<PAGE>
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, 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 31,861,189 shares of Common Stock outstanding as of March 31, 1999.
<PAGE>
EARTHLINK NETWORK, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 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 MARCH 31, 1999
----------------- --------------
(AUDITED) (UNAUDITED)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 140,864 $ 364,199
Accounts receivable, net 4,779 4,652
Prepaid expenses 4,147 5,399
Other assets 775 571
--------- ---------
Total current assets 150,565 374,821
Other long-term assets 564 475
Property and equipment, net 35,206 44,338
Intangibles, net (Note 4) 80,006 62,297
--------- ---------
$ 266,341 $ 481,931
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 14,818 $ 28,421
Accrued payroll and related expenses 8,934 6,587
Other accounts payable and accrued liabilities 20,372 18,597
Current portion of capital lease obligations 8,341 7,634
Deferred revenue 8,831 10,273
--------- ---------
Total current liabilities 61,296 71,512
Long-term debt 7,701 6,388
--------- ---------
Total liabilities 68,997 77,900
Stockholders' equity:
Preferred stock 41 47
Common stock 291 319
Stock subscriptions receivable (1,041) --
Additional paid-in capital 330,911 562,412
Warrants to purchase common stock 597 597
Accumulated deficit (133,455) (159,344)
--------- ---------
Total stockholders' equity 197,344 404,031
--------- ---------
$ 266,341 $ 481,931
--------- ---------
--------- ---------
</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
MARCH 31,
---------------------
1998 1999
---- ----
(UNAUDITED)
(in thousands,
except per share data)
<S> <C> <C>
Recurring revenues $ 27,856 $ 64,837
Other revenues 1,578 1,422
Incremental revenues 392 1,984
-------- --------
Total revenues 29,826 68,243
Cost of recurring revenues 14,087 28,893
Cost of other revenues 36 287
Sales and marketing 7,566 18,717
General and administrative 4,537 7,783
Operations and member support 9,540 20,694
Amortization (Note 4) -- 17,673
-------- --------
Total operating costs and expenses 35,766 94,047
-------- --------
Loss from operations (5,940) (25,804)
Interest income 223 3,876
Interest expense (687) (315)
-------- --------
Net loss (6,404) (22,243)
Deductions for accretion dividends (Note 5) -- (3,646)
-------- --------
Net loss attributable to common stockholders $ (6,404) $(25,889)
-------- --------
-------- --------
Basic and diluted net loss per share (Note 3) $ (0.28) $ (0.82)
-------- --------
-------- --------
Weighted average shares 22,746 31,393
-------- --------
-------- --------
</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
MARCH 31,
------------------
1998 1999
---- ----
(UNAUDITED)
(in thousands)
<S> <C> <C>
Net cash provided by operating activities $ 3,648 $ 10,198
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (5,664) (13,726)
Purchases of intangible assets (9) --
Transaction costs (1,270) --
--------- ---------
Net cash used in investing activities (6,943) (13,726)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable 1,198 --
Repayment of notes payable -- (47)
Proceeds from capital lease obligations 2,513 469
Principal payments under capital lease obligations (1,894) (2,490)
Proceeds from public stock offerings -- 183,099
Proceeds from issuance of redeemable preferred stock -- 42,622
Proceeds from liquidation of stock subscription receivable -- 1,041
Proceeds from stock options and warrants exercised 1,743 2,169
--------- ---------
Net cash provided by financing activities 3,560 226,863
--------- ---------
Net increase in cash and cash equivalents 265 223,335
Cash and cash equivalents, beginning of period 16,450 140,864
--------- ---------
Cash and cash equivalents, end of period $ 16,715 $ 364,199
--------- ---------
--------- ---------
</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 month period
ended March 31, 1999 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, 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 March 31, 1999 and the results of
operations and of cash flows for the three month period ended March 31, 1999.
The results of operations for the three month period ended March 31, 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, as of
March 31, 1999, is being amortized on a straight-line basis over their
estimated useful lives. During the quarter ended March 31, 1999, the Company
incurred amortization expense of $17.7 million on these assets.
4
<PAGE>
EARTHLINK NETWORK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. DEDUCTIONS FOR DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
The Series A and B Convertible Preferred Stock issued in conjunction
with the Sprint Transaction will pay liquidation dividends for the first five
years in the form of increases in its Liquidation Value. The adjustment of
$3.6 million recorded during the three months ended March 31, 1999 represents
a liquidation dividend of $2.1 million based on a 3% dividend and the
accretion of a $1.5 million dividend related to the beneficial conversion
feature of the Convertible Preferred Stock.
6. FOLLOW ON OFFERING OF COMMON STOCK
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. The offering consisted
of 2.3 million shares and an underwriter's over-allotment of 99,000 shares
exercised in February 1999. 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. 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.
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 March 31, 1999, our member base included approximately
1,155,000 paying members and an additional 69,000 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.
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
MARCH 31,
------------------
1998 1999
---- ----
<S> <C> <C>
Revenues:
Recurring revenues 94% 95%
Other revenues 5 2
Incremental revenues 1 3
---- ----
Total revenues 100% 100%
Operating costs and expenses:
Cost of recurring revenues 47 43
Cost of other revenues -- --
Sales and marketing 26 28
General and administrative 15 11
Operations and member support 32 30
Amortization (1) -- 26
---- ----
120 138
---- ----
Loss from operations (20) (38)
Interest income 1 6
Interest expense (2) (1)
---- ----
Net loss (21%) (33%)
---- ----
---- ----
EBITDA (2) (10%) (5%)
---- ----
---- ----
</TABLE>
- ---------------
(1) Represents amortization expense for the quarter ended March 31, 1999,
related to the intangible assets acquired as part of 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
months ended March 31, 1999 as compared to the corresponding period of 1998.
The increase in recurring revenues of 132% from $27.9 million in the quarter
ended March 31, 1998 to $64.8 million in the quarter ended March 31, 1999 was
primarily due to an increase in the Company's member base from 500,000 at
March 31, 1998 to 1,155,000 at March 31, 1999.
OTHER REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------
INCREASE
1998 1999 (DECREASE)
---- ---- ----------
(in thousands)
<S> <C> <C> <C>
Dial-up set up fees $ 828 $ 522 $ (306)
Non dial-up set up fees 750 900 150
------ ------ ------
Total other revenues $1,578 $1,422 $ (156)
------ ------ ------
------ ------ ------
</TABLE>
7
<PAGE>
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
affinity marketing partnerships and other programs. The Company expects this
trend to continue for dial-up set up revenues. EarthLink has continued to
expand its sales of premium services such as Business Web Site Hosting, National
ISDN, LAN ISDN and Frame Relay Connections and cable-modem connections. As
such, one-time fees for the set up of non dial-up members has increased due to
market demand. However, management cannot predict whether the Company will
continue to charge set up fees for these premium services.
INCREMENTAL REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------
PERCENT PERCENT
OF TOTAL OF TOTAL
1998 REVENUES 1999 REVENUES
---- -------- ---- --------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
Total revenues $29,826 100% $68,243 100%
Incremental revenues 392 1 1,984 3
</TABLE>
The Company continued to focus on deriving additional revenue from
marketing activities targeted to its active member base. Incremental
revenues increased 406% during the three months ended March 31, 1999, as
compared to the corresponding period 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 MARCH 31,
-----------------------------------------------------------------
PERCENT OF PERCENT OF
RECURRING RECURRING
1998 REVENUES 1999 REVENUES
---- --------- ---- ---------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
Recurring revenues $27,856 100% $64,837 100%
Cost of recurring revenues 14,087 51 28,893 45
</TABLE>
Cost of recurring revenues increased 105% during the three months
ended March 31, 1999, as compared to the corresponding period of 1998,
primarily due to the corresponding increase in the Company's member base. 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. This decrease was partially offset by the effect of an
increase in monthly usage per member from 32.5 hours during the three months
ended March 31, 1998 to 42.0 hours during the three months ended March 31,
1999.
8
<PAGE>
COST OF OTHER REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------
PERCENT PERCENT
OF OTHER OF OTHER
1998 REVENUES 1999 REVENUES
---- -------- ---- --------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
Royalties $ 14 1% $136 9%
Other 22 1% 151 11%
---- --- ---- ---
Total cost of other revenues $ 36 2% $287 20%
---- --- ---- ---
---- --- ---- ---
</TABLE>
Cost of other revenues increased 697% during the three months
ended March 31, 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 royalties related to some of the newer products.
SALES AND MARKETING
Sales and marketing expenses consist primarily of advertising,
sales compensation, bounties, communications costs related to trial members
and the cost of promotional material. Sales and marketing expenses increased
146% from $7.6 million to $18.7 million during the three month periods ended
March 31, 1998 and 1999, respectively. 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.
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 73% from $4.5 million to $7.8
million during the three months ended March 31, 1998 and 1999, respectively.
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.
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 118% from $9.5
million to $20.7 million during the three month periods ended March 31, 1998 and
1999, respectively. The increase reflects management's focus on retaining
existing members by providing superior services 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 683 and 1,328 at March 31, 1998 and 1999, respectively.
9
<PAGE>
INTEREST EXPENSE
Interest expense decreased from $687,000 to $315,000 during the
three months ended March 31, 1999, as compared to the corresponding period
of 1998. This was 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 interest rates on newer
lease obligations.
INTEREST INCOME
Interest income increased from $223,000 to $3.9 million for the
three months ended March 31, 1998 and 1999, respectively. The increase was
primarily due to an increase in average cash balances available for
investment.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $3.6 million and $10.2
million during the three month periods ended March 31, 1998 and 1999,
respectively. During the three months ended March 31, 1998, the Company's net
loss of $6.4 million was offset by depreciation and amortization expenses of
$2.9 million and increases in accounts payable and accrued liabilities of
$7.2 million. In the three month period ended March 31, 1999, the Company's
net loss of $22.2 million was offset by depreciation and amortization
expenses of $22.3 million and increases in accounts payable, accrued
liabilities and deferred revenue of $11.0 million.
Cash used in investing activities was $6.9 million and $13.7
million during the three month periods ended March 31, 1998 and 1999,
respectively. During the three months ended March 31, 1998, the Company
incurred approximately $1.3 million in deferred transaction costs related to
the Sprint Transaction and the follow on stock offering. Both transactions
subsequently closed in June of 1998. Capital equipment purchases were $5.7
million and $13.7 million for the three month periods ended March 31, 1998
and 1999, respectively.
Cash provided by financing activities was approximately $3.6
million and $226.9 million during the three months ended March 31, 1998 and
1999, respectively. 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. The
offering consisted of 2.3 million shares and an underwriter's over-allotment
of 99,000 shares exercised in February 1999. 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. 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.
10
<PAGE>
Proceeds from capital lease transactions were $2.5 million and
$469,000 during the three months ended March 31, 1998 and 1999, respectively.
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.
As of March 31, 1999, the Company had cash and cash equivalents
of approximately $364.2 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 $25 million
credit facility from Sprint in the form of convertible senior debt,
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.
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 POP
vendors to maintain network reliability.
We are continuing to assess the year 2000 readiness of our
third-party supplied software, computer technology and other services. Based
upon the results of this assessment, we will develop and implement, if
necessary, a remediation plan with respect to third-party software, computer
technology and services, which may fail to be year 2000 compliant. We have
assessed our 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 failure of our software and computing systems and our third-party
vendors to be year 2000 compliant could have a material adverse effect on us.
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 others, 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 are expected 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
None
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: May 14, 1999 /s/ Charles G. Betty
------------------------------
Charles G. Betty, President,
Chief Executive Officer and
Director
Date: May 14, 1999 /s/ Grayson L. Hoberg
------------------------------
Grayson L. Hoberg, Senior Vice
President-Finance and Administration
and Chief Financial Officer
Date: May 14, 1999 /s/ Richard A. Quiroga
------------------------------
Richard A. Quiroga, Vice President,
Corporate Controller
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 364,199 0
<SECURITIES> 0 0
<RECEIVABLES> 5,458 0
<ALLOWANCES> 806 0
<INVENTORY> 282 0
<CURRENT-ASSETS> 374,821 0
<PP&E> 73,964 0
<DEPRECIATION> 29,626 0
<TOTAL-ASSETS> 481,931 0
<CURRENT-LIABILITIES> 71,512 0
<BONDS> 0 0
0 0
47 0
<COMMON> 319 0
<OTHER-SE> 403,665 0
<TOTAL-LIABILITY-AND-EQUITY> 481,931 0
<SALES> 0 0
<TOTAL-REVENUES> 68,243 29,826<F1>
<CGS> 0 0
<TOTAL-COSTS> 29,180 14,123<F1>
<OTHER-EXPENSES> 64,867 21,643<F1>
<LOSS-PROVISION> 949 1,047
<INTEREST-EXPENSE> 315 687
<INCOME-PRETAX> (25,889) (6,404)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (25,804) (5,940)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (25,889) (6,404)
<EPS-PRIMARY> (0.82) (0.28)
<EPS-DILUTED> (0.82) (0.28)
<FN>
<F1>CERTAIN AMOUNTS IN PRIOR YEARS ARE RECLASSIFIED TO CONFORM TO CURRENT YEAR
PRESENTATION.
</FN>
</TABLE>
