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EARTHLINK INC
FORM 10-K
(Annual Report)
Filed 02/26/10 for the Period Ending 12/31/09
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 2010, 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 02/26/10 for the Period Ending 12/31/09 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
    ... 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) Securities registered pursuant...

  • Page 3
    ... of the registrant on June 30, 2009 was $784.6 million. As of January 29, 2010, 107,283,136 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 Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services PART IV...

  • Page 5
    ... ancillary services sold as add-on features to our Internet access services, search and advertising. In addition, through our wholly-owned subsidiary, New Edge Networks ("New Edge"), we build and manage IP-based wide area networks for businesses and communications carriers. We operate two reportable...

  • Page 6
    ... web pages. Revenues primarily consist of fees charged to customers for dial-up Internet access. Broadband Access High-speed, or broadband, access offers a high speed, always on Internet connection that uses a modem to supply an Internet connection across an existing home phone line or cable...

  • Page 7
    ... for our dial-up and high-speed Internet services. In addition to our customer support, our free tools offer protection against email viruses, spyware, spam, pop-ups and online scams, as well as dial-up Web acceleration. We believe that providing these tools also increases customer satisfaction...

  • Page 8
    ...our EarthLink DSL and Home Phone Service. The following summarizes the contract expiration dates for our largest providers of broadband access: Broadband Network Provider Contract Expiration Comcast Corporation Verizon Communications Inc. Covad Communications Group, Inc. AT&T Inc. Time Warner Cable...

  • Page 9
    ... fees, termination fees, fees for equipment and cost recovery fees billed to customers. Internet Access We provide high-speed and dial-up Internet access for business customers. We offer various speeds, reliable connectivity, business-class features like static IP addresses, multiple email accounts...

  • Page 10
    ... one seamless network, one provider and one point of contact for their total connection needs. These services include installation programs, managed network services, remote access and disaster recovery, among others. Sales and Distribution We sell our services to end user business customers and to...

  • Page 11
    ... a broadband Internet access information service are not required by the FCC to offer unaffiliated ISPs stand-alone broadband transmission. We have entered into several commercial agreements with cable and telephone companies to offer broadband access to our customers. However, if our contracts with...

  • Page 12
    ..., ISPs in connection with marketing, billing, customer retention, cancellation and disclosure practices. Universal Service While current policy exempts broadband access services from the Universal Service Fund ("USF"), the Congress and FCC may consider expanding the USF to include broadband Internet...

  • Page 13
    ... disability access; (v) payments for regulatory fees; (vi) compliance with customer proprietary network information ("CPNI") procedures; and (vii) compliance with number portability rules. Proprietary Rights Our EarthLink, PeoplePC and New Edge Networks trademarks are valuable assets to our business...

  • 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
    ... availability and reduced pricing of broadband access services and an increase in advanced applications such as music downloads, videos, online gaming and social networking which require greater bandwidth for optimal performance. In addition, our narrowband subscriber base and revenues have been...

  • Page 16
    ... providing broadband access, including Charter Communications, Inc., Comcast, Cox Communications, Inc. and Time Warner Cable; local and regional ISPs; free or value-priced ISPs, such as United Online, Inc. which provides service under the brands Juno and NetZero; wireless Internet service providers...

  • Page 17
    ...our Business Services segment may be adversely affected by increased subscriber acquisition and retention costs necessary to attract and retain subscribers in a difficult economic environment. We also provide web hosting services to enable customers to build and maintain an effective online presence...

  • Page 18
    ...Edge has a network and cost structure designed to support a larger revenue stream. We are continuing to evaluate ways to create more scale in our New Edge business, and are closely managing operating costs and expenses. However, to achieve and sustain operating profitability in our business services...

  • Page 19
    ... technology, customer requirements and industry standards. Such changes could include acceleration of the adoption of broadband due to government funding to deploy broadband to rural areas. If we fail to use new technologies effectively, to develop our technical expertise and new services, or...

  • Page 20
    ..., as the dial-up Internet access market declines and new technologies emerge, we will be able to continue to effectively distribute and deliver our dial-up services. Our business may suffer if third parties used for customer service and technical support and certain billing services are unable to...

  • Page 21
    ... dial-up ISP bound traffic could impact our cost of providing this service. Currently, broadband Internet access is classified as an "information service" and, as a result, cable Broadband Internet access. companies and telephone companies that offer a broadband Internet access information service...

  • Page 22
    ...from the state public utility commissions. New Edge also must contribute to state and federal universal service funds. In addition, New Edge makes use of the special access services and DSL services of ILECs and other CLECs in order to provide New Edge services to its customers. VoIP regulation. The...

  • Page 23
    ... particular, we believe the strength of the EarthLink brand among existing and potential customers is important to the success of our business. Additionally, our EarthLink, PeoplePC and New Edge Networks service marks, proprietary technologies, domain names and similar intellectual property are also...

  • Page 24
    ... past few years, we implemented a corporate restructuring plan under which we significantly reduced our workforce and closed or consolidated various facilities. We also completed the divestiture of our municipal wireless broadband operations. We continue to evaluate our business, which may result in...

  • Page 25
    ... and to some extent are dependent on information that is not publicly available. The risk of an "ownership change" occurring could increase if additional shares are repurchased, if additional persons acquire five percent or more of our outstanding common stock in the near future and/or current...

  • Page 26
    ...of stockholders to call special meetings of stockholders; and authorize the board of directors to issue preferred stock in one or more series without any action on the part of stockholders. These provisions could limit the price that investors might be willing to pay in the future for shares of our...

  • Page 27
    ... under a lease that will expire in 2012. We also own a data center facility in Atlanta, Georgia. We currently have facilities in excess of our needs, and have entered into or plan to enter into various sublease agreements for our unused office and technical space. We believe the facilities we are...

  • Page 28
    ... Securities. Market Information 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...

  • Page 29
    ... from December 31, 2004 to December 31, 2009, as compared to the total return for the Nasdaq Global Market and the Morgan Stanley Internet Index for the same period. The calculations in the graph assume that $100 was invested on December 31, 2004 in our common stock and each index and also assumes...

  • Page 30
    ... in this Annual Report on Form 10-K. Year Ended December 31, 2006 2007 2008 (in thousands, except per share amounts) 2005 2009 Statement of operations data: Revenues $ 1,290,072 $ 1,301,072 $ 1,215,994 $ Operating costs and expenses (1)(2) 1,125,576 1,205,431 1,167,960 Income from operations...

  • Page 31
    ... assets of New Edge in our Business Services segment. We concluded the carrying value of these assets were impaired in conjunction with our annual tests of goodwill and intangible assets deemed to have indefinite lives. During the years ended December 31, 2008 and 2009, we recorded income tax...

  • Page 32
    ... may suffer if third parties used for customer service and technical support and certain billing services are unable to provide these services or terminate their relationships with us; (12) that interruption or failure of our network and information systems and other technologies could impair our...

  • Page 33
    ... ancillary services sold as add-on features to our Internet access services, search and advertising. In addition, through our wholly-owned subsidiary, New Edge Networks ("New Edge"), we build and manage IP-based wide area networks for businesses and communications carriers. We operate two reportable...

  • Page 34
    ...home networking, email storage and Internet call waiting; search revenues; and advertising revenues. Narrowband access revenues primarily consist of fees charged to customers for dial-up Internet access. Broadband access revenues primarily consist of fees charged for high-speed access services; fees...

  • Page 35
    .... However, our consumer broadband access customers also have lower churn rates than our consumer narrowband access customers. Accordingly, we expect to realize benefits from a more tenured subscriber base, such as reduced support costs and lower bad debt expense. Business services. The markets in...

  • Page 36
    ... evaluate ways to grow revenues or create more scale for our business services. We expect cost savings in 2010 associated with our decreased sales and marketing activities, and decreased telecommunication and support costs from a lower and longer tenured customer base. We will continue to implement...

  • Page 37
    ... 31, 2009 Subscriber Data (a) Consumer Services Narrowband access subscribers Broadband access subscribers Total consumer services subscribers Business Services Narrowband access subscribers Broadband access subscribers Web hosting accounts Total business services subscribers Total subscribers at...

  • Page 38
    ... wholesale high-speed ISP for Embarq's local residential and small business customers. In April 2007, our wholesale contract with Embarq expired. As a result, we removed 753,000 wholesale broadband EarthLink-supported Embarq subscribers from our broadband subscriber count and total subscriber count...

  • Page 39
    ... revenues Sales and marketing Operations and customer support General and administrative Amortization of intangible assets Impairment of goodwill and intangible assets Facility exit and restructuring costs Total operating costs and expenses Income from operations Net losses of equity affiliate Gain...

  • Page 40
    ... chief executive reviews our operating results in assessing performance and allocating resources. Our Consumer Services segment provides Internet access services and related value-added services to individual customers. These services include dial-up and high-speed Internet access and VoIP services...

  • Page 41
    ... Segment operating income Business Services Revenues Cost of revenues Gross margin Direct segment operating expenses Segment operating income Consolidated Revenues Cost of revenues Gross margin Direct segment operating expenses Segment operating income Stock-based compensation expense Amortization...

  • Page 42
    ...-priced narrowband access) and broadband access services (including high-speed access via DSL and cable and VoIP services). These revenues are derived from fees charged to customers for dial-up Internet access; fees charged for high-speed access services; fees charged for VoIP services; usage fees...

  • Page 43
    ... Edge access and service revenues. Business access and service revenues consist of fees charged for managed IP-based networks; fees charged for Internet access services; installation fees; termination fees; fees for equipment; usage fees; and cost recovery fees billed to customers. Business access...

  • Page 44
    ..."), Qwest Corporation, Time Warner Cable and Verizon Communications, Inc. We also do lesser amounts of business with a wide variety of local, regional and other national providers. Cost of revenues also includes sales incentives. We offer sales incentives, such as free modems and Internet access on...

  • Page 45
    ... rate of return. Operations and customer support Operations and customer support expenses consist of costs associated with technical support and customer service, maintenance of customer information systems, software development, network operations and compensation and related costs (including stock...

  • Page 46
    ... 2009. General and administrative General and administrative expenses consist of compensation and related costs (including stock-based compensation) associated with our finance, legal, facilities and human resources organizations; fees for professional services; payment processing; credit card fees...

  • Page 47
    ... two reporting units, New Edge and Web Hosting. Each of these reporting units constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results. The first step of the impairment test involves comparing the estimated fair value...

  • Page 48
    ...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 49
    ... of Virgin Mobile common stock. In November 2009, Sprint Nextel and Virgin Mobile completed a merger and we received 2.4 million shares of Sprint Nextel common stock for our Virgin Mobile common stock. As a result, we no longer have an investment in HELIO and we did not record any net losses of...

  • Page 50
    ... ended December 31, 2009, Sprint Nextel and Virgin Mobile completed a merger and we received 2.4 million shares of Sprint Nextel common stock for our Virgin Mobile common stock. During the year ended December 31, 2009, we sold 2.2 million of the Sprint Nextel shares for net proceeds of $8.2 million...

  • Page 51
    ... existing network agreements. We also transferred our municipal wireless broadband networks in the city of Philadelphia, PA to a local Philadelphia company. Additionally, we terminated our municipal wireless broadband service in New Orleans, LA and Anaheim, CA and removed our network equipment from...

  • Page 52
    ... service period for awards expected to vest. The fair value of our stock options is estimated using the Black-Scholes valuation model, and the fair value of restricted stock units is determined based on the number of shares granted and the quoted price of our common stock on the date of grant...

  • Page 53
    ... remaining for real estate commitments associated with the Legacy Plans. All other costs have been paid or otherwise settled. We expect to incur future cash outflows for real estate obligations through 2010 related to the Legacy Plans. Liquidity and Capital Resources The following table sets forth...

  • Page 54
    ... and become longer tenured. Non-cash items include items that are not expected to generate or require the use of cash, such as depreciation and amortization relating to our network, facilities and intangible assets, net losses of equity affiliate, deferred income taxes, stock-based compensation, non...

  • Page 55
    ... our ability to maintain our customer base, the costs required to maintain our network infrastructure, the size and types of acquisitions in which we may engage, the pricing of our access services, and the level of resources used for our sales and marketing activities, among others. Sources of cash...

  • Page 56
    ... broker that sold us our auction rate securities that gives us the right to sell our existing auction rate securities back to the broker at par plus accrued interest, beginning on June 30, 2010 until July 2, 2012. The agreement also grants the broker the right to buy our auction rate securities at...

  • Page 57
    .... EarthLink and HELIO had a services agreement pursuant to which we provided HELIO billing and other support services in exchange for management fees. The management fees were determined based on our costs to provide the services, and management believed such fees were reasonable. Fees for services...

  • Page 58
    ... obligor and/or the broadband 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...

  • Page 59
    ... reportable segment is one reporting unit, while the Business Services reportable segment consists of two reporting units, New Edge and Web Hosting. Each of these reporting units constitutes a business for which discrete financial information is available and segment management regularly reviews...

  • Page 60
    ... amount may not be recoverable. Our tests involve critical estimates reflecting management's best assumptions and estimates related to, among other factors, subscriber additions, churn, prices, marketing spending, operating costs and capital spending. Significant judgment is involved in estimating...

  • Page 61
    ... Issued Accounting Pronouncements In September 2009, the Financial Accounting Standards Board ("FASB") issued new guidance on revenue recognition. The new guidance addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables...

  • Page 62
    ...cash interest expense. Retrospective application to all periods presented is required. The adoption of this new guidance on January 1, 2009 affected the accounting for our Notes, which were issued in November 2006. Upon adoption, we recorded an adjustment to increase additional paid-in capital as of...

  • Page 63
    ... plus accrued interest, beginning on June 30, 2010 until July 2, 2012 (herein referred to as "put right"). We elected a one-time transfer of our auction rate securities from the available-for-sale category to the trading category. We also elected the fair value option for the put right to offset the...

  • Page 64
    ...value of our financial instruments subject to equity risk as of December 31, 2008 and 2009: As of December 31, 2008 As of December 31, 2009 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (dollars in thousands) Investments in other companies for which it is: Practicable to...

  • Page 65
    ... STATEMENTS Page Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2008 and 2009 Consolidated Statements of Operations for the years ended December 31, 2007, 2008 and 2009 Consolidated Statements of Stockholders' Equity and Comprehensive Income...

  • Page 66
    ... our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining...

  • Page 67
    ... in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our...

  • Page 68
    ... 31, 2008 and 2009 - - Common stock, $0.01 par value, 300,000 shares authorized, 188,264 and 190,472 shares issued as of December 31, 2008 and 2009, respectively, and 108,516 and 107,132 shares outstanding as of December 31, 2008 and 2009, respectively 1,883 1,905 Additional paid-in capital 2,135...

  • Page 69
    ... revenues Sales and marketing Operations and customer support General and administrative Amortization of intangible assets Impairment of goodwill and intangible assets Facility exit and restructuring costs Total operating costs and expenses Income from operations Net losses of equity affiliate Gain...

  • Page 70
    ... Dividends paid on shares outstanding and restricted stock units Dividends payable on restricted stock units Stock-based compensation expense Repurchase of common stock Unrealized holding gains on certain investments, net of tax Net income Total comprehensive income Balance as of December 31, 2009...

  • Page 71
    ... Net losses of equity affiliate Loss on disposals and impairments of assets Loss (gain) on investments in other companies, net Stock-based compensation Non-cash income taxes Accretion of debt discount and amortization of debt issuance costs Decrease in accounts receivable, net Decrease (increase...

  • Page 72
    ...-added services, such as ancillary services sold as add-on features to the Company's Internet access services, search and advertising. In addition, through the Company's wholly-owned subsidiary, New Edge Networks ("New Edge"), the Company builds and manages IP-based wide area networks for businesses...

  • Page 73
    ... for VoIP services; usage fees; installation fees; termination fees; fees for equipment; and cost recovery fees billed to customers. Web hosting revenues consist of fees charged for leasing server space and providing web services to enable customers to build and maintain an effective online presence...

  • Page 74
    ... 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 75
    ... 2009 (in thousands, except per share data) Numerator Income from continuing operations Loss from discontinued operations Net income Denominator Basic weighted average common shares outstanding Dilutive effect of Common Stock Equivalents Diluted weighted average common shares outstanding Basic net...

  • Page 76
    ...of stock options using the Black-Scholes valuation model, and determines the fair value of restricted stock units based on the number of shares granted and the quoted price of EarthLink's common stock on the date of grant. Such value is recognized as expense over the requisite service period, net of...

  • Page 77
    ... is determined using the straight-line method over the estimated useful lives of the various asset classes, which are generally three to five years for computers, telecommunications equipment and furniture and other office equipment and 15 years for buildings. Leasehold improvements are depreciated...

  • Page 78
    ... 1.8 million shares of Virgin Mobile common stock. As a result, the Company no longer has an investment in HELIO. Goodwill and Purchased Intangible Assets Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under...

  • Page 79
    ...appraisal. Intangible assets determined to have definite lives are amortized on a straight-line basis over their estimated useful lives. Subscriber bases acquired directly are valued at cost plus assumed service liabilities, which approximates fair value at the time of purchase. The Company does not...

  • Page 80
    ... evidence of market value. Regulatory Risk. EarthLink purchases broadband access from incumbent local exchange carriers, competitive local exchange carriers and cable providers. Please refer to "Regulatory Environment" in the Business section of this Annual Report on Form 10-K for a discussion of...

  • Page 81
    ... risks, system failures or other services interruptions beyond the Company's or the providers' control which could jeopardize their ability to deliver services. Although management believes that alternate contact center service providers could be found in a timely manner, any disruption of these...

  • Page 82
    ... presented is required. The adoption of this new guidance on January 1, 2009 affected the accounting for the Company's Convertible Senior Notes due November 15, 2026 (the "Notes"), which were issued in November 2006. Upon adoption, the Company recorded an adjustment to increase additional paid-in...

  • Page 83
    ... of Reported Reported Change Adjusted Change Adjusted (in thousands, except per share data) Statement of Operations: Interest income (expense) and other, net Income (loss) from continuing operations Net income (loss) Basic net income (loss) per share Continuing operations Basic net income per share...

  • Page 84
    ... functions and businesses. Under the 2007 Plan, the Company reduced its workforce by approximately 900 employees, closed office facilities in Orlando, Florida; Knoxville, Tennessee; Harrisburg, Pennsylvania and San Francisco, California and consolidated its office facilities in Atlanta, Georgia and...

  • Page 85
    ... remaining for real estate commitments related to Legacy Plans which was classified as other accrued liabilities in the Consolidated Balance Sheet. All other costs have been paid. 4. Discontinued Operations In November 2007, management concluded that its municipal wireless broadband operations were...

  • Page 86
    ... agreements. The Company also transferred its municipal wireless broadband networks in the city of Philadelphia, PA to a local Philadelphia company. Additionally, the Company terminated its municipal wireless broadband service in New Orleans, LA and Anaheim, CA and removed its network equipment...

  • Page 87
    ...2008, EarthLink entered into an agreement with the broker that sold the Company its auction rate securities that gives the Company the right to sell its existing auction rate securities back to the broker at par plus accrued interest, beginning on June 30, 2010 until July 2, 2012. The agreement also...

  • Page 88
    ...on investments, net, in the Consolidated Statement of Operations. During the year ended December 31, 2008, the Company received limited partnership units equivalent to approximately 1.8 million shares of Virgin Mobile common stock in exchange for its investment in HELIO. EarthLink had an approximate...

  • Page 89
    ... Virgin Mobile completed a merger. As a result, EarthLink received 2.4 million shares of Sprint Nextel common stock for its Virgin Mobile common stock. During the year ended December 31, 2009, EarthLink sold 2.2 million of the Sprint Nextel shares for net proceeds of $8.2 million. EarthLink recorded...

  • Page 90
    ... and 2009: As of December 31, 2008 2009 (in thousands) Data center and network equipment Office and other equipment Land and buildings Leasehold improvements... ended December 31, 2009 were as follows: Consumer Services Segment Business Services Segment (in thousands) Total Balance as of December...

  • Page 91
    ... of its April 2006 acquisition of New Edge were impaired and recorded non-cash impairment charges related to the New Edge reporting unit of $64.0 million for goodwill, $3.1 million for the indefinite-lived trade name and $11.6 million for customer relationships. The primary factor contributing to...

  • Page 92
    ...two reporting units, New Edge and Web Hosting. Each of these reporting units constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results. The first step of the annual impairment test involves comparing the estimated fair...

  • Page 93
    ... to the analysis of its other indefinite-lived trade names. Definite-lived intangible assets. As a result of the goodwill and indefinite-lived asset impairments in the New Edge reporting unit, the Company also tested this segment's definite-lived intangible assets for impairment. Because of the...

  • Page 94
    ... warrant agreements. See Note 10, "Shareholders' Equity," for more information on the Call Spread Transactions. As of December 31, 2008 and 2009, the fair value of the Notes was approximately $236.6 million and $279.8 million, respectively, based on quoted market prices. Adoption of New Accounting...

  • Page 95
    ... amortization period for the discount is 22 months. As of December 31, 2009, the conversion price was approximately $8.82 per share, resulting in 29.4 million shares issuable upon conversion. The following table presents the associated interest cost related to the Notes during the years ended...

  • Page 96
    ... of Directors adopted a shareholder rights plan (the "Rights Plan"). In connection with the Rights Plan, the Board of Directors also declared a dividend of one right for each outstanding share of EarthLink's common stock for stockholders of record at the close of business on August 5, 2002. Each...

  • Page 97
    ...operating expense line items as cash compensation paid to employees. Included in stock-based compensation expense for the year ended December 31, 2007 was $4.9 million of stock-based compensation expense related to Charles G. Betty, EarthLink's former President and Chief Executive Officer. Mr. Betty...

  • Page 98
    ...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, 2009. The total intrinsic value of options...

  • Page 99
    ... the status of the Company's stock options as of December 31, 2009: Stock Options Outstanding Weighted Average Remaining Number Contractual Life Outstanding (in thousands) Stock Options Exercisable Weighted Average Exercise Price Weighted Average Exercise Price Range of Exercise Prices Number...

  • Page 100
    ..., 2008 and 2009 was $2.7 million, $7.0 million and $15.4 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. 401...

  • Page 101
    ... State Total deferred Income tax benefit $ - $ (20,618) $ (220) (4,860) (220) (25,478) (4,103) (5,184) (9,287) 1,244 203 1,447 $ 1,227 $ 52,475 124,357 5,187 11,015 57,662 135,372 32,184 $ 126,085 During the year ended December 31, 2009, the Company released $199.0 million of its valuation...

  • Page 102
    ... December 31, 2008 2009 (in thousands) 2007 Federal income tax provision at statutory rate State income taxes, net of federal benefit Nondeductible expenses Goodwill and intangible asset impairment Net change to valuation allowance Change in state effective tax rate Other Income tax benefit $ 19...

  • Page 103
    ...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 beyond our control. The Company continues to maintain a valuation allowance...

  • Page 104
    ...) 2010 2011 2012 2013 2014 Total minimum lease payments, including estimated operating expenses Less aggregate contracted sublease income $ 12,531 10,714 10,083 10,447 7,089 50,864 (7,169) 43,695 $ Purchase Obligations The Company leases network capacity from a number of third-party providers...

  • Page 105
    ...of Contents EARTHLINK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The following tables present the Company's assets that are measured at fair value on a recurring basis as of December 31, 2008 and 2009: Fair Value Measurements as of December 31, 2008 Using Quoted Prices Significant...

  • Page 106
    ... 2008 2009 (in thousands) Significant non-cash transactions Assets acquired pursuant to capital lease agreement Additional cash flow information Cash paid during the year for interest Cash paid during the year for income taxes Purchase of businesses Issuance of common stock Net liabilities incurred...

  • Page 107
    ...resources. The Company operates two reportable segments, Consumer Services and Business Services. The Company's Consumer Services segment provides Internet access services and related value-added services to individual customers. These services include dial-up and high-speed Internet access and VoIP...

  • Page 108
    ...handling fees; and termination fees. Consumer value-added services revenues consist of revenues from ancillary services sold as add-on features to the Company's Internet services, such as security products, premium email only, home networking, email storage and Internet call waiting; search revenues...

  • Page 109
    ... for Internet access services; installation fees; termination fees; fees for equipment; usage fees; cost recovery fees billed to customers; and fees charged for leasing server space and providing web services that enable customers to build and maintain an effective online presence. Information on...

  • Page 110
    ...(1) Operating costs and expenses for the quarters ended December 31, 2008 and 2009 include non-cash impairment charges of $78.7 million and $24.1 million, respectively, related to goodwill and certain intangible assets of New Edge in the Company's Business Services segment. EarthLink concluded the...

  • Page 111
    ...to the generation of sufficient taxable income in the future. In November 2007, management concluded that the municipal wireless broadband operations were no longer consistent with EarthLink's strategic direction and the Company's Board of Directors authorized management to pursue the divestiture of...

  • Page 112
    ... Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management's Report on Internal...

  • Page 113
    ... amendment to this Annual Report on Form 10-K. Information regarding 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...

  • Page 114
    ... 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. As of December 31, 2009, 200,793 of these options were outstanding. The options have an exercise price equal to the last reported price of...

  • Page 115
    ... S-8-File No. 333-108065). 10.3#- EarthLink, Inc. 2006 Equity and Cash Incentive Plan (incorporated by reference to Exhibit 10.1 to EarthLink, Inc.'s Report on Form 8-K dated May 5, 2006). 10.4#- EarthLink, Inc. Stock Option Plan for Inducement Awards Relating to the Acquisition of New Edge Holding...

  • Page 116
    ...ended December 31, 2007-File No. 001-15605). 10.19#*- Form of Restricted Stock Unit Agreement for Nonemployee Directors. 10.20#- 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 117
    ...and Rolla P. Huff, President and Chief Executive Officer of EarthLink, Inc. (incorporated by reference to Exhibit 10.1 of EarthLink, Inc.'s Report on Form 10-Q for the quarterly period ended March 31, 2009-File No. 001-15605). 10.27- Amended and Restated Employment Agreement, dated December 30, 2008...

  • Page 118
    Table of Contents 10.35+- High-Speed Service Agreement between EarthLink, Inc. and Time Warner Cable Inc. (incorporated by reference to Exhibit 10.5 of EarthLink, Inc.'s Report on Form 10-Q for the quarterly period ended March 31, 2009-File No. 001-15605). 21.1*- Subsidiaries of the Registrant. 23...

  • Page 119
    ... 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/ ROLLA P. HUFF Rolla P. Huff, Chairman of the Board, Chief Executive Officer and President Date: February 26, 2010 Each person...

  • Page 120

  • Page 121
    ..., INC. EQUITY PLAN FOR NON-EMPLOYEE DIRECTORS (as amended effective May 8, 2008) Restricted Stock Unit Agreement No. of Restricted Stock Units Awarded Hereunder: THIS RESTRICTED STOCK UNIT AGREEMENT (this "Agreement") dated as of the day of , 20 , between EarthLink, Inc., a Delaware corporation (the...

  • Page 122
    ... any such applicable withholding taxes (i) by allowing the Participant to deliver shares of Common Stock that the Participant already owns and, if necessary to avoid adverse accounting consequences, has held for at least six months valued at their Fair Market Value by a "net" settlement procedure...

  • Page 123
    ... receive absent any such reduction. "Net After Tax Amount" means the amount of any Parachute Payments (as defined in (b) below) or Capped Payments (as defined in (c) below), as applicable, net of taxes imposed under Code Sections 1, 3101(b) and 4999 and any State or local income taxes applicable...

  • Page 124
    ... the Company of that determination and the amount of that Underpayment will be paid to the Participant promptly by the Company. (f) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by the preceding subsections shall be...

  • Page 125
    ..., 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: 11. No Right to Continued Service . Neither the Plan, the granting of this Award nor any other action...

  • Page 126
    ... it is intended that payments hereunder will not be considered deferred compensation within the meaning of Section 409A of the Code. For purposes of this Agreement, all rights to payments hereunder shall be treated as rights to receive a series of separate payments and benefits to the fullest extent...

  • Page 127
    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: Rolla P. Huff Chief Executive Officer PARTICIPANT: 7

  • Page 128
    Exhibit 10.28 EARTHLINK, INC. Board of Directors Compensation Plan Effective January 2010 1. Retainers a. Each independent director receives a $35,000 annual retainer, paid semi-annually in advance ($17,500 following January Board meeting and $17,500 following July Board meeting). b. The Lead ...

  • Page 129
    ...CHANGE-IN-CONTROL ACCELERATED VESTING AND SEVERANCE PLAN (this "Plan"), of EarthLink, Inc., a Delaware corporation ("Employer"), and its Affiliates (as defined below) for the benefit of the eligible employees described herein, is effective as of the 3 rd day of February, 2010. This Plan replaces and...

  • Page 130
    ... mean the annual incentive bonus payable to the Employee at the greater of the rate in effect on (1) the date the Change in Control of the Employer occurs or (2) the date of the Employee's Termination of Employment under the circumstances described in Section 2(a). (g) " Business Combination " means...

  • Page 131
    ...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 (2) of this definition and specifying...

  • Page 132
    ... 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 who is employed by the Employer or an Affiliate and selected to participate in the Plan and...

  • Page 133
    ... 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 Employee other...

  • Page 134
    ... the foregoing, for purposes of Section 3 of the Plan regarding accelerated vesting of outstanding restricted stock units only, "For Good Reason" means the Employee's Termination of Employment is by the Employee other than on death or On Account of Disability and based on: (i) With respect to...

  • Page 135
    ... to a Change in Control of the Employer or to pay the Employee the amounts that he or she would be entitled to receive in accordance with such plan(s); or (v) The Employer or an Affiliate requiring the Employee to be based more than thirty-five (35) miles from the location where he or she is based...

  • Page 136
    ... otherwise provided in regulations issued under the Code) shall be excluded for purposes of determining the number of officers. For purposes of this Section, the term "five-percent owner" ("one-percent owner") means any person who owns more than five percent (one percent) of the outstanding stock of...

  • Page 137
    ... date. This definition is intended to comply with the specified employee rules of Section 409A(a)(2)(B)(i) of the Code and shall be interpreted accordingly. (w) " Termination of Employment " means the termination of the Employee's employment with the Employer and all Affiliates; provided, however...

  • Page 138
    ..., or any other person entitled to receive benefits with respect to the Employee under any Retirement Plan, Welfare Plan, or other plan or program maintained by Employer or any Affiliate in which Employee participates at the date of the Employee's Termination of Employment, shall receive any and all...

  • Page 139
    ... with the Change in Control of the Employer, all outstanding stock options that the Employer or any Affiliate previously granted to an Employee in the Bronze Benefit Category shall be exercisable, in accordance with the terms of such options and the applicable plans pursuant to which they were...

  • Page 140
    ...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 141
    ... (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 142
    ... accelerated vesting of outstanding stock options and restricted stock units only applies with respect to the Employee in connection with (i) a Change in Control of Employer if Employee has remained employed with the Employer or an Affiliate until the Change in Control or (ii) Employee's Termination...

  • Page 143
    determination on review. (e) Plan. (f) If a claim is denied, the claimant may appeal the denial by delivering a written notice to the Employer specifying the reasons for the appeal. That notice must be delivered 15 The full value of any payment made according to the Plan satisfies that much of the ...

  • Page 144
    ... third meeting of the Employer following the Plan's receipt of the request for review. If such an extension of time for review is required because of special circumstances, the Employer will provide the claimant with written notice of the extension, describing the special circumstances and the date...

  • Page 145
    ... or representative within the time, if any, required by Section 409A of the Code. 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...

  • Page 146
    ... was selected to participate as an Employee in the Plan shall no longer 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 (A) during any period in which the Employer is involved in discussions with a third...

  • Page 147
    ... notice: If to Employer: EarthLink, Inc. 1375 Peachtree Street, N.W. Suite 7 North Atlanta, Georgia 30309-2935 Attention: Chief People Officer 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...

  • Page 148
    ... 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 tax or similar requirements. (d) The terms of an Employee's benefits are as set forth in this...

  • Page 149
    ... to receive a series of separate payments and benefits to the fullest extent allowed by Section 409A of the Code. Notwithstanding the preceding, the Employer and all Affiliates shall not be liable to any Employee or any other person if the Internal Revenue Service or any court or other authority...

  • Page 150
    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: Title: 22

  • Page 151
    ... 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...

  • Page 152
    ... AND FUNDING MEDIUM: The general assets of the Employer or the Affiliate that employs Employee shall fund the severance pay from the Plan. PROCEDURES FOR PRESENTING CLAIMS AND REDRESS OF DENIED CLAIMS: Section 6 provides detailed instructions for filing a claim and redress of a denied claim. AGENT...

  • Page 153
    ... Plan, you should contact the Employer. If you have any questions about this statement or about your rights under ERISA, you should contact the nearest office of the Pension and Welfare Benefits Administration, U.S. Department of Labor, listed in your telephone directory or the Division of Technical...

  • Page 154
    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 155
    ... her employment for good reason; no paid COBRA benefits if the termination of employment is on account of the employee's death or disability. Accelerated vesting of outstanding stock options If stock options are assumed or continued after a change in control, all outstanding stock options granted...

  • Page 156
    ... 18 months of the change in control the company terminates employee's employment without cause or employee voluntarily terminates his or her employment for good reason; no such vesting if the termination of employment is on account of the employee's death or disability; if restricted stock units...

  • Page 157
    ...of the EarthLink, Inc. 2010 Short-Term Incentive Bonus Plan (the "Plan") is to encourage the creation of shareholder value by establishing a direct link between Adjusted EBITDA (as defined below) and, in certain cases, Net Sent to Billing (as defined below) achieved and the incentive compensation of...

  • Page 158
    ... the voting power of such Board of Directors were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board of Directors providing for that Business Combination and, as a result of or in connection with such Business Combination, no person has...

  • Page 159
    ... the requirements of Section 162(m) of the Code for deductibility to the extent intended. " Disability " means where the Participant is "disabled" or has incurred a "disability" in accordance with the policies of the Employer that employs the Employee in effect at the applicable time. " Distribution...

  • Page 160
    ... " means January 1, 2010. " Employee " means a full-time common law employee of an Employer. A full-time common law employee of an Employer only includes an individual who renders personal services to the Employer and who, in accordance with the established payroll, accounting and personnel policies...

  • Page 161
    ...Performance Bonus Multipliers that relate to the levels of Corporation Performance Objectives that must be achieved during the Bonus Period to calculate the Participant's Performance Bonus. " Plan " means this EarthLink, Inc. 2010 Short-Term Incentive Bonus Plan, in its current form and as it may be...

  • Page 162
    ... may be stated with respect to the Company's, an Affiliate's, a product's, and/or a business unit's Adjusted EBITDA or Net Sent to Billing and/or any combination of the foregoing as the Committee may designate. The Corporate Performance Conditions may, but need not, be based upon an increase or...

  • Page 163
    ... for Payment . Except as otherwise set forth in Sections 7.1 and 8.1 of this Plan or under any other agreement between the Employer and the Participant or any other benefit plan of the Employer, Bonus Awards shall not be paid to any Participant who is not employed by an Employer on the date the...

  • Page 164
    ... no later than the time they would have been paid under the Plan if the Participant had remained employed or, if earlier, no later than the time they are required to be paid under any position elimination and severance plan maintained by the Company or any Affiliate in which Participant participates...

  • Page 165
    ... shall be paid under the Plan no later than the time they would have been paid had the Participant remained employed or, if earlier, no later than the time they are required to be paid under any position elimination and severance plan maintained by the Company or any Affiliate in which Participant...

  • Page 166
    Participant's or any other persons bankruptcy or insolvency, except as set forth in Section 9.2 above. 9.4 Employment or Future Pay or Compensation Not Guaranteed . Nothing contained in this Plan nor any action taken hereunder shall be construed as a contract of employment or as giving any ...

  • Page 167
    ... to any shares of Common Stock that must be returned to the Employer and (iv) any and all other amounts the Participant received or earned that are attributable to a Distribution under the Plan, to the extent required under applicable law or any clawback or compensation recoupment policy that the...

  • Page 168
    ... 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 Internal Revenue Service or any court or other authority...

  • Page 169
    Exhibit 21.1 Subsidiaries of the Registrant Name Jurisdiction of Incorporation EarthLink, Inc. PeoplePC Inc. New Edge Holding Company Delaware Delaware Delaware

  • Page 170
    ... 26, 2010, 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, 2009. /s/ Ernst & Young LLP Atlanta, Georgia February...

  • Page 171
    QuickLinks Exhibit 23.1

  • Page 172
    ... OF 2002 I, Rolla P. Huff, certify that: 1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2009 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 necessary to make the...

  • Page 173
    ...2002 I, Bradley A. Ferguson, certify that: 1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2009 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 necessary to make the...

  • Page 174
    ...-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of EarthLink, Inc. (the "Company") for the period ended December 31, 2009 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...

  • Page 175
    ... ACT OF 2002 In connection with the Annual Report on Form 10-K of EarthLink, Inc. (the "Company") for the period ended December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bradley A. Ferguson, Chief Financial Officer of the Company, certify...