<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-20799
EARTHLINK NETWORK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4481766
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
3100 NEW YORK DRIVE, PASADENA, CALIFORNIA 91107
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(818) 296-2400
(REGISTRANT'S TELEPHONE, INCLUDING AREA CODE)
____________________
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
____________________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
There were 9,732,994 shares of Common Stock outstanding as of April 30, 1997.
<PAGE>
EARTHLINK NETWORK, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
TABLE OF CONTENTS
PART I
Item 1. Financial Statements and Supplementary Data . . . . . . . . . . . . 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Result of Operations . . . . . . . . . . . . . . . . . . . . . . 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . 12
PART II
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 12
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EARTHLINK NETWORK, INC.
BALANCE SHEET
ASSETS
DECEMBER 31, 1996 MARCH 31, 1997
----------------- --------------
(AUDITED) (UNAUDITED)
(in thousands)
Current assets:
Cash and cash equivalents $ 3,993 $ 13,149
Restricted short-term investment 1,087 1,087
Accounts receivable, net 1,725 1,933
Prepaid expenses 885 600
Other assets 1,383 1,248
-------- --------
Total current assets 9,073 18,017
Other long-term assets 329 382
Property and equipment, net 17,401 20,387
Intangibles, net 316 320
-------- --------
$ 27,119 $ 39,106
-------- --------
-------- --------
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable $ 11,207 $ 4,388
Accrued payroll and related expenses 1,469 1,478
Other accounts payable and accrued
liabilities 2,061 2,732
Current portion of capital lease obligations 3,582 4,381
Notes payable 7,950 5,000
Deferred revenue 2,010 2,395
-------- --------
Total current liabilities 28,279 20,374
Long-term debt 6,088 7,186
-------- --------
Total liabilities 34,367 27,560
-------- --------
Mandatorily redeemable convertible
preferred stock 14,013 -
Stockholders' equity (deficit)
Common stock 60 98
Additional paid-in capital 14,236 55,308
Warrants to purchase common stock 599 675
Accumulated deficit (36,156) (44,535)
-------- --------
Total stockholders' equity (deficit) (21,261) 11,546
-------- --------
$ 27,119 $ 39,106
-------- --------
-------- --------
The accompanying notes are an integral part of these financial statements
1
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EARTHLINK NETWORK, INC
STATEMENT OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1997
-------- --------
(in thousands, except
per share amounts)
(UNAUDITED)
Revenues:
Recurring revenues $ 2,628 $14,086
Other revenues 790 1,632
------- -------
Total Revenues 3,418 15,718
Operating costs and expenses:
Cost of recurring revenue 1,698 7,955
Cost of other revenue 569 915
Sales and marketing 2,209 4,961
General and administrative expenses 1,632 3,502
Operations and customer support 2,098 6,422
-------- --------
8,206 23,755
-------- --------
Loss from operations (4,788) (8,037)
Interest expense (100) (507)
Interest income 19 165
-------- --------
Net loss $(4,869) $(8,379)
-------- --------
-------- --------
Net loss per share $ (0.79) $ (0.92)
-------- --------
-------- --------
Weighted average shares outstanding (Note 1) 6,138 9,094
-------- --------
-------- --------
The accompanying notes are an integral part of these financial statements
2
<PAGE>
EARTHLINK NETWORK, INC
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1997
-------- --------
(in thousands)
(UNAUDITED)
Net cash used in operating activities $(2,829) $(12,101)
------- --------
Cash flows from investing activities:
Purchases of property and equipment (4,247) (4,786)
Liquidation of restricted short-term
investment 1,000 -
------- --------
Net cash used in investing activities (3,247) (4,786)
------- --------
Cash flows from financing activities:
Payment of line of credit (1,494) -
Decrease in notes payable - (2,225)
Proceeds from capital lease obligations 2,163 2,783
Principal payments under capital lease
obligations (205) (886)
Proceeds from issuance of Common Stock, net 341 26,371
Proceeds from Common Stock pending
issuance, net 5,931 -
------- --------
Net cash provided by financing
activities 6,736 26,043
------- --------
Net increase in cash and cash equivalents 660 9,156
Cash and cash equivalents, beginning of period 290 3,993
------- --------
Cash and cash equivalents, end of period $ 950 $ 13,149
------- --------
------- --------
The accompanying notes are an integral part of these financial statements
3
<PAGE>
1. BASIS OF PRESENTATION
The condensed financial statements of EarthLink Network, Inc.
("EarthLink" or the "Company") for the three months ended March 31, 1997 and
the related footnote information are unaudited and have been prepared on a
basis substantially consistent with the Company's audited financial
statements as of December 31, 1996 contained in the Company's Annual Report
on Form 10-K as filed with the Securities and Exchange Commission (the
"Annual Report"). These financial statements should be read in conjunction
with the audited financial statements and the related notes thereto contained
in the Company's Annual Report. In the opinion of management, the
accompanying unaudited financial statements contain all adjustments
(consisting of normal recurring adjustments) which management considers
necessary to present fairly the financial position of the Company at March
31, 1997 and the results of operations and the cash flows for the three month
periods ended March 31, 1996 and 1997. The results of operations for the
three month period ended March 31, 1997 may not be indicative of the results
expected for any succeeding quarter or the entire year ending December 31,
1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Actual results may differ from those estimates.
2. RECLASSIFICATION
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
3. NET LOSS PER SHARE
For the quarter ended March 31, 1997, options to purchase shares of Common
Stock, warrants to purchase shares of Common Stock and debt instruments
convertible into shares of Common Stock are excluded from the calculation as
their effect is antidilutive. Pursuant to Securities and Exchange Commission
Staff Accounting Bulletins, Common Stock and Common Stock equivalent shares
issued by the Company at prices below the Company's initial public offering
price during the twelve month period prior to the Company's initial public
offering, which was effected on January 21, 1997, have been included in the
calculation for the quarter ended March 31, 1996 as if they were outstanding for
all periods prior to the initial public offering, regardless of whether they are
dilutive (using the treasury stock method and an initial public offering price
of $13.00 per share). Accordingly, all common stock equivalents are included in
the earnings per share calculations for the quarter ended March 31, 1996, even
though the effect on net loss is antidilutive. The Series A Convertible
Preferred Stock shares have been included for the respective weighted average
periods for which such shares were outstanding, even though their effect is
antidilutive.
4. INCENTIVE STOCK OPTION GRANTS
On January 22, 1997 and March 20, 1997, the Company granted incentive stock
options to purchase 138,500 shares of Common Stock at $13.00 per share and
66,375 shares of Common Stock at $10.50 per share, respectively. The options
were granted pursuant to the Company's 1995 Stock Option Plan.
4
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5. INITIAL PUBLIC OFFERING
On January 21, 1997 the Company effected its initial public offering. The
offering consisted of 2,000,000 shares of Common Stock issued at $13 per share.
Net proceeds to the Company were approximately $23.5 million. Upon consummation
of the offering, 2,727,273 shares of the Company's Series A Convertible
Preferred Stock were automatically converted to 1,363,624 shares of Common
Stock. The holders of $725,000 of the Company's 10% Promissory Notes, including
certain stockholders, converted their indebtedness into 55,767 shares of Common
Stock upon consummation of the initial public offering. On January 29, 1997, the
Company repaid the $2,225,000 balance remaining of the 10% Promissory Notes. At
the completion of the offering, 9,442,115 shares of Common Stock were
outstanding.
On February 13, 1997 the Underwriter exercised a portion of its over-
allotment option and purchased 284,750 shares of the Company's Common Stock at
the initial public offering price of $13.00 per share. Net proceeds to the
Company from this exercise were approximately $3.4 million.
5
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This report contains certain forward-looking statements with respect to the
Company's operations, industry, financial condition and liquidity. These
statements, which are typically introduced by statements such as "the Company
believes", "anticipates", "estimates" or "expects" certain conditions to exist,
reflect management's best current assessment of a number of risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward -looking financial statements as a result
of certain factors described in this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE ACCOMPANYING
UNAUDITED CONDENSED FINANCIAL STATEMENTS AND RELATED NOTES THERETO AND THE
AUDITED FINANCIAL STATEMENTS AND THE NOTES THERETO.
OVERVIEW
EarthLink Network, Inc. ("EarthLink" or the "Company") is an Internet
service provider ("ISP") formed to help its members derive meaningful benefits
from the extensive resources of the Internet. The Company focuses on providing
access, information, assistance and services to its members to encourage their
introduction to the Internet and to help them have a satisfying user experience.
The Company has experienced net losses in each quarter since it commenced
operations. The Company expects that it is likely to continue to incur net
losses at least through the end of 1997 as it continues to expend substantial
resources to build its infrastructure, develop new service and product offerings
and build its sales and marketing and administrative organizations. The
Company's operating results have fluctuated significantly in the past and will
likely continue to fluctuate significantly in the future as a result of a
variety of factors, many of which are beyond the Company's control.
EarthLink's principal strategy is to rapidly expand its member base and
increase its market share. To realize this strategy, the Company is
aggressively investing in sales and marketing, increasing its member support
capabilities, enhancing its network operations capacity to meet member demand
and adding administrative infrastructure. This strategy requires substantial
initial cash outlays.
The Company believes that its long-term success largely depends on
maintaining member satisfaction with its services. EarthLink continues to
devote significant resources to enhancing its network operations capability, its
World Wide Web site and its service offerings. In addition, the Company
continues to expand its technical support staff and enhance the staff's
effectiveness by providing software tools that can assist the staff in
identifying and solving member problems. The Company has introduced a variety
of services for business customers, including business Web sites, high-speed
ISDN communications capability and frame relay connections, each of which
involve a monthly service charge plus set-up fees. The Company has expanded its
consumer service offerings, including personalized start pages, chat, the Arena
and multiplayer Internet games. In order to maintain its focus on member needs,
the Company has leveraged the infrastructure and software development efforts of
others by leasing POP capacity from UUNET Technologies, Inc. ("UUNET") and
PSINet, Inc. ("PSINet") and licensing software from software developers. The
Company believes that this approach gives it flexibility to rapidly expand its
service coverage without the need for substantial capital expenditures. The
Company will continue to pursue this strategy so that, in addition to its sales
and marketing efforts, it can devote its principal resources to improving its
members' experience with the Internet.
6
<PAGE>
RESULTS OF OPERATIONS
REVENUES.
QUARTER QUARTER
ENDED PERCENT ENDED PERCENT
MARCH 31, OF TOTAL MARCH 31, OF TOTAL
1996 REVENUE 1997 REVENUE
---- ------- ---- --------
(in thousands except percentages)
Recurring revenues $2,628 77% $14,086 90%
Other revenues 790 23% 1,632 10%
------ -------
Total Revenues $3,418 100% $15,718 100%
------ -------
------ -------
Recurring revenues consist of monthly fees charged to members for Internet
access and other ongoing services. Other revenues generally represent one-time
set-up fees. Recurring revenues are recognized over the period in which the
services are performed. As indicated in the above chart, the Company
experienced substantial growth in revenues for the quarter ended March 31, 1997
as compared to the corresponding quarter of 1996. This growth is primarily
attributable to an increase in the number of members who use the Company's
services, from approximately 75,000 at March 31, 1996 to 279,000 at March 31,
1997. The increase in revenues was partially offset by credits given to members
under the Company's member referral program. Under this program the $19.95
service fee is waived for one month in consideration for each new member
referred by an existing member. Waived service fees resulted in a reduction to
revenue of approximately $589,000 during the quarter ended March 31, 1997.
The increase in other revenues is primarily attributable to an increase in
the number of members added and one-time set-up fees collected from members. As
the Company's member base continues to expand, start-up fees have progressively
represented a smaller percentage of revenue. From time to time, the Company
waives the one-time set-up fee it charges new members. As competition in the ISP
market intensifies, the Company may find it necessary to waive the one-time
set-up fee to remain competitive. Therefore, revenues from the one-time set-up
fee are expected to decrease in future periods.
COST OF REVENUES.
QUARTER QUARTER
ENDED PERCENT ENDED PERCENT
MARCH 31, OF TOTAL MARCH 31, OF TOTAL
1996 REVENUE 1997 REVENUE
---- ------- ---- --------
(in thousands except percentages)
Cost of recurring revenue $1,698 65% $7,955 56%
QUARTER QUARTER
ENDED PERCENT ENDED PERCENT
MARCH 31, OF TOTAL MARCH 31, OF TOTAL
1996 REVENUE 1997 REVENUE
---- ------- ---- --------
Cost of other revenue $569 72% $915 56%
Cost of recurring revenues principally includes telecommunications
expenses and depreciation expense on equipment used in network operations for
ongoing member services. Included in telecommunications costs are fees paid
to UUNET and PSINet for local access to their respective nationwide systems
of POPs. Cost of other revenues principally includes expenses related to the
registration of new
7
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members. These costs include licensing fees for software, software
duplication costs and commissions paid to third parties for referring new
members to the Company.
The increase in dollars of the cost of recurring revenue is primarily due
to the increase in the number of members. The decrease in cost of recurring
revenue as a percentage of recurring revenue is primarily due to the
Company's ability to exploit economies of scale to reduce per member costs as
the total member base expands.
As noted above, from time to time, the Company waives the one-time set-up
fee it charges new members. Therefore, the increase in cost of other revenue
as a percentage of other revenue is due to the waiving of the one-time set-up
fee for certain customers while the per set-up costs to the Company have
remained constant. Revenues from the one-time set-up fee are expected to
decrease in future periods.
Cost of revenue increased during the second and third quarters of 1996
due to increased hourly member usage and the Company's expansion to
nationwide service through its relationship with UUNET. During these periods,
the Company paid UUNET a fixed monthly fee per member plus a variable amount
based on member usage in excess of a threshold number of hours per month. The
Company's agreement with UUNET was amended as of October 1996 such that the
key variable component is peak usage rather than hourly usage.
The Company's members generally pay a fixed monthly fee for the Company's
Internet services. Under the Company's current agreement with UUNET, the
Company pays UUNET a monthly fee equal to the greater of a specified minimum
or an amount that varies based primarily on peak member usage. The Company
also pays UUNET an additional fee to the extent that hours of usage exceed a
formula set forth in the agreement. In the past the Company experienced
increasing per member usage of its services. If the number of hours used by
EarthLink members accessing the Internet through UUNET increases beyond the
amount provided for in the agreement or the usage becomes more concentrated
during peak times, the fees paid by the Company to UUNET would increase,
which would adversely affect the Company's operating margins.
In January 1997, the Company began leasing POP access from PSINet,
becoming, in effect, a reseller of PSINet services in a similar fashion to
the Company's UUNET arrangement. EarthLink's members pay a fixed monthly
fee for the Company's Internet services. The Company is charged a tiered
rate based on the number of EarthLink members signed on through POP's leased
from PSINet.
SALES AND MARKETING.
QUARTER QUARTER
ENDED PERCENT ENDED PERCENT
MARCH 31, OF TOTAL MARCH 31, OF TOTAL
1996 REVENUE 1997 REVENUE
---- ------- ---- --------
(in thousands except percentages)
Sales and marketing $2,209 65% $4,961 32%
Sales and marketing expenses consist primarily of sales commissions,
salaries, cost of promotional material, advertising, travel and trade shows.
The Company experienced an increase of 125% in sales and marketing expenses
for the quarter ended March 31, 1997 as compared to the corresponding quarter
of the the previous year, primarily as a result of EarthLink's efforts to
expand its member base and increase its market share of the underrepresented
market for Internet access services. However, as a percentage of total
revenue, sales and marketing expenses declined to 32% from 75%, as such
expenses grew at slower rate than the Company's revenues. EarthLink's
marketing efforts emphasize the variety of services available to business
members, including business Web sites, high-speed ISDN communications
capability, high-speed
8
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frame relay connections and Internet access through corporate Intranets. The
Company also introduced the EarthLink Store, an online retailing service, and
the Arena and online multi-player gaming service.
GENERAL AND ADMINISTRATIVE EXPENSES.
QUARTER QUARTER
ENDED PERCENT ENDED PERCENT
MARCH 31, OF TOTAL MARCH 31, OF TOTAL
1996 REVENUE 1997 REVENUE
---- ------- ---- --------
(in thousands except percentages)
General and administrative expenses $1,632 48% $3,502 22%
General and administrative expenses consist primarily of costs associated
with the finance and accounting and human resources departments, professional
expenses, rent and expenses, compensation related to certain executive
officers, depreciation associated with office equipment and bad debts. The
Company experienced an increase of 115% percent in general and administrative
expenses for the quarter ended March 31, 1997 as compared to the corresponding
quarter of the previous year, because it hired a number of senior management
personnel, moved into a new headquarters building and engaged professional
consultants to assist in the development of an administrative infrastructure
to accommodate anticipated increases in the number of members and employees.
However, as a percentage of total revenue, general and administrative expenses
declined to 22% from 48%, as such expenses grew at a slower rate than the
Company's revenues.
OPERATIONS AND MEMBER SUPPORT.
QUARTER QUARTER
ENDED PERCENT ENDED PERCENT
MARCH 31, OF TOTAL MARCH 31, OF TOTAL
1996 REVENUE 1997 REVENUE
---- ------- ---- --------
(in thousands except percentages)
Operations and customer support $2,098 61% $6,422 41%
Operations and member support expenses consist primarily of expenses
associated with technical support and member service to register and maintain
member accounts. These expenses have increased significantly since the
Company's inception. This trend reflects the costs associated with building a
customer service organization to support the Company's member base and
anticipated member growth. The Company intends to continue to increase
expenditures for operations and member support.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are beyond the Company's
control. These factors include the rates of, and costs associated with, new
member acquisition, member retention, capital expenditures and other costs
relating to the expansion of operations, including upgrading the Company's
systems and infrastructure, the timing and market acceptance of new and upgraded
service introductions, changes in the pricing policies of the Company and its
competitors, changes in operating expenses (including telecommunications costs),
personnel changes, the introduction of alternative technologies, the effect of
potential acquisitions, increased competition in the Company's markets and other
general economic factors. In addition, a significant portion of the Company's
expenses are fixed; therefore, the Company's operating margins are particularly
sensitive to fluctuations in revenues.
9
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LIQUIDITY AND CAPITAL RESOURCES
The Company has not generated net cash from operations since its
inception. The Company has funded its operations primarily through public and
private sales of equity securities, borrowings from third parties and capital
leases of equipment. The Company's operating activities used net cash of
approximately $2.8 million and $12.1 million during the quarters ended March
31, 1996 and 1997, respectively. During the quarter ended March 31, 1996, net
cash used in operations resulted primarily from net losses, partially offset
by increases in trade accounts payable. During the quarter ended March 31,
1997, net cash used in operations resulted from net losses, and decreases in
trade accounts payable.
Cash used by investing activities has consisted primarily of equipment
purchases for POP and network expansion. For the quarters ended March 31,
1996 and 1997, capital expenditures amounted to approximately $4.2 million
and $4.7 million, respectively. The Company estimates that capital
expenditures for 1997 will be approximately $20.2 million including network
enhancements, data center expansion, and procurement of telecommunication and
office equipment and furniture and fixtures. Where feasible, the Company will
seek to finance certain of these expenditures through capital leases.
Cash from financing activities provided the Company with approximately
$6.7 million and $26.0 million during the quarters ended March 31 1996 and,
1997, respectively. During the first quarter of 1996, the Company's financing
activities consisted of the private sale of debt and equity securities and
capital lease transactions, primarily for equipment. During the quarter ended
March 31, 1997 the Company effected its initial public offering. The offering
consisted of 2,000,000 shares of common stock issued at $13 per share. Net
proceeds to the Company were approximately $23.5 million. The holders of
$725,000 of the 10% Promissory Notes, including certain stockholders,
converted their indebtedness into 55,767 shares of Common Stock upon
consummation of the initial public offering. The Company repaid the $2,225,000
balance remaining of the 10% Promissory notes. At the completion of the
offering, 9,442,115 shares of Common Stock were outstanding. On February 13,
1997 the Underwriter exercised its over-allotment option and purchased 284,750
at the initial public offering price of $13.00. Net proceeds to the Company
were approximately $3.4 million. The Company raised $2.1 million and $2.7
million from the sale and leaseback of equipment during the quarters ended
December 31, 1996 and March, 31, 1997, respectively. The sale leaseback
transactions were recorded at cost, which approximates the fair market value
of the property and, therefore, no gains or losses were recorded. The property
remains on the books and continues to be depreciated. A financing obligation
representing the proceeds is recorded and reduced based upon payments under
the lease agreement. Under an agreement with another ISP, EarthLink obtained
a $5 million credit facility for customer access. The EarthLink accumulates
customer access charges, applies them against the credit facility and is
charged interest at a rate of prime plus 4% on the balance. The outstanding
balance due under the credit facility at March 31, 1997 was $623,000, leaving
$4,377,000 unused and available.
As of March 31, 1996 and 1997, the Company had cash and cash equivalents
of approximately $950,000 and $13.1 million, respectively, and negative
working capital of approximately $19.2 million and $2.3 million,
respectively.
The Company believes that available cash will be sufficient to meet the
Company's operating expenses and capital requirements through the end of this
fiscal year. However, the Company's capital requirements depend on numerous
factors, including the rate of market acceptance of the Company's services,
the Company's ability to maintain and expand its member base, the rate of
expansion of the Company's network infrastructure, the level of resources
required to expand the Company's marketing and sales organization,
information systems and research and development activities, the availability
of hardware and software provided by third-party vendors and other factors.
The timing and amount of such capital requirements cannot accurately be
predicted. If capital requirements vary materially from those currently
planned, the Company may require additional financing sooner than
anticipated. The Company has obtained a commitment from another ISP to make
available to EarthLink a $5 million rental facility for network equipment
owned or leased by the ISP for use by EarthLink. Rental charges, including
all costs such as service maintenance, will be agreed to in advance of the
commencement of the lease. The lease agreement
10
<PAGE>
will have a three year term with buyout provisions, and an effective rate not
more than prime plus 3% per annum. The Company has no other commitments for
any additional financing, and there can be no assurance that any such
commitments can be obtained on favorable terms, if at all. Any additional
equity financing may be dilutive to the Company's stockholders, and debt
financing, if available, may involve restrictive covenants with respect to
dividends, raising future capital and other financial and operational
matters. If the Company is unable to obtain additional financing as needed,
the Company may be required to reduce the scope of its operations or its
anticipated expansion, which could have a material adverse effect on the
Company.
11
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable
PART II
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are filed as part of this report:
EXHIBIT NO. DESCRIPTION
----------- --------------------------
11.1 Statement of computation of per earnings per share
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended March 31, 1997.
12
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SIGNATURES
Pursuant to the requirements 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 NETWORK, INC.
Date: _____________ /s/ C. GARRY BETTY
------------------------------------------
C. Garry Betty, President, Chief Executive
Officer and Director
Date: _____________ /s/ BARRY W. HALL
-------------------------------------------
Barry W. Hall, Vice President - Finance and
Administration and Chief Financial Officer
13
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EXHIBIT 11.1
EARTHLINK NETWORK, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
1996 1997
--------- ---------
Net loss................................. $ (4,869) $ (8,379)
--------- ---------
Weighted average shares outstanding
pursuant to SAB 83..................... 5,521
Weighted average shares outstanding
pursuant to APB 15..................... 9,094
Purchase of shares of Common
Stock below the expected IPO
price during fiscal 1996............. 19 -
Assumed exchange of warrants
for Common Stock..................... 235 -
Assumed exchange of options
for Common Stock..................... 363 -
--------- ---------
Weighted average shares outstanding...... 6,138 9,094
--------- ---------
--------- ---------
Net loss per share....................... $ (0.79) $ (0.92)
--------- ---------
--------- ---------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 13,149
<SECURITIES> 0
<RECEIVABLES> 2,097
<ALLOWANCES> 164
<INVENTORY> 397
<CURRENT-ASSETS> 18,017
<PP&E> 26,424
<DEPRECIATION> 6,037
<TOTAL-ASSETS> 39,106
<CURRENT-LIABILITIES> 20,374
<BONDS> 0
0
0
<COMMON> 98
<OTHER-SE> 55,308
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<INCOME-PRETAX> (8,379)
<INCOME-TAX> 0
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<EPS-PRIMARY> 0.92
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</TABLE>
