<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): June 5, 1998
EARTHLINK NETWORK, INC.
------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 000-20799 58-2389244
- ------------------------ ------------------------ ---------------------
(State of Incorporation) (Commission File Number) (IRS Employer
Identification No.)
3100 New York Dr. Pasadena, California 91107
--------------------------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: 626-296-2400
<PAGE>
Item 5. Other Events.
On February 10, 1998, EarthLink Network, Inc. (the "Company")
established a broad strategic relationship (the "Strategic Alliance") with
Sprint Corporation ("Sprint") in the area of consumer Internet access and
related services, pursuant to certain related agreements and documents, as
previously reported in the Current Report on Form 8-K filed by the Company on
February 17, 1998.
On June 5, 1998, Sprint consummated a tender offer for 1.25 million
shares of the Company's Common Stock at a price per share of $45 net in cash
to each seller (the "Offer"). Immediately following the closing of the
Offer, Sprint received approximately 4.1 million shares of the Company's
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) aggregate cash consideration of
approximately $24 million and (iii) the exclusive right to use certain ports
within Sprint's high-speed data network for four years. EarthLink and Sprint
also entered into a Marketing and Distribution Agreement which includes a
commitment by Sprint to deliver a minimum of 150,000 new subscribers per year
for five years through its own channels, EarthLink's 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. Sprint has also provided EarthLink with a credit facility of
up to $25 million (increasing to $100 million over three years) in the form
of convertible senior debt (collectively, the "Sprint Transaction").
Immediately following consummation of the Sprint Transaction and the
Company's recently completed secondary public stock offering, Sprint owned
Common Stock and Series A Convertible Preferred Stock constituting
approximately 27% of the Company's capital stock on a fully diluted basis
(assuming acceleration of certain dividend rights and the exercise by Sprint
of certain preemptive rights) and approximately 9% of the Company's voting
stock.
In connection with the Sprint Transaction, a newly-formed subsidiary of
the Company was merged with and into the former EarthLink Network, Inc. (the
"Merger"), pursuant to which (i) the former EarthLink became a wholly-owned
subsidiary of the Company and (ii) each outstanding share of former EarthLink
common stock was converted into one share of common stock of the Company.
EarthLink Operations, Inc. ("EarthLink Operations"), the corporation
surviving the Merger, is now a wholly-owned subsidiary of the Company.
As a result of the Merger, the Company is the successor registrant to
EarthLink Operations (previously known as EarthLink Network, Inc.), and shall
for all purposes be the registrant under the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended.
On July 20, 1998, the Company completed a two-for-one stock split,
effected in the form of a stock dividend of one additional share for each
share outstanding on the record date. The accompanying pro forma financial
information has been adjusted to give retroactive effect to the stock split.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
give effect to the acquisition by the Company of the Sprint Internet Passport
business ("SIP") of Sprint in a transaction accounted for as a purchase. The
unaudited pro forma balance sheet is based on the balance sheet of the
Company as of December 31, 1997 and the assets acquired and liabilities
assumed from SIP and Sprint and has been prepared to reflect the acquisition by
the Company of SIP as of March 31, 1998. The unaudited statements of operations
are based on the statements of operations of the Company and the statements of
revenues and direct expenses of SIP appearing elsewhere in this Report, and
combine the results of operations of the Company and of SIP for the year ended
December 31, 1997 and the quarter ended March 31, 1998 as if the acquisition
occurred on January 1, 1997. These unaudited pro forma financial statements
should be read in conjunction with the historical statement of revenues and
direct expenses and notes thereto of SIP and the historical financial statements
and notes thereto of the Company, both included elsewhere in this Report.
The historical statement of revenues and direct expenses of SIP are not
necessarily indicative of the financial condition or results of operations of
such operations on a prospective basis because of the omission of various
operating expenses from such presentation and the change in the nature and scope
of such business as it will be operated by the Company.
The purchase price paid by the Company consisted of approximately 4.1
million shares of Series A Convertible Preferred Stock, which has been valued at
$135,000,000. In exchange for the Series A Convertible Preferred Stock, the
Company obtained SIP's customer base of approximately 130,000 members, cash of
$23,750,000 and access to Sprint's high-speed data network. Sprint has further
provided the Company access to $25 million (increasing to $100 million over a
three year period) in convertible debt financing, and has entered into a
Marketing and Distribution Agreement with the Company. The Company acquired no
other assets of SIP or Sprint. Accordingly, the purchase price was allocated to
the cash and intangible assets acquired. The excess of the purchase price over
the fair value of the assets acquired was allocated to goodwill. The final
allocation may differ from that used in the unaudited pro forma condensed
combined financial statements. The acquisition was accounted for using the
purchase method.
Sprint began offering Internet access in the fourth quarter of 1996 and
reported this operation within its Emerging Businesses Segment (the "Group").
Sprint maintained the financial information relative to the Internet subscribers
in the financial statements for the Group. Sprint maintained revenue and direct
operating expense information separately within the Group. Direct operating
expenses include cost of services and products, selling, general and
administrative expense, and depreciation expense. Sprint, however, did not
separately maintain and account for other costs and expenses to operate this
business. The Company is unable to determine or estimate these costs on a
historical and pro forma basis. In addition, Sprint did not separately maintain
and account for all assets used in the individual business. Such assets,
primarily network related, are recorded in the other businesses of Sprint and
used by the other divisions of Sprint in addition to the Group.
2
<PAGE>
EARTHLINK NETWORK, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------------------
ASSETS
ACQUIRED AND
EARTHLINK LIABILITIES PRO FORMA
NETWORK, INC. ASSUMED COMBINED
------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents....................................... $16,715 $ 23,750(a) $ 40,465
Restricted short-term investment................................ 1,250 1,250
Accounts receivable, net........................................ 2,923 2,923
Prepaid expenses................................................ 1,904 1,904
Deferred transaction costs...................................... 1,270 1,270
Other assets.................................................... 427 427
------------- ------------- -----------
Total current assets.......................................... 24,489 23,750 48,239
Other long-term assets.......................................... 563 563
Property and equipment, net..................................... 26,465 26,465
Intangibles, net................................................ 575 119,718(b) 120,293
------------- ------------- -----------
$52,092 $143,468 $195,560
------------- ------------- -----------
------------- ------------- -----------
Trade accounts payable.......................................... $10,128 $10,128
Accrued payroll and related expenses............................ 2,698 2,698
Other accounts payable and accrued liabilities.................. 6,873 $8,468(c) 15,341
Current portion of capital lease obligations.................... 7,692 7,692
Notes payable................................................... 5,585 5,585
Deferred revenue................................................ 4,385 4,385
------------- ------------- -----------
Total current liabilities..................................... 37,361 8,468 45,829
Long-term debt.................................................. 8,257 8,257
------------- ------------- -----------
Total liabilities......................................... 45,618 8,468 54,086
------------- ------------- -----------
Stockholders' equity
Preferred stock............................................... 41(d) 41
Common stock.................................................. 120 120
Additional paid-in capital.................................... 77,677 134,959(d) 212,636
Warrants to purchase common stock............................. 1,153 1,153
Accumulated deficit........................................... (72,476) (72,476)
------------- ------------- -----------
Total stockholders' equity................................ 6,474 135,000 141,474
------------- ------------- -----------
$52,092 $143,468 $195,560
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
3
<PAGE>
EARTHLINK NETWORK, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET
Pro forma adjustments are as follows:
a. This adjustment reflects the cash acquired of $23,750,000.
b. This adjustment reflects the fair value of the intangible assets acquired,
consisting of a customer base valued at $65,000,000, intangible assets
related to Sprint's provision of customers and the co-branding feature of
the Marketing and Distribution Agreement valued at $20,000,000 and the
excess of consideration over the fair value of assets acquired totalling
$34,718,000.
c. Represents incremental acquisition costs directly attributable to the
transactions, consisting of primarily investment banking, legal and
accounting professional fees.
d. These adjustments reflect the issuance of approximately 4.1 million shares
of Convertible Preferred Stock in connection with the transactions
contemplated by the Investment Agreement at estimated fair value. The Series
A Convertible Preferred Stock will pay dividends for the first five years in
the form of increases in its Liquidation Value ("Liquidation Accretion
Dividends"), at a rate of 3% of the Liquidation Value. Thereafter, the
Series A Convertible Preferred Stock will pay a cash dividend of 3% for 15
years increasing from 8% to 12% in years 21 through 23.
4
<PAGE>
EARTHLINK NETWORK, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SPRINT
EARTHLINK INTERNET
NETWORK, INC. PASSPORT PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
------------- ---------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Recurring revenues.................................... $ 72,943 $ 72,943
Other revenues........................................ 6,231 6,231
Net operating revenues................................ $ 14,489 14,489
------------- ---------- ------------ ------------
Total revenues...................................... 79,174 14,489 93,663
------------- ---------- ------------ ------------
Operating costs and expenses:
Cost of recurring revenues............................ 37,974 37,974
Cost of other revenues................................ 3,401 3,401
Cost of services...................................... 51,313 51,313
Sales and marketing................................... 21,020 21,020
General and administrative............................ 14,333 69,728(a) 84,061
Operations and member support......................... 30,900 30,900
Selling, general and administrative................... 13,099 13,099
Depreciation.......................................... 6,070 (6,070)(b) --
Other................................................. 3,404 3,404
------------- ---------- ------------ ------------
Total operating costs and expenses.................. 107,628 73,886 63,658 245,172
------------- ---------- ------------ ------------
Loss from operations.................................. (28,454) (59,397) (63,658) (151,509)
Interest expense...................................... (2,099) (2,099)
Interest income....................................... 637 637
------------- ---------- ------------ ------------
Net loss.......................................... (29,916) (59,397) (63,658) (152,971)
Deductions for dividends on convertible preferred
stock................................................. 9,355(c) 9,355
------------- ---------- ------------ ------------
Net loss attributable to common stockholders........ $ (29,916) $ (59,397) $ (73,013) $ (162,326)
------------- ---------- ------------ ------------
------------- ---------- ------------ ------------
Basic and diluted net loss per share.................. $ (1.50) $ (8.12)
------------- ------------
------------- ------------
Weighted average shares outstanding................... 20,002 20,002(d)
------------- ------------
------------- ------------
</TABLE>
5
<PAGE>
EARTHLINK NETWORK, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
Pro Forma adjustments are as follows:
a. This entry reflects the amortization of intangible assets as follows:
customer base amortized over 18 months, the Marketing and Distribution
Agreement amortized over five and ten years, which are the life of the
portion of the contract related to Sprint's provision of customers and the
overall contract life relative to the co-branding feature, respectively, and
the excess of purchase price over net assets acquired amortized over 18
months. Additional costs to provide service to the acquired members are not
considered to be material.
b. The Company acquired no depreciable assets of SIP. This adjustment
eliminates the depreciation expense recorded by SIP.
c. This adjustment reflects the Liquidation Dividends based upon a 3%
Liquidation Value accretion dividend ($3,736,000), the accretion of a
dividend related to the beneficial conversion feature in accordance with
EITF Topic No. D-60 based upon the rate at which the preferred stock becomes
convertible ($5,619,000).
d. Pro forma share data are based on the number of shares of the Company's
Common Stock and common equivalent shares that would have been
outstanding had SIP been acquired on January 1, 1997, but excludes any
shares purchased by Sprint in the Offer. As of December 31, 1997,
EarthLink had reserved 3,377,222 shares for issuance upon the exercise of
outstanding employee stock options, 783,030 shares for issuance pursuant
to the Convertible Note issued to UUNET Technologies, Inc. and 1,775,294
reserved for issuance upon exercise of outstanding warrants. These common
stock equivalents and 4.1 million shares of the Series A Convertible
Preferred Stock have been excluded from the calculation as their effect
is antidilutive. The pro forma per share data also reflects the exchange
on a one-for-one basis of common stock between the former EarthLink and
the new EarthLink upon consummation of the Merger.
6
<PAGE>
EARTHLINK NETWORK, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SPRINT
EARTHLINK INTERNET
NETWORK, INC. PASSPORT PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
------------- ----------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Recurring revenues....................................... $27,270 $ 27,270
Other revenues........................................... 1,578 1,578
Incremental revenues..................................... 392 392
Net operating revenues................................... 6,259 6,259
------------- ----------- ------------ -----------
Total revenues......................................... 29,240 6,259 35,499
------------- ----------- ------------ -----------
Operating costs and expenses:
Cost of recurring revenues............................... 14,506 14,506
Cost of other revenues................................... 705 705
Cost of services......................................... 9,813 9,813
Sales and marketing...................................... 5,916 5,916
General and administrative............................... 4,513 17,432(a) 21,945
Operations and member support............................ 9,540 9,540
Selling, general and administrative...................... 2,155 2,155
Depreciation............................................. 2,146 (2,146)(b) --
Other.................................................... 198 198
------------- ----------- ------------ -----------
Total operating costs and expenses..................... 35,180 14,312 15,286 64,778
------------- ----------- ------------ -----------
Loss from operations..................................... (5,940) (8,053) (15,286) (29,279)
Interest expense......................................... (687) (687)
Interest income.......................................... 223 223
------------- ----------- ------------ -----------
Net loss............................................. (6,404) (8,053) (15,286) (29,743)
Deductions for dividends on convertible preferred stock.... 2,006(c) 2,006
------------- ----------- ------------ -----------
Net loss attributable to common stockholders........... $(6,404) $(8,053) $(17,292) $(31,749)
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
Basic and diluted net loss per share..................... $ (0.28) $ (1.40)
------------- -----------
------------- -----------
Weighted average shares outstanding...................... 22,746 22,746(d)
------------- -----------
------------- -----------
</TABLE>
7
<PAGE>
EARTHLINK NETWORK, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS (Continued)
For the Three Months Ended March 31, 1998
(Unaudited)
Notes to Pro Forma Combined Statement of Operations
Pro Forma adjustments are as follows:
(a) This entry reflects the amortization of intangible assets as follows:
customer base amortized over 18 months, the Marketing and Distribution
Agreement amortized over five and ten years, which are the life of the
portion of the contract related to Sprint's provision of customers and
the overall contract life relative to the co-branding feature,
respectively, and the excess of purchase price over net assets acquired
amortized over 18 months. Additional costs to provide service to the
acquired members are not considered to be material.
(b) The Company acquired no depreciable assets of SIP. This adjustment
eliminates the depreciation expense recorded by SIP.
(c) This adjustment reflects the Liquidation Dividends based upon a 3%
Liquidation Value accretion dividend ($951,000) and the accretion of a
dividend related to the beneficial conversion feature in accordance with
EITF Topic No. D-60 based upon the rate at which the preferred stock
becomes convertible ($1,055,000).
(d) Pro forma per share data are based on the number of shares of the
Company's Common Stock and common equivalent shares that would have been
outstanding had SIP been acquired on January 1, 1997, but excludes any
shares to be purchased by Sprint in the Offer. As of March 31, 1998,
EarthLink had reserved for Issuance 3,827,432 shares upon the exercise of
outstanding employee stock options, and 1,391,732 shares reserved for
issuance upon exercise of outstanding warrants. These common stock
equivalents and 4.1 million shares of the Series A Convertible Preferred
Stock have been excluded from the calculation as their effect is
antidilutive. The pro forma per share data also reflects the exchange on
a one for one basis of common stock between former EarthLink and new
EarthLink upon consummation of the Merger.
8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Sprint Corporation
We have audited the accompanying statement of revenues and direct expenses
of the Consumer Internet Access Services of Sprint Corporation (the "Company")
for the year ended December 31, 1997. This statement is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the revenues and direct expenses are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit also
includes assessing the basis of accounting used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying statement of revenues and direct expenses was prepared for
inclusion in the Registration Statement on Form S-1 of EarthLink Network, Inc.
for purposes of complying with the rules and regulations of the Securities and
Exchange Commission in lieu of the full financial statements required by Rule
3-05 for the transaction between EarthLink Network, Inc. and Sprint Corporation.
The statement is not intended to be a complete presentation of the Consumer
Internet Access Services of Sprint Corporation revenues and expenses.
In our opinion, the statement of revenues and direct expenses referred to
above presents fairly, in all material respects, the revenues and direct
expenses described in the note to the statement of revenues and direct expenses
for the Consumer Internet Access Services of Sprint Corporation for the year
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Kansas City, Missouri
March 6, 1998
9
<PAGE>
CONSUMER INTERNET ACCESS SERVICES OF SPRINT CORPORATION
STATEMENTS OF REVENUES AND DIRECT EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
------------------- ---------------------
(UNAUDITED)
<S> <C> <C>
(IN THOUSANDS)
Net operating revenues................................................ $ 14,489 $ 6,259
Direct expenses:
Cost of services.................................................... 51,313 9,813
Selling, general and administrative................................. 13,099 2,155
Depreciation........................................................ 6,070 2,146
Other............................................................... 3,404 198
-------- --------
Total direct expenses................................................. 73,886 14,312
-------- --------
Direct expenses in excess of revenues................................. $ (59,397) $ (8,053)
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTE.
10
<PAGE>
CONSUMER INTERNET ACCESS SERVICES OF SPRINT CORPORATION
NOTE TO STATEMENTS OF REVENUES AND DIRECT EXPENSES
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED WITH RESPECT TO THE THREE MONTHS ENDED MARCH 31, 1998)
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BASIS OF PRESENTATION
The statements of revenues and direct expenses represent the activities
related to the Consumer Internet Access Services of Sprint Corporation and have
been prepared in connection with the transaction between EarthLink Network, Inc.
and Sprint Corporation. The statements of revenues and direct expenses are not
intended to be a complete presentation of the revenues and expenses of the
Consumer Internet Access Services of Sprint Corporation because corporate
allocated expenses have not been included. Direct expenses are defined as those
costs which were incurred as a direct result of providing Consumer Internet
Access Services and which will no longer be incurred by Sprint Corporation
subsequent to consummation of the transaction with EarthLink Network, Inc.
Sprint Corporation began offering Internet access in the fourth quarter of
1996 and any revenues generated and direct operating expenses incurred from
inception through December 31, 1996, were nominal. Sprint Corporation reports
this operation within its "Emerging Businesses Segment" (the "Group") and
maintains the financial information relative to the Internet subscribers in the
Group. Revenues and direct operating expense information are separately
maintained for the Consumer Internet Access Services within the Group. Sprint
Corporation does not, however, separately maintain and account for other costs
and expenses to operate this business and is unable to determine or reasonably
estimate these costs on a historical basis. In addition, Sprint Corporation does
not separately maintain and account for all assets used in the consumer Internet
access services business. Such assets, primarily network related, are recorded
in the other businesses of Sprint Corporation and used by the other divisions of
Sprint Corporation, including the Group. Accordingly, financial statements for
1996 and full financial statements required by Rule 3-05 of Regulation S-X have
not been presented.
The statements of revenues and direct expenses are not indicative of the
financial condition or results of operations of this business going forward
because of the change in the business and the omission of various operating
expenses.
UNAUDITED FINANCIAL INFORMATION
The statement of revenues and direct expenses for the three months ended
March 31, 1998 is unaudited. Sprint Corporation believes that such information
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the revenues and direct expenses related to the
Consumer Internet Access Services of Sprint Corporation.
REVENUE RECOGNITION
Operating revenues are recognized as services are rendered to customers and
are recorded net of an estimate for uncollectible accounts. The provision for
doubtful accounts for the year ended December 31, 1997 and the three months
ended March 31, 1998 was $723,000 and $471,000 (unaudited), respectively.
DEPRECIATION
The cost of property, plant and equipment is depreciated on a straight-line
basis over estimated economic useful lives.
USE OF ESTIMATES
The statements of revenues and direct expenses are prepared in accordance
with generally accepted accounting principles which requires management to make
estimates and assumptions that affect the amounts reported in the financial
statement. Actual results could differ from those estimates.
11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of EarthLink Network, Inc.
We have audited the accompanying statement of assets acquired and liabilities
assumed of the Sprint Internet Passport Business acquired by EarthLink Network,
Inc. as of June 5, 1998. This statement of assets acquired and liabilities
assumed is the responsibility of the Company's management; our responsibility is
to express an opinion on the statement of assets acquired and liabilities
assumed based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets acquired and liabilities assumed
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of assets
acquired and liabilities assumed. An audit also includes, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the statement of assets acquired and
liabilities assumed. We believe that our audit provides a reasonable basis for
our opinion.
The accompanying statement of assets acquired and liabilities assumed was
prepared for inclusion in the Registration Statement on Form S-1 of EarthLink
Network, Inc. for purposes of complying with the rules and regulations of the
Securities and Exchange Commission in lieu of the full financial statements
required by Rule 3-05 of Regulation S-X for the transaction between EarthLink
Network, Inc. and Sprint Corporation.
In our opinion, the accompanying statement of assets acquired and liabilities
assumed presents fairly, in all material respects, the assets acquired and
liabilities assumed as described in the note to the statement of assets acquired
and liabilities assumed of the Sprint Internet Passport Business by EarthLink
Network, Inc. as of June 5, 1998, in conformity with generally accepted
accounting principles.
PRICE WATERHOUSE LLP
Costa Mesa, California
June 16, 1998
12
<PAGE>
EARTHLINK NETWORK, INC.
STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
OF THE SPRINT INTERNET PASSPORT BUSINESS
<TABLE>
<CAPTION>
JUNE 5, 1998
--------------
(IN THOUSANDS)
<S> <C>
Current assets:
Cash............................................................................................. $ 23,750
--------------
Total current assets........................................................................... 23,750
Intangible assets.................................................................................. 119,718
--------------
143,468
--------------
Current liabilities:
Other accounts payable and accrued liabilities................................................... (8,468)
--------------
Total current liabilities...................................................................... (8,468)
--------------
Net assets acquired................................................................................ $ 135,000
--------------
--------------
</TABLE>
See accompany note to this financial statement.
13
<PAGE>
EARTHLINK NETWORK, INC.
NOTE TO STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
OF THE SPRINT INTERNET PASSPORT BUSINESS
JUNE 5, 1998
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BASIS OF PRESENTATION
The statement of assets acquired and liabilities assumed represents the
acquisition by EarthLink Network, Inc. (the "Company") of the Sprint Internet
Passport business ("SIP") of Sprint Corporation ("Sprint") in a transaction
accounted for as a purchase. The purchase price paid by the Company consisted of
approximately 4.1 million shares of Series A Convertible Preferred Stock, which
has been valued at $135,000,000. In exchange for the Series A Convertible
Preferred Stock, the Company obtained SIP's customer base, cash and access to
Sprint's high-speed data network. Sprint has further provided the Company access
to up to $100 million in convertible debt financing, and has entered into a
Marketing and Distribution Agreement with the Company.
Sprint Corporation began offering Internet access in the fourth quarter of
1996. Sprint reports this operation within its "Emerging Businesses Segment"
(the "Group") and maintains the financial information relative to the Internet
subscribers in the Group. Revenues and direct operating expense information are
separately maintained for the Sprint Internet Passport business within the
Group. Sprint Corporation does not, however, separately maintain and account for
other costs and expenses to operate this business and is unable to determine or
reasonably estimate these costs on a historical basis. In addition, Sprint
Corporation does not separately maintain and account for all assets used in the
Sprint Internet Passport business. Such assets, primarily network related, are
recorded in the other businesses of Sprint Corporation and used by the other
divisions of Sprint Corporation, including the Group. Accordingly, the Company
has included this statement of assets acquired and liabilities assumed in order
to comply with Rule 3-05 of Regulation S-X.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of the statement of assets acquired and liabilities assumed
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the statement. Actual results could differ from those estimates.
PURCHASE PRICE ALLOCATION
The purchase price was allocated to the fair value of assets acquired,
consisting of cash and intangible assets related to a customer base, Sprint's
provision of additional customers and the co-branding feature of the Marketing
and Distribution Agreement and the excess of consideration over the fair value
of net assets acquired.
INTANGIBLE ASSETS
The intangible assets are amortized on a straight-line basis over the
estimated useful lives as follows: customer base amortized over 18 months, the
Marketing and Distribution Agreement amortized over 5 and 10 years, which are
the life of the portion of the contract related to Sprint's provision of
additional customers and the overall contract life relative to the co-branding
feature, respectively, and the excess of consideration over the fair value of
net assets acquired over 18 months. The Company regularly reviews the
recoverability of intangible assets based on estimated undiscounted future cash
flows from operating activities compared with the carrying values of the
intangible assets.
14
<PAGE>
EARTHLINK NETWORK, INC.
NOTE TO STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
OF THE SPRINT INTERNET PASSPORT BUSINESS (CONTINUED)
JUNE 5, 1998
OTHER ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The liabilities consist of accrued expenses for incremental acquisition
costs directly attributable to the acquisition, primarily investment banking,
legal and accounting professional fees.
15
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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 hereunto duly authorized.
EARTHLINK NETWORK, INC.
Date: August 11, 1998 By: /s/ Grayson L. Hoberg
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Grayson L. Hoberg, Chief Financial Officer
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