<PAGE>
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UNITED STATES
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, 1998
OR
[_] 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)
(626) 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 11,997,884 shares of Common Stock outstanding as of March 31, 1998.
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<PAGE>
EARTHLINK NETWORK, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
PART I
Item 1. Condensed Financial Statements and Supplementary Data ........... 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 11
Item 4. Submission of Matters to a Vote of Security Holders.............. 11
PART II
Item 6. Exhibits and Reports on Form 8-K................................. 11
<PAGE>
EARTHLINK NETWORK, INC.
CONDENSED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
----------------- --------------
(Audited) (Unaudited)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $16,450 $16,715
Restricted short-term investment 1,250 1,250
Accounts receivable, net 2,520 2,923
Prepaid expenses 1,109 1,904
Deferred transaction costs - 1,270
Other assets 753 427
------- -------
Total current assets 22,082 24,489
Other long-term assets 449 563
Property and equipment, net 23,398 26,465
Intangibles, net 958 575
------- -------
$46,887 $52,092
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $6,472 $10,128
Accrued payroll and related expenses 2,316 2,698
Other accounts payable and accrued liabilities 3,717 6,873
Current portion of capital lease obligations 7,112 7,692
Notes payable 9,387 5,585
Deferred revenue 3,590 4,385
------- -------
Total current liabilities 32,594 37,361
Long-term debt 8,218 8,257
------- -------
Total liabilities 40,812 45,618
Stockholders' equity:
Common stock 112 120
Additional paid-in capital 70,942 77,677
Warrants to purchase common stock 1,093 1,153
Accumulated deficit (66,072) (72,476)
------- -------
Total stockholders' equity 6,075 6,474
------- -------
$46,887 $52,092
------- -------
------- -------
</TABLE>
See notes to condensed financial statements
1
<PAGE>
EARTHLINK NETWORK, INC.
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1997 1998
------ ------
(Unaudited)
(in thousands, except
per share amounts)
<S> <C> <C>
Revenues:
Recurring revenues $14,086 $27,270
Other revenues 1,632 1,578
Incremental revenues - 392
-------- --------
Total revenues 15,718 29,240
Operating costs and expenses:
Cost of recurring revenues 7,955 14,506
Cost of other revenues 915 705
Sales and marketing 4,961 5,916
General and administrative 3,502 4,513
Operations and member support 6,422 9,540
-------- --------
23,755 35,180
-------- --------
Loss from operations (8,037) (5,940)
Interest income 165 223
Interest expense (507) (687)
-------- --------
Net loss $(8,379) $(6,404)
-------- --------
-------- --------
Basic and diluted net loss per share $ (0.92) $ (0.56)
-------- --------
-------- --------
Weighted average shares outstanding 9,094 11,373
-------- --------
-------- --------
</TABLE>
See notes to condensed financial statements
2
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EARTHLINK NETWORK, INC.
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1997 1998
------- ------
(Unaudited)
(in thousands)
<S> <C> <C>
Net cash (used in) provided by operating activities: $(12,101) $3,648
--------- --------
Cash flows from investing activities:
Purchases of property and equipment (4,786) (5,664)
Purchase of intangible assets - (9)
Deferred transaction costs - (1,270)
--------- --------
Net cash (used in) provided by investing activities (4,786) (6,943)
--------- --------
Cash flows from financing activities:
(Payment of) proceeds from notes payable (2,225) 1,198
Proceeds from capital lease obligations 2,783 2,513
Principal payments under capital lease obligations (886) (1,894)
Proceeds from initial public offering 26,371 -
Proceeds from stock options and warrants exercised - 1,743
--------- --------
Net cash provided by financing activities 26,043 3,560
--------- --------
Net increase in cash and cash equivalents 9,156 265
Cash and cash equivalents, beginning of period 3,993 16,450
--------- --------
Cash and cash equivalents, end of period $13,149 $16,715
--------- --------
--------- --------
</TABLE>
See notes to condensed financial statements
3
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EARTHLINK NETWORK, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed financial statements of EarthLink Network, Inc.
("EarthLink" or the "Company") for the three months ended March 31, 1998 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, 1997 contained in the Company's Annual Report
on Form 10-K, as amended, 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, 1998 and the results of operations and the cash flows for the
three month periods ended March 31, 1997 and 1998. The results of operations
for the three months ended March 31, 1998 are not necessarily indicative of
the results for the entire year ending December 31, 1998.
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. NET LOSS PER SHARE
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share" ("EPS"). SFAS No. 128 requires a dual
presentation of basic and diluted EPS. Basic EPS represents the weighted
average number of shares divided into net income during a reported period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. However, the Company has not included potential common stock in the
calculation of EPS as such inclusion would have an anti-dilutive effect.
3. INCENTIVE STOCK OPTION PLAN
In February 1998, the Company's 1995 Incentive Stock Option Plan was
amended to increase the number of options available for grant under the plan
from 1,250,000 to 1,850,000.
4. CONVERSION OF UUNET NOTE
On March 31, 1998, the Company's $5.0 million convertible note payable
to UUNET Technologies, Inc., and the related accrued interest, were converted
into 391,515 shares of Common Stock, per the terms of the convertible note,
at a conversion price of $12.88 per share.
4
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
5. STRATEGIC ALLIANCE WITH SPRINT CORPORATION
On February 11, 1998, the Company announced its long-term strategic
alliance with Sprint Corporation. In connection with this alliance, Sprint
has tendered to purchase approximately 1.25 million shares of EarthLink's
Common Stock at $45 per share. Upon closing of this tender offer, EarthLink,
by virtue of a merger with a wholly-owned acquisition subsidiary of Dolphin,
Inc., will become a wholly-owned subsidiary of Dolphin, Inc. and the
outstanding shares of Common Stock of EarthLink will be exchanged on a
one-for-one basis with shares of common stock of Dolphin, Inc. Sprint will
also receive approximately 4.1 million shares of Dolphin, Inc. Series A
Convertible Preferred Stock, par value $0.01 per share, in exchange for (i)
transfer to the Company of Sprint's approximately 130,000 Sprint Internet
Passport subscribers, (ii) a Marketing and Distribution Agreement including a
commitment by Sprint to deliver a minimum of 150,000 new subscribers per year
for five years through its own channels, the right to be Sprint's exclusive
provider of consumer Internet access services for at least ten years, and the
right to use Sprint's brand and distribution network for at least ten years,
(iii) aggregate cash consideration of approximately $24 million, (iv) a
credit facility of up to $100 million in the form of convertible senior debt
and, (v) the exclusive right to use certain ports within Sprint's high-speed
data network for four years. Dolphin, Inc. was formed solely for the
purposes of facilitating this transaction and upon consummation thereof
EarthLink will change its name to EarthLink Operations, Inc. and Dolphin,
Inc. will change its name to EarthLink Network, Inc.
5
<PAGE>
ITEM 2. 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 a leading
Internet service provider ("ISP") that provides reliable, nationwide Internet
access and related value-added services to its individual and business
members, helping them to derive meaningful benefits from the extensive
resources of the Internet. The Company has experienced rapid member growth
and has become one of the world's largest ISPs by enhancing its members'
Internet experience through simple, rapid and reliable access to the
Internet, high quality service and member support and enhanced services.
EarthLink provides its members with a core set of features through its
standard Internet service, which provides unlimited access to the Internet
and several related value-added services for a flat monthly fee of $19.95. In
addition, the Company offers a variety of premium services to both its
individual and business members. Recurring revenues, which are generally
paid for in advance with credit cards, consist of monthly fees charged to
members for Internet access and other ongoing services. Access fees are
recognized ratably over the period services are provided. Other revenues
generally represent one-time, non-refundable set up fees and are recorded as
earned. Incremental revenues are derived from leveraging the Company's member
base, including online advertising, commissions from electronic commerce, and
sales of certain products.
Cost of recurring revenues principally includes telecommunications costs
and depreciation expense on equipment used in network operations for ongoing
member services. Included in telecommunications costs are fees paid to UUNET
Technologies, Inc. ("UUNET") and PSINet, Inc. ("PSINet") for local access to
their respective nationwide systems of points of presence ("POPs"). Cost of
other revenues principally includes expenses related to the registration of
new members, such as bounties paid to third parties for generating new
members for the Company and licensing fees for software.
The Company has experienced net losses since it commenced operations. As
of March 31, 1998, the Company had an accumulated deficit of approximately
$72.5 million (exclusive of $1.3 million of losses incurred from inception
through June 19, 1995 which have been reclassified from accumulated deficit
to common stock as a result of the Company's conversion from S Corporation to
C Corporation status). The Company has noted a trend of continuing
improvement in net loss and earnings before interest, taxes, depreciation and
amortization ("EBITDA"). EBITDA losses were $6.2 million and $3.0 million,
respectively, for the quarters ended March 31, 1997 and 1998. The improvement
in EBITDA was primarily due to significant member growth and the Company's
ability to take advantage of economies of scale to control costs and
expenses. EBITDA is not determined in accordance with generally accepted
accounting principles, is not indicative of cash used by operating activities
and should not be considered in isolation from, an alternative to, or more
meaningful than measures of performance determined in accordance with
generally accepted accounting principles. The Company expects that it will
continue to incur net losses as it continues to expend substantial resources
on sales and marketing to rapidly increase its member base. There can be no
assurance that the Company will achieve or sustain profitability or positive
cash flow from its operations.
On February 10, 1998, the Company and Sprint entered into a long-term
strategic alliance. In connection with this alliance, Sprint tendered to
purchase 1.25 million shares of Common Stock at $45 per share (the "Offer").
The Company expects the closing of this offering in June of 1998, upon
which, EarthLink, by virtue of a merger with a wholly-owned acquisition
subsidiary of Dolphin, Inc., will become a wholly-owned subsidiary of
Dolphin, Inc. and the outstanding shares of Common Stock of EarthLink will be
exchanged on a one-for-one basis with shares of common stock of Dolphin, Inc.
Sprint will receive approximately 4.1 million shares of Dolphin, Inc. Series
A Convertible Preferred Stock, par value $0.01 per share, in exchange for (i)
transfer to the Company of Sprint's approximately 130,000 Sprint Internet
Passport subscribers, (ii) a Marketing and Distribution Agreement including a
commitment by Sprint to deliver a minimum of 150,000 new subscribers per year
for five years through its own channels, the right to be
6
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Sprint's exclusive provider of consumer Internet access services for at least
ten years, and the right to use Sprint's brand and distribution network for
at least ten years, (iii) aggregate cash consideration of approximately $24
million, (iv) a credit facility of up to $100 million in the form of
convertible senior debt and, (v) the exclusive right to use certain ports
within Sprint's high-speed data network for four years. Dolphin, Inc. was
formed solely for the purposes of facilitating this transaction and upon
consummation thereof EarthLink will change its name to EarthLink Operations,
Inc. and Dolphin, Inc. will change its name to EarthLink Network, Inc.
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues
represented by certain items on the Company's statements of operations for the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
-------- -------
<S> <C> <C>
REVENUES:
Recurring revenues 90% 93%
Other revenues 10 6
Incremental revenues -- 1
---- ----
Total revenues 100% 100%
Operating costs and expenses:
Cost of recurring revenues 50 50
Cost of other revenues 6 2
Sales and marketing 32 20
General and administrative 22 15
Operations and member support 41 33
---- ----
151% 120%
---- ----
Loss from operations (51%) (20%)
Interest expense (3) (3)
Interest income 1 1
---- ----
Net loss (53%) (22%)
---- ----
---- ----
EBITDA (39%) (10%)
---- ----
---- ----
</TABLE>
RECURRING REVENUES
The Company experienced substantial growth in revenues for the quarter
ended March 31, 1998 as compared to the corresponding period of 1997.
Recurring revenues increased 94% from $14.1 million in the quarter ended
March 31, 1997 to $27.3 million in the quarter ended March 31, 1998 due to a
significant increase in the Company's member base.
7
<PAGE>
OTHER REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
PERCENT PERCENT
OF OTHER OF OTHER
1997 REVENUES 1998 REVENUES
------ -------- ------- ---------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
Dial-up set up fees $1,130 69% $ 828 52%
Other set up fees and other revenues 502 31 750 48
------ ---- ------ ---
Total other revenues $1,632 100% $1,578 100%
------ ---- ------ ---
------ ---- ------ ---
</TABLE>
Other revenues decreased 3% for the quarter ended March 31, 1998 as
compared to the corresponding period of 1997 primarily as a result of the
Company waiving set up fees for dial-up members acquired through certain
affinity marketing partnerships due to market pressures. This resulted in a
decrease in dial-up set up fees collected in the quarter ended March 31, 1998
as compared to the corresponding period of 1997. The Company expects this
trend to continue for dial-up set up revenue. The decline in the dial-up set
up fees was offset by increases in other set up fees and other revenues as a
result of increased sales of premium services.
COST OF RECURRING REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
PERCENT OF PERCENT OF
RECURRING RECURRING
1997 REVENUES 1998 REVENUES
------ ---------- ------- ----------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
Recurring revenues $14,086 100% $27,270 100%
Cost of recurring revenues 7,955 56 14,506 53
</TABLE>
Cost of recurring revenues increased 82% during the quarter ended March
31, 1998 as compared to the corresponding period of 1997, primarily due to
the increase in the Company's member base. Cost of recurring revenues was 53%
of recurring revenues for the quarter ended March 31, 1998 as compared to 56%
for the corresponding period of 1997. The decrease in the cost of recurring
revenues as a percentage of recurring revenues was primarily due to the
Company's ability to more effectively manage and thereby reduce
communications costs per member and to exploit economies of scale to reduce
per member costs as the total member base expanded.
COST OF OTHER REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
PERCENT PERCENT
OF OTHER OF OTHER
1997 REVENUES 1998 REVENUES
------ ---------- ------- ---------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
Dial-up set up fees $1,130 69% $ 828 52%
Other set up fees and other revenues 502 31 750 48
------ ---- ------ ----
Total other revenues $1,632 100% $1,578 100%
------ ---- ------ ----
------ ---- ------ ----
</TABLE>
Cost of other revenues decreased $210,000 or 23% during the quarter
ended March 31, 1998 as compared to the corresponding period of 1997. The
decrease was primarily due to a reduction in royalty expense occasioned by
the renewal of various contracts for licensed software under more favorable
terms.
8
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SALES AND MARKETING
Sales and marketing expenses consist primarily of advertising, sales
commissions, salaries and the cost of promotional material. Sales and
marketing expenses increased 18% from $5.0 million during the quarter ended
March 31, 1997 to $5.9 million in the quarter ended March 31, 1998. The
increase was primarily due to increased emphasis on marketing the Company's
services, expanding sales and marketing efforts on a nationwide basis,
increased sales commissions and increased marketing personnel headcount. The
Company does not defer sales, marketing or other direct costs associated with
the acquisition of members. These costs are expensed as incurred.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of costs
associated with the accounting and human resources departments, professional
expenses, rent, bad debt and compensation. General and administrative
expenses increased 29%, from $3.5 million in the quarter ended March 31, 1997
to $4.5 million in the same period of 1998, due to increases in payroll,
rent, depreciation expenses and credit card fees. The rise in payroll costs
was primarily due to growth in headcount. The numbers of general and
administrative employees as of March 31, 1997 and 1998 were 96 and 115,
respectively. In October 1997, the Company occupied an additional 45,000
square feet of its existing corporate headquarters facility, and monthly rent
increased from $45,000 to $73,000. The increase in depreciation expense was
due to the acquisition of office equipment and the build-out of leasehold
improvements. The increase in credit card processing fees from $350,000 to
$619,000 was due to the increase in the Company's member base.
OPERATIONS AND MEMBER SUPPORT
Operations and member support expenses consist primarily of costs
associated with technical support and member service, as well as costs to
register and maintain member accounts. Operations and member support expenses
increased $3.1 million or 49% from $6.4 million in the quarter ended March
31, 1997 to $9.5 million in the quarter ended March 31, 1998, reflecting
management's focus on retaining existing members by providing superior
services and devoting significant resources to expanding technical support
and network operations capabilities. The number of employees engaged in
operations and member support activities was 420 and 718 at March 31, 1997
and 1998, respectively. The Company also continued to make significant
investments in improving its customer services functions by investing in
training programs, hardware and software. The Company intends to continue to
invest in this area in the future.
INTEREST EXPENSE
Interest expense increased from $507,000 in the quarter ended March 31,
1997 to $687,000 in the quarter ended March 31, 1998. The increase in
interest expense was primarily due to increased borrowings and capital lease
obligations which were incurred to finance the Company's network
infrastructure and capital improvements.
INTEREST INCOME
The increase in interest income from $165,000 in the quarter ended March
31, 1997 to $223,000 in the quarter ended March 31, 1998 was primarily due to
an increase in average cash balances available for investment.
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), 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
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities used was $12.1 million during the
quarter ended March 31, 1997. Cash provided by operating activities was $3.6
million during the quarter ended March 31, 1998, primarily as a result of the
increase in accounts payable and accrued liabilities of $7.2 million relating
to network service costs.
Cash used in investing activities has consisted primarily of capital
equipment purchases for expansion. Total capital expenditures amounted to
approximately $4.8 million and $5.7 million for the quarters ended March 31,
1997 and 1998, respectively. During the quarter ended March 31, 1998, the
Company incurred approximately $1.3 million in specific incremental
acquisition costs directly attributable to the Sprint Transaction.
Cash provided by financing activities was approximately $26.0 million
and $3.6 million during the quarters ended March 31, 1997 and 1998,
respectively. In the first quarter of 1997, the Company sold 2,284,750 shares
of Common Stock in its initial public offering. Net proceeds from the
offering were approximately $26.4 million. Lease proceeds for the quarter
ended March 31, 1998 were $2.5 million. The sale leaseback transactions are
recorded at cost, which approximates the fair market value of the property
and, therefore, no gains or losses are recorded. The property continues to be
depreciated by the Company. A financing obligation representing the proceeds
is recorded and reduced based upon payments under the lease agreement.
In connection with an amendment of its agreement with UUNET in October
1996, the Company issued a $5.0 million, one-year convertible promissory note
to UUNET. This note, along with accrued interest, was converted into 391,515
shares of Common Stock at $12.88 per share on March 31, 1998 per the terms of
the note.
As of March 31, 1998, the Company had cash and cash equivalents of
approximately $16.7 million. The Company believes that available cash will be
sufficient to meet the Company's operating expenses and capital requirements
for at least the next 12 months. In addition, as a result of the Sprint
Transaction (assuming the Sprint Transaction closes), EarthLink will obtain
approximately $24 million in cash and have available a $25 million credit
facility in the form of convertible debt financing, increasing to $100
million over a three-year period, at an interest rate of 6% per annum. 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 programs, 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 no commitments for any
additional financing other than the $100 million line of credit from Sprint
(assuming the Sprint Transaction closes), 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 and may otherwise limit the Company's ability to raise
additional equity capital. 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.
"SAFE HARBOR" STATEMENT
The following "Safe Harbor Statement" is made pursuant to the Private
Securities Litigation Reform Act of 1995. Certain of the Statements
contained in the body of this Report are forward-looking statements (rather
than historical facts) that are subject to risks and uncertainties that could
cause actual results to differ materially from those described in the
forward-looking statements. With respect to such forward-looking statements,
the Company seeks the protections afforded by the Private Securities
Litigation Reform Act of 1995. These risks
10
<PAGE>
include, without limitation, (1) that the Company will not retain or grow its
member base, (2) that the Company will fail to be competitive with existing
and new competitors, (3) that the Sprint Transactions will fail to close, (4)
that if the Sprint Transactions close, they will not be as beneficial to the
Company as management anticipates, (5) that the Company will not be able to
sustain its current growth, (6) that the Company will not adequately respond
to technological developments impacting the Internet, and (7) that needed
financing will not be available to the Company if and as needed. This list
is intended to identify certain of the principal factors that could cause
actual results to differ materially from those described in the
forward-looking statements included elsewhere herein. These factors are not
intended to represent a complete list of all risks and uncertainties inherent
in the Company's business, and should be read in conjunction with the more
detailed cautionary statements included in the Company's Report on Form
10-K, as amended, for fiscal 1997 as well as the Company's other publicly
filed reports and documents.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 19, 1998 the Company held a special meeting of its
stockholders to approve a proposal to amend its 1995 Stock Option Plan to
increase the number of shares authorized for grant thereunder from 1,250,000
to 1,850,000. The proposal passed by a vote of 8,546,034 votes for and
70,657 against the matter. There were 19,562 abstentions and no broker
non-votes.
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
2.1 Investment Agreement dated as of February 10, 1998, among
Sprint Corporation, a Kansas corporation, Sprint
Communications Company L.P., a Delaware limited
partnership, Dolphin, Inc., a Delaware corporation, Dolphin
Sub, Inc., a Delaware corporation, and EarthLink Network,
Inc., a Delaware corporation (incorporated by reference to
Exhibit 2.1 to the Company's Form 8-K filed on February 10,
1998).
10.1 Governance Agreement, dated as of February 10, 1998, among
Sprint Corporation, a Kansas corporation, Sprint
Communications Company L.P., a Delaware limited
partnership, Dolphin, Inc., a Delaware corporation, and
EarthLink Network, Inc., a Delaware corporation
(incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K filed on February 10, 1998).
10.2 Proposed form of Certificate of Designation, Preferences
and Rights of Series A Convertible Preferred Stock of
Dolphin, Inc. (incorporated by reference to Exhibit 10.2 to
the Company's Form 8-K filed on February 10, 1998).
10.3 Credit Agreement, dated as of February 10, 1998, between
Dolphin, Inc., a Delaware corporation, and EarthLink
Network, Inc., a Delaware corporation, as Borrowers, and
Sprint Corporation, a Kansas corporation, as Lender
(incorporated by reference to Exhibit 10.3 to the Company's
Form 8-K filed on February 10, 1998).
11
<PAGE>
10.4 First Amendment to Employment Agreement between the Company
and Charles G. Betty (incorporated by reference to Exhibit
10.9 (b) to the Company's Report on Form 10K for the fiscal
year ended December 31, 1997)
10.5 Second Amendment to Employment Agreement between the
Company and Charles G. Betty (incorporated by reference to
Exhibit 10.9 (c) to the Company's Report on Form 10K for
the fiscal year ended December 31, 1997)
10.6 Marketing and Distribution Agreement, dated as of February
10, 1998 among Dolphin, Inc., EarthLink Network, Inc.,
Sprint Corporation and Sprint Communications Company L.P.
(incorporated by reference to Exhibit 10.26 of the
Registration Statement on Form S-4 of Dolphin, Inc., File
No. 333-52507)
10.7 Registration Rights Agreement, dated as of February 10, 1998,
among Dolphin, Inc., a Delaware corporation, Sprint
Corporation, a Kansas corporation, and Sprint
Communications Company L.P., a Delaware limited partnership
(incorporated by reference to Exhibit 99.1 to the Company's
Form 8-K filed on February 10, 1998).
10.8 Stockholders' Agreement, dated as of February 10, 1998,
among EarthLink Network, Inc., a Delaware corporation,
Dolphin, Inc., a Delaware corporation, Sprint Corporation,
a Kansas corporation, Sprint Communications Company L.P., a
Delaware limited partnership, and the persons identified on
Schedule I thereto (incorporated by reference to Exhibit
99.2 to the Company's Form 8-K filed on February 10, 1998).
10.9 Agreement to Vote Stock, dated as of February 10, 1998,
among the Granting Stockholders named on Schedule A
thereto, Sprint Corporation, a Kansas corporation and
Sprint Communications Company L.P., a Delaware limited
partnership (incorporated by reference to Exhibit 99.3 to
the Company's Form 8-K filed on February 10, 1998).
10.10 Agreement to Vote and Tender Stock, dated as of February
10, 1998, among the Granting Stockholders named on Schedule
A thereto, Sprint Corporation, a Kansas corporation and
Sprint Communications Company, L.P., a Delaware limited
partnership (incorporated by reference to Exhibit 99.4 to
the Company's Form 8-K filed on February 10, 1998
describing the Sprint related transactions.
27.1 Financial Data Schedule
12
<PAGE>
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: May 15, 1998 /s/ Charles G. Betty
------------ --------------------------------------------
Charles G. Betty, President, Chief Executive
Officer and Director
Date: May 15, 1998 /s/ Grayson L. Hoberg
------------ --------------------------------------------
Grayson L. Hoberg, Vice President - Finance
and Administration and Chief Financial
Officer
Date: May 15, 1998 /s/ Richard A. Quiroga
------------ --------------------------------------------
Richard A. Quiroga, Vice President,
Corporate Controller
13
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 16,715
<SECURITIES> 0
<RECEIVABLES> 3,088
<ALLOWANCES> (165)
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<CURRENT-ASSETS> 24,489
<PP&E> 41,829
<DEPRECIATION> 15,364
<TOTAL-ASSETS> 52,092
<CURRENT-LIABILITIES> 37,361
<BONDS> 0
0
0
<COMMON> 120
<OTHER-SE> 6,354
<TOTAL-LIABILITY-AND-EQUITY> 52,092
<SALES> 0
<TOTAL-REVENUES> 29,240
<CGS> 0
<TOTAL-COSTS> 15,211
<OTHER-EXPENSES> 19,969
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<INTEREST-EXPENSE> 687
<INCOME-PRETAX> (6,404)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,940)
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<NET-INCOME> (6,404)
<EPS-PRIMARY> (0.56)
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