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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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.
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(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
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(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 and amended on August 13, 1998.
On June 5, 1998, Sprint consummated a tender offer for 2.5 million
shares of the Company's Common Stock at a price per share of $22.50 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.
The unaudited pro forma condensed combined statement of operations for the
year ended December 31, 1998 is filed herewith in connection with the joint
proxy statement/prospectus expected to be filed by the Company and MindSpring
Enterprises, Inc.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
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PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statement
gives 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 statement of operations is based on the
statement of operations of the Company and the historical results of SIP from
January 1, 1998 through June 5, 1998 (the date of acquisition) and combine
the results of operations of the Company and of SIP for the year ended
December 31, 1998 as if the acquisition occurred on January 1, 1998. 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, included in this report, and the historical financial statements and
notes thereto of the Company. 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 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.
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EARTHLINK NETWORK, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SPRINT
EARTHLINK INTERNET
NETWORK, INC. PASSPORT PRO FORMA PRO FORMA
HISTORICAL HISTORICAL(a) ADJUSTMENTS COMBINED
------------- ---------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Total revenues $ 175,941 $ 11,122 $ 187,063
Operating costs and expenses:
Cost of revenues 70,467 17,881 88,348
Selling, general and administrative and member support 112,570 3,423 115,993
Depreciation 12,508 3,655 (3,655)(b) 12,508
Amortization and transaction expenses 42,635 28,058 (c) 70,693
---------- --------- --------- ----------
Total operating costs and expenses 238,180 24,959 24,403 287,542
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Loss from operations (62,239) (13,837) (24,403) (100,479)
Interest income, net 2,457 2,457
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Net loss (59,782) (13,837) (24,403) (98,022)
Deductions for accretion dividends (7,601) (5,525)(d) (13,126)
---------- --------- --------- ----------
Net loss attributable to common stockholders $ (67,383) $ (13,837) $ (29,928) $ (111,148)
---------- --------- --------- ----------
---------- --------- --------- ----------
Basic and diluted net loss per share $ (2.58) $ (4.25)
---------- ----------
---------- ----------
Weighted average shares outstanding 26,157 26,157(e)
---------- ----------
---------- ----------
</TABLE>
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EARTHLINK NETWORK, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
Pro Forma adjustments are as follows:
a. The historical SIP revenues and expenses include results from January 1,
1998 through June 5, 1998 (the date of acquisition).
b. The Company acquired no depreciable assets of SIP. This adjustment
eliminates the depreciation expense recorded by SIP.
c. 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 lives of the
portion of the contract related to Sprint's provision of customers and
the overall contract period 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.
d. This adjustment reflects the Liquidation Dividends based upon a 3%
Liquidation Value accretion dividend 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.
e. 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, 1998, but excludes any
shares purchased by Sprint in the Offer. The Company's common stock
equivalents have been excluded from the calculation as their effect is
antidilutive.
4
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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
5
<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
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(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
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.
6
<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.
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<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
8
<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.
9
<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.
10
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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.
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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: October 12, 1999 By: /s/ Grayson L. Hoberg
------------------------------------------
Grayson L. Hoberg, Chief Financial Officer
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