Earthlink 2010 Annual Report Download

Download and view the complete annual report

Please find the complete 2010 Earthlink annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 152

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152

EARTHLINK INC
FORM 10-K
(Annual Report)
Filed 03/01/11 for the Period Ending 12/31/10
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 2011, 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 03/01/11 for the Period Ending 12/31/10 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
    ... 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 to...

  • Page 3
    .... As of January 31, 2011, 108,421,272 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 on May 3, 2011 are incorporated by reference in Part...

  • Page 4
    ... with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Item 10. Item 11. Item 12. Item 13. Item 14. Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and...

  • Page 5
    ... and communications carriers. These services include data services, including managed IP-based network services and broadband Internet access services; voice services, including local exchange, long-distance and conference calling; mobile data and voice services; and web hosting. We provide our...

  • Page 6
    ... customers provide cost benefits, including reduced contact center support costs and reduced bad debt expense. We continue to focus on offering our services with high-quality customer service and technical support. We also continue to seek to add customers that generate an acceptable rate of return...

  • Page 7
    ..., services, applications, tools and technical and customer support. Such features and services include email, a customizable start page, antivirus protection and acceleration tools. We also offer value-priced dial-up access through our PeoplePC TM Online offering that provides customers with access...

  • Page 8
    ...an acceptable rate of return. We offer our products and services primarily through direct customer contact through our call centers, search engine marketing, affinity marketing partners, resellers and marketing alliances such as our relationship with Time Warner Cable. Customer Service and Retention...

  • Page 9
    ... cable companies providing broadband access, including Charter Communications, 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...

  • Page 10
    ... services include data services, including managed IP-based network services and broadband Internet access services; voice services, including local exchange, long-distance and conference calling; mobile data and voice services; and web hosting. We provide our services to end user business customers...

  • Page 11
    ...various speeds, reliable connectivity, business-class features like static IP addresses, multiple email accounts and customer service that is available 24 / 7 . Revenues primarily consist of monthly recurring fees, installation fees and usage fees. Local Telephone Services. We offer basic local dial...

  • Page 12
    ... services; and Dedicated Internet access services through our IP network and our direct connectivity to the IP networks of other ISPs. • • • Web Hosting We lease server space and provide web hosting services that enable customers to build and maintain an effective online presence. Features...

  • Page 13
    ...all major local exchange carriers to lease unbundled network elements, as well as commercial services agreements with national communications companies, CLECs, and cable and wireless service providers to provide last mile access to our customers and connectivity onto our network. Fiber Optic Network...

  • Page 14
    ... Nextel; wireless and satellite service providers; cable service providers, such as Charter Communications, Inc., Comcast, Cox Communications, Inc. and Time Warner Cable; and stand-alone VoIP providers. Competition could adversely impact us in several ways, including (i) the loss of customers and...

  • Page 15
    ...our retail local, long distance and data services as a result of the mergers of BellSouth, SBC and AT&T and of MCI and Verizon which have increased substantially their respective market power; the increase of cable companies, wireless carriers and providers of alternative forms of communication that...

  • Page 16
    ... that directly or indirectly affect our business. The Communications Act preempts state and local laws to the extent that they prevent competition in the Local Competition. provisioning of any telecommunications service. The Communications Act imposes a variety of duties on local carriers, including...

  • Page 17
    ..., or UNE-P, to provide local services to customers at TELRIC-based rates. In some circumstances, AT&T, Verizon and other incumbent carriers are making available some of these facilities and services, either as lightly regulated special access services or under unregulated "commercial agreements," at...

  • Page 18
    ... the manner in which carriers, including carriers that use different service platforms such as wireless, cable and VoIP, are compensated for the origination and termination of communications traffic and the rates local exchange carriers charge for these access services. The proceeding could also...

  • Page 19
    ... access is a service offered by incumbent local telephone companies that consists of dedicated transmission facilities or private lines used by wireline and wireless telecommunications carriers, Internet-based service providers and large enterprise endusers. We rely on the purchase of special access...

  • Page 20
    ... of access to other carriers or end-user customers. Universal Service. The Communications Act and the FCC's rules provide for a federal Universal Service Fund, which is intended to subsidize communications services in rural and high-cost areas, services for low-income consumers, and services for...

  • Page 21
    ... a policy statement expressing its view that consumers are entitled to access lawful Internet content and to run applications and use services of their choice, subject to the needs of law enforcement and reasonable network management. In an August 2008 decision, the FCC characterized these net...

  • Page 22
    ...for violations. Public utility commissions or third parties may raise issues with regard to our compliance with applicable laws or regulations. We have authority to offer intrastate long distance services in all 50 U.S. states and the District of Columbia. We provide local services, where authorized...

  • Page 23
    ...promote local telephone service competition. States also regulate the intrastate carrier access services of incumbent carriers. We are required to pay access charges to incumbent carriers when they originate or terminate our intrastate long distance traffic. We could be harmed by high access charges...

  • Page 24
    ... inquiries into, ISPs in connection with marketing, billing, customer retention, cancellation and disclosure practices. Proprietary Rights Our EarthLink, EarthLink Business and PeoplePC trademarks are valuable assets to our business, and are registered trademarks in the United States. In particular...

  • Page 25
    ... 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 26
    ... IP infrastructure and managed services provider. To implement this strategy, we plan to combine our existing business services with the integrated communications businesses of our recent acquisition of ITC^DeltaCom and our pending acquisition of One Communications. We plan to offer a comprehensive...

  • Page 27
    ... to executive officers and key employees under retention plans. Additionally, future acquisitions may result in the dilutive issuances of equity securities, use of our cash resources, incurrence of debt or contingent liabilities, amortization expense related to acquired definite-lived intangible...

  • Page 28
    ... forms of communication, such as handheld Internet-access devices and mobile phones, new competitors such as VoIP providers and the acceleration of the adoption of broadband due to government funding to deploy broadband to rural areas. In addition, the development and offering of new services in...

  • Page 29
    ... 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 30
    ... number of network service providers. Our principal provider for narrowband services is Level 3. We also purchase narrowband services from certain regional and local providers. Our largest providers of broadband connectivity are AT&T, Bright House Networks, Comcast, Covad, Qwest, Time Warner Cable...

  • Page 31
    ... the high-speed DOCSIS 3.0 technology offered by many cable broadband providers. This decline may adversely affect our broadband access business as our only other significant means of offering broadband services over cable is through our agreement with Time Warner Cable. In addition, advanced fiber...

  • Page 32
    ...the prices we charge for our retail local, long distance and data services as a result of the mergers of BellSouth, SBC and AT&T and of MCI and Verizon Communications which have increased substantially their respective market power; the increase of cable companies, wireless carriers and providers of...

  • Page 33
    ... suffer if we are not offered competitive rates for the access services we need to provide our long distance services. We depend on other communications companies to originate and terminate a significant portion of the long distance traffic initiated by our customers. Our operating performance will...

  • Page 34
    ...&T, Verizon and other incumbent carriers on acceptable terms, our ability to offer competitively priced local telephone services will be adversely affected. To provide local telephone services, we must interconnect with and resell the services of the incumbent carriers to supplement our own network...

  • Page 35
    ... on us. Interruption or failure of our network and information systems and other technologies could impair our ability to provide our services, which could damage our reputation and harm our operating results. Our network, network operations centers, central offices, corporate headquarters and those...

  • Page 36
    ... support systems and other carriers to order and receive network elements and wholesale services from the incumbent carriers. These systems are necessary for carriers like us to provide local service to customers on a timely and competitive basis. FCC rules, together with rules adopted by state...

  • Page 37
    ...state and federal laws imposing taxes or other regulations on Internet access and electronic commerce are adopted, our cost of providing Internet access services could be increased and our business could be adversely affected. Universal Service. While current policy exempts broadband access services...

  • Page 38
    ...cost of our operations and our potential liability if the security of our confidential customer data is breached. Broadband Internet access. Currently, broadband Internet access is classified as an "information service" and, as a result, cable companies and telephone companies that offer a broadband...

  • Page 39
    ... certain billing services are unable to provide these services or terminate their relationships with us. Our business and financial results depend, in part, on the availability and quality of our customer service and technical support and certain billing services, including collection services. Our...

  • Page 40
    ... (for example, traffic originated or terminated on wireless or VoIP), the jurisdiction of traffic for intercarrier compensation purposes, the wholesale services and facilities available to us, the prices we will pay for those services and facilities, and the regulatory treatment of new technologies...

  • Page 41
    ...losses for state income tax purposes began to expire in 2010. Additionally, we acquired companies with existing federal and state net operating losses. Our future income taxes could be adversely affected by changes in the valuation of our deferred tax assets and liabilities or by changes in tax laws...

  • Page 42
    ... or to purchase or repurchase the EarthLink Notes in cash at such time or the ability to arrange necessary financing on acceptable terms. In addition, the requirement to pay the fundamental change repurchase price, including the related make whole premium, may discourage a change in control of our...

  • Page 43
    ... 2. Properties. Unresolved Staff Comments. We own and lease several corporate offices, sales offices, switch sites, colocation sites, and other facilities across our nationwide service area. Our corporate headquarters is in Atlanta, Georgia, where we occupy approximately 76,000 square feet under...

  • Page 44
    ...sites expire on various dates from 2011 to 2018. As part of our fiber optic network, we own or lease rights-of-way, land, and point-of-presence space throughout the southeastern United States. We believe our facilities are suitable and adequate for our business operations. For additional information...

  • Page 45
    ... of Equity 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...

  • Page 46
    ...is more comparable with our new business focus. We are also comparing our total return to another new index, the Russell 2000,... 2008 December 31, 2009 December 31, 2010 EarthLink, Inc. NASDAQ Stock Market (U.S.) Russell 2000 Index Morgan Stanley Internet Index NASDAQ Telecomm Index 100.0 63.9 ...

  • Page 47
    ... thereto included elsewhere in this Annual Report on Form 10-K. Year Ended December 31, 2007 2008 2009 (in thousands, except per share amounts) 2006 2010 (1) Statement of operations data: Revenues Operating costs and expenses (2)(3) Income from operations Income (loss) from continuing operations...

  • Page 48
    ... assets were impaired in conjunction with our annual tests of goodwill and intangible assets deemed to have indefinite lives. During 2010, we decided to re-brand the New Edge name as EarthLink Business and wrote off our New Edge trade name. Operating costs and expenses for the years ended December...

  • Page 49
    ... AT&T, Verizon and other incumbent carriers on acceptable terms, our ability to offer competitively priced local telephone services will be adversely affected; (20) that we may not be able to compete effectively if we are unable to install additional network equipment or convert our network to more...

  • Page 50
    ... and communications carriers. These services include data services, including managed IP-based network services and broadband Internet access services; voice services, including local exchange, long-distance and conference calling; mobile data and voice services; and web hosting. We provide our...

  • Page 51
    ... customers provide cost benefits, including reduced contact center support costs and reduced bad debt expense. We continue to focus on offering our services with high-quality customer service and technical support. We also continue to seek to add customers that generate an acceptable rate of return...

  • Page 52
    ... various web properties. Business Services. Our Business Services segment earns revenue by providing high-speed or broadband data communications services, which include managed IP-based networks and Internet access; voice services, which include local exchange services, long distance and conference...

  • Page 53
    ...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. We operate in the communications...

  • Page 54
    ... subscriber base has decreased and become longer tenured. Our longer tenured customers require less customer service and technical support and have a lower frequency of non-payment. We also experienced benefits from workforce reduction initiatives and other cost cutting initiatives. Net income...

  • Page 55
    ... data for...administrative (exclusive of depreciation and amortization shown separately below) Depreciation and amortization Impairment of goodwill and intangible assets Restructuring and acquisition-related costs Total operating costs and expenses Income from operations Gain (loss) on investments, net...

  • Page 56
    ... managed IP-based network services and broadband Internet access services; voice services, including local exchange, long-distance and conference calling; mobile data and voice services; and web hosting. We also sell transmission capacity in our fiber network to other communications providers...

  • Page 57
    ... Contents billing operations and provisions for doubtful accounts. Segment income from operations excludes other income and expense items and certain expenses over which segment managers do not have discretionary control. Costs excluded from segment income from operations include various corporate...

  • Page 58
    related costs Other operating expenses Income from operations 9,142 54,342 5,615 46,126 22,368 30,702 (3,527) (8,216) 17,551 53 -39% -15% 16,753 (15,424) 298% -33% -11% $ 164,607 $ 182,158 $ 161,693 $ 11% $ (20,465)

  • Page 59
    ...15,000 EarthLink-supported Sprint customers from our broadband subscriber counts. During the year ended December 31, 2009, we removed approximately 7,000 satellite subscribers from our broadband subscriber count and total subscriber count as a result of our sale of these subscriber accounts. Average...

  • Page 60
    ... 2010 Legacy EarthLink Business Metrics (a) Narrowband access subscribers Broadband access subscribers Web hosting accounts ITC^DeltaCom Business Metrics (b) Total fiber optic route miles (c) Colocations Voice and data switches Retail voice lines Wholesale voice lines Total business voice lines 17...

  • Page 61
    55

  • Page 62
    ... fully-featured narrowband access and value-priced narrowband access); broadband access services (including high-speed access via cable and DSL; VoIP; and managed IP-based wide area networks); voice services (including local exchange services, long distance and conference calling services); the sale...

  • Page 63
    ... sold as add-on features to our Internet access services, such as security products, premium email only, home networking, email storage and Internet call waiting; search revenues; and advertising revenues. We derive these revenues from fees charged for ancillary services; fees charged for paid...

  • Page 64
    ... regional and local providers. Our principal providers of broadband connectivity are AT&T Inc., Bright House Networks, Comcast Corporation, Covad Communications Group, Inc., Qwest Corporation, Time Warner Cable and Verizon Communications, Inc. Cost of revenues for our Consumer Services segment also...

  • Page 65
    ..., reduced discretionary sales and marketing spend, consolidation to primarily one outsourced customer service and technical support provider for our consumer services and cost benefits as our overall subscriber base has decreased and become longer tenured. Longer tenured customers have a lower...

  • Page 66
    ... 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 67
    ... the New Edge Networks name as EarthLink Business. We recorded a non-cash impairment charge of $1.7 million during the year ended December 31, 2010 to write-down our New Edge trade name. As a result, there is no remaining carrying value related to the New Edge trade name. Definite-lived intangible...

  • Page 68
    ... directly related to our acquisitions, such as advisory, legal, accounting, valuation and other professional fees. Acquisition-related costs also include employee severance and benefit costs and costs to settle stock-based awards attributable to postcombination service in connection with the ITC...

  • Page 69
    ... of $9.9 million to reflect the auction rate securities at their fair value, as we no longer had the intent to hold the securities until maturity. We also elected a one-time transfer of our auction rate securities from the available-for-sale category to the trading category. We recorded the value of...

  • Page 70
    ...in 2010 relating to stock compensation deferred tax assets. To the extent we report income in future periods, we intend to use our net operating loss carryforwards to the extent available to offset taxable income and reduce cash outflows for income taxes. Our ability to use our federal and state net...

  • Page 71
    ... 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. Such value is recognized as expense over the requisite service period, net...

  • Page 72
    ...base has decreased. However, this decrease was partially offset by reduced sales and marketing spending, reduced telecommunication costs and reduced customer support and bad debt expense as our overall subscriber base has decreased and become longer tenured, and reduced back-office support costs. 66

  • Page 73
    ... 31, 2010. This consisted primarily of $192.3 million of net cash used for the acquisition of ITC^DeltaCom and $9.1 million of cash paid to settle stock-based awards in connection with the acquisition. We also used $229.5 million of purchases of investments in marketable securities, net of sales and...

  • Page 74
    ... those related to severance pay, payments to executive officers and key employees under retention plans, employee benefit costs, and legal, accounting and financial advisory fees. There are a number of systems that must be integrated, including management information, sales, billing and benefits. We...

  • Page 75
    ... in which we may engage, the costs required to maintain our network infrastructure, the pricing of our access services, and the level of resources used for our sales and marketing activities, among others. In addition, our use of cash in connection with acquisitions may limit other potential...

  • Page 76
    ...15, 2011, provided that we have made at least ten semi-annual interest payments. In addition, the holders may require us to purchase all or a portion of their EarthLink Notes on each of November 15, 2011, November 15, 2016 and November 15, 2021. In connection with our acquisition of ITC^DeltaCom, we...

  • Page 77
    ... 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 78
    ...impaired and we recorded non-cash impairment charges related to the New Edge reporting unit of $64.0 million for goodwill and $3.1 million for the indefinite-lived trade name. During the fourth quarter of 2009, our annual impairment test concluded that goodwill and certain intangible assets recorded...

  • Page 79
    ... and broadband access, VoIP and value-added services), EarthLink Business and Web Hosting. The Consumer Services reportable segment is one reporting unit, while the Business Services reportable segment consists of two reporting units, EarthLink Business and Web Hosting. Each of these reporting units...

  • Page 80
    ... of consideration transferred and the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the...

  • Page 81
    ... includes direct expenses associated with providing services to our customers and the cost of equipment sold. These costs include the cost of leasing facilities from incumbent local exchange carriers and other telecommunications providers that provide us with access connections to our customers, to...

  • Page 82
    ... impact on our financial statements. Also in December 2010, the FASB issued new guidance on disclosure of supplementary pro forma financial information for business combinations. The new guidance specifies that if a public entity presents comparative financial statements, the entity should disclose...

  • Page 83
    ... on June 30, 2010 until July 2, 2012. 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 fair value changes of the auction rate securities. We are also...

  • Page 84
    ...of Contents Item 8. Financial Statements And Supplementary Data. EARTHLINK, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2009 and 2010 Consolidated Statements of Operations for the years...

  • Page 85
    ... with the standards of the Public Company Accounting Oversight Board (United States), EarthLink, Inc.'s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations...

  • Page 86
    ...million of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of EarthLink, Inc. also did not include an evaluation of the internal control over financial reporting of ITC^DeltaCom. In our opinion, EarthLink, Inc. maintained, in all...

  • Page 87
    ... of operations, stockholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2010 of EarthLink, Inc. and our report dated March 1, 2011 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Atlanta, Georgia March 1, 2011 81

  • Page 88
    ... cash Accounts receivable, net of allowance of $1,736 and $1,182 as of December 31, 2009 and 2010, respectively Prepaid expenses Deferred income taxes, net Other current assets Total current assets Long-term marketable securities Property and equipment, net Deferred income taxes, net Purchased...

  • Page 89
    ... EARTHLINK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2008 2009 2010 (in thousands, except per share data) Revenues Operating costs and expenses: Cost of revenues (exclusive of depreciation and amortization shown separately below) Selling, general and administrative...

  • Page 90
    Table of Contents EARTHLINK, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME Additional Accumulated Paid-in Capital Deficit Accumulated Other Total Total Comprehensive Stockholders' Comprehensive Income (Loss) Equity Income Common Stock Shares Amount Treasury Stock ...

  • Page 91
    ... - Net income - Total comprehensive income Balance as of December 31, 2009 190,472 Issuance of common stock pursuant to exercise of stock options and vesting of restricted stock units 1,353 Tax withholdings related to net share settlements of restricted stock units and stock options - Dividends paid...

  • Page 92
    ... in accounts payable and accrued and other liabilities Decrease in deferred revenue Net cash provided by operating activities Cash flows from investing activities: Purchase of business, net of cash acquired Purchases of property and equipment Purchases of investments in marketable securities Sales...

  • Page 93
    ...and communications carriers. These services include data services, including managed IP-based network services and broadband Internet access services; voice services, including local exchange, long-distance and conference calling; mobile data and voice services; and web hosting. The Company provides...

  • Page 94
    ... long-term rating of A/A2. These securities are classified as available for sale. Available-for-sale securities are carried at fair value, with any unrealized gains and losses, net of tax, included in accumulated other comprehensive income as a separate component of stockholders' equity and in total...

  • Page 95
    ... of its network and operating support systems, including employee-related costs. The Company also capitalizes customer installation and acquisition costs related to its Business Services customers to the extent they are recoverable. Customer installation costs represent nonrecurring fees paid to...

  • Page 96
    ... recognized as gain (loss) on investments, net, in the Consolidated Statement of Operations. The fair value of the put right was estimated using a discounted cash flow analysis. During the year ended December 31, 2010, the Company sold its auction rate securities to the selling broker at par, plus...

  • Page 97
    .... 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 amortize...

  • Page 98
    ...or number of subscriber purchases or actions. Business Services. The Company's Business Services segment earns revenue by providing high-speed or broadband data communications services, which include managed IP-based networks and Internet access; voice services, which include local exchange services...

  • Page 99
    ... fees and network operations costs incurred to provide the Company's Internet access services; fees paid to content providers for information provided on the Company's online properties; and the cost of equipment sold to customers for use with the Company's services. Consumer Services cost...

  • Page 100
    ... advisory, legal, accounting, valuation and other professional fees. Acquisition-related costs also include employee severance and benefit costs and costs resulting from the settlement of stock-based awards attributable to postcombination service in connection with the ITC^DeltaCom acquisition. See...

  • Page 101
    ... per share represents net income divided by the weighted average number of common shares outstanding during the reported period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, including stock options, restricted...

  • Page 102
    ... for basic and diluted net income per share for the years ended December 31, 2008, 2009 and 2010: Year Ended December 31, 2008 2009 2010 (in thousands, except per share data) Numerator Income from continuing operations Loss from discontinued operations Net income Denominator Basic weighted average...

  • Page 103
    ... providers. Only a small number of providers offer the network services the Company requires, and the majority of its network services are currently purchased from a limited number of network service providers. Although management believes that alternate network providers could be found in a timely...

  • Page 104
    ... of ITC^DeltaCom in a merger transaction with ITC^DeltaCom surviving as a wholly-owned subsidiary of EarthLink. The acquisition will enable EarthLink to become an IP infrastructure and managed services provider by combining its existing business services with ITC^Deltacom's integrated communications...

  • Page 105
    ... that will not be collected. In connection with the merger, each ITC^DeltaCom stock option was cancelled in exchange for cash equal to the difference between the merger consideration and the exercise price, and certain ITC^DeltaCom restricted stock units were cancelled in exchange for cash equal to...

  • Page 106
    ... The trade name represents the fair values of brand and name recognition associated with ITC^DeltaCom's services. In connection with the acquisition, EarthLink assumed ITC^DeltaCom's outstanding $325.0 million aggregate principal amount of 10.5% senior secured notes due 2016 (the "ITC^DeltaCom Notes...

  • Page 107
    ...acquisition will further transform EarthLink into an IP infrastructure and managed services provider by expanding its IP network footprint. Under the terms of the merger agreement, EarthLink will acquire 100% of One Communications in a merger transaction with One Communications surviving as a wholly...

  • Page 108
    ... associated with the 2007 Plan for the years ended December 31, 2008, 2009 and 2010, including changes during the years attributable to costs incurred and charged to expense and costs paid or otherwise settled: Severance and Benefits Facilities Asset Impairments (in thousands) Other Costs Total...

  • Page 109
    ..., legal, accounting, valuation and other professional fees. Acquisition-related costs also include employee severance and benefit costs and costs resulting from cash paid to settle stock-based awards attributable to postcombination service in connection with the ITC^DeltaCom acquisition. Acquisition...

  • Page 110
    .... In October 2008, EarthLink entered into an agreement with the broker that sold the Company its auction rate securities that gave 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...

  • Page 111
    ... at their fair value, as the Company no longer had the intent to hold the securities until maturity. The Company also elected a one-time transfer of its auction rate securities from the available-for-sale category to the trading category. The Company recorded the value of the put right to long-term...

  • Page 112
    ... 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. EarthLink accounted for its investment in Sprint Nextel under the cost method and classified the investment as available for sale. During the year...

  • Page 113
    ... Sprint Nextel shares for net proceeds of $1.0 million and recognized a gain of $0.1 million. 7. Property and Equipment Property and equipment consisted of the following as of December 31, 2009 and 2010: As of December 31, 2009 2010 (in thousands) Communciations and fiber optic networks Office and...

  • Page 114
    ...to the acquisition of ITC^DeltaCom. The Company's definite-lived intangible assets primarily consist of subscriber bases and customer relationships, acquired software and technology, trade names and other assets acquired in conjunction with the purchases of businesses and subscriber bases from other...

  • Page 115
    ...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 116
    ... the New Edge name as EarthLink Business. The Company recorded a non-cash impairment charge of $1.7 million during the year ended December 31, 2010 to write-down its New Edge trade name. As a result, there is no remaining carrying value related to the New Edge trade name. Definite-lived intangible...

  • Page 117
    ... revolving credit facility, the ITC^DeltaCom Notes, or other indebtedness secured on a first-priority basis or (b) reinvest the net sale proceeds in its business, or (2) ITC^DeltaCom experiences a change of control, ITC^DeltaCom may be required to offer to purchase ITC^DeltaCom Notes from holders at...

  • Page 118
    ...in sale-leaseback transactions, enter into transactions with affiliates, sell assets, create restrictions on dividends and other payments to ITC^DeltaCom from its subsidiaries, issue or sell stock of subsidiaries, and engage in mergers and consolidations. All of the covenants are subject to a number...

  • Page 119
    ...hedge and warrant agreements. See Note 11, "Shareholders' Equity," for more information on the Call Spread Transactions. As of December 31, 2009 and 2010, the fair value of the EarthLink Notes was approximately $279.8 million and $300.3 million, respectively, based on quoted market prices. Under the...

  • Page 120
    ... Each right entitles the holder to purchase one one-thousandth (1/1000) of a share (a "Unit") of EarthLink's Series D Junior Preferred Stock at a price of $60.00 per Unit upon certain events. Generally, in the event a person or entity acquires, or initiates a tender offer to acquire, at least 15% of...

  • Page 121
    ... 2009 and 2010, respectively. The Company has classified stock-based compensation expense within the same operating expense line item as cash compensation paid to employees. Stock Incentive Plans The Company has granted options to employees and non-employee directors to purchase the Company's common...

  • Page 122
    ... million shares, of which approximately 4.1 million shares were still available for grant as of December 31, 2010. Upon exercise of stock options or vesting of restricted stock units, the Company will issue authorized but unissued common stock. In connection with the acquisition of ITC^DeltaCom, the...

  • Page 123
    .... The selection of implied volatility data to estimate expected volatility was based upon the availability of prices for actively traded options on the Company's stock. The risk-free interest rate assumption was based upon the U.S. Treasury yield curve in effect at the time of grant for periods...

  • Page 124
    ...respectively. As of December 31, 2010, there was $6.5 million of total unrecognized compensation cost related to nonvested restricted stock units. That cost is expected to be recognized over a weighted-average period of 1.4 years. The total fair value of shares vested during the years ended December...

  • Page 125
    ...due to the generation of sufficient taxable income in the future. Of the total valuation allowance release, $56.1 million was recorded as an income tax benefit in the Consolidated Statement of Operations. The remaining $9.5 million related to acquired net operating losses and reduced goodwill on the...

  • Page 126
    ... Ended December 31, 2009 2010 (in thousands) 2008 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 tax rate Other Income tax benefit (provision...

  • Page 127
    ... had NOLs for state income tax purposes totaling approximately $178.0 million and $776.6 million, respectively, which started to expire in 2010. The increase in the amount of net operating losses for 2010 is due to the inclusion of net operating losses from the ITC Deltacom acquisition. Under the...

  • Page 128
    ... require the Company to pay operating costs, including property taxes, insurance and maintenance, and generally contain annual escalation provisions as well as renewal options. Total rent expense (including operating expenses) during the years ended December 31, 2008, 2009 and 2010 for all operating...

  • Page 129
    ... The Company has entered into agreements with vendors to purchase certain telecommunications services and equipment under noncancelable agreements. The Company has minimum commitments under non-cancelable agreements of $8.1 million for the year ending December 31, 2011. The Company also has...

  • Page 130
    ... on June 30, 2010 until July 2, 2012. As a result, the Company classified its auction rate securities as trading, with changes in fair value included in gain on investments, net, in the Condensed Consolidated Statement of Operations. The Company elected the fair value option for the put right...

  • Page 131
    ... organizations and communications carriers. These services include data services, which include managed IP-based network services and Internet access; voice services, which include local exchange, long-distance and conference calling; mobile data and voice services; and web hosting. ITC^DeltaCom is...

  • Page 132
    ...segments based on segment income from operations. Segment income from operations includes revenues from external customers, related cost of revenues and operating expenses directly attributable to the segment, which include costs over which segment managers have direct discretionary control, such as...

  • Page 133
    ..., fully-featured narrowband access and value-priced narrowband access); broadband access services (including high-speed access via DSL and cable, VoIP and managed IP-based networks); voice services (including local exchange services, long distance and conference calling services); the sale of...

  • Page 134
    ...in the United States. 19. Quarterly Financial Data (Unaudited) The following table sets forth certain unaudited quarterly consolidated financial data for the eight quarters in the period ended December 31, 2010. In the opinion of the Company's management, this unaudited information has been prepared...

  • Page 135
    ... of New Edge in the Company's Business Services segment. EarthLink concluded the carrying value of these assets were impaired in conjunction with its annual test of goodwill and intangible assets deemed to have indefinite lives. Operating costs and expenses for the quarter ended December 31, 2010...

  • Page 136
    ... this company was acquired by EarthLink in December 2010 and there was not sufficient time to assess the design and effectiveness of ITC^DeltaCom's key internal controls prior to the conclusion of management's evaluation. Total assets and total revenues of ITC^DeltaCom represented approximately 46...

  • Page 137
    ...or in a subsequent amendment to this Annual Report on Form 10-K. Such information is incorporated herein by reference. Securities Authorized for Issuance Under Equity Compensation Plans The following table sets forth information as of December 31, 2010 concerning the shares of our common stock which...

  • Page 138
    ... 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, 2010, 187,597 of these options were outstanding. The options have an exercise price equal to the last reported price of...

  • Page 139
    ...Merger Corp. and ITC^DeltaCom, Inc. (incorporated by reference to Exhibit 2.1 of EarthLink, Inc.'s Report on Form 8-K dated October 1, 2010-File No. 001-15605). 2.2- Agreement and Plan of Merger, dated as of December 20, 2010, by and among EarthLink, Inc., Egypt Acquisition Corp., One Communications...

  • Page 140
    .... 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 Company (incorporated by reference to Exhibit 10...

  • Page 141
    ...on Form 10-K for the year ended December 31, 2009-File No. 001-15605). 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 Exhibit 4.4 to the Registration Statement on Form...

  • Page 142
    ...effective as of October 31, 2010, to the High-Speed Service Agreement, dated as of June 30, 2006, as amended, by and between Time Warner Cable Inc. and EarthLink, Inc. (incorporated by reference to Exhibit 10.1 of EarthLink, Inc.'s Report on Form 8-K dated December 1, 2010-File No. 001-15605). 10.36...

  • Page 143
    ... herewith. Management compensatory plan or arrangement. Confidential treatment has been requested with respect to portions of this exhibit. (b) Exhibits The response to this portion of Item 15 is submitted as a separate section of this Annual Report on Form 10-K. (c) Financial Statement Schedule...

  • Page 144
    ... of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EARTHLINK, INC. By: /s/ ROLLA P. HUFF Rolla P. Huff, Chairman of the Board and Chief Executive Officer Date: March 1, 2011 Each person whose...

  • Page 145

  • Page 146
    ...later than the next annual shareholder meeting, provided the director is serving as an independent director at that time. i. Note: Each RSU is equal to one share of EarthLink stock. Upon vesting, the RSUs may be received in shares of stock (in which case the recipient has taxable income equal to the...

  • Page 147
    Exhibit 21.1 Subsidiaries of the Registrant Name Jurisdiction of Incorporation EarthLink, Inc. ITC^DeltaCom, Inc. New Edge Holding Company Delaware Delaware Delaware

  • Page 148
    ... 2011, 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, 2010. /s/ Ernst & Young LLP Atlanta, Georgia March 1, 2011

  • Page 149
    ... 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 I, Rolla P. Huff, certify that: 1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2010 of EarthLink, Inc.; 2. Based on my...

  • Page 150
    ... 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 I, Bradley A. Ferguson, certify that: 1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2010 of EarthLink, Inc.; 2. Based on my...

  • Page 151
    ...-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of EarthLink, Inc. (the "Company") for the year ended December 31, 2010 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 152
    ...-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of EarthLink, Inc. (the "Company") for the year ended December 31, 2010 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...