broadband Internet service or electrical power supply, that customer will be unable to make or receive calls...

  • Page 29
    ... and future investments in other companies, including our investment in the HELIO joint venture, may not provide the economic returns we are seeking and may lose value, which would materially, adversely affect our financial position and results of operations. Other Risks Our stock price has been...

  • Page 30
    ... requirement to pay the fundamental change repurchase price, including the related make whole premium, may discourage a change in control of our company. The convertible notes hedge and warrant transactions may affect the value of our common stock. In November 2006, in connection with the offering...

  • Page 31
    ... Our principal executive offices are in Atlanta, Georgia. We also maintain and occupy certain other leased space for operations and administrative purposes. Certain of our leases include scheduled base rent increases over the respective lease terms. The total amount of base rent payments, net of...

  • Page 32
    ... Our common stock is traded on the Nasdaq Global Market under the symbol "ELNK." The following table sets forth the high and low sale prices for our common stock for the periods indicated, as reported by the Nasdaq Global Market. EarthLink, Inc. High Low YEAR ENDED DECEMBER 31, 2005 First Quarter...

  • Page 33
    ... paid per share for each month in the three months ended December 31, 2006 were as follows: Total Number of Shares Repurchased Total Number of Maximum Dollar Average Shares Repurchased Value that May Price Paid as Part of Publicly Yet be Purchased per Share Announced Program(1) Under the Program (in...

  • Page 34
    ... in this Annual Report on Form 10-K. 2002 Year Ended December 31, 2003 2004 2005 (in thousands, except per share amounts) 2006 Statement of operations data: Revenues Operating costs and expenses Income (loss) from operations Net income (loss) Deductions for accretion dividends(1) Net income (loss...

  • Page 35
    ... or develop new products and services in a cost-effective manner to meet customer demand in the rapidly evolving market for Internet, wireless and IP-based voice communications services, including new products and services offered in connection with our voice and municipal broadband network growth...

  • Page 36
    ... of households with broadband access surpassed the number of households with dial-up connections. Focused, value-priced narrowband access, which provides service with a limited set of features at a lower cost, is still attracting households new to the Internet or current Internet users interested in...

  • Page 37
    ... and value-priced narrowband access); broadband access services (including high-speed access via DSL, cable and wireless technologies and IP-based voice); advertising and other value-added services; and web hosting services. Our subscriber base remained consistent at approximately 5.3 million paying...

  • Page 38
    ... lines and reducing total operations and customer support expenses. We will also continue to evaluate opportunities to more cost effectively provide customer and technical support to broadband customers and manage direct sales and marketing expenses required to add new broadband customers. New...

  • Page 39
    ... broadband access over their own cable or telephone lines. However, to attract and retain customers, we continue to focus on improving the high-quality Internet experience EarthLink offers, including providing superior customer and technical support and differentiating our products and services...

  • Page 40
    ... develop, implement and build wireless broadband networks in these municipalities, as well as increased costs to market the new services. Business services. In April 2006, we acquired New Edge, a single-source national provider of secure multi-site managed data networks and dedicated Internet access...

  • Page 41
    ... certain New Edge liabilities and direct transaction costs. Marketing Alliances We have an agreement with Time Warner Cable and Bright House Networks, companies whose networks pass more than 19 million homes, to offer our broadband Internet access services over their systems. In connection with...

  • Page 42
    .... Customers receiving service under promotional programs that include periods of free service at inception are not included in subscriber counts until they become paying customers. (b) Acquired subscribers for the year ended December 31, 2006 includes approximately 58,000 broadband subscribers...

  • Page 43
    ... Narrowband access Broadband access Advertising and other value-added services Web hosting Total revenues Operating costs and expenses: Telecommunications service and quipment costs Sales incentives Total cost of revenues Sales and marketing Operations and customer support General and administrative...

  • Page 44
    ... access revenues Narrowband access revenues primarily consist of monthly fees charged to customers for dial-up Internet access. Narrowband revenues decreased 15% to $742.8 million during the year ended December 31, 2005 and decreased 17% to $618.0 million during the year ended December 31, 2006...

  • Page 45
    ..., cable, satellite and wireless services; fees charged for high-speed data networks to businesses and communications carriers; fees charged for IPbased voice services; installation fees; termination fees; fees for equipment; and regulatory surcharges billed to customers. Broadband revenues increased...

  • Page 46
    ... EarthLink Experience and certain cable customers, generate per month revenues that are less than $20 and have negligible telecommunications service and equipment costs. Consumer retail voice services are generally priced between $25 and $70 per month and consumer retail wireless broadband services...

  • Page 47
    ... providers of broadband connectivity are Covad and Time Warner Cable. We also do lesser amounts of business with a wide variety of local, regional and other national providers. EarthLink purchases broadband access from ILECs, CLECs and cable providers. Telecommunications service and equipment costs...

  • Page 48
    ... to launch our municipal wireless broadband services in additional markets. Operations and customer support Operations and customer support expenses consist of costs associated with technical support and customer service, providing our subscribers with toll-free access to our technical support and...

  • Page 49
    ... in communications costs for providing subscribers with toll-free access to our technical support and customer service centers. General and administrative General and administrative expenses consist of fully burdened costs associated with the executive, finance, legal and human resources departments...

  • Page 50
    ...and fair value of non-cash assets contributed. Due to the start-up nature of HELIO's operations and HELIO's product launches in 2006, we expect HELIO's net loss to continue to increase, and, as a result, we expect our net losses of equity affiliate to increase as we record our proportionate share of...

  • Page 51
    ... 31, 2006. Our cash and investment balances decreased as a result of repurchases of our common stock, investments in the HELIO joint venture, our investment in Covad to fund line-powered voice, capital expenditures, the acquisition of New Edge and purchases of subscriber bases from other companies...

  • Page 52
    ... in Atlanta, Georgia. Approximately 1,140 employees were directly impacted, primarily customer support personnel. Under the 2005 Plans, we outsourced certain contact center and credit and collections activities. Approximately 227 employees were directly impacted. We realized reduced costs following...

  • Page 53
    ... affiliate related to our investment in HELIO and deferred income taxes associated with the utilization of acquired net operating loss carryforwards. Non-cash items increased during the year ended December 31, 2006 due to an increase in net losses of equity affiliate and stock-based compensation...

  • Page 54
    ... technical and customer support services and to build out municipal wireless broadband networks. Our investing activities used cash of $69.1 million during the year ended December 31, 2004. This consisted primarily of $33.7 million for purchases of investments in marketable securities, net of sales...

  • Page 55
    ...market conditions and other factors. The share repurchase program does not require us to acquire any specific number of shares and may be terminated by the Board of Directors at any time. We have not repurchased common stock under this program since October 2006. Income Taxes We continue to maintain...

  • Page 56
    ..., including, without limitation, the timing and extent of municipal wireless network build-outs and additional awards to build out networks. Additionally, technological advances may require us to make capital expenditures to develop or acquire new equipment or technology in order to replace aging or...

  • Page 57
    ... agreement pursuant to which we provide HELIO facilities, accounting, tax, billing, procurement, risk management, payroll, human resource, employee benefit administration and other support services in exchange for management fees. However, as HELIO develops its business, the extent to which HELIO...

  • Page 58
    ...telecommunications partner has latitude in establishing prices, we record revenue associated with the related subscribers on a net basis, netting the cost of revenue associated with the service against the gross amount billed the customer and recording the net amount as revenue. The determination of...

  • Page 59
    ... products or services, we account for the fees as a reduction in revenue because the consideration is presumed to be a reduction of the selling price of our products or services; however, if we receive an identifiable benefit whose fair value can be reasonably estimated in exchange for the fees, we...

  • Page 60
    ... other indefinite lived intangible assets. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit...

  • Page 61
    ... fair value recognition provisions of SFAS 123R, we recognize stock-based compensation net of an estimated forfeiture rate and therefore only recognize compensation cost for those shares expected to vest over the service period of the award. Prior to SFAS No. 123(R) adoption, we accounted for share...

  • Page 62
    ... debt securities (including auction rate debt securities), corporate notes and commercial paper, all of which bear a minimum shortterm rating of A1/P1 or a minimum long-term rating of A/A2. As of December 31, 2005 and 2006, net unrealized losses in these investments were not material. In general...

  • Page 63
    ... 31, 2005 and 2006: As of December 31, 2005 As of December 31, 2006 Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value (dollars in thousands) Investments in other companies for which it is: Practicable to estimate fair value Not practicable to estimate fair value Call options...

  • Page 64
    Item 8. Financial Statements And Supplementary Data. EARTHLINK, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2005 and 2006 Consolidated Statements of Operations for the years ended ...

  • Page 65
    ... No. 123 (revised), Share-Based Payment . We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of EarthLink, Inc.'s internal control over financial reporting as of December 31, 2006, based on criteria established...

  • Page 66
    ..., in our opinion, EarthLink, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006 based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the...

  • Page 67
    ... Other accounts payable and accrued liabilities Deferred revenue Total current liabilities Long-term debt Other long-term liabilities Total liabilities Commitments and contingencies (See Note 14) Stockholders' equity: Convertible preferred stock, $0.01 par value, 100,000 shares authorized, 0 shares...

  • Page 68
    ... and equipment costs Sales incentives Total cost of revenues Sales and marketing Operations and customer support General and administrative Amortization of intangible assets Facility exit and restructuring costs Total operating costs and expenses Income from operations Net losses of equity affiliate...

  • Page 69
    ... of New Edge Issuance of phantom share units Reclass of deferred compensation Stock-based compensation expense Tax provision from stock options Purchase of call options Issuance of warrants Repurchase of common stock Unrealized holding losses on certain investments Net income Total comprehensive...

  • Page 70
    ... and equipment Purchases of subscriber bases Proceeds from sales of fixed assets Investments in marketable securities Purchases Sales and maturities Investments in and net advances to equity affiliate Purchase of business, net of cash acquired Investments in other companies Distributions received...

  • Page 71
    ... of monthly fees charged to customers for dial-up Internet access. Broadband access revenues consist of retail and wholesale fees charged for high-speed, high-capacity access services including DSL, cable, satellite, wireless and dedicated circuit services; fees charged for high-speed data networks...

  • Page 72
    ...fees and network operations costs incurred to provide the Company's Internet access services; fees paid to content providers for information provided on the Company's online properties, including the Company's Personal Start Page TM ; the costs of equipment sold to customers for use with the Company...

  • Page 73
    ... whose fair value can be reasonably estimated in exchange for the fees, the Company classifies the fees as operating expenses. Sales and Marketing Sales and marketing expenses include advertising and promotion expenses, fees paid to distribution partners to acquire new paying subscribers, personnel...

  • Page 74
    ...must pay upon exercise and the amounts of compensation cost attributed to future services and not yet recognized. The following table sets forth the computation for basic and diluted net income per share for the years ended December 31, 2004, 2005 and 2006: Year Ended December 31, 2004 2005 2006 (in...

  • Page 75
    ... certain key employees was reflected in net income as services were rendered. On January 1, 2006, the Company adopted SFAS No. 123(R), "Share-Based Payment," using the modified prospective method, which requires measurement of compensation cost for all stock awards at fair value on the date of grant...

  • Page 76
    ...2005 (in thousands, except per share data) Net income, as reported Add: Stock-based compensation expense associated with stock options included in reported net income Deduct: Stock-based compensation expense determined using a fair value based method for all stock options Pro forma net income Basic...

  • Page 77
    ... prior to their stated maturities. Available for sale securities are carried at fair value, with any unrealized gains and losses, net of tax, included in unrealized gains (losses) on investments as a separate component of stockholders' equity and in total comprehensive income (loss). Realized gains...

  • Page 78
    ... ended December 31, 2004, 2005 and 2006, respectively. The Company acquired a $2.2 million allowance for doubtful accounts in its acquisition of New Edge Holding Company ("New Edge"). Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation expense...

  • Page 79
    ... from other companies. Subscriber bases acquired directly are valued at cost plus assumed service liabilities, which approximates fair value at the time of purchase. When management determines material intangible assets are acquired in conjunction with the purchase of a company, EarthLink engages an...

  • Page 80
    ... December 31, 2006 that would cause the Company to retest its goodwill. Long-Lived Assets The Company accounts for long-lived assets in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of LongLived Assets," which addresses financial accounting and reporting for the impairment...

  • Page 81
    ... 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...

  • Page 82
    .... The Company's investments in privately-held companies are stated at cost, net of other-than-temporary impairments. The Company's long-term debt is carried at cost, and the estimated fair value of the Company's long-term debt is based on the quoted market price. Segments The Company operates in...

  • Page 83
    ... of the total purchase price to identifiable definite lived intangible assets, consisting of acquired customer relationships and software, and $7.8 million of the total purchase price to identifiable indefinite lived intangible assets, consisting of trade names. The fair values of identifiable...

  • Page 84
    ...based on quoted market prices as of December 31, 2005 and 2006: As of December 31, 2005 Gross Gross Amortized Unrealized Unrealized Cost Losses Gains Short-term Government agency notes Asset-backed (including auction rate) securities Corporate notes Commercial paper Long-term Government agency notes...

  • Page 85
    ... invested in domestic emerging Internet-related companies. In applying the cost method, EarthLink recorded $0.6 million as a return of EarthLink's investment based on the carrying value of the investment, and the gain of $3.8 million was included in gain (loss) on investments in other companies, net...

  • Page 86
    ...amortizing the difference between the book value and fair value of non-cash assets contributed to HELIO over their estimated useful lives. The amortization increases the carrying value of the Company's investment and decreases the net losses of equity affiliate included in the Consolidated Statement...

  • Page 87
    ...) 5. Property and Equipment Property and equipment is recorded at cost and consisted of the following as of December 31, 2005 and 2006: As of December 31, 2005 2006 (in thousands) Data center and network equipment Office and other equipment Land and buildings Leasehold improvements Construction in...

  • Page 88
    ... lived intangible assets consist of trade names. In connection with the formation of HELIO and the transfer of 27,000 wireless subscribers to HELIO, EarthLink reclassified a subscriber base asset with a net book value of $0.4 million associated with certain wireless subscribers to its investment...

  • Page 89
    ...As of December 31, 2006, the Company had a $2.6 million liability remaining for real estate commitments. All other costs have been paid. During the year ended December 31, 2005, EarthLink executed plans to further streamline operations by outsourcing certain contact center and credit and collections...

  • Page 90
    ..."). The Company purchased call options to cover approximately 28.4 million shares of the Company's common stock, subject to adjustment in certain circumstances, which is the number of shares underlying the Notes. In addition, the Company sold warrants permitting the purchasers to acquire up to...

  • Page 91
    ...treasury stock: Year Ended December 31, 2004 2005 2006 (in thousands) Number of shares repurchased Aggregate purchase price Call Spread Transactions 12,628 $ 125,286 20,527 $ 192,563 11,339 $ 85,613 In connection with the issuance of the Notes (see Note 9, "Long-Term Debt"), the Company entered...

  • Page 92
    ... longer outstanding due to conversion or otherwise. As of December 31, 2006, the estimated fair value of the call options was $58.4 million. The Company also sold warrants permitting the purchasers to acquire up to approximately 28.4 million shares of the Company's common stock at an exercise price...

  • Page 93
    ... through October 2007. During the year ended December 31, 2006, the Company sold warrants in connection with the issuance of Notes permitting the purchasers to acquire up to approximately 28.4 million shares of the Company's common stock. See Note 10, "Stockholders' Equity," for a description of...

  • Page 94
    ... stock price and implied volatility. The selection of implied volatility data to estimate expected volatility is based upon the availability of actively traded options on the Company's stock. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve in effect at the time...

  • Page 95
    ..., 2004, 2005 and 2006 was $0.1 million, $0.1 million and $1.2 million, respectively, which represents the closing price of the Company's common stock on the vesting date multiplied by the number of restricted stock units that vested. 12. Profit Sharing Plans The Company sponsors the EarthLink, Inc...

  • Page 96
    ... NOLs to offset taxable income; however, EarthLink owed state income and federal and state alternative minimum tax ("AMT") aggregating $2.5 million and $5.3 million for the years ended December 31, 2004 and 2005, respectively, and the AMT was payable primarily due to limitations associated with the...

  • Page 97
    ... at statutory rate State income taxes, net of federal benefit Nondeductible expenses Net change to valuation allowance Change in valuation allowance associated with realized deferred tax assets Valuation allowance for realized deferred tax assets acquired in business combinations Increase in...

  • Page 98
    ... annual escalation provisions as well as renewal options. The total amount of base rent payments, net of allowances and incentives, is being charged to expense using the straight-line method over the terms of the leases. In addition to the base rent payments, EarthLink generally pays a monthly...

  • Page 99
    ... market exchange. 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...

  • Page 100
    ... of fair value investments and $1.0 million of cost-method investments. As of December 31, 2006, the Company had $61.7 million of investments accounted for using the equity method of accounting, $48.3 million of fair value investments and $11.0 million of cost-method investments. Interest Rate Risk...

  • Page 101
    ...facilities, accounting, tax, billing, procurement, risk management, payroll, human resource, employee benefit administration and other support services in exchange for management fees. However, as HELIO develops it business, the extent to which HELIO relies on EarthLink to provide these services has...

  • Page 102
    .... EarthLink purchases wireless Internet access devices and services from HELIO. During the years ended December 31, 2005 and 2006, fees paid for products and services received from HELIO were $0.9 million and $0.9 million, respectively. As of December 31, 2005 and 2006, the Company had accounts...

  • Page 103
    ...costs and expenses Income from operations Gain (loss) on investments in other companies, net Net losses of equity affiliate Interest income and other, net Income (loss) before income taxes Provision (benefit) for income taxes Net income (loss) Basic net income (loss) per share (1) Diluted net income...

  • Page 104
    ... 8-K during the three months ended December 31, 2006 covered by this Report on Form 10-K that was not reported. PART III Item 10. Directors, Executive Officers and Corporate Governance. Information relating to the directors and nominees for directors of EarthLink will be set forth under the captions...

  • Page 105
    ... for Issuance Under Equity Compensation Plans The following table sets forth information as of December 31, 2006 concerning the shares of our common stock which are authorized for issuance under our equity compensation plans: Number of Securities Remaining Available for Future Issuance Under...

  • Page 106
    ... to the Acquisition of New Edge Holding Company. The Leadership and Compensation Committee then granted options to purchase 657,000 shares of our Common Stock to these New Edge employees in accordance with this plan. The options have an exercise price equal to the last reported price of our Common...

  • Page 107
    ... Report on Form 8-K dated May 5, 2006). EarthLink, Inc. Stock Option Plan for Inducement Awards Relating to the Acquisition of New Edge Holding Company (incorporated by reference to Exhibit 10.1 to EarthLink, Inc.'s Report on Form 8-K dated April 14, 2006). EarthLink, Inc. Deferred Compensation Plan...

  • Page 108
    ... and Cash Incentive Plan (incorporated by reference to Exhibit 10.5 to EarthLink, Inc.'s Report on Form 8-K dated May 5, 2006). Form of Award Agreement under EarthLink, Inc. Stock Option Plan for Inducement Awards Relating to the Acquisition of New Edge Holding Company (incorporated by reference to...

  • Page 109
    ...-File No. 001-15605). Lease Agreement Between WHMNY Real Estate Limited Partnership and EarthLink, Inc. Dated September 19, 2005 (incorporated by reference to Exhibit 10.1 of EarthLink, Inc.'s Report on Form 8-K dated October 14, 2005-File No. 001-15605). Contribution and Formation Agreement Among...

  • Page 110
    ... 27, 2006, between EarthLink, Inc. and Charles G. Betty, President and Chief Executive Officer of EarthLink, Inc. (incorporated by reference to Exhibit 10.1 of EarthLink, Inc.'s Report of Form 8-K dated March 27, 2006-File No. 001-15605). EarthLink, Inc. Board of Director Compensation Plan, dated...

  • Page 111
    ... of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Management compensatory plan or arrangement. Exhibits The response to this portion of Item 15 is submitted as a separate section of this Annual Report on Form 10...

  • Page 112
    ... the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EARTHLINK, INC. By: /s/ MICHAEL C. LUNSFORD Michael C. Lunsford, Interim Chief Executive Officer Date: March 1, 2007 Each person whose signature...

  • Page 113
    ... Report on Form 8-K dated May 5, 2006). EarthLink, Inc. Stock Option Plan for Inducement Awards Relating to the Acquisition of New Edge Holding Company (incorporated by reference to Exhibit 10.1 to EarthLink, Inc.'s Report on Form 8-K dated April 14, 2006). EarthLink, Inc. Deferred Compensation Plan...

  • Page 114
    ... and Cash Incentive Plan (incorporated by reference to Exhibit 10.5 to EarthLink, Inc.'s Report on Form 8-K dated May 5, 2006). Form of Award Agreement under EarthLink, Inc. Stock Option Plan for Inducement Awards Relating to the Acquisition of New Edge Holding Company (incorporated by reference to...

  • Page 115
    ...-File No. 001-15605). Lease Agreement Between WHMNY Real Estate Limited Partnership and EarthLink, Inc. Dated September 19, 2005 (incorporated by reference to Exhibit 10.1 of EarthLink, Inc.'s Report on Form 8-K dated October 14, 2005-File No. 00115605). Contribution and Formation Agreement Among...

  • Page 116
    ... 27, 2006, between EarthLink, Inc. and Charles G. Betty, President and Chief Executive Officer of EarthLink, Inc. (incorporated by reference to Exhibit 10.1 of EarthLink, Inc.'s Report of Form 8-K dated March 27, 2006-File No. 001-15605). EarthLink, Inc. Board of Director Compensation Plan, dated...

  • Page 117
    32.1*- 32.2*- * # Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley ...

  • Page 118
    ... the Plan as set forth below. 1. Definitions . For purposes of this Plan: (a) or 414(c). (b) Act. (c) " Beneficiary " shall mean the person or entity an Employee designates, by written instrument delivered to the Employer or an Affiliate, to receive the benefits payable under this Plan after...

  • Page 119
    ... Employee by an executive officer of the Employer or Affiliate which employs Employee or the person in charge of the Human Resources function of such Employer or Affiliate (or if the Employee is the Chief Executive Officer or President of the Employer, the Chairman of the Compensation Committee of...

  • Page 120
    ...cases, finding that in the good faith opinion of the applicable executive officer or person in charge of the Human Resources function or a direct report to the Chief Executive Officer to whom such responsibility was delegated, that the Employee committed the conduct set forth above in clauses (1) or...

  • Page 121
    ...direction of the management and policies of the Employer (a) through the ownership of securities which provide the holder with such power excluding voting rights attendant with such securities or (b) by contract. (m) " Employee " shall mean a full-time common-law employee of Employer or an Affiliate...

  • Page 122
    ... she has under the EarthLink, Inc. Accelerated Vesting and Compensation Continuation Plan. (n) " Exchange Act " means the Securities Exchange Act of 1934, including amendments, or successor statutes of similar intent. (o) " For Good Reason " means the Employee's Termination of Employment is by the...

  • Page 123
    (6) The failure by the Employer or an Affiliate to continue in effect any material retirement or compensation plan, performance share plan, stock option plan, life insurance plan, health and accident plan, disability plan or another benefit plan in which the Employee is participating immediately ...

  • Page 124
    ..., however, that the Employee will not be considered as having had a Termination of Employment if (i) the Employee continues to provide services to the Employer or any Affiliate as an employee (as that term is used in Code Section 409A) at an annual rate that is at least equal to 20 percent of the...

  • Page 125
    ... that time. For purposes of this Section, annual rate of providing services shall be determined based upon the measurement used to determine the Employee's base compensation. (x) " Voting Stock " means the then outstanding securities of an entity entitled to vote generally in the election of members...

  • Page 126
    ...-month delay provisions will only be applicable if it is subsequently determined that the amounts paid pursuant to this Plan are not exempt from Section 409A. (b) If the Employee has a Termination of Employment by the Employer or an Affiliate or by the Employee other than under the circumstances set...

  • Page 127
    ...to such extent. (iii) It is deemed under this Plan that the Employer or an Affiliate consistent with the plans and agreements governing the applicable stock options accelerated the exercisability of such outstanding stock options at such time and on such basis. Notwithstanding any other provision of...

  • Page 128
    ... would have been earned and payable had Employee remained employed with the Employer or any Affiliate for twenty-four (24) months after the Change in Control of the Employer occurs, if not then already earned and payable to such extent; provided that a restricted stock unit that contains performance...

  • Page 129
    ... (24) months after the date of the Change in Control. (iii) It is deemed under this Plan that the Employer or an Affiliate consistent with the plans and agreements governing the applicable restricted stock units accelerated such restricted stock units becoming earned and payable at such time and on...

  • Page 130
    ... be furnished to the claimant within ninety (90) days of receipt of such claim unless special circumstances require an extension of time for processing the claim. If the Employer needs an extension of time to process a claim, written notice will be delivered to the claimant before the end of the...

  • Page 131
    ... a civil action under Section 502(a) of ERISA following a denial on review. The written decision will be rendered within sixty (60) days after the request for review is received, unless special circumstances require an extension of time for processing. If an extension is necessary the Employer will...

  • Page 132
    ... out of being such committee member or agent or representative. The Employer also may employ such accountants, counsel, specialists and other advisory clerical persons as it deems necessary or desirable in connection with administration of the Plan. The Employer is entitled to rely conclusively...

  • Page 133
    ... participate as an Employee in the Plan, (ii) to amend the Plan from time to time and (iii) to terminate the Plan at any time; provided that, within four (4) months before a Change in Control of the Employer occurs or after a Change in Control of the Employer occurs, without the Employee's consent...

  • Page 134
    ..., Inc. 1375 Peachtree Street, N.W. Suite 7 North Atlanta, Georgia 30309-2935 Attention: Executive Vice President, Employee Services If to an Employee: The address last indicated on the records of Employer. 16. Excise Tax . Despite any other provisions of this Plan to the contrary, if the receipt of...

  • Page 135
    ... party or other employer after the Employee's Termination of Employment. (c) Whenever any benefits become payable under the Plan, the Employer and its Affiliates shall have the right to withhold such amounts as are sufficient to satisfy any applicable federal, state or local withholding, tax, excise...

  • Page 136
    .... Accordingly, the Plan must be interpreted and administered in a manner that is consistent with that intent. IN WITNESS WHEREOF, Employer has caused this instrument to be executed in its name by its duly authorized officer, all as of the day and year first above written. EARTHLINK, INC. By...

  • Page 137
    ...AND SEVERANCE PLAN SUMMARY PLAN DESCRIPTION NAME OF PLAN: EarthLink, Inc. Change-in-Control Accelerated Vesting and Severance Plan NAME, ADDRESS, AND TELEPHONE NUMBER OF SPONSOR AND PLAN ADMINISTRATOR: EarthLink, Inc. ("Employer") 1375 Peachtree Street, N.W. Suite 7 North Atlanta, Georgia 30309-2935...

  • Page 138
    ...and redress of a denied claim. AGENT FOR SERVICE OF PROCESS: EarthLink, Inc. 1375 Peachtree Street, N.W. Suite 7 North Atlanta, Georgia 30309-2935 Attention: Executive Vice President, Employee Services In addition to the agent listed above, service of process may be made upon the Employer itself. 2

  • Page 139
    ...decide who should pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees. If you have any questions about your Plan, you should contact the Employer. If you have...

  • Page 140
    Washington, D.C. 20210. You may also obtain certain publications about your rights and responsibilities under ERISA by calling the publications hotline of the Pension and Welfare Benefits Administration. 2

  • Page 141
    ...change in control the company terminates employee's employment without cause or employee voluntarily terminates his or her employment for good reason; no cash severance if termination of employment is on account of the employee's death or disability. Company will pay all amounts payable with respect...

  • Page 142
    Exhibit 21.1 Subsidiaries of the Registrant Name Jurisdiction of Incorporation EarthLink/OneMain, Inc. PeoplePC Inc. Cidco Incorporated New Edge Holding Company Delaware Delaware Delaware Delaware

  • Page 143
    ... PUBLIC ACCOUNTING FIRM We consent to the incorporation by...control over financial reporting, and the effectiveness of internal control over financial reporting of EarthLink, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2006. /s/ Ernst & Young LLP Atlanta, Georgia...

  • Page 144
    ..., the Chief Executive Officer of EarthLink, Inc., certify that: 1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2006 of EarthLink, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact...

  • Page 145
    ... SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Kevin M. Dotts, the Chief Financial Officer of EarthLink, Inc., certify that: 1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2006 of EarthLink...

  • Page 146
    ... OF 2002 In connection with the Annual Report on Form 10-K of EarthLink, Inc. (the "Company") for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael C. Lunsford, Chief Executive Officer of the Company, certify, pursuant...

  • Page 147
    ... OF 2002 In connection with the Annual Report on Form 10-K of EarthLink, Inc. (the "Company") for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin M. Dotts, Chief Financial Officer of the Company, certify, pursuant to...