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EARTHLINK INC
FORM 10-K
(Annual Report)
Filed 02/28/08 for the Period Ending 12/31/07
Address 1375 PEACHTREE STREET
SUITE 400
ATLANTA, GA 30309
Telephone 4048150770
CIK 0001102541
Symbol ELNK
SIC Code 7370 - Computer Programming, Data Processing, And
Industry Computer Services
Sector Technology
Fiscal Year 12/31
http://www.edgar-online.com
© Copyright 2008, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

Table of contents

  • Page 1
    EARTHLINK INC FORM 10-K (Annual Report) Filed 02/28/08 for the Period Ending 12/31/07 Address 1375 PEACHTREE STREET SUITE 400 ATLANTA, GA 30309 4048150770 0001102541 ELNK 7370 - Computer Programming, Data Processing, And Computer Services Technology 12/31 Telephone CIK Symbol SIC Code Industry ...

  • Page 2
    ... from to 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 No.) 1375 Peachtree St., Atlanta, Georgia 30309 (Address of principal executive offices, including zip...

  • Page 3
    ... of the registrant on June 30, 2007 was $901.4 million. As of January 31, 2008, 109,363,655 shares of common stock were outstanding. Portions of the Proxy Statement to be filed with the Securities and Exchange Commission and to be used in connection with the Annual Meeting of Stockholders to be held...

  • Page 4
    ... 14. Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Manageent and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services PART IV...

  • Page 5
    ... EarthLink, Inc. is an Internet service provider, or ISP, providing nationwide Internet access and related value-added services to individual and business customers. Our primary service offerings include dial-up Internet access, high-speed Internet access, voice services and web hosting services...

  • Page 6
    ... we provide. In addition to implementing our corporate restructuring plan which reduced back-office support costs and subscriber acquisition costs, we are focused on delivering our services more cost effectively, reducing and more efficiently handling the number of calls to contact centers, managing...

  • Page 7
    ...fees; early termination fees; reactivation fees; shipping and handling fees; and equipment revenues associated with the sale of modems and other access devices to our subscribers. IP-Based Voice EarthLink DSL and Home Phone Service is a bundle offer that includes EarthLink high-speed Internet access...

  • Page 8
    ..., high-capacity access services; fees charged for high-speed data networks for small and medium-sized businesses; installation fees; termination fees; fees for equipment; and regulatory surcharges billed to customers. Web Hosting We lease server space and provide web hosting services to companies...

  • Page 9
    ... bell operating companies ("RBOCs"), competitive local exchange carriers ("CLECs"), and cable and satellite service providers to provide last mile connectivity onto its network. The network provides coverage via frame relay, DSL, and/or T-1 access to service small and medium sized businesses and...

  • Page 10
    ... years, a number of the telephone companies that we compete with or who provide us with broadband Internet access services have consolidated through merger activity. In each of these transactions, the Justice Department and the FCC have reviewed the mergers for compliance with the antitrust laws and...

  • Page 11
    ... cost of providing Internet access services could be increased and our business could be adversely affected. Consumer Protection Consumer protection laws and enforcement actions regarding advertising and user privacy, are becoming more prevalent. The Federal Trade Commission ("FTC") and some state...

  • Page 12
    ... of the telephone call cannot be accurately determined. In March 2007, a U.S. Court of Appeals upheld the FCC's decision in Minnesota Public Utility Commission v. Federal Communications Commission. Unlike Vonage, we offer fixed line VoIP services. Several state public utility commissions, which...

  • Page 13
    ... 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 discontinue using our services, or churn. VoIP services. The market for VoIP services is...

  • Page 14
    ... 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 15
    ... short-term, market-specific situations, such as special introductory pricing or new product or service offerings. Any of the above could adversely affect our revenues and profitability. We might not realize the benefits we are seeking from the corporate restructuring plan announced in August 2007...

  • Page 16
    ...; wireless Internet service providers; satellite and fixed wireless service providers; and electric utilities and other providers offering or planning to offer broadband Internet connectivity over power lines. Many of our current and prospective competitors have longer operating histories, greater...

  • Page 17
    value-added services for free, and we can provide no assurance that our offerings will remain competitive or commercially viable. While the personal web hosting business is fragmented, a number of significant companies, including Yahoo!, currently compete actively for these subscribers. In addition,...

  • Page 18
    ... 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. Our largest providers of broadband connectivity are Covad and Time Warner Cable...

  • Page 19
    ... number of internal customer service and technical support personnel. We are not currently equipped to provide the necessary range of customer service functions in the event that our service providers become unable or unwilling to offer these services to us. Our outsourced contact center service...

  • Page 20
    ...our computer and 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, a natural disaster or other unanticipated problem that impacts one...

  • Page 21
    ... cost of providing Internet access services could be increased and our business could be adversely affected. Consumer protection. Consumer protection laws and enforcement actions regarding advertising and user privacy, are becoming more prevalent. The Federal Trade Commission ("FTC") and some state...

  • Page 22
    ... and liquidity. Our business depends on the continued development of effective business support systems, processes and personnel. Our business relies on our data, billing and other operational and financial reporting and control systems. All of these systems have become increasingly complex, largely...

  • Page 23
    ... of facilities and equipment owned and operated by third parties and is, therefore, beyond our control. Our VoIP service requires our customers to have an operative broadband Internet connection and an electrical power supply, which are provided by the customer's Internet service provider, which may...

  • Page 24
    ... upon future conversion of our outstanding convertible senior notes), and acquisitions or sales of shares by certain holders of our shares, including persons who have held, currently hold, or may accumulate in the future five percent or more of our outstanding stock. Many of these transactions are...

  • Page 25
    ... less debt; and restrict us from making strategic acquisitions, introducing new technologies or otherwise exploiting business opportunities. We may be unable to repurchase the Notes for cash when required by the holders, including following a fundamental change, or to pay the cash portion of the...

  • Page 26
    ... square footage of approximately 23,000 feet. Our technology centers host and manage Internet content, email, web hosting and authentication applications and services. We may acquire additional amounts of storage and processing capacity in relatively small increments and, consequently, we expect...

  • Page 27
    ... 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, 2006 First Quarter Second Quarter Third Quarter...

  • Page 28
    ...274.0 The number of shares repurchased and the average price paid per share for each month in the three months ended December 31, 2007 were as follows: Total Number of Shares Repurchased Average Price Paid per Share Total Number of Shares Repurchased as Part of Publicly Announced Program(1) Maximum...

  • Page 29
    ... thereto included elsewhere in this Annual Report on Form 10-K. Year Ended December 31, 2003 2004 2005 (in thousands, except per share amounts) 2006 2007 Statement of operations data: Revenues Operating costs and expenses Income (loss) from operations Income (loss) from continuing operations Loss...

  • Page 30
    wireless broadband operations, including the sale of the assets. Management concluded that the municipal wireless broadband operations were no longer 25

  • Page 31
    ... to increase our subscriber base; (12) that our business may suffer if third parties used for technical and customer support and certain billing services are unable to provide these services, cannot expand to meet our needs or terminate their relationships with us; (13) that service interruptions or...

  • Page 32
    ... our share price and delay a change of management. Overview EarthLink, Inc. is an Internet service provider, or ISP, providing nationwide Internet access and related value-added services to individual and business customers. Our primary service offerings include dial-up Internet access, high-speed...

  • Page 33
    ... speeds, has been declining and is approaching prices for traditional dial-up services, making it a more viable option for consumers that continue to rely on dial-up connections for Internet access. In addition, advanced applications such as online gaming, music downloads and photo sharing require...

  • Page 34
    ... we provide. In addition to implementing our corporate restructuring plan which reduced back-office support costs and subscriber acquisition costs, we are focused on delivering our services more cost effectively, reducing and more efficiently handling the number of calls to contact centers, managing...

  • Page 35
    ...In April 2006, we acquired New Edge. The acquisition of New Edge expands our service offerings for businesses and communications carriers. Under the terms of the merger agreement, we acquired 100% of New Edge in a merger transaction for 1.7 million shares of EarthLink common stock and $108.7 million...

  • Page 36
    ... serviced via either the Time Warner Cable or Bright House Networks network. We had a marketing relationship with Embarq, a spin-off of Sprint Nextel Corporation's local communications business. The relationship provided that EarthLink was the wholesale high-speed ISP for Embarq's local residential...

  • Page 37
    ... customers. 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. Effective March 24, 2005, we transferred approximately 27,000 wireless subscribers to HELIO in connection...

  • Page 38
    ... 31, 2005 2006 2007 2006 vs. 2005 $ Change % Change 2007 vs. 2006 $ Change % Change (dollars in thousands) Revenues Operating costs and expenses: Service and equipment costs Sales incentives Total cost of revenues Sales and marketing Operations and customer support General and administrative...

  • Page 39
    ...in customers, services and marketing channels. Our Consumer Services segment provides dial-up Internet access, high-speed Internet access and voice services, among others, to individual customers. Our Business Services segment provides managed data networks, dedicated Internet access and web hosting...

  • Page 40
    ... narrowband access and value-priced narrowband access); broadband access services (including high-speed access via DSL, cable and satellite; IP-based voice; and fees charged for high-speed data networks to small and medium-sized businesses and communications carriers); and web hosting services. We...

  • Page 41
    ... in costs from our DSL service providers and the increased use of promotional pricing for our service offerings. Narrowband access and service ARPU decreased from the year ended December 31, 2006 to the year ended December 31, 2007 due to the shift in the mix of our narrowband subscriber base...

  • Page 42
    ... for high-speed, high-capacity access services including DSL, cable, satellite and dedicated circuit services; fees charged for high-speed data networks for small and medium-sized businesses; installation fees; termination fees; fees for equipment; regulatory surcharges billed to customers; and web...

  • Page 43
    ... costs for providing subscribers with toll-free access to our technical support and customer service centers, offset by an increase in operations expense for our value-added services and an increase due to stock-based compensation expense from the adoption of Statement of Financial Accounting...

  • Page 44
    ... human resources departments; outside professional services; payment processing; credit card fees; collections and bad debt. General and administrative expenses were $112.2 million, $125.6 million and $128.4 million during the years ended December 31, 2005, 2006 and 2007, respectively. The increase...

  • Page 45
    ...and businesses. Under the 2007 Plan, we reduced our workforce by approximately 900 employees, consolidated our office facilities in Atlanta, Georgia and Pasadena, California and closed office facilities in Orlando, Florida; Knoxville, Tennessee; Harrisburg, Pennsylvania and San Francisco, California...

  • Page 46
    ... and financial policies of the companies in which we have invested. We are not the primary beneficiary for any of the companies in which we have invested. Accordingly, we use the cost method to account for our investments in other companies. Interest income and other, net Interest income and other...

  • Page 47
    ... less estimated costs to sell. These charges are reflected within loss from discontinued operations. In addition, as a result of the 2007 Plan, we recorded restructuring costs of $20.9 million during the year ended December 31, 2007 related to our municipal wireless broadband operations, including...

  • Page 48
    ... 2006, we accounted for stock-based compensation issued to employees using the intrinsic value method. Generally, no stock-based employee compensation cost related to stock options was reflected in net income, as all options granted under stock-based compensation plans had an exercise price equal to...

  • Page 49
    ... ended December 31, 2006 was primarily due to an increase in costs associated with launching our municipal wireless broadband and IPbased voice services. The decrease from the year ended December 31, 2006 to the year ended December 31, 2007 was primarily due to a decrease in revenues. However, this...

  • Page 50
    ... network build-out of IP-based voice services; $10.0 million for our investment in Current Communications; $38.9 million for capital expenditures, primarily associated with network and technology center related projects; and $8.9 million for acquiring subscriber bases from other companies. Partially...

  • Page 51
    ... Securities and Exchange Commission's regulations and other legal requirements, and subject to 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. Income Taxes We...

  • Page 52
    ... plan and to pay real estate obligations associated with facilities exited in our restructuring plan. We may also incur costs to exit our municipal wireless broadband operations. Historically, we have expended significant resources enhancing our existing services and developing, acquiring...

  • Page 53
    ... EarthLink and HELIO have entered into a services 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. The management fees...

  • Page 54
    ... in which we provide services to customers using the "last mile" element of the telecommunications providers' networks. The term "last mile" generally refers to the element of telecommunications networks that is directly connected to homes and businesses. In these instances, management evaluates the...

  • Page 55
    ...than temporary impairment of goodwill, we may be required to record a significant impairment adjustment, which would reduce earnings. For noncurrent assets such as property and equipment, definite lived intangible assets and investments in other companies, we perform tests of impairment when certain...

  • Page 56
    ... 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 57
    ... granted, exercised and cancelled. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. Restructuring and facility exit costs From time to time, we have closed...

  • Page 58
    ...December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB 51," which establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income...

  • Page 59
    ... of public and private companies for operational and strategic purposes. In connection with the issuance of our convertible senior notes, we purchased call options to cover approximately 28.4 million shares of our common stock, subject to adjustment in certain circumstances, which is the number of...

  • Page 60
    ... 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, 2006 and 2007 Consolidated Statements of Operations for the years ended December 31, 2005, 2006 and...

  • Page 61
    ... Statement of Financial Accounting Standards No. 123 (revised), Share-Based Payment . We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), EarthLink, Inc.'s internal control over financial reporting as of December 31, 2007, based on...

  • Page 62
    ... In our opinion, EarthLink, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, 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 63
    ..., 184,545 and 186,490 shares issued as of December 31, 2006 and 2007, respectively, and 122,634 and 110,547 shares outstanding as of December 31, 2006 and 2007, respectively Additional paid-in capital Warrants to purchase common stock Accumulated deficit Treasury stock, at cost, 61,911 and 75,943...

  • Page 64
    The accompanying notes are an integral part of these consolidated financial statements. 58

  • Page 65
    ... Year Ended December 31, 2005 2006 (in thousands, except per share data) 2007 Revenues Operating costs and expenses: Service and equipment costs Sales incentives Total cost of revenues Sales and marketing Operations and customer support General and administrative Amortization of intangible assets...

  • Page 66
    ... 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 67
    ...net cash provided by operating activities: Depreciation and amortization Net losses of equity affiliate (Gain) loss on disposals and impairments of assets (Gain) loss on investments in other companies, net Stock-based compensation Deferred income taxes (Increase) decrease in accounts receivable, net...

  • Page 68
    ..."Company") is an Internet service provider ("ISP"), providing nationwide Internet access and related value-added services to individual and business customers. The Company's primary service offerings include dial-up Internet access, high-speed Internet access, voice services and web hosting services...

  • Page 69
    ... consist 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 and dedicated circuit services; fees charged for high-speed data networks to...

  • Page 70
    ...network operations costs incurred to provide the Company's Internet access services; depreciation of network equipment; fees paid to content providers for information provided on the Company's online properties, including the Company's Personal Start Pageâ„¢; the costs of equipment sold to customers...

  • Page 71
    ... per share ("EPS"). Basic EPS represents net income (loss) divided by the weighted average number of common shares outstanding during a reported period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock, including stock options...

  • Page 72
    ... unrecognized compensation cost attributed to future services. The following table sets forth the computation for basic and diluted net income per share for the years ended December 31, 2005 and 2006: Year Ended December 31, 2005 2006 (in thousands, except per share data) Numerator Income from...

  • Page 73
    ... 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 and recognition of...

  • Page 74
    ... December 31, 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...

  • Page 75
    ... ended December 31, 2005, 2006 and 2007, respectively. 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...

  • Page 76
    ... 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 investee is a VIE and whether EarthLink...

  • Page 77
    ..., trade names and other assets acquired in conjunction with the purchases of businesses and subscriber bases 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...

  • Page 78
    .... The Company's cash investment policy limits investments to investment grade instruments. Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the U.S. Credit risk with respect to trade receivables is limited due to the large number of...

  • Page 79
    ...contracts with broadband access providers. Supply Risk. The Company's business substantially depends on the capacity, affordability, reliability and security of third-party telecommunications and data service providers. Only a small number of providers offer the network services the Company requires...

  • Page 80
    .... The Company is currently assessing the impact of the adoption of this standard on its financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which provides companies with an option to report selected financial...

  • Page 81
    ... and businesses. Under the 2007 Plan, the Company reduced its workforce by approximately 900 employees, consolidated its office facilities in Atlanta, Georgia and Pasadena, California and closed office facilities in Orlando, Florida; Knoxville, Tennessee; Harrisburg, Pennsylvania and San Francisco...

  • Page 82
    ... 31, 2007, approximately $16.1 million associated with the Plan was classified as other accounts payable and accrued liabilities and $12.1 million was classified as other long-term liabilities. Legacy Restructuring Plans During the years ended December 31, 2003, 2004 and 2005, EarthLink executed...

  • Page 83
    .... These charges are reflected within discontinued operations in the Consolidated Statements of Operations. In addition, as a result of the 2007 Plan, the Company recorded restructuring costs of $20.9 million during the year ended December 31, 2007 related to the municipal wireless broadband business...

  • Page 84
    ... not material. New Edge Holding Company In April 2006, EarthLink acquired New Edge, a single-source national provider of secure multi-site managed data networks and dedicated Internet access for businesses and communications carriers. Through this acquisition, EarthLink expanded its business in the...

  • Page 85
    ...changes in market rates of interest and yields on bonds. The Company believes its gross unrealized losses are temporary because management has the intent and ability to hold these investments until maturity, at which time the Company would expect to receive the amortized cost basis of the investment...

  • Page 86
    ...-held broadband-overpowerline provider. The Company accounts for its investment in Current under the cost method of accounting because the Company cannot exert significant influence over Current's operating and financial policies. During the year ended December 31, 2005, the Company received...

  • Page 87
    ..., the Company paid HELIO to assume $0.9 million of net liabilities associated with wireless customers and related operations. The Company recorded no gain or loss in March 2005 associated with the contribution of non-cash assets, the transfer of net liabilities, or the associated payment to HELIO...

  • Page 88
    ...,539 64,032 Property and equipment is recorded at cost and consisted of the following as of December 31, 2006 and 2007: As of December 31, 2006 (in thousands) 2007 Data center and network equipment Office and other equipment Land and buildings Leasehold improvements Construction in progress Less...

  • Page 89

  • Page 90
    ... of Operations for the years ended December 31, 2005, 2006 and 2007 represents the amortization of definite lived intangible assets. The Company's definite lived intangible assets primarily consist of subscriber bases and customer relationships, acquired software and technology and other assets...

  • Page 91
    ... year ended December 31, 2007, the Company recorded permanent impairment losses of $4.3 million as a result of the annual review of the Company's trade names in accordance with SFAS No. 142. 9. Other Accounts Payable and Accrued Liabilities Other accounts payable and accrued liabilities consisted of...

  • Page 92
    ... person or entity acquires, or initiates a tender offer to acquire, at least 15% of EarthLink's then outstanding common stock, the rights will become exercisable for common stock having a value equal to two times the exercise price of the right, or effectively at one-half of EarthLink's then-current...

  • Page 93
    ..., for $47.2 million. The call options generally allow the Company to receive shares of the Company's common stock from counterparties equal to the number of shares of common stock payable to the holders of the Notes upon conversion. These call options will terminate the earlier of the maturity dates...

  • Page 94
    ... 31, 2007, approximately 12.3 million stock options, restricted stock units and phantom share units were outstanding under various stock incentive plans that expire in 2010 and 2016 and approximately 12.2 million shares were available for grant. Deferred Compensation Plan The Company's Second...

  • Page 95
    ...number of stock options outstanding or exercisable, when the closing price is greater than the exercise price. This represents the amount that would have been received by the stock option holders if they had all exercised their stock options on December 31, 2007. The total intrinsic value of options...

  • Page 96
    ... Stock Options The fair value of stock options granted during the years ended December 31, 2005, 2006 and 2007 was estimated using the Black-Scholes option-pricing model with the following assumptions: Year Ended December 31, 2005 2006 2007 Dividend yield Expected volatility Risk-free interest rate...

  • Page 97
    ...31, 2005, 2006 and 2007 was $0.1 million, $1.2 million and $2.7 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. 13. Profit Sharing Plans The Company sponsors the EarthLink, Inc...

  • Page 98
    ...and $67.9 million, of state NOLs to offset taxable income; however, EarthLink owed state income and federal and state alternative minimum tax ("AMT") aggregating $5.3 million for the year ended December 31, 2005, and the AMT was payable primarily due to limitations associated with the utilization of...

  • Page 99
    ... statutory tax rate and the Company's effective tax rate for continuing operations for financial statement purposes for the years ended December 31, 2005, 2006 and 2007: Year Ended December 31, 2005 2006 (in thousands) 2007 Federal income tax provision at statutory rate State income taxes, net...

  • Page 100
    ... to the exercise of employee stock options and warrants. Any benefit resulting from the utilization of this portion of the NOLs will be credited directly to equity. As of December 31, 2007, the NOLs included $56.5 million of NOLs acquired in connection with business acquisitions. An additional $126...

  • Page 101
    ... or sales of shares by certain holders of the Company's shares, including persons who have held, currently hold, or may accumulate in the future five percent or more of the Company's outstanding stock. Many of these transactions are beyond the Company's control. On January 1, 2007, EarthLink adopted...

  • Page 102
    ... network capacity from a number of third-party providers such as Level 3 Communications, Inc. EarthLink is, in effect, buying this capacity in bulk at a discount, and providing access to EarthLink's customer base. The Company also leases certain equipment used to provide its Internet access services...

  • Page 103
    ... on quoted market prices. The Company's purchased call options are stated at cost and the estimated fair value is based on the Black-Scholes valuation model. The following table presents the carrying value and fair value of the Company's financial instruments as of December 31, 2006 and 2007: As of...

  • Page 104
    .... As of December 31, 2007, the Company had $0.0 million of investments accounted for using the equity method of accounting, $52.9 million of fair value investments and $10.0 million of cost-method investments. Interest Rate Risk The Company is exposed to interest rate risk with respect to its...

  • Page 105
    ... human resource, employee benefit administration and other support services in exchange for management fees. The management fees were determined based on EarthLink's costs to provide the services, and management believes such fees are reasonable. The total amount of fees that HELIO pays to EarthLink...

  • Page 106
    ... high-speed Internet access and voice services, among others. The Company's Business Services segment provides Internet access services and related value-added services to businesses and communications carriers. These services include managed data networks, dedicated Internet access and web hosting...

  • Page 107
    ...monthly fees charged to customers for dial-up Internet access; monthly retail and wholesale fees charged for high-speed, high-capacity access services including DSL, cable and satellite; fees charged for IP-based voice services; usage fees; installation fees; termination fees; and fees for equipment...

  • Page 108
    ... products, email by phone, Internet call waiting and email storage; and revenues from home networking products and services. Business access and service revenues consist of retail and wholesale fees charged for high-speed, high-capacity access services including DSL, cable, satellite and dedicated...

  • Page 109
    ... the net income per share computed for the year. In November 2007, EarthLink's Board of Directors authorized management to pursue the divestiture of the Company's municipal wireless broadband assets. Management concluded that the municipal wireless broadband operations were no longer consistent with...

  • Page 110
    ... a report on Form 8-K during the three months ended December 31, 2007 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...

  • Page 111
    ... compliance by our directors and executive officers and owners of more than 10% of EarthLink's common stock with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, as amended, will be set forth under the caption "Executive Officers-Compliance with Section 16(a) of...

  • Page 112
    ... closing, the Leadership and Compensation Committee approved the EarthLink, Inc. Stock Option Plan for Inducement Awards Relating 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...

  • Page 113
    ...No. 001-15605). Agreement and Plan of Merger, dated December 12, 2005, by and among EarthLink, Inc., New Edge Holding Company and New Edge Merger Corporation (incorporated by reference to Exhibit 2.1 to EarthLink, Inc.'s Report on Form 8-K dated December 12, 2005-File No. 001-15605). Second Restated...

  • Page 114
    ... 30, 2005-File No. 001-15605). Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 of EarthLink, Inc.'s Report on Form 10-Q for the quarterly period ended September 30, 2005-File No. 001-15605). Form of Performance Accelerated Nonqualified Stock Option Agreement...

  • Page 115
    ... under EarthLink, Inc. Stock Option Plan for Inducement Awards Relating to the Acquisition of New Edge Holding Company (incorporated by reference to Exhibit 4.4 to the Registration Statement of Form S-8-File No. 333-133870). Office Lease Agreement dated November 16, 1999, between Kingston Atlanta...

  • Page 116
    ..., Inc. and Joseph M. Wetzel, Chief Operating Officer of EarthLink, Inc. (incorporated by reference to Exhibit 10.1 of EarthLink, Inc.'s Report of Form 8-K dated August 27, 2007- File No. 001-15605). Form of Retention Agreement for Lump Sum Payment (incorporated by reference to Exhibit 10.1 of...

  • Page 117
    ... Summary of 2007 bonus payments and 2008 salaries for executive officers (incorporated by reference to EarthLink, Inc.'s Report on Form 8-K dated February 6, 2008-File No. 001-15605). EarthLink, Inc. 2008 Incentive Bonus Plan. Form of Restricted Stock Unit Agreement under the EarthLink, Inc. Equity...

  • Page 118
    ... all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents full power and authority to do and perform...

  • Page 119

  • Page 120
    QuickLinks EARTHLINK, INC. Annual Report on Form 10-K For the Year Ended December 31, 2007 TABLE OF CONTENTS FORWARD-LOOKING STATEMENTS PART I Item 1. Business. Item 1A. Risk Factors. Item 1B. Unresolved Staff Comments. Item 2. Properties. Item 3. Legal Proceedings. Item 4. Submission of Matters to ...

  • Page 121
    ..., of the power to direct or cause the direction of management policies of such Entity through the ownership of voting securities or by contract. "Person" means any human being, firm, corporation, partnership, or other entity. "Person" also includes any human being, firm, corporation, partnership, or...

  • Page 122
    ...an Initial Member, is or becomes a Management Company Acquiring Person; (ii) holders of the securities of the Management Company entitled to vote thereon approve any agreement with a Person, other than an Initial Member or any Affiliate, (or, if such approval is not required by applicable law and is...

  • Page 123
    ... in good faith and enter into a contract between the Operating Company and the Management Company (the " Special Management Services Agreement "), pursuant to which the Management Company shall provide the additional and special management required by such Type C Triggering Event in return for...

  • Page 124
    ...the liquidation and dissolution process, and the Total Outstanding Shares at the time of the Type C Triggering Event. The Type C Triggering Event Fee shall be a current obligation of the Operating Company payable prior to any distributions made pursuant to Article 11 ; if the Type C Triggering Event...

  • Page 125
    IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be executed by their duly authorized representatives as of the date first written in this Second Amendment. EARTHLINK, INC. Name: Title: SK TELECOM USA HOLDINGS, INC. Name: Title: HELIO, INC. Name: Title: HELIO LLC By: ...

  • Page 126
    QuickLinks Exhibit 10.30 RECITALS

  • Page 127
    ...converted to Class A Common Stock as provided in Article 5.12 . In addition, upon a Type C Triggering Event, all outstanding shares of Class B Common Stock shall be automatically converted to Class A Common Stock at the Class B Conversion Rate then in effect and following the procedures set forth in...

  • Page 128
    ...an Initial Member, is or becomes a Management Company Acquiring Person; (ii) holders of the securities of the Management Company entitled to vote thereon approve any agreement with a Person, other than an Initial Member or any Affiliate, (or, if such approval is not required by applicable law and is...

  • Page 129
    ... under the Exchange Act) of securities representing more than fifty percent (50%) of the Operating Company's then outstanding Membership Units. "Operating Company Change in Control" means (i) a Person, other than an Initial Member, is or becomes an Operating Company Acquiring Person; (ii) holders of...

  • Page 130
    ... Stock, at a special meeting of stockholders called and held upon notice in accordance with Section 222 of the DGCL. IN WITNESS WHEREOF this Certificate of Amendment of the Second Amended and Restated Certificate of Incorporation has been executed by the Chief Executive Officer of the Corporation...

  • Page 131
    QuickLinks Exhibit 10.31

  • Page 132
    ... in any number of related or unrelated transactions by any person of beneficial ownership (as such term is used in Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) of more than fifty percent (50%) of the combined voting power of the Company's voting stock; provided that...

  • Page 133
    ... any person, directly or indirectly, of the power to direct or cause the direction of the management and policies of the Company (i) through the ownership of securities which provide the holder with such power, excluding voting rights attendant with such securities, or (ii) by contract; provided the...

  • Page 134
    ... incurred a "disability" in accordance with the policies of the Employer that employs the Employee in effect at the applicable time. " Distribution " means the payment of cash or the grant of Restricted Stock Units under the Plan. " Distribution Date " means the date on which the Distribution occurs...

  • Page 135
    ... Plan " means this EarthLink, Inc. 2008 Incentive Bonus Plan, in its current form and as it may be hereafter amended. " Restricted Stock Units " mean an award, stated with respect to a specified number of shares of Common Stock, that entitles the Participant to receive one share of Common Stock with...

  • Page 136
    ... OF THE PLAN 3.1 Administration of the Plan. The Committee shall be the sole administrator of the Plan and shall have full authority to formulate adjustments and make interpretations under the Plan as it deems appropriate. The Committee shall also be empowered to make any and all of the...

  • Page 137
    ... vest and be paid only if the Participant is employed by an Employer on the six-month anniversary of the date of Distribution for the applicable Bonus Period. Any Restricted Stock Units to be awarded to a Management Participant under the Plan shall be awarded under the EarthLink, Inc. 2006 Equity...

  • Page 138
    ... Distribution Date or a combination thereof, provided in any case that the Management Participant will receive the cash or shares of Common Stock on the six-month anniversary of the Distribution Date only if the Participant is employed by an Employer at such time. 6.3 Payment of Award. The amount of...

  • Page 139
    ... other person, nor shall it be transferable by operation of law in the event of the Participant's or any other persons bankruptcy or insolvency, except as set forth in Section 7.2 above. 9.4 Employment or Future Pay or Compensation Not Guaranteed. Nothing contained in this Plan nor any action taken...

  • Page 140
    ...at any time amend the Plan in Termination of the Plan. (a) Employer's Right to Terminate. Except as set forth in Section 10.3 below, the Committee may at any time terminate the Plan, if it determines in good faith that the continuation of the Plan is not in the best interest of the Company and its...

  • Page 141
    ... therewith. The Company may at any time amend, suspend or terminate this Plan, or any payments to be made hereunder, as necessary to be exempt from Section 409A of the Code. Notwithstanding the preceding, neither the Company nor any Employer shall be liable to any Employee or any other person if the...

  • Page 142
    QuickLinks Exhibit 10.49 EARTHLINK, INC. 2008 INCENTIVE BONUS PLAN

  • Page 143
    ... continuously employed by, or providing services to, the Company or an Affiliate from the Date of Grant until each such time. (2) Seventy-Five Percent ( ) of the outstanding Restricted Stock Units shall be considered "Performance-Based" and shall become eligible to be earned and payable with respect...

  • Page 144
    ... [s] of [Free Cash Flow of the Company] [and] [EBITDA of New Edge Holding Company] that the Committee set forth on the attached Exhibit A for the Company's fiscal year that includes the Date of Grant. The outstanding Restricted Stock Units that become eligible to be earned and payable under either...

  • Page 145
    ... become earned and payable in full on termination of the Participant's employment as the result of a position elimination with respect to that number of the Restricted Stock Units that correlates to the level [s] of [Free Cash Flow of the Company] [and] [EBITDA of New Edge Holding Company] that [is...

  • Page 146
    ... the Restricted Stock Units become earned and payable and the related shares of Common Stock are issued to the Participant. In that case, the Company shall pay such cash amounts to the Participant, less any required withholding taxes, at the same time the related shares of Common Stock are delivered...

  • Page 147
    ... mail, postage prepaid, return receipt requested, to the following addresses: If to the Company: EarthLink, Inc. 1375 Peachtree Street-Level A Atlanta, Georgia 30309 Attention: General Counsel If to the Participant: 10. No Right to Continued Employment or Service. Neither the Plan, the granting...

  • Page 148
    ...the Company's consolidated revenues or adjusted EBITDA for the four fiscal quarters immediately preceding the Participant's termination of employment. As used herein, "business" means the business of providing integrated communication services and related value added services to individual customers...

  • Page 149
    IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by a duly authorized officer, and the Participant has affixed his signature hereto. COMPANY: EARTHLINK, INC. By: Name: Title: PARTICIPANT: [Participant's Name]

  • Page 150
    QuickLinks Exhibit 10.50 EARTHLINK, INC. 2006 EQUITY AND CASH INCENTIVE PLAN Restricted Stock Unit Agreement

  • Page 151
    QuickLinks -- Click here to rapidly navigate through this document 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 152
    QuickLinks Exhibit 21.1 Subsidiaries of the Registrant

  • Page 153
    ..., with respect to the consolidated financial statements of EarthLink, Inc. 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, 2007. /s/ Ernst & Young LLP Atlanta, Georgia February 28, 2008

  • Page 154
    QuickLinks Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  • Page 155
    ... here to rapidly navigate through this document Exhibit 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in EarthLink, Inc.'s Registration Statements on Form S-8 (Nos. 333-30024, 333-34810, 33339456, 333-96553, 333-108065, 333-126004, 333...

  • Page 156
    QuickLinks Exhibit 23.2

  • Page 157
    ... Officer of EarthLink, Inc., certify that: 1. 2. I have reviewed this annual report on Form 10-K for the year ended December 31, 2007 of EarthLink, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make...

  • Page 158
    QuickLinks Exhibit 31.1 CERTIFICATION OF CEO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

  • Page 159
    ... Officer of EarthLink, Inc., certify that: 1. 2. I have reviewed this annual report on Form 10-K for the year ended December 31, 2007 of EarthLink, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make...

  • Page 160
    QuickLinks Exhibit 31.2 CERTIFICATION OF CFO PURSUANT TO SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

  • Page 161
    ...ACT OF 2002 In connection with the Annual Report on Form 10-K of EarthLink, Inc. (the "Company") for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Rolla P. Huff, Chief Executive Officer of the Company, certify, pursuant to...

  • Page 162
    QuickLinks Exhibit 32.1 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

  • Page 163
    ... OF 2002 In connection with the Annual Report on Form 10-K of EarthLink, Inc. (the "Company") for the year ended December 31, 2007 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...

  • Page 164
    QuickLinks Exhibit 32.2 CERTIFICATION 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

  • Page 165
    ...HELIO, INC. and HELIO LLC INDEX TO COMBINED FINANCIAL STATEMENTS Page Report of Independent Auditors Combined Balance Sheets as of December 31, 2006 and 2007 Combined Statements of Operations for the period inception (January 27, 2005) to December 31, 2005, and the years ended December 31, 2006 and...

  • Page 166
    ... available to meet its planned operating activities over the next twelve months. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters also are described in Note 1. The 2007 combined financial statements do...

  • Page 167
    ...; 2 shares authorized, issued and outstanding at December 31, 2006 and 2007) Class A common stock ($0.01 par value; 230,000,002 shares authorized; 5,337,900, and 5,561,272 shares issued and outstanding at December 31, 2006 and 2007, respectively) Additional paid-in capital Accumulated deficit Total...

  • Page 168
    ... 31, 2007 Revenue: Service revenue Equipment sales and other revenue Total revenue Cost of sales: Cost of services Cost of equipment sales Total cost of sales Gross (loss) margin Operating expenses: Operations and member service Sales and marketing General and administrative Stock compensation...

  • Page 169
    ...10) Exercise of employee stock options during 2006 Stock expense pertaining to vested portion of a warrant issued in 2005 to a Partner to purchase 1,995,000 shares of the Company's Class A Common Stock at $1.71 per share Employee stock compensation expense Supplemental compensation paid on behalf of...

  • Page 170
    ... 2007 (See Note 9) Cancellation of member units from Partner (See Note 10) Exercise of employee stock options during 2007 Stock expense pertaining to vested portion of a warrant issued in 2005 to a Partner to purchase 1,995,000 shares of the Company's Class A Common Stock at $1.71 per share Stock...

  • Page 171
    ...on disposal of property and equipment Stock based compensation Impairment charge on intangible assets Interest expense associated with convertible notes payable to partners Other non-cash activities Changes in operating assets and liabilities: Accounts receivable Inventory Prepaid expenses and other...

  • Page 172
    ... by a Partner in conjunction with the Company's formation Accrued property and equipment purchases Non-cash financing activities Warrants issued to a Partner to purchase common stock in exchange for services Exchange of Partner convertible notes payable in the aggregate principal amount of $70...

  • Page 173
    ...of the Membership Units may be exchanged, at the option of the holder, at any time and from time-to-time, for validly issued, fully paid and non-assessable shares of HELIO, Inc.'s Class A Common Stock. The number of shares of Class A Common Stock obtained from such an exchange of Membership Units is...

  • Page 174
    ..., EarthLink forfeited 9,090,909 of its then outstanding preferred membership units (which were immediately cancelled by the Company). Through December 2007, aggregate cash contributions under the Amended Joint Venture Agreement totaled $100.0 million, which included the November 2007 Exchange and...

  • Page 175
    ...music, video and games downloads), data usage, messaging and other services, net of related member account credits. The Company earns service revenue by providing its members airtime minutes, data, messaging and content downloads on its HELIOâ„¢ devices over dedicated wireless networks. All services...

  • Page 176
    ... of their selected coverage area, "411" dialing charges, international calling minutes and, when applicable, activation fees. Service revenue is recognized in the period of use. As a result of bill cycle cut-off times, the Company is required to make estimates for airtime service revenue earned but...

  • Page 177
    ...devices and services, information technology costs, supply chain management and member support. Product development costs are charged to expense as incurred. Sales and Marketing Costs Sales and marketing costs are generally comprised of costs of external sales commissions, co-op advertising, general...

  • Page 178
    ... for billing, collecting and paying various sales and service usage taxes on behalf of its members. The Company accounts for these pass-through tax arrangements in accordance with Emerging Issues Task Force No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should...

  • Page 179
    .... The collection policies and procedures of the Company vary by credit class and payment history of members. The Company's allowance for doubtful accounts was $5.5 million and $10.9 million at December 31, 2006 and 2007, respectively. For the periods ended December 31, 2005, 2006 and 2007, bad debt...

  • Page 180
    ... or intended useful lives, generally between three to five years, beginning in March 2005. In September 2007, Earthlink announced that it was restructuring and would no longer be providing funding to the Company, and as a result the Company recorded an impairment charge of $3.1 million pertaining...

  • Page 181
    ... with Emerging Issues Task Force No. 02-7, Unit of Accounting for Testing Impairment of Indefinite Lived Intangible Assets, the Company tests its goodwill on an aggregate basis, consistent with the Company's management of its business. The Company uses a fair value approach, incorporating discounted...

  • Page 182
    ...common stock, are valued using the Black-Scholes valuation model, and, as applicable, the measurement of expense is subject to periodic mark-to-market adjustments in each reporting period. Recently Issued Accounting Pronouncements In February 2007, the FASB issued SFAS No. 159, the Fair Value Option...

  • Page 183
    ...) $ 50,456 $ 40,556 Estimated useful lives for property and equipment range from three to five years. Depreciation expense, which is included in operations and member service, sales and marketing and general and administrative expenses in the Company's statement of operations, depending on the...

  • Page 184
    ...449 $ 24,480 $ 12,419 In September 2007, Earthlink announced that it was restructuring and would no longer be providing funding to the Company. At such time and based upon discussions with EarthLink's management, the probability of Earthlink honoring its remaining commitments related to certain...

  • Page 185
    ... a per unit exchange rate as defined by the agreements). In connection with any such exchange, such holder shall also have the right to receive a payment, at the time of exchange, of any accrued and unpaid interest with respect to the outstanding principal amount of the Convertible Note Payable (or...

  • Page 186
    ... in the Company's statement of operations for the year ended December 31, 2007. As of December 31, 2005, 2006 and 2007 there was no Preferred Stock issued or outstanding. Rights of Common Stock Holders Except as provided in the Certificate of Incorporation, the holders of Common Stock vote together...

  • Page 187
    ... Total Outstanding Shares, one Class B Director will be elected by such holder. If there is no Class B Common Stock and Preferred Stock, if any, voting together as a single class. For so long as there are any shares of Class B Common Stock outstanding, upon a Public Offering, the holders of Class...

  • Page 188
    ... (book value of $40.0 million). As of December 31, 2007, the following Membership Units were issued and outstanding by the Operating Company (in thousands, except for Membership Units): Membership Units Issued and Outstanding (including EarthLink Cancelled Shares as a result of the Trigger Event...

  • Page 189
    ... 31, 2007, the Unit Exchange Rate then in effect was one for one. A holder of Class B Common stock is entitled to convert, at any time and from time-to-time, any or all of shares of Class B Common Stock into validly issued, fully paid and non-assessable shares of Class A Common Stock. The number of...

  • Page 190
    ... offering of shares of the Company's Common Stock, the Company will receive a number of Membership Units determined by the Unit Exchange Rate then effect based upon the number of shares of Class A Common Stock sold in such a public offering. 11. Stock Compensation HELIO, Inc. Equity Incentive Plan...

  • Page 191
    ... and stockholders of the Company approved a 4,000,000 share increase in the number of shares reserved for issuance under the Plan. As of December 31, 2007, an aggregate 14,205,000 shares of Class A Common Stock were reserved for issuance under the Plan. Stock-Based Compensation Before Adoption of...

  • Page 192
    ... average deemed fair value of employee time-vested stock options outstanding was $1.15, $1.16 and $0.96 per share for the periods ended December 31, 2005, 2006, and 2007, respectively. The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model...

  • Page 193
    ... the Company would be required to reclassify such Vested Shares from equity to a liability at such time (on a grant-by-grant basis). Stock Option Activity The following table summarizes information about stock option activity from January 27, 2005 (date of inception) through December 31, 2007 (in...

  • Page 194
    ...") at an exercise price of $1.71 per share and (ii) an aggregate 1,800,000 shares of the Company's Class A Common Stock (the "Performance Warrant") at an exercise price of $1.71 per share. The November 2005 Warrant vests over the term of the four year SKTI Service Agreement at the rate of 25% each...

  • Page 195
    ... Services Agreement"). In exchange for the Amended Wireless Network Services Agreement, the Company issued a ten-year warrant to an outside service provider to purchase 2,348,883 fully vested shares of the Company's Class A Common Stock at an exercise price of $10.00 per share. In December 2007...

  • Page 196
    ...Price Number Exercisable Weighted Average Exercise Price $1.71 - $10.00 13. Income Taxes 6,721 8.46 $ 4.62 3,363 $ 7.50 HELIO LLC is not a taxable entity for federal income tax purposes. The allocable share of HELIO LLC's taxable income or loss is included in its members federal and state...

  • Page 197
    ... 31, 2007, the Company had no accrued interest or penalties related to unrecognized tax benefits. The Company files income tax returns in the U.S. and in various state and local jurisdictions. The Company is subject to U.S. federal and state income tax examinations by the taxing authorities in all...

  • Page 198
    ..., subscriptions receivable, prepaid expenses, other current assets and accounts payable are reasonable estimates of their fair value due to the short-term nature of these instruments. The majority of the Company's wireless airtime services are leased from a third party wireless network provider. Any...

  • Page 199
    ... EarthLink provides the Company various software development, software license and support services in exchange for management fees. The management fees were determined based on EarthLink's costs to provide such services, and management believes such fees were reasonable. Fees for services provided...

  • Page 200
    ... respectively, associated with the CCBS 2.0 Agreement were included in property and equipment on the Company's balance sheets. During the period ending December 31, 2007, $2.1 million of the CCBS 2.0 Agreement fees has been paid. In December 2005, the Operating Company entered into a sales agreement...

  • Page 201
    ...is required to pay to SKT for service usage (the "SKT Telink Agreement"). In return for entering into the SKT Telink Agreement, SKT provided the Operating Company an aggregate credit in the amount of $0.3 million, which is being recognized straight-line through December 2009. As of December 31, 2007...

  • Page 202
    ...) development costs and monthly operation fee the under the Agreement were $0.3 million, which was paid and charged to expense in 2007. In March 2007, the Operating Company and SKT entered into a technical support agreement whereby SKT would provide technical and system operational support on...

  • Page 203
    ... for waived service fees and a warrant to purchase stock in a third party. The value of the Sale Agreement was accounted for under Accounting Principle Board No. 29, Non-monetary Exchanges and deemed to be approximately $0.5 million. In January 2008, the Company's Chief Executive Officer, who also...

  • Page 204
    ... the Transition Event, the Company's former Chief Executive Officer received a grant of stock options to purchase up to 1.5 million shares of Class A Common Stock of Helio, Inc., subject to certain vesting requirements. In February 2008, SKT contributed $20 million in cash in exchange for 6,666,666...

  • Page 205
    ...Financial Data) (Continued) At and for the year ended December 31, 2006 Combined HELIO, Inc. HELIO LLC HELIO, Inc. Adjustments Total ... represent the elimination of costs incurred by HELIO, Inc., which are largely for Delaware state franchise taxes that was subsequently paid for by HELIO LLC ...

  • Page 206
    ... Data) (Continued) At and for the year ended December 31, 2007 Combined HELIO, Inc. HELIO LLC HELIO, Inc. Adjustments Total ...Adjustments represent the elimination of costs incurred by HELIO, Inc., which are largely for Delaware state franchise taxes that was subsequently paid for by HELIO LLC on ...

  • Page 207
    ... LLC COMBINED BALANCE SHEETS (in thousands, except share/unit data) HELIO, INC. and HELIO LLC COMBINED STATEMENTS OF OPERATIONS (In thousands) HELIO, INC. and HELIO LLC COMBINED STATEMENTS OF STOCKHOLDERS' AND PARTNERS' EQUITY (In thousands, except share/unit data) HELIO, INC. and HELIO LLC COMBINED...