<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 JUNE 30, 1999
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 58-2389244
(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 32,108,684 shares of Common Stock outstanding as of June 30, 1999.
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<PAGE>
EARTHLINK NETWORK, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
PART I
Item 1. 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 .......12
PART II
Item 4. Submission of Matters to a Vote of Security Holders...............12
Item 6. Exhibits and Reports on Form 8-K..................................13
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EARTHLINK NETWORK, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ------------
(AUDITED) (UNAUDITED)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 140,864 $ 352,372
Accounts receivable, net 4,779 7,082
Prepaid expenses 4,147 7,462
Other assets 775 1,983
--------- ---------
Total current assets 150,565 368,899
Other long-term assets 564 1,899
Property and equipment, net 35,206 47,450
Intangibles, net (Note 4) 80,006 44,612
--------- ---------
$ 266,341 $ 462,860
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 14,818 $ 23,033
Accrued payroll and related expenses 8,934 7,513
Other accounts payable and accrued liabilities 20,372 21,333
Current portion of capital lease obligations 8,341 9,362
Deferred revenue 8,831 11,608
--------- ---------
Total current liabilities 61,296 72,849
Long-term debt 7,701 8,988
--------- ---------
Total liabilities 68,997 81,837
Stockholders' equity:
Preferred stock 41 47
Common stock 291 321
Stock subscriptions receivable (1,041) -
Additional paid-in capital 330,911 567,576
Warrants to purchase common stock 597 597
Accumulated deficit (133,455) (187,518)
--------- ---------
Total stockholders' equity 197,344 381,023
--------- ---------
$ 266,341 $ 462,860
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
1
<PAGE>
EARTHLINK NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
(in thousands, except per share data)
Recurring revenues $ 35,224 $ 74,591 $ 63,080 $ 139,428
Other revenues 1,620 1,137 3,198 2,559
Incremental revenues 1,146 2,273 1,538 4,257
--------- --------- --------- ---------
Total revenues 37,990 78,001 67,816 146,244
Cost of recurring revenues 17,555 33,203 31,642 62,096
Cost of other revenues 120 289 156 576
Sales and marketing 8,281 22,605 15,847 41,322
General and administrative 5,018 7,892 9,555 15,675
Operations and member support 11,630 24,840 21,170 45,534
Amortization and transaction costs (Note 4) 7,208 17,673 7,208 35,346
--------- --------- --------- ---------
Total operating costs and expenses 49,812 106,502 85,578 200,549
--------- --------- --------- ---------
Loss from operations (11,822) (28,501) (17,762) (54,305)
Interest income 426 4,371 649 8,247
Interest expense (621) (417) (1,308) (732)
--------- --------- --------- ---------
Net loss (12,017) (24,547) (18,421) (46,790)
Deductions for accretion dividends (Note 5) (1,054) (3,627) (1,054) (7,273)
--------- --------- --------- ---------
Net loss attributable to common stockholders $ (13,071) $ (28,174) $ (19,475) $ (54,063)
========= ========= ========= =========
Basic and diluted net loss per share (Note 3) $ (0.53) $ (0.88) $ (0.82) $ (1.71)
========= ========= ========= =========
Weighted average shares 24,586 31,980 23,674 31,689
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE>
EARTHLINK NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
(in thousands)
Net cash provided by (used in) operating
activities $ 8,288 $ (9,439) $ 11,936 $ 759
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (5,866) (8,477) (11,530) (22,203)
Proceeds from sale of property and equipment - 221 - 221
Purchase of intangible assets - - (9) -
Transaction costs (7,142) - (8,412) -
Net cash acquired from acquisition 23,750 - 23,750 -
--------- --------- --------- ---------
Net cash provided by (used in) investing
activities 10,742 (8,256) 3,799 (21,982)
--------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable - - 200 -
Repayment of notes payable (5,385) - (4,387) (47)
Proceeds from capital lease obligations 3,122 7,293 5,635 7,762
Principal payments under capital lease obligations (1,994) (2,966) (3,888) (5,456)
Proceeds from issuance of common stock, net 105,329 - 105,329 183,099
Proceeds from stock options and warrants exercised 896 1,541 2,639 3,710
Proceeds from sale of redeemable preferred stock - - - 42,622
Proceeds from liquidation of subscription receivable - - - 1,041
--------- --------- --------- ---------
Net cash provided by financing activities 101,968 5,868 105,528 232,731
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 120,998 (11,827) 121,263 211,508
Cash and cash equivalents, beginning of period 16,715 364,199 16,450 140,864
--------- --------- --------- ---------
Cash and cash equivalents, end of period $ 137,713 $ 352,372 $ 137,713 $ 352,372
========= ========= ========= =========
Acquisition, net of cash acquired (Note 4):
Issuance of convertible preferred stock $ 135,000
Transaction costs 8,412
Intangible assets (119,662)
---------
Net cash acquired from acquisition $ 23,750
=========
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of EarthLink
Network, Inc., which include the accounts of its wholly owned subsidiary,
EarthLink Operations, Inc., (collectively, "EarthLink" or the "Company") for
the three and six month periods ended June 30, 1999 and the related footnote
information are unaudited and have been prepared on a basis substantially
consistent with the Company's audited consolidated financial statements as of
December 31, 1998 contained in the Company's Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission (the "Annual Report"). All
significant intercompany transactions have been eliminated. 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 June 30, 1999 and the results of
operations and of cash flows for the three month and six month periods ended
June 30, 1999. The results of operations for the three and six month periods
ended June 30, 1999 are not necessarily indicative of the results for the
entire year ending December 31, 1999.
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. RECLASSIFICATIONS
Certain amounts in prior period financial statements have been
reclassified to conform to the current period presentation.
3. 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 outstanding divided into net income attributable to
common stockholders 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.
4. INTANGIBLE ASSETS AND AMORTIZATION COSTS
In June 1998, the Company consummated its strategic alliance with
Sprint Corporation ("the Sprint Transaction"). The value of intangible assets
acquired in the Sprint Transaction, aggregating $121.2 million is being
amortized on a straight-line basis over their estimated useful lives. During
the three and six month periods ended June 30, 1999, the Company incurred
amortization expense of $17.7 million and $35.3 million, respectively, on
these assets.
4
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. DEDUCTIONS FOR DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
The Convertible Preferred Stock issued to Sprint in the Sprint
Transaction as well as to Sprint pursuant to its "top up" rights in the
Company's July 1998 and January 1999 follow-on public offerings will pay
liquidation dividends for the first five years in the form of increases in
its Liquidation Value. The adjustments of $3.6 million and $7.3 million
recorded during the three and six month periods ended June 30, 1999,
respectively, represent liquidation dividends of $2.2 million and $3.3
million, based on a 3% dividend and accretion dividends of $1.4 million and
$4.0 million, respectively, related to the beneficial conversion feature of
the Convertible Preferred Stock.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 phrases 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. See "Safe Harbor
Statement."
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE ACCOMPANYING
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES
THERETO AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES
THERETO CONTAINED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1998.
OVERVIEW
We are a leading Internet service provider, or ISP, providing
reliable nationwide Internet access and related value-added services to our
individual and business members. Our member base has grown rapidly, making us
one of the world's leading ISPs. We believe this growth is the result of our
efforts to enhance our members' Internet experience through simple, rapid and
reliable access to the Internet, high quality service, and member support and
enhanced services. At June 30, 1999, our member base included approximately
1,335,000 paying members and an additional 62,000 members having trial
accounts.
We provide our members with a core set of features through our
standard Internet service, which provides unlimited Internet access and
several related services for a $19.95 monthly fee. We also offer a variety of
premium services to both our 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 including business Web site hosting, national ISDN, LAN ISDN, and
frame relay connections and, in certain areas, cable access. We derive
incremental revenues by leveraging the value of our member base and user
traffic through promotional and content partnerships, online advertising, and
electronic commerce. We recognize access fees and certain incremental
revenues ratably over the period services are provided. Other revenues
generally represent one-time, non-refundable set up fees and are recorded as
earned.
Cost of recurring revenues principally includes telecommunications
costs and depreciation expense on equipment used in network operations for
ongoing member services. Fees paid to third party providers for dial-up
access to their respective nationwide systems of POPs are included in
telecommunications costs. Cost of other revenues principally includes
expenses associated with new member registration and cost of products sold.
Cost of incremental revenues is immaterial and is included in cost of other
revenues.
6
<PAGE>
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
<S> <C> <C> <C> <C>
Revenues: 1998 1999 1998 1999
---- ---- ---- ----
Recurring revenues 93% 96% 93% 95%
Other revenues 4 1 5 2
Incremental revenues 3 3 2 3
---- ---- ---- ----
Total revenues 100% 100% 100% 100%
Operating costs and expenses:
Cost of recurring revenues 46 43 47 43
Cost of other revenues - - - -
Sales and marketing 22 29 23 28
General and administrative 13 10 14 11
Operations and member support 31 32 31 31
Amortization and transaction costs (1) 19 23 11 24
---- ---- ---- ----
131 137 126 137
---- ---- ---- ----
Loss from operations (31) (37) (26) (37)
Interest income 1 6 1 6
Interest expense (1) (1) (2) (1)
---- ---- ---- ----
Net loss (31%) (32%) (27%) (32%)
==== ==== ==== ====
EBITDA (2) (7%) (7%) (8%) (6%)
==== ==== ==== ====
</TABLE>
- -------------------
(1) Represents amortization expense for the periods ending June 30, 1999 and
1998 and a one time transaction cost of $1,397,000 resulting from the June
1998 Sprint transaction.
(2) Represents earnings (loss) before depreciation and amortization, interest
income and expense and income tax expense. 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.
RECURRING REVENUES
The Company experienced substantial growth in revenues for the three
and six month periods ended June 30, 1999 as compared to the corresponding
periods of 1998. The increase in recurring revenues of 112% from $35.2
million in the quarter ended June 30, 1998 to $74.6 million in the quarter
ended June 30, 1999 was primarily due to an increase in the Company's member
base from 710,000 at June 30, 1998 to 1,335,000 at June 30, 1999.
7
<PAGE>
OTHER REVENUES
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30,
------------------ INCREASE ------------------ INCREASE
1998 1999 (DECREASE) 1998 1999 (DECREASE)
------ ------ ---------- ------ ------ ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Dial-up set up fees $ 711 $ 468 $ (243) $1,539 $ 990 $ (549)
Non dial-up set up fees 909 669 (240) 1,659 1,569 (90)
------ ------ ------- ------ ------ -------
Total other revenues $1,620 $1,137 $ (483) $3,198 $2,559 $ (639)
====== ====== ======= ====== ====== =======
</TABLE>
The decrease in dial-up set up fees is primarily due to the
Company's willingness to waive set up fees for dial-up members acquired
through certain marketing programs. The Company expects this trend to
continue for dial-up set up revenues. The Company has seen an increase in the
number of premium services sold such as web-site hosting, national ISDN, LAN
ISDN and frame relay connections and cable-modem connections. However, the
Company has reduced set up fees for certain premium services, primarily
web-site hosting, to remain competitive.
INCREMENTAL REVENUES
The Company continued to focus on deriving additional revenue from
marketing activities targeted to its active member base. Incremental revenues
increased 120% from $1.1 million to $2.3 million and 187% from $1.5 million
to $4.3 million during the three and six month periods ended June 30, 1999,
respectively, as compared to the corresponding periods of 1998. The principal
component of the Company's incremental revenue strategy is its Premier
Partnership Program through which the Company offers and sells promotional
packages that provide advertisers with access to the multiple points of
contact EarthLink has with its members. The Company also sells content space
and advertising on its various online properties such as the Personal Start
Page and its bi-monthly print newsletter, "bLink".
COST OF RECURRING REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- -------------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
RECURRING RECURRING RECURRING RECURRING
1998 REVENUES 1999 REVENUES 1998 REVENUES 1999 REVENUES
-------- -------- -------- -------- -------- -------- ------ --------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Recurring revenues $ 35,224 100% $ 74,591 100% $ 63,080 100% $139,428 100%
Cost of recurring revenues 17,555 50 33,203 45 31,642 50 62,096 45
</TABLE>
Cost of recurring revenues increased 89% and 96% during the three
and six month periods ended June 30, 1999, as compared to the corresponding
periods of 1998, due to the corresponding increase in the Company's member
base. As a percentage of revenue, however, cost of recurring revenues
decreased. The decrease in the cost of recurring revenues as a percentage of
recurring revenues was primarily due to the Company's ability to negotiate
more favorable contracts with third party access providers and to effectively
manage and, thereby reduce, communications costs per member as the Company
exploits economies of scale and to reduce per member costs as the total
member base expanded.
COST OF OTHER REVENUES
Cost of other revenues increased 141% and 269% during the three and
six months ended June 30, 1999 as compared to the corresponding period of
1998. The increase is primarily due to increases in the cost of ISDN
equipment sold to members, the costs of providing advertising, content and
electronic commerce to certain customers and other royalties.
8
<PAGE>
SALES AND MARKETING
Sales and marketing expenses consist primarily of advertising, sales
compensation, bounties, communications costs related to trial members,
salaries and the cost of promotional material. Sales and marketing expenses
increased 172% from $8.3 million to $22.6 million during the three month
periods ended June 30, 1998 and 1999, respectively, and 160% from $15.9
million to $41.3 million in the six months ended June 30, 1999 as compared to
the same period in 1998. The increase was primarily due to management's
increased emphasis on organic growth through marketing strategies including
expanding sales and marketing efforts, 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.
OPERATIONS AND MEMBER SUPPORT
Operations and member support expenses consist primarily of costs
associated with technical support and member service, as well as costs
associated with operating the data center and MIS functions to maintain
member accounts. Operations and member support expenses increased 114% from
$11.6 million to $24.8 million during the three month periods ended June 30,
1998 and 1999, respectively and 116% from $21.1 million to $45.5 million in
the six months ended June 30, 1999 and 1998, respectively. These increases
reflect (1) the increase in members from 710,000 as of June 30, 1998 to 1.3
million as of June 30, 1999, (2) the opening of the Company's Sacramento call
center in April 1999 and (3) management's focus on retaining existing members
by providing superior service and devoting significant resources to expanding
technical support staff and network operations capabilities. The number of
employees engaged in operations and member support activities was 775 and
1,553 at June 30, 1998 and 1999, respectively.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of costs
associated with the accounting and human resources departments, professional
expenses, bad debt, credit card processing and executive compensation.
General and administrative expenses increased 58% from $5.0 million to $7.9
million during the three months ended June 30, 1998 and 1999, and 64% from
$9.6 million to $15.7 million in the six months ended June 30, 1999 as
compared to the same period in 1998. The increase was primarily due to
increases in payroll, depreciation expenses and credit card fees. The rise in
payroll costs was primarily due to growth in headcount. In October 1998, the
Company occupied an additional 55,000 square feet of its data center
facility, and monthly rent increased from $66,000 to $92,000. 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 was due to the increase in the Company's member base and increases in
fees charged by credit card companies.
INTEREST INCOME
Interest income increased from $426,000 to $4.4 million and from
$649,000 to $8.2 million during the three and six months ended June 30, 1998
and 1999, respectively. The increases were primarily due to an increase in
average cash balances available for investment.
INTEREST EXPENSE
Interest expense decreased from $621,000 to $417,000 and from $1.3
million to $732,000 during the three months and six months ended June 30,
1998 and 1999, respectively. The decreases were primarily due to the aging of
capital lease obligations. As capital lease obligations have aged, a greater
portion of lease payments has been attributed to principal payments rather
than interest expense. Furthermore, management has been able to obtain lower
effective interest rates on new lease obligations.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operating activities was $9.4 million during the three
month period ended June 30, 1999. Cash provided by operating activities was
$759,000 during the six month period ended June 30, 1999. The decrease in
cash during the three months ended June 30, 1999 was primarily due to a
significant increase in cash used in the Company's sales and marketing
efforts. The Company has increased its emphasis on organic growth through
marketing strategies including expanding sales and marketing efforts,
increased sales commissions and increased marketing personnel headcount.
Overall, during the three months ended June 30, 1999, the Company's cash
balances were reduced by the net loss of $24.5 million, a $1.8 million
decrease in accounts payable and accrued expenses and a $2.4 million dollar
increase in net accounts receivable. These factors were partially offset by
depreciation and amortization expenses of $22.7 million and an increase in
deferred revenue of $1.3 million. During the six months ended June 30, 1999,
the Company's cash balances were reduced by the net loss of $46.8 million and
an increase in net accounts receivable of $2.3 million. These factors were
offset by depreciation and amortization expenses of $45.0 million, a $7.7
million net increase in accounts payable and accrued expenses and a $2.8
million increase in deferred revenue.
Cash used in investing activities was $8.3 million and $22.0 million
during the three and six month periods ended June 30, 1999, respectively.
Capital equipment purchases were $8.5 million and $22.2 million during the
three and six month periods ended June 30, 1999, respectively.
Cash provided by financing activities was approximately $5.9 million
and $232.7 million during the three and six month periods ended June 30,
1999, respectively. Proceeds and principal payments under capital leases were
$7.3 million and $3.0 million, respectively, during the three months ended
June 30, 1999. 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. Proceeds from the
exercise of stock options and warrants were $4.7 million during the six
months ended June 30, 1999. In January 1999, the Company completed a follow
on public offering of 2.4 million shares of its Common Stock at $73.63 per
share. In conjunction with the offering, Sprint exercised its preemptive
rights to maintain its existing ownership level in the Company. Accordingly,
Sprint purchased 808,000 shares of which 201,000 shares were Common Stock and
607,000 shares were Series B Convertible Preferred Stock (having the same
rights and preferences as the Series A Convertible Preferred Stock already
held by Sprint). Net proceeds from the sale of Common Stock were $183.1
million. Net proceeds from the sale of Series B Convertible Preferred Stock
to Sprint were approximately $42.6 million. Proceeds and principal payments
under capital leases were $7.8 million and $5.5 million, respectively, during
the six months ended June 30, 1999.
As of June 30, 1999, the Company had cash and cash equivalents of
approximately $352.4 million. The Company believes that available cash will
be sufficient to meet the Company's operating expenses and capital
requirements for the next 12 months. EarthLink has available a $50 million
credit facility from Sprint in the form of convertible senior debt,
increasing to $100 million by June 5, 2001, 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.
10
<PAGE>
YEAR 2000
Many existing computer programs use only two digits to identify a
year. These programs were designed and developed without addressing the
impact of the upcoming change in the century. If not corrected, many computer
software applications could fail or create erroneous results by, at or beyond
the year 2000. We utilize software, computer technology and other services
internally developed and provided by third-party vendors that may fail due to
the year 2000 phenomenon. For example, we are dependent on the institutions
involved in processing our members' credit card payments for Internet
services. We are also dependent on telecommunications vendors and leased dial
up access vendors to maintain network reliability.
We have substantially completed our assessment of the year 2000
readiness of our third-party supplied software, computer technology and other
services. Based upon the results of this assessment, we believe that all of
our material third party providers are year 2000 compliant and that all other
providers are substantially ready. We have assessed our own proprietary
software and internal systems and determined them to be year 2000 compliant.
We anticipate that our systems, including components thereof provided by
third-party vendors, will be year 2000 compliant by 2000.
The most reasonably likely worst-case year 2000 scenario would be
for one or more of our network service providers to fail thereby making it
difficult or impossible for members to dial-up and access the Internet;
however, we maintain agreements with several nationwide network service
providers including UUNET, Sprint, PSINet and Level 3, and have the ability
to switch our members among the networks of these providers. Therefore,
should any of these providers be unable to provide our members with Internet
access as a result of year 2000 problems, we believe our redundant network
arrangements will adequately accommodate our dial-up access needs.
Total costs incurred in connection with our year 2000 compliance
efforts have been and are expected to continue to be minimal.
11
<PAGE>
"SAFE HARBOR" STATEMENT
The Management's Discussion and Analysis and other portions of this
Report include "forward looking" statements within the meaning of the federal
securities laws that are subject to future events, risks and uncertainties
that could cause actual results to differ materially from those expressed or
implied. Important factors that ether individually or in the aggregate could
cause actual results to differ materially from those expressed 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 alliance will not be as beneficial to the
Company as management anticipates, (4) that the Company will not be able to
sustain its current growth, (5) that the Company will not adequately respond
to technological developments impacting the Internet, (6) that needed
financing will not be available to the Company if and as needed, (7) that a
significant change in the growth rate of the overall U.S. economy will occur,
such that consumer and corporate spending are materially impacted, (8) that a
significant reversal in the trend toward increased usage of the Internet will
occur, and (9) that the Company or its vendors and suppliers may fail to
timely achieve Year 2000 readiness such that there is a material adverse
impact on the business, operations or financial results of the Company, (10)
that a drastic negative change in the market conditions may occur, or (11)
that some other unforeseen difficulties may occur. This list is intended to
identify only certain of the principal factors that could cause actual
results to differ materially from those describe in the forward-looking
statements included herein.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Earthlink held its 1999 annual meeting of Stockholders (the "Annual
Meeting") on April 26, 1999 for the purposes of electing directors for the
ensuing year, amending its 1995 Stock Option Plan to increase the number of
shares authorized for grant thereunder from 5.7 million to 7.7 million and to
amend the Company's Certificate of Incorporation to increase authorized
shares of the Company's Common Stock from 50,000,000 to 200,000,000. The
following individuals were re-elected to the Company's Board of Directors:
Sky Dayton Kevin O'Donnell
Charles G. Betty Reed Slatkin
Linwood A. Lacy, Jr. Sidney Azeez
Robert M. Kavner Paul McNulty
Each nominee received 28,089,252 votes for his election and 47,791 shares
abstained from voting. There were no votes against the election of any of the
nominees. Also, William T. Esrey and Len J. Lauer were appointed by Sprint to
serve as Sprint's board representatives. With respect to the amendment of the
Company's Stock Option Plan, 13,977,137 shares voted for the proposal,
4,035,931 voted against the proposal and there were 37,805 abstentions. With
respect to the amendment of the Company's Certificate of Incorporation,
26,783,457 shares voted for the proposal, 1,314,367 voted against the
proposal and there were 39,219 abstentions. All three proposals passed.
12
<PAGE>
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
----------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None
13
<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: August 13, 1999 /s/ Charles G. Betty
--------------- ------------------------------
Charles G. Betty, President, Chief
Executive Officer and Director
Date: August 13, 1999 /s/ Grayson L. Hoberg
--------------- ------------------------------
Grayson L. Hoberg, Senior Vice President
- Finance and Administration and Chief
Financial Officer
Date: August 13, 1999 /s/ Richard A. Quiroga
--------------- ------------------------------
Richard A. Quiroga, Vice President,
Corporate Controller
14
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<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 JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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